10 pages
Mr.Q
fwdfwassignmentpart2.zipWintersession_lec7.pptx
Department of Economics
University of Toronto at Mississauga
ECO322- History of Economic Thought
Fall 2014/Spring 2015
Money and Business Cycles
Fisher
Wicksell
Pigou
Cambridge v/s Austrian school
American Thinking
Money
Money not prime under classicism
What are classical preoccupations? Why wasn`t is important under classical economic thought ?
Dichotomy between value theory and monetary theory
Once neoclassicists (marginalists) dealt with value --. Money theory addressed
Money
Irving Fisher
Wicksell
A.C. Pigou
Irving Fisher: Yale (1867-1947)
Believed that business cycles (not real business cycles) were caused by erratic changes in the money supply
The original monetarist
Money and Crisis
Crises in US in the 19th century – Panic of 1893 – most significant since the Great Depression and Great Recession
Grover Cleveland was President – Bank runs?
Run on gold in the U.S. Treasury
Declining prices for wheat and cotton
Overinvestment in the railroads wish shaky financing
Credit crunch
Firesales of American stocks in Europe
Bankcruptcy in the age of ‘robber barrons’ and ‘bankers’
Cornelius Vanderbilt, owner of steamship lines and railroads.
Andrew Carnegie, steel manufacturer.
J.P. Morgan, financier and banker.
John D. Rockefeller, founder of Standard Oil.
Jay Gould, Wall Street trader.
Jim Fisk, Wall Street trader.
Russell Sage, financier.
Quantity theory of Money
If we assume the quantity of goods on sale and the number of times those goods are resold, to be fixed quantities, the value of money will depend on its’ quantity; together with the average number of times that each piece changes hands in the process…. Consequently, the amount of goods and transactions being the same, the value of money is inversely as its quantity multiplied by what is called the rapidity of circulation (velocity). And the quantity of money in circulation is equal to the money value of all goods sold, divided by the number which expresses the rapidity of circulation
John Stuart Mill
MV=PT
% Δ M + % Δ V = % Δ P + % Δ T
Inflation and money supply growth move together
Does an increase in money supply always lead to inflation?
Inflation and the Fisher effect
Md = f( y, i)
Real interest rates underlying forces of borrowing and lending (thrift and productivity)
Expected rate of inflation in general equilibrium equals the actual rate and so
i =r + π
Quantity theory of Money : monetarism’s infancy
Discussion of ‘expectations’
Say a real rate of interest is 4% and inflation (expected) is 5%
Lender will not lend at rate less than 9%
What if actual inflation is 10%? What is the real interest rate of lending?
Lenders will adjust expectations about inflation in succeeding periods
Fisher effect
Inflation can be self perpetuating
Monetary expansion could lead to lower nominal interest rates
Initial increase in prices and inflation will lead to spiral
This is the basis of modern monetarism
How do depressions form?
Easy money boom and bubble that leads to toil and trouble
Bubble bursts distress sales of assets and asset liquidation
Credit crunches as very low borrowing and no confidence in money
Money supply falls , deflation
Deflation leads to falling profits and employment and output falls - DEPRESSION
This leads to further liquidation of assets and spiraling downwards
Quantity theory of Money : monetarism’s infancy
Knut Wicksell (1851 – 1926)
Originator of the famous ‘Stockholm’ school
Linked real activity with movements in money
Two rates: i : loan rate (rate of borrowing)
r : natural rate (return on capital)
i< r boom and desire for credit raising investment leading to inflation
i > r bust and liquidation decreasing investment deflation
Dynamic process at zero inflation i = r
How does this analysis link money markets and product markets?
Cumulative process above may also be irreversible
Increasing (Invt/y) factor prices climbing
What might happen to factor prices if deflation/bust occurs?
Quantity theory of Money : monetarism’s infancy
Marshall and A.C. Pigou from Cambridge
Demand for money (desired quantity of cash balances) expressed as fraction of income
How much M1 people desire to hold rather than spending or investing it?
What is the ratio of that cash balance to monetary value of all transactions in economy (P T)
M = k P T
k: fraction of income held in ‘money’ (or desire for balances)
k= (1/V) from Fisher’s equation
k: could rise as real interest rates fall and vice versa (and so measurable)
(why real interest rates? ) micro concept?
Both Marshall and Fisher viewed Money as a medium of exchange
(Fisher saw it as neutral)
Stability conditions not applied as in partial equilibruim commodity markets
Wicksell’s contribution is invaluable
Cambridge versus the Austrians and American Thought
The Austrians again:
Economic life of the nation is the result of economic efforts undertaken by INDIVIDUALS
Methodological individualism
Forestalled attention to economic aggregates
Contradicting any discussion of aggregates including Marx
Later Austrians (post Menger, Weiser) attacked Marxian socialism and any form of economic intervention
Böhm-Bawerk
Eugen von Böhm-Bawerk, 1851-1914
Presents a theory of interest as the rate of time preference
People tend to overestimate future resources and underestimate future wants
People place a higher value on present than future goods of the same kind and quantity
To induce them to exchange present for future goods they are to paid agio/premium which equates current consumption of goods to future consumption Interest
Cambridge versus the Austrians and American Thought : Before the GREAT DEPRESSION
Böhm-Bawerk
Goods available now will yield goods of higher value in future
Productivity theory of capital
The problem with capital greatly enhances productivity but is time consuming and roundabout method of production
E.g. of a fisherman and his net
Critque of socialism: no rational method of pricing
Refusal to cede government role even in monetary policy
Ludwig von Mises , 1881- 1973 (born in the Ukraine (Lviv), died NYC)
Austrians dispersed decline of Hapsburg Empire, and occupation of Austria by Germans
Greater diversity in Austrian school but with some unifying principles
www.mises.org
Cambridge versus the Austrians and American Thought
Marshall & A.C. Pigou again
Theory of externality what is it?
