1. This document provides a review and summary of Chapter 3 from Eric Roll's 1938 book "A History of Economic Thought", which focuses on the founders of political economy in the 18th century. 2. It discusses the works and ideas of key thinkers from this era, including Machiavelli, Bodin, Bacon, Hobbes, Petty, Locke, North, Law, Hume, Cantillon, Steuart, and the Physiocrats like Quesnay and Turgot. 3. The review analyzes three streams of thought during this period: 1) The philosophical development of economic thought, 2) The progress of English economic thought from mercantilism, and 3) The

1. [5th
December 2016]
A History of Economic Thought (1938)
By Eric Roll
Review of Chapter-3
“The Founders of Political Economy”
by
Shoeb Ahmed
CENTRE FOR ECONOMIC AND SOCIAL STUDIES
Begampet, Hyderabad - 500016, Telangana, India.

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The Founders of Political Economy
Introduction
This review work focus on eighteen century development of modern industrial capitalism and its
theory embodied in the works of classical economists. This review enlighten the works of
Machiavelli, Bodin, Bacon, Thomas Hobbes, Petty, John Locke, Sir Dudley North, John Law,
David Hume, Richard Cantillon, Sir James Steuart, Physiocrats like Quesnay and Turgot.
Present review focus on Eric Roll great emphasis on three streams of thought, which go along
with the transition from commercial to industrial capitalism and together with that economic
development, which help to shape the classical theory.
Streams of thoughts:
1. Philosophical: The development of economic thought from its canonical origin to philosophic
radicalism.
2. Progress of English economic thought from the later mercantilist.
3. Physiocratic system, the French origin developed by number of thinkers in the eighteen
century France.
In review of political thought, emancipation from theology is more radical as freeing of thought
from dominance of church authority as it was evident that economic activity was carried out with
influence of theological laws. Political thinker like Bodin who was also concerned with
emancipation said “the relation of man to man, instead of the relations of man with god, the
foundation of social enquiry”.
Machiavelli
The main impact of new modes of thought was on theory of state and its foremost influence was
on Machiavelli, who was able to notice the decay of medieval society and gave new direction to
new method of approach to social and political questions. Machiavelli studied the actions of
wise prince and said that “necessity not virtue” to be the guide.
Machiavelli was guilty off many errors which are as follows:
i. He had little idea of the complex forces which fashion history.
ii. To him social development was exclusively the work of great men.
iii. His protest against the ethical was immense which could lead strong reaction.
iv. He minimized the power of traditional ideas of right conduct, and thought exclusively in
terms of the princes of Renaissance.

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v. He did not envision the rise of a new, non-theological, ethical discipline which can
influence economic thought.
Eric Roll thinks Machiavelli influence was immense, in spite of initial opposition and concludes
that social philosophy was based upon a rational and positive foundation.
Bodin
Bodin was impressed with problem of authority which the decay of church power, the religious
wars and the struggle of conflicting civil units had raised. Bodin laid the foundation for “theory
of the need” for a central sovereign authority in his book Les Six Livres de la Republique
(1576). He pleaded for the modern sovereign state which has to be source of all law and order.
Bodin was also conscious of the danger of unrestricted authority. Bodin thought divine law and
natural law should prescribe the broad limits of the state’s power. He emphasized on the rights
of private property and beneficence of free trade, which he sensed a possible antithesis between
state and society and was probing for theory which could give ‘some place for the consent of
subjects to the actions of authority’. Eric Roll concludes that Bodin was forerunner of liberalism
in direct sense than the natural-law philosophers of the seventeen century.
Bacon
Bacon laid philosophical foundations for experimental science and he carried the method of
rational inquiry from the natural sciences to the study of man and his community. Bacon gave
the philosophical imprimatur to the authority of the state. His eulogies of the monarch sincerely
reflect his fundamental belief in the secular authority. Bacon thought monarchy as natural
institution and obedience to it as natural duty. He upheld the doctrine of the divine right of kings
and gave absolutism a powerful theoretical support.
Eric says absolute sovereign was assigned the role of supreme judge, who would not be fettered
by prejudice or laws and who would stand above the social factions. There was transition in
authority from shattered feudal system and political quintessence of age.
Thomas Hobbes
He was Bacon’s companion and gave more powerful interpretation to Bacaonian ideas on the
principles of sovereignty of the state. He stressed on coercion as essential element of state
organization and based his analysis on voluntary association of individuals who agreed that one
or more of their number should represent their common will. He says any ruler, lawful or
otherwise was possessed of the fundamental attributes of kingship. Hobbes worked in the
direction of religious emancipation and he was regarded as a foe of belief by his contemporaries.
Hobbes given a theoretical basis to the claims of usurpers of sovereignty, church and king were
united in opposing him. Hobbes disregarded laws and respect for indivisible and unrestricted

