2018 Volume 60 Issue 1 Pages 1-19
Abstract: The differences between the theories of displacement and of compensation of machinery are related not only to issues regarding employment and income distribution but also to the dif-ferent perspectives on the market economy. Neoclassical as well as contemporary economists criticise Ricardoʼs machinery theory in the third edition of his Principles （1817）, which casts serious doubt on the efﬁciency of a market economy. The compensation theory advocated by economists, such as McCulloch, was in accordance with the neoclassical criticism of Ricardo, wherein they perceive a market economy to be an efﬁcient one. The development of the com-pensation theory has rarely been studied so far, although its development can be observed in the same way as that of the displacement theory. This study examines the formation of McCullochʼs compensation theory in his debate with Ricardo and its relevance to the neoclassical criticism of Ricardoʼs machinery theory. McCulloch insisted on the general beneﬁts of machinery from the beginning as stated in ʻTaxation and the Corn-Lawsʼ （1820）. The basic framework of McCullochʼs compensation theory emerged in ʻEffects of Machinery and Accumulationʼ （1821）, in which he argued that workers displaced by the introduction of machinery could be employed again owing to the expansion of production, which would be stimulated by the growing demand for commodities caused by the fall in prices. In the correspondence with Ricardo, after the publication of the third edition of Ricardoʼs Principles, McCulloch withdrew his criticism that Ricardo had accepted the possibility of a general glut and focused his criticism on the decrease in gross produce. McCulloch assumes that in arguing this, the maximum amount of a product could necessarily be achieved in the competitive market under a given condition. JEL classiﬁcation numbers: B 12, B 31, O 33.