How does the existence of externalities contradict the individualism of the Austrians?
1877- 1959
1920, The Economics of Welfare
Marginal revolution efficient allocation od resources
Welfare economics components
Marginal social and private net product
Divergence of the above lead to failure to attain optimal national output
Case for subsidies and taxes to attain national optimum
Proponent of wider diffusion of income
Close to Fabian socialists (of J.S. Mill etc)
Cambridge Contributions
Compensation principle
Theory of second best ranking of less than optimal situations arising from violations of optimum conditions tariff v/s free trade versus quota and free trade
Public goods
Cost benefit analysis
Cambridge versus the Austrians and American Thought
The Americans of the time: The Institutionalists
Thorstein Veblen (1857-1929) , John R. Commons (1982-1945) and Wesley C. Mitchell (1874-1948)
Institution: an organized pattern of group behavior; well-established and accepted as a basic part of the culture.
Seeks to:
Understand society’s normative priorities, and the direct implementation of the collective values of a particular culture.
Describe the organization and control of the economic system and its historical evolution
Cambridge versus the Austrians and American Thought
“Human behavior is based on discernible patterns called “instincts.”
Thought human history is the evolution of social institutions.
Growth and development are the cumulative result of a process of habituation.
It is culture and social institutions that differentiate humans from other animals.
Strongly linked to German Historical School and subjective and diverse analysis
Revolt against formalism of abstract deductive reasoning in social sciences
Traits or instincts that arise underly all of human behavior and are inter-related in a fundamental way.
They form a fundamental antagonistic dichotomy in nearly all societies.
Two clusters of traits in perpetual conflict:
Cluster I: Related to Workmanship
Cluster II: Related to Exploitation (Predatory Instinct)
The conflict between these two and the social institutions created to deal with this conflict, was the central point of Veblen’s social theory.
Cambridge versus the Austrians and American Thought
Critique of Neoclassical Economics.
Simple product of Benthamite Utilitarianism
Attacked consumer sovereignty,saying society might be better off if gov’t directed production.
Neoclassical economics is static.
Simplistic view of human nature and social institutions
Equates hedonism with human nature
Production requires human beings to share knowledge and skills
Categorizing inputs and land, labor, and capital is peculiar to capitalism.
Neoclassical theory is designed to obscure the fundamental antagonism between capitalists and workers.
Rejects (private) property rights.
Private property originated in brute coercive force and is perpetuated by force and by institutional and ideological legitimization.
Government
Ultimate power is in the hands of owners of capital because they control the government.
Did not deny the democratic nature of U.S. government.
Social Mores
Cultural and social domination of the leisure class
Cambridge versus the Austrians and American Thought
Theory of the Leisure Class.
Most is devoted to a detailed description of how the leisure class displays its predatory prowess.
“Conspicuous consumption”
“Veblen good”
“Conspicuous use of leisure”
The wealthy maintain their position by predation or parasitism.
Power is everything.