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sovereignty. Hobbe’s belief in power above the conflicting interests of social classes was both
his weakness and his strength. Hobbe’s importance in growth of new society and its thought was
considered very great and his basis was individualist and he recognize the individual impelled by
self interest as the unit from which to start. Hobbes’s Leviathan was based on this self interest.
Eric says, in spite of central doctrine of state authority and logical development of the principle
immanent in Hobbes system, utilitarianism philosophy begin to progress.
Petty
He was English economist and prepared ground for classical system. Founder of political
economy and free from mercantile interest. He wrote his first book Political Arithmatic in 1672
and published it in 1690. Petty adhered to manifesto of empiricism and he play important part in
laying foundation to statics. He has shown the ways of data collection and also wider functions
of statical inquiry. His main work “A treatise of taxes and contributions (1662), verbum Sapienti
(1664), in political Anatomy of Ireland, written in 1672 and published in 1691. In Sir William
Quantulumcumque concerning money, written in 1682 and published 1695.
Petty’s approach to economic problems distinguishes him sharply from classical and modern
economist. Petty shared Hobbes political philosophy and adopted indirect approach to important
economic problem wealth and value was itself an expression of the changes in social and
political relations that had taken place as an indispensable part of evolution of industrial
capitalism.
In the book “Treatise on Taxes”, Petty discussed source of public revenue, forms of public
expenditure and best means of raising the revenue and distributing it to others. In his theory of
public finance, he agrees with mun on taxation as inevitable, Petty urged economy in running of
state, main services, defense administration and he condemns expensive wars and maintenance
of supernumeraries and supported expenditure of public money in order to provide for those
would otherwise be unemployed, as they lose their faculty of laboring. On determinants of
states, he recognized individual self interest and high
He realized that people were not always ready to recognize utilitarian nature of taxation, as
people refuse to pay tax and think king is extravagant or they were unjustly assessed compared
with their fellow tax payers. From above arguments, Petty was intrinsically motivated into
economic analysis and examined different ways in which taxes can be levied.
Petty theory of value is contained in short digression on rent, which follows his theory of rent-
tax, in a discussion of real and political price of commodities at a latter point in his treatise and
also in some remarks on wages in political anatomy of Ireland. Labour, he said is the father and
active principle of wealth, as lands are the mother.’

