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The absence of uncertainty in nineteenth-century classical economics

12 Jun

Ricardo (1817), the father of nineteenth-century classical economics, assumed a world of perfect certainty. On this view, all households and businesses were assumed to possess a full and correct knowledge of a presumed pre-programmed external economic reality that governed all past, present and future economic outcomes. The external economic environment was assumed to be immutable in the sense that it was not susceptible to change induced by human action. The path of the economy, like the path of the planets under Newton’s celestial mechanics, was regarded as determined by timeless natural laws.

Economic decision-makers were assumed to have complete knowledge of these laws. Accordingly, while pursuing their respective goals of utility maximization and profit maximization, households and enterprises never make errors in their spending choices among all the goods available in the competitive market place. Theses’ economic agents’ always spend everything they have earned on things with the highest ‘known’ future pay-off in terms of utility for households and profits for businesses. Accordingly, within the capacity of the economy to produce, there could never be a lack of demand for the products of industry or for workers who wanted to work. In this manner, classical economics justified a laissez-faire philosophy for the economic system. No government action could ensure a higher pay-off than the decisions of individuals with complete knowledge of the pay-off of each of their decisions made in free markets.

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Posted by on June 12, 2012 in Economics

 

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