368Polanyitable.pdf
Polanyi, chapter 4 1/1/1
Karl Polyani, The Great Transformation,
(1944) Chapter IV, Societies and Economic Systems (pp 43 - 55) Before we can proceed to the discussion of the laws governing a market economy, such as the nineteenth century was trying to establish, we must first have a firm grip on the extraordinary assumptions underlying such a system. (43) Market economy implies a self-regulating system of markets; in slightly more technical terms, it is an economy directed by market prices and nothing but market prices. Such a system capable of organizing the whole of economic life without outside help or interference would certainly deserve to be called self- regulating. These rough indications should suffice to show the entirely unprecedented nature of such a venture in the history of the race. (43) Let us make our meaning more precise. No society could, naturally, live for any length of time unless it possessed an economy of some sort; but previously to our time no economy has ever existed that, even in principle, was controlled by markets. In spite of the chorus of academic incantations so persistent in the nineteenth century, gain and profit made on exchange never before played an important part in human economy. Though the institution of the market was fairly common since the later Stone Age, its role was no more than incidental to economic life. (43) We have good reason to insist on this point with all the emphasis at our command. No less a thinker than Adam Smith suggested that the division of labor in society was dependent upon the existence of markets, or, as he puts it, upon man’s “propensity to barter, truck and exchange one thing for another." This phrase was later to yield the concept of the Economic Man. In retrospect it can be said that no misreading of the past ever proved more prophetic of the future. For while up to Adam Smith's time that propensity had hardly shown up on a considerable scale in the life of any observed community, and had remained, at best, a subordinate feature of economic life, a hundred years later an industrial system was in full swing over the major part of the planet which, practically and theoretically, implied that the human race was swayed in all its economic activities, if not also in its political intellectual, and spiritual pursuits, by that one particular propensity. Herbert Spencer, in the second half of the nineteenth century, could without more than a cursory acquaintance with economics, equate the principle of the division of labor with barter and exchange, and another fifty years later, Ludwig von Mises and Walter Lippmann could repeat the same fallacy. By that time there was no need for argument. A host of writers on political economy, social history, political philosophy, and general sociology had followed in Smith's wake and established his paradigm of the bartering savage as an axiom of their respective sciences. In point of fact, Adam Smith's suggestions about the economic psychology of early man were as false as Rousseau's were on the political psychology of the savage. Division of labor, a phenomenon as old as society, springs from differences inherent in the facts of sex, geography, and individual endowment; and the alleged propensity of man to barter, truck, and exchange is almost entirely apocryphal. While history and ethnography know of various kinds of economies, most of them comprising the institution of markets they
Space for Notes ↓
Polanyi, chapter 4 2/2/2
know of no economy prior to our own, even approximately controlled and regulated by markets. This will become abundantly clear from a bird's-eye view of the history of economic systems and of markets, presented separately. The role played by markets in the internal economy of the various countries it will appear, was insignificant up to recent times and the changeover to an economy dominated by the market pattern will stand out all the more clearly. (43, 44) To start with, we must discard some nineteenth century prejudice, that underlay Adam Smith's hypothesis about primitive man's alleged predilection for gainful occupations. Since his axiom was much more relevant to the immediate future than to the dim past, it induced in his followers a strange attitude toward man's early history. On the face of it, the evidence seemed to indicate that primitive man, far from having a capitalistic psychology, had, in effect, a communistic one (later this also proved to be mistaken). Consequently, economic historians tended to confine their interest to that comparatively recent period of history in which truck and exchange were found on any considerable scale, primitive economics was relegated to prehistory. Unconsciously, this led to a weighting of the scales in favor of a marketing psychology, for within the relatively short period of the last few centuries everything might be taken to tend towards the establishment of that which we eventually established, ie., a market system, irrespective of other tendencies which were temporarily submerged. The corrective of such a “short-run" perspective would obviously have been the linking up of economic history with social anthropology, a course which was consistently avoided. (44, 45) We cannot continue today on these lines. The habit of looking at the last ten thousand years as well as at the array of early societies as a mere prelude to the true history of our civilization which started approximately with the publication of the Wealth of Nations in 1776, is, to say the least, out of date. It is this episode which has come to a close in our days, and in trying to gauge the alternatives of the future, we should subdue our natural proneness to follow the proclivities of our fathers. But the same bias which made Adam Smith's generation view primeval man as bent on barter and truck induced their successors to disavow all interest in early man, as he was now known not to have indulged in those laudable passions. The tradition of the classical economists who attempted to base the law of the market on the alleged propensities of man in the state of nature, was replaced by an abandonment of all interest in the cultures of "ucivilized” man as irrelevant to an understanding of the problems of our age. (45) Such an attitude of subjectivism in regard to earlier civilizations should make no appeal to the scientific mind. The differences existing between civilized and "uncivilized" peoples have been vastly exaggerated, especially in the economic sphere. According to the historians, the forms of industrial life in agricultural Europe were, until recently, not much different from what they had been several thousand years Ever since the introduction of the plow – essentially a large hoe drawn by animals – the methods of agriculture remained substantially unaltered over the major part of Western and Central Europe until the beginning of the modern age. Indeed, the progress of civilization was, in these regions, mainly political intellectual and spiritual; in respect to material conditions, the Western Europe of 1100 AD had hardly caught up with the Roman world of a thousand years before. Even later, change flowed more easily in the channels of statecraft, literature, and the arts, but particularly in those of religion and learning, than in those of industry. In its economics, medieval Europe was largely on a level with ancient Persia, India, or China, and certainly not rival in riches and culture the New Kingdom of Egypt, two