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Petty’s analysis of value and price, led to the question of “what is the mysterious nature of rents”
and he answered that the natural and true rent of piece of land for any particular year is the
difference between the proceeds of the harvest and the seed plus what the producer ‘himself hath
both eaten and given to others in exchange for clothes and other natural necessities, which
explains origin of surplus and value’. Petty focusing on production from the land emphasized
that surplus product of labour and labour power to create a surplus above its own sustenance.
Petty knows rent was only surplus and think of profit in it and he argued that rent was
determined by price and not vice versa. Petty was having confusion between exchange value and
use-value.
Petty theory on capitalization of rent or the ‘usus fructus per annum’ focused on computation
of value of land at twenty-one years purchase of its annual rent. Petty thought money and foreign
trade are important as they help country to develop and improve its industry. He expects country
should Endeavour by policy to improve its efficiency in the production of its commodities
needed for trade. He thinks ‘art’ as an important aid in production and he measured the power of
the prince by the number, art and industry of his people, well united and governed.
In Quantulumcumque, he discussed monetary matters and suggested that money is only needed
as a help in trade and industry and also gave a commutation of the amount of money needed in
which the concept of velocity of circulation was implied. He raised objections to the prohibition
of bullion exports and to the legal regulations limiting interest and exchange rates. Petty was not
happy with existing laws at his time and he thinks that laws were against the laws of Nature and
also impracticable. He has strong belief in England’s ability to capture the trade of the world. He
said’ in England materials for a bank which shall furnish stock enough to drive the trade of the
whole commercial world’- Expectation of Petty was latter fulfilled.
John Locke
John Locke is the economist of transition from mercantilism to the classics and immediate
follower of Petty. Locke was largely influenced by mercantilist notions. The appearance of
Locke’s philosophy at the end of the seventeenth century has shown change of economic policy
which was less rapid than that of political philosophy.
Locke has synthesized and carried further all elements of past thought like social contract which
in Plato had made men build the city, in ‘Hobbes summit to the Leviathan’, and in Bodin had
established and set the limits to central authority, is found again in the work of Locke. He
developed doctrine of natural law. Realization of self-interest as the inherent motive force of
conduct is found entirely in Locke’s philosophy. Locke observed orderly voluntary association
of merchants in commercial ventures in regulated companies appeared to him the natural form of
organization for purpose of government. In constitutional monarchy that rationalism found its
political expression. Locke thought freedom must only be restricted in the interests of preserving

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it. Its basis was property, acquired by industry and reason, and entirely to the security which the
state could give. Locke insisted that a country grew rich by exporting more than it imported.
Locke took some points in Petty’s theory of rent, interest, money and debasement. He gave very
good analysis of the effect of debasement on prices in his some considerations of the
consequence of the lowering of interest and raising the value of money (1691). Locke also
opposed the laws for the limitation of interest. Locke followed closely petty in deriving theory of
interest from an analysis of rent. He regarded rent as the only surplus and inquired how money,
which was by nature barren, could have some productive character as soil, which did produce
something useful. He concluded that, “unequal distribution of money enabled its owners to
obtain a tenant for it from whom they could receive interest”.
Locke’s “Two Treatises concerning Government” (1690), share petty’s views of the origin of
value. He expressed that earth belonged to all men in common and private property was justified
by in so far as human being had mixed his labour with the gifts of nature. He considered labour
as the main source of value and whole value of the products of soil was due to labour, the rest
was assumed as natural gift. Locke confined to use-value and to have endeavored to show
importance of labour in its production. He avoided the issue of the origin of exchange –value and
made analysis which has been classed as a supply and demand theory of price. This analysis
appears in the Consequences, but is prefaced by a statement on money in Government.
According to Locke, money has imaginary value which was created by common consent.
In the consequences, Locke gave money double value. One arises from the ability of money to
supply a yearly income and the other for meeting necessaries or convenience of life which
money can procure in exchange. Locke felled into the mercantilist error of identifying money
and capital. Locke’s emphasis on the medium of exchange function of money was based on the
quantity theory of money, which was outlined with problem of debasement. Locke viewed that
changes in amount of money were bound to affect the prices and prices are determined by the
amount of money in circulation. This view of Locke was based on a supply and demand theory
of price. Locke believes that any quantity of money might be enough to carry on the trade of a
country. Locke pursued interest as consequence, and not as a cause, of the amount of money
seeking employment.
Sir Dudley North
He is immediately follower of Petty and advocate of free trade of his time. In his book
“Discourses upon Trade” (1691) took up a stubborn free trade attitude. He emphasized that all
trades are profitable because no one would continue in an unprofitable occupation. North also
took up some points of Petty’s theory on rent, interest, and money. North called capital as stock
and said little on subject of value, though he discussed price.