Polanyi, chapter 4 3/3/3
thousand years before. Max Weber was the first among modern historians to protest against the brushing aside of primitive economics as irrelevant to the question of the motives and mechanisms of civilized societies. The subsequent work of social anthropology proved him emphatically right. For, if one conclusion stands out from the recent study of early societies it is the changelessness of man as a social being. His natural endowments reappear with societies of all times and places; and the necessary preconditions of the survival of human society appear to be immutably the same. (45, 46) The outstanding discovery of recent historical and anthropological research is that man's economy, as a rule, is submerged in his social relationships. He does not act so as to safeguard his individual interest in the possession of material goods; he acts so as to safeguard his social standing, his social claims, his social assets. He values material goods only in so far as they serve this end. Neither the process of production nor that of distribution is linked to specific economic interests attached to the possession of goods; but every single step in that process is geared to a number of social interests which eventually ensure that the required step be taken. these interests will be very different in a small hunting or fishing community from those in a vast despotic society, but in either case the economic system will be run on noneconomic motives. The explanation, in term of survival, is simple. Take the case of a tribal society. The individual's economic interest is rarely paramount for the community keeps all its members from starving unless it is itself borne down by catastrophe, in which case interests are again threatened collectively, not individually. The maintenance of social ties, on the other hand, is crucial. First, because by disregarding the accepted code of honor, or generosity, the individual cuts himself off from the community and becomes an outcast; second, because, in the long run, all social obligations are reciprocal, and their fulfillment serves also the individual's give-and-take interests best. Such a situation must exert a continuous pressure on the individual to eliminate economic self-interest from his consciousness to the point of making him unable, in many cases (but by no means in all), even to comprehend the implication of his own actions in term of such an interest. This attitude is reinforced by the frequency of communal activities such as partaking of food from the common catch or sharing in the results of some far-flung and dangerous tribal expedition. The premium set on generosity is a great when measured in terms of social prestige as to make any other behavior than that of utter self-forgetfulness simply not pay. Personal character has little to do with the matter. Man can be as good or evil as social or asocial, jealous or generous, in respect to one another. Not to allow anybody reason for jealousy is, indeed, an accepted principle of ceremonial distribution, just as publicly bestowed praise is the due of the industrious, skillful, or otherwise successful gardener (unless he be too successful, in which case he may deservedly be allowed to wither away under the delusion of being the victim of black magic). The human passions, good or bad, are merely directed towards noneconomic ends. Ceremonial display serves to spur emulation to the utmost and the custom of communal labor tends to up both quantitative and qualitative standards to the highest pitch. The performance of all acts of exchange as free gifts that are expected to be reciprocated though not necessarily by the same individuals – a procedure minutely articulated and perfectly safeguarded by elaborate methods of publicity, by magic rites, and by the establishment of "dualities" in which groups arc linked in mutual obligations – should in itself explain the absence of the notion of gain or even of wealth other than that consisting of objects traditionally enhancing social prestige. (46, 47)
Polanyi, chapter 4 4/4/4
In this sketch of the general traits characteristic of a Western Melanesian community we took no account of its sexual and territorial organization, in reference to which custom, law, magic, and religion exert their influence, as we only intended to show the manner in which so-called economic motives spring from the context of social life. For it is on this one negative point that modern ethnographers agree: the absence of the motive of gain; the absence of the principle of laboring for remuneration; the absence of the principle of least effort; and, especially, the absence of any separate and distinct institution based on economic motives. But how, then, is order in production and distribution ensured? The answer is provided in the main by two principles of behavior not primarily associated with economics: reciprocity, and redistribution. With the Trobriand Islanders of Western Melanesia, who serve as an illustration of this type of economy, reciprocity works mainly in regard to the sexual organization of society, that is, family and kinship; redistribution is mainly effective in respect to all those who are under a common chief and is, therefore, of a territorial character. Let us take these principles separately. (47) The sustenance of the family - the female and the children - is the obligation of matrilineal relatives. The male, who provides for his sister, and her family by delivering the finest specimens of his crop, will mainly earn credit due to his good behavior, but will reap little immediate material benefit in exchange; if he is slack, it is first and foremost his reputation that will suffer. It is for the benefit of his wife and her children that the principle of reciprocity will work, and thus compensate him economically for his acts of civic virtue. Ceremonial display of food both in his own garden and before the recipient's storehouse will ensure that the high quality of his gardening be known to all. It is apparent that the economy of garden and household here forms part of the social relations connected with good husbandry and fine citizenship. The broad principle of reciprocity helps to safeguard both production and family sustenance. (47, 48) The principle of redistribution is no less effective. A substantial part of all the produce of the island is delivered by the village headmen to the chief who keeps it in storage. But as all communal activity centers around the feasts, dances, and other occasions when the islanders entertain one another as well as their neighbors from other islands (at which the results of long distance trading are handed out, gifts are given and reciprocated according to the rules of etiquette, and the chief distributes the customary presents to all), the overwhelming importancc of the storage system becomes apparent. Economically, it is an essential part of the existing system of division of labor, of foreign trading, of taxation for public purposes, of defense provisions. But these functions of an economic system proper are completely absorbed by the intensely vivid experiences which offer superabundant non-economic motivation for every act performed in the frame of the system as a whole. (48) However, principles of behavior such as these cannot become effective unless existing institutional patterns lend themselves to their application. Reciprocity and redistribution are able to ensure the working of an economic system without the help of written records and elaborate administration only because the organization of the societies in question meets the requirements of such a solution with the help of patterns such as symmetry and centricity. (48) Reciprocity is enormously facilitated by the institutional pattern of symmetry, a frequent feature of social organization among nonliterate peoples. The striking “duality” which we find in tribal subdivisions lends itself to the pairing out of individual relations and thereby assists the give-and-take of goods and
Polanyi, chapter 4 5/5/5
services in the absence of permanent records. The moieties of savage society which tend to create a “pendant”, to each subdivision, turned out to result from, as well as help to perform, the acts of reciprocity on which the system rests. Little is known of the origin of "duality"; but each coastal village on the Trobriand Islands appears to have its counterpart in an inland village, so that the important exchange of breadfruits and fish, though disguised as a reciprocal distribution of gifts, and actually disjoint in time, can be organized smoothly. In the Kula trade, too, each individual has his partner on another isle, thus personalizing to a remarkable extent the relationship of reciprocity. But for the frequency of the symmetrical pattern in the subdivisions of the tribe, in the location of settlements, as well as in intertribal relations, a broad reciprocity relying on the long run working of separated acts of give-and-take would be impracticable. (48, 49) The institutional pattern of centricity, again, which is present to some extent in all human groups, provides a track for the collection, storage, and redistribution of goods and services. The members of a hunting tribe usually deliver the game to the headman for redistribution. It is in the nature of hunting that the output of game is irregular, besides being the result of a collective input. Under conditions such as these no other method of sharing is practicable if the group is not to break up after every hunt. Yet in all economies of kind a similar need exists, be the group ever so numerous. And the larger the territory and the more varied the produce, the more will redistribution result in an effective division of labor, since it must help to link up geographically differentiated groups of producers. (49) Symmetry and centricity will meet halfway the needs of reciprocity and redistribution; institutional patterns and principles of behavior are mutually adjusted. As long as social organization runs in its ruts, no individual economic motives need come into play; no shirking of personal effort need be feared; division of labor will automatically be ensured; economic obligations will be duly discharged; and, above all, the material means for an exuberant display of abundance at all public festivals will be provided. In such a community the idea of profit is barred; higgling and haggling is decried; giving freely is acclaimed as a virtue; the supposed properisity to barter, truck, and exchange does not appear. The economic system is, in effect, a mere function of social organization. (49) It should by no means be inferred that socioeconomic principles of this type are restricted to primitive procedures or small communities; that a gainless and marketless economy must necessarily be simple. The Kula ring, in western Melanesia, based on the principle of reciprocity, is one of the most elaborate trading transactions known to man; and redistribution was present on a gigantic scale in the civilization of the pyramids. (49, 50) The Trobriand Islands belong to an archipelago forming roughly a circle, and an important part of the population of this archipelago spends a considerable proportion of its time in activities of the Kula trade. We describe it as trade though no profit is involved, either in money or in kind; no goods are hoarded or even possessed permanently; the goods received are enjoyed by giving them away; no biggling and haggling, no truck, barter, or exchange enters; and the whole proceedings are entirely regulated by etiquette and magic. Still, it is trade, and large expeditions are undertaken periodically by natives of this approximately ring-shaped archipelago in order to carry one kind of valuable object to peoples living on distant islands situated clockwise, while other expeditions are arranged carrying another kind of valuable object to the islands
Polanyi, chapter 4 6/6/6
of the archipelago lying counterclockwise. In the long run, both sets of objects- white-shell armbands and redshell necklaces of traditional make-will move round the archipelago, a trajectory which may take them up to ten years to complete. Moreover, there are, as a rule, individual partners in Kula who reciprocate one anothers Kula gift with equally valuable armbands and necklaces, referably such that have previously belonged to distinguished persons. Now, a systematic and organized give-and-take of valuable objects transported over long distances is justly described as trade. Yet this complex whole is exclusively run on the lines of reciprocity. An intricate time-space- person system covering hundreds of miles and several decades, linking many hundreds of people in respect to thousands of strictly individual objects, is being handled here without any records or administration, but also without any motive of gain or truck. Not the propensity to barter, but reciprocity in social behavior dominates. Nevertheless, the result is a stupendous organizational achievement in economic field Indeed, it would be interesting to consider whether even the most advanced modem market organization, based on exact accountancy, would be able to cope with such a task, should it care to undertake it. It is to be feared that the unfortunate dealers, faced innummerable monopolists buying and selling individual objects with with extravagant restrictions attached to each transaction, would fail to make a standard profit and might prefer to go out of business. (50) Redistribution also has its long and variegated history which leads up almost to modern times. The Bergdama returning from his hunting excursion, the woman coming back from her search for roots, fruit, or leaves are expected to offer the greater part of their spoil for the benefit of the community. In practice, this means that the produce of their activity is shared with the other persons who happen to be living with them. Up to this point the idea of reciprocity prevails: today's giving will be recompensed by tomorrow's taking. Among some tribes, however, there is an intermediary in the person of the headman or other prominent member of the group; it is he who receives and distributes the supplies, especially if they need to