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North says that the rate of interest would fall if there were more lenders than borrowers. A low
rate of interest did not make trade, on the contrary, with an increase in trade the volume of
money would increase and the rate of interest would fall. North adopted the view of Mun’s
distribution of the precious metals through international trade. He said that the amount of money
brought from foreign countries or mined at home, anything in excess of the requirements of trade
was nothing more than an ordinary commodity to be treated as such.
John Law
Law was famous businessman than as an economist. He made contribution to theory of money
and he did not believe that paper money was equivalent to metallic money, but he believed that
money has active power and its good supply of it was necessary in order to create employment.
He contributed to the creation of conducive condition, which inspired physiocratic thought. He
desired that state should have ‘stock of treasure’. Law was the founder of a ‘subjective theory of
value’, with special reference to the value of money and rejected the idea of money having an
imaginary value. The service which it rendered as money was no different from other services or
from the service of any other commodity. He became the forerunner of the Austrian school.
David Hume
Hume’s Political Discourses (1752), he included a number of economic essays of which of
money, Of Interest, Of Commerce and Of the Balance of Trade are given importance. He
repeated mercantilist errors. His praise of the merchants as ‘one of the most useful races of men
and as the motive force of production sounds strange after the writings of Petty, Locke and
North. He urged the desirability of treasure and uses of money in stimulating trade. On the
quantity theory of money, he based the belief that the balance of trade argument was wrong,
because the movements of specie would affect the price and merchandise trade. Hume ranged
himself on the side of free traders, but his advocacy of free trade was no stronger than that of
North.
In ‘Theory of Money’ he view that prices are determined by the amount of money. In ‘Theory of
Interest’, he opposed Locke’s view in certain aspects. Like Locke he regarded the value of
money as fictious only. Hume drew no distinction between changes in the value of the money
commodity itself and changes by an increased volume of circulating money. Hume believed that
the prices of commodities would always be proportioned to the quantity of money. The absolute
quantity of the latter did not therefore matter: a point which he demonstrated in a ‘celebrated
illustration’. Hume thought that changes in the quantity of money were of importance, as they
could alter the habits of people. Prices might not change if the changes in the amount of money
were accompanied by alterations in habits, which affected the volume of trade and demand for
money. Hume described what Keynes later called a profit inflation, which was taking place at the
expense of labour.

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Hume’s essay on ‘Of Interest’ suggests that a low rate of interest was the surest sign of
flourishing state of country trade. He showed low interest was not a cause but an effect. Rejected
Locke’s view on low rate of interest, which was due to abundance of money, although he
admitted both can occur together. Among the factors which determined the rate of interest he
distinguished the supply and demand of borrowers and lenders. A high rate of interest is caused
by ‘a great demand for borrowing’ and ‘little riches to supply that demand.’ Following North’s
view of the profit creating quality of capital, Hume added a third determinant of rate of interest.
Hume regarded profits and interest as independent. He viewed landed interest and desire for
accumulation as the driving forces of economic activity in his time helped to consolidate the
forces that were on the point of achieving economic supremacy and gained much political power.
Richard Cantillon
“Essai sur la nature du commerce en general” (1755) present’s most systematic statement of
economic principles, before the ‘Wealth of Nations’. Cantillon faced no difficulties in presenting
mechanism of foreign payments. His hypothesis on increase gold output from mines will
increase the power of purchasing was well accepted. He was aware of effects of increase of
money commodity and those of paper money. He showed relation between merchandise trade,
speculation and specie movement and he also showed their interaction with exchange rates and
price-levels in the mechanism of international payments. Cantillon has well-articulated the
causes which raise or lower the exchange from parity and the way in which such movements can
be foreseen and discounted. Cantillon ‘Theory of Value’ is in origin a labour theory but it is
transformed into a ‘Cost of Production Theory’ and admixture of supply and demand theory.
Cantillon distinguishes between the intrinsic value and the fluctuating price at which goods are
sold in the market. He assumed the excess of supply over demand depress the market price
below the intrinsic value, which never alter. As it is impossible to allocate production among the
different commodities in perfect harmony with consumption, hence variation in market price
exists. He rejects the definition which gives money an imaginary value. He emphasized on the
difference of wages in different occupation.
Sir James Steuart
His work “Principles of Political Economy’ published in 1767, became standard guideline for
comprehensive treatises. He distinguished between positive profit and relative profit. Positive
profit did not cause any one any loss and it derived from general increase in labour, industry, and
skill and it gets added up to the public good. Whereas, relative profit represents only a vibration
of balance of wealth between parties; it did not add to the existing volume of stock.
Steuart developed a ‘Cost-of-Production’ theory of value and he distinguished between the real
value of commodities and the profit upon alienation obtained in their sale. Real value is
determined by three factors: First, the amount of it which a workman could on average produce