be stored. This is redistribution proper. Obviously, the social consequences of such a method of distribution may be far reaching, since not all societies are as democratic as the primitive hunters. Whether the redistributing is performed by an, influential family or an outstanding individual, a ruling aristocracy or a group of bureaucrats, they will often attempt to increase their political power by the manner in which they redistribute the goods. In the potlatch of the Kwakiutl it is a point of honor with the chief to display his wealth of hides and to distribute them; but he does this also in order to place the recipients under an obligation, to make them his debtors,' and ultimately, his retainers. (51) All large-scale economies in kind were run with the help of the principle of redistribution. The kingdom of Hammurabi in Babylonia and, in particular, the New Kingdom of Egypt were centralized despotisms of a bureaucratic type founded on such an economy. The household of the patriarchal family was reproduced here on an enormously enlarged scale, while its "communistic" distribution was graded, involving sharply differentiated rations. A vast number of storehouses was ready to receive the produce of the peasant's activity, whether he was cattle breeder, hunter, baker, brewer, potter, weaver, or whatever else. The produce was minutely registered and, in so far as it was not consumed locally, transferred from smaller to larger storehouses until it reached the central administration situated at the court of the Pharaoh. There were separate treasure houses for cloth, works of art, ornamental objects, cosmetics, silverware, the royal wardrobe; there were huge grain stores, arsenals, and wine cellars.(51)
Polanyi, chapter 4 7/7/7
But redistribution on the scale practiced by the pyramid builders was not restricted to economies which knew not money. Indeed, all archaic kingdoms made use of metal currencies for the payment of taxes and salaries, but relied for the rest on payments in kind from granaries and warehouses of every description, from which they distributed the most varied goods for use and consumption mainly to the nonproducing part of the population, that is, to the officials, the military, and the leisure class. This was the system practiced in ancient China, in the empire, of the Incas, in the kingdoms of India, and also in Babylonia. In these, and many other civilizations of vast economic achievement, an elaborate division of labor was worked by the mechanism of redistribution.(51, 52) Under feudal conditions also this principle held. In the ethnically stratified societies of Africa it sometimes happens that the superior a consist of herdsmen settled among agriculturalists who are still strating the digging stick or the hoe. The gifts collected by the herdsmens are mainly agricultural - such as cereals and beer - while the gifts distributed by them may be animals, especially sheep or goats. In these cases there is division of labor, though usually an unequal one, between the various strata of society: distribution may often cover up a measure of exploitation, while at the same time the symbiosis benefits the standards of both strata owing to the advantages of an improved division of labor. Politically, such societies live under a regime of feudalism, whether cattle or land be the privileged value. There are "regular cattle fiefs in East Africa." Thurnwald, whom we follow closely on the subject of redistribution, could therefore say that feudalism implied everywhere a system of redistribution. Only under very advanced conditions and exceptional circumstances does this system become predominantly political as happened in Western Europe, where the change arose out pof the vassal's need for protection, and gifts were converted into feudal tributes.(52) These instances show that redistribution also tends to enmesh the economic system proper in social relationships. We find, as a rule, the process of redistribution forming part of the prevailing political regime, whether it be that of tribe, city-state, despotism, or feudalism of cattle or land. The production and distribution of goods is organized in the main through collection, storage, and redistribution, the pattern being focused on the chief, the temple, the despot, or the lord. Since the relations of the leading group to the led are different according to the foundation on which political power rests, the principle of redistribution will involve individual motives as different as the voluntary sharing of the game by hunters and the dread of punishment which urges the fellaheen to deliver his taxes in kind. (52) We deliberately disregarded in this presentation the vital distinction between homogeneous and stratified societies, i.e., societies which are on the whole socially unified, and such as are split into rulers and ruled. Though the relative status of slaves and masters may be worlds apart from that of the free and equal members of some hunting tribes, and consequently, motives in the two societies will differ widely, the organization of the economic system may still be based on the same principles, though accompanied by very different culture traits, according to the very different human relations with which the economic system is intertwined.(52, 53) The third principle, which was destined to play a big role in history and which we will call the principle of householding, consists in production for one's own use. The Greeks called it oeconomia, the etymon of the word "economy." As
Polanyi, chapter 4 8/8/8
far as ethnographical records are concerned, we should not assume that production for a person's or group's own sake is more ancient than reciprocity or redistribution. On the contrary, orthodox tradition as well as some more recent theories on the subject have been emphatically disproved. The individualistic savage collecting food and hunting on his own or for his family has never existed. Indeed, the practice of catering for the needs of one's household becomes a feature of economic life only on a more advanced level of agriculture; however, even then it has nothing in common either with the motive of gain or with the institution of markets. Its pattern is the closed group. Whether the very different entities of the family or the settlement or the manor formed the self-sufficient unit, the principle was invariably the same, namely, that of producing and storing for the satisfaction of the wants of the members of the group. The principle is as broad in its application as either reciprocity or redistribution. The nature of the institutional nucleus is indifferent: it may be sex as with the patriarchal family, locality as with the village settlement, or political power as with the seigneurial manor. Nor does the internal organization of the group matter. It may be as despotic as the Roman familia or as democratic as the South Slav zadruga; as large as the, great domains of the Carolingian magnates or as small as the average peasant holding of Western Europe. The need for trade or markets is, no greater than in the case of reciprocity or redistribution.(52, 53) It is such a condition of affairs which Aristotle tried to establish as a norm more than two thousand years ago. Looking back from the rapidly declining heights of a world-wide market economy we must concede that his famous distinction of householding proper and moneymaking, in the introductory chapter of his Politics, was probably the most prophetic pointer ever made in the realm of the social sciences; it is certainly still the best analysis of the subject we possess. Aristotle insists on production for use as against production for gain as the essence of householding proper; yet accessory production for the market need not, he argues, destroy the self-sufficiency of the household as long as the cash crop would also otherwise be raised on the farm for sustenance, as cattle or grain; the sale of the surpluses need not destroy the basis of householding. Only a genius of common sense could have maintained, as he did, that gain was a motive peculiar to production for the market, and that the money factor introduced a new element into the situation, yet nevertheless, as long as markets and money were mere accessories to an otherwise self- sufficient household, the principle of production for use could operate. Undoubtedly, in this he was right, though he failed to see how impracticable it was to ignore the existence of markets at a time when Greek economy had made itself dependent upon wholesale trading and loaned capital. For this was the century when Delos and Rhodes were developing into emporia of freight insurance, sea-loans, and giro-banking, compared with which the Western Europe of a thousand years later was the very picture of primitivity. Yet Jowett, Master of Balliol, was grievously mistaken when he took it for granted that his Victorian England had a fairer grasp than Aristotle of the nature of the difference between householding and moneymaking. He excused Aristotle by conceding that the "subjects of knowledge that are concerned with man run into one another; and in the age of Aristotle were not easily distinguished." Aristotle, it is true, did not recognize clearly the implications of the division of labor and its connection with markets and money; nor did he realize the uses of money as credit and capital. So far Jowett’s strictures were justified. But it was the Master of Balliol, not Aristotle, who was impervious to the human implications of money-making. He failed to see that the distinction between the principle of use and that of gain was the key to the utterly different civilization the outlines of which Aristotle accurately forecast two thousand years before its
Polanyi, chapter 4 9/9/9
advent out of the bare rudiments of a market economy available to him, while Jowett, with the full-blown specimen before him, overlooked its existence. In denouncing the principle of production for gain "as not natural to man," as boundless and limitless, Aristotle was, in effect, aiming at the crucial point, namely the divorcedness of a separate economic motive from the social relations in which these limitations inhered. (53, 54) Broadly, the proposition holds that all economic systems known to us up to the end of feudalism in Western Europe were organized either on the principles of reciprocity or redistribution, or houscholding, or some combination of the three. These principles were institutionalized with the help of a social organization which, inter alia, made use of the patterns of symmetry, centricity, and autarchy. In this framework, the orderly production and distribution of goods was secured through a great variety of individual motives disciplined by general principles of behavior. Among these motives gain was not prominent. Custom and law, magic and religion co-operated in inducing the individual to comply with rules of behavior which, eventually, ensured his functioning in the economic system. (54, 55) The Greco-Roman period, in spite of its highly developed trade, represented no break in this respect; it was characterized by the grand scale on which redistribution of grain was practiced by the Roman administration in an otherwise householding economy, and it formed no exception to the rule that up to the end of the Middle Ages, markets played no important part in the economic system; other institutional patterns prevailed.(55) From the sixteenth century onwards markets were both numerous and important. Under the mercantile system they became, in effect, a main concern of government; yet there was still no sign of the coming control of markets over human society. On the contrary. Regulation and regimentation were stricter than ever; the very idea of a self-regulating market was absent. To comprehend the sudden changever to an utterly new type of economy in the nineteenth century, we must now turn to the history of the market, an institution we were able practically to neglect in our review of the economic systems of the past. (55)
Article_20.pdf
Essay Grading Rubric.docx
3
Essay Grading Rubric:
These are qualitative rankings.
Content:
Critical Reading
2. The writer represents the text(s) under discussion poorly.
3. The writer demonstrates a fair and basic understanding of the text(s) under discussion
4. The writer demonstrates original insight about the text(s) under discussion.
5. The writer demonstrates superior and original insight about the text(s) under discussion.
Argument
2. The paper’ is unclear
3. The paper has a basic thesis
4. The paper’s thesis asserts an original and partially developed argument
5. The paper’s thesis is original, well established and originally presented
Logic and Coherence
2. The paper’s organization (ordering of assertions) is faulty; inferences are drawn illogically throughout the paper and material is extraneous and does not lend strength to any point made.
3. The paper’s organization (ordering of assertions) is basic; inferences are drawn partially only and little material is extraneous.
4. The papers organization (ordering of assumptions) is thoughtfully composed; inferences are drawn logically and interestingly and a marginal amount of material is extraneous.
5. The paper’s organization (ordering of assumptions) is outstandingly composed; inferences are drawn logically and with superior insight and no part of the paper is extraneous.
Evidence
1. The writer fails to support assertions with evidence throughout the paper
2. The writer fails to support assertions with evidence many times in the paper
3. The writer supports assertions with evidence but incorrectly or without real relevance a few places in the paper. The evidence is weak.
4. The writer supports assertions with carefully selected evidence.
5. The writer demonstrates a breadth of understanding the topic through careful selection nd presentation of evidence to support assertions.
Directness, Succinctness, Form of writing and contribution to understanding of the subject at hand.
1. Most of the sentences in the paper are wordy, pretentious, overwritten in more than one ‘voice’, obscuring the argument, thereby creating confusion for the reader. Impression of intense confusion for reader.
1. At least 25% to 50% of the sentences in the paper are wordy, pretentious, overwritten in more than one ‘voice’ detracting from the general argument of the paper but still able to convey a general theme to reader. Central theme is not absolutely clear, arguments weak.