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in a given period of time. Secondly, by the value of workman’s subsistence and necessary
expense, both for supplying his personal wants and providing the instruments belonging to his
profession and thirdly, by the value of materials, that is the first matter employed by workman.
Given by above three amounts, the real value of a good is determined. Anything above is the
profit of the manufacturer and depends on the condition of supply and demand.
Above analysis has twofold significance. Firstly, it makes manufacturer profit arise only in
exchange and thus represents a consistent application of the mercantilist theory of surplus.
Secondly it leads Stuart to develop a ‘supply and demand’ theory of price, which was elaborate
for his time.
PHYSIOCRATS
Physiocracy was developed in France in the eighteenth century. Political philosophy of the
physiocrarts was logical development of their economic ideas. The division of labour, one
producing surplus and other being sterile is found in whole classical system and defining
productive labour was important subjects discussed by Adam Smith and Ricardo. Physiocrats
tried to discover the actual form of productive labour. They were unable to distinguish use-value
and exchange-value. They thought surplus as the difference between use-values which has been
consumed and those which has been produced. They thought produit net was not a surplus of
social wealth in terms of exchange-value, but of concrete material wealth of useful goods.
Physiocrats concentrated on agriculture and were able to ignore problem of exchange-value
altogether. The analysis of the circulation of produit net between different classes of society
forms the most spectacular part of physiocratic doctrine.
Quesnay
Quesnay’s ‘tableau economique’ showed that how produit net circulates between proprietors of
land, tenant farmers and sterile class and secondly how it is reproduced each year of the same
produit net.
Turgot
He introduced dualism into theory of price and value and considered produit net in its most
primitive form. Other than believing only labour in agriculture could create a surplus, he also
gave importance to subjective elements in the determination of exchange-value. Turgot made a
list of different factors which an individual took into account in forming judgement about a
particular good. Its ability to satisfy a want, the ease with which it could be obtained, its scarcity
and other considerations would together form what he called the ‘valuer estimative’ of a good.
From this exchange value was derived. Turgot called it ‘valeur appreciative’ and said it was
determined by the average of the valeurs estimative of the parties to the exchange. He provided a

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link between exchange-value theory and theory of the function of labour. He said individual
would apply portions of his labor to obtain goods he needed according to his valuation of them.
Physiocrats were inconsistent in explaining value, as they made labour the exclusive creator of
surplus; they thought value as use-value only. Single tax on the land was the financial maxim of
physiocracy. According to physiocrats, human society was ruled by the natural laws which could
never be altered by the positive laws of statecraft. The essential aspects of the natural order were
the right to enjoy the benefits of property, to exercise one’s labour, and to have such freedom as
was consistent with freedom of others to follow their self-interest. Supporters of physiocrats saw
them as defenders of feudalism, but on economic front, physiocrats are forced to look economic
problems through capitalist glasses, as for them owner of the land is capitalist who employed the
labourer. Physiocrats prepared the ground for the French Revolution.