1. Most of the sentences in the paper are direct and clear and but sometimes more than one ‘voice’ is used, but the overall direction of the paper is clear and direct. Central theme and arguments are mostly clear but not always relevant.
1. The writer includes wordy construction very few times throughout the paper and most of the paper is clear and direct. Single ‘voice’ used and the theme and arguments are clear and relevant always.
1. The writer chooses words and construction with care, making statements and arguments directly and clearly. Quality of the theme and arguments are clear but also illuminating and provide a superior understanding for reader.
Form:
Grammatical and Mechanical Clarity
2. The paper contains many errors throughout in sentence structure, spelling, word choice, punctuation and or/ documentation.
3. The paper contains some (a few ) errors in sentence structure, spelling, word choice, punctuation and or documentation.
4. The paper contains very few errors (less than 10% of the paper) in sentence structure, spelling, word choice, punctuation and or documentation
5. The paper contains no errors in sentence structure, spelling, word choice, punctuation and or documentation, the composition is elegant and complex while remaining clear.
Two additional criteria:
The Topic is:
2. Unsatisfactory for this course
3. Adequate for this course
5. Good for this course
The sources are:
2. Low quality
3. Medium quality
5. High quality
Finally if the requirements of page limits not met, lateness, font, etc, then -1 to the mark.
Plagiarism will result in a failing grade for the course, possibly more.
This rubric has been constructed using a template created by American University of Bulgaria.
Essay_poverty&econ.thought.docx
Lessons from a history of thought on poverty
Martin Ravallion 13 August 2013
Poverty is in ascendency as a policy issue – but it has not always been that way. This column, based on the author’s “The Idea of Antipoverty Policy”, recounts how mainstream thinking until well into the 19th century saw little scope for fighting widespread chronic poverty. The revolution came with a deeper understanding of how market and governmental failures interact with inequality to both perpetuate poverty and retard development more broadly. New policies for fighting poverty emerged and now extreme absolute poverty is at an historic low. History suggests, however, that continued progress is not assured.
Over the last 200 years the world as a whole has seen a marked decline in the incidence of absolute poverty (Sala-i-Martin and Pinkovskiy 2010 ). The success of Western Europe and North America over the 19th and 20th Centuries in reducing absolute poverty is well-known, as is the success of China and India in more recent times. We have also seen encouraging signs of faster progress against poverty in much of Africa since the late 1990s. The proportion of the world’s population living below (say) $1-a-day has fallen from over 80% in the early 19th century to under 20% today (see Ravallion 2013a, drawing on cited sources).
We have also seen a marked transition in thinking about poverty. Observations of poverty have long interacted with prior ‘theories’ (including ideologies) to yield an ‘interpretation’ of the causes of that poverty, with possible implications for action. Two stylised interpretations can be distinguished in past thought, both scholarly and popular.
· In the ‘utility of poverty’ interpretation, some people are poor largely because of the choices they make and there is little reason to think that they have the potential to be anything else than poor;
And their poverty is seen as necessary for the country’s economic success, which requires a large number of people eager for work, and avoiding hunger is seen as a necessary incentive for doing that work. The view of Patrick Colquhoun (1806), the founder of the modern police force, is a fair representation: “Poverty is a most necessary and indispensable ingredient in society, without which nations and communities could not exist in a state of civilization. It is the lot of man – it is the source of wealth”. This appears to have been the dominant mainstream view until well into the 19th century, and versions of this view survive today, though it is clearly no longer dominant.
Past advocates of the ‘utility of poverty’ saw little hope for poverty reduction through technical progress and economic growth, given the claimed lack of ‘moral restraint’ amongst poor people. Classical economists (from Adam Smith to John Stuart Mill) acknowledged the logic of policies for mass education to change behaviours and thus assure more pro-poor growth in a capitalist market economy. But there was little enthusiasm for public intervention to foster basic schooling for all children until the late 19th century. There was reasonably broad support within the elites for policies that helped protect people from transient poverty due to downside risks even when mass poverty was taken for granted (England’s Old Poor Laws, dating from Elizabethan times, were an early and seemingly successful example of such policies). But public action to reduce chronic poverty had few advocates.
· The second, alternative, interpretation sees poverty as stemming in large part from market and other institutional failures;
One version came to prominence in the socialist movements of the mid-19th century, whereby poverty was seen as an inevitable consequence of capitalism. Similarly to the classical economists, Karl Marx was skeptical of the prospects of poverty-reducing growth under capitalism, but not because of the moral failings of poor people; rather he believed that full-employment would be impossible, and the ‘reserve army’ of the unemployed would hold back any wage gains.
As economic analysis deepened, a version of the institutional-failures idea emerged in which market failures interact with initial inequalities to impede progress against poverty. For example, credit constraints entail that children in poor families do not attract the investments – in nutrition, health care and schooling – they need to eventually escape poverty. Threshold effects, such as the existence of a (positive) lower bound to human capital in order to be productive, create the potential for poverty traps. General equilibrium effects, notably on the distribution of labour earnings given unequal human capital endowments, entail that the benefits of labour-augmenting technical progress are shared quite unequally. Governments fail in not adequately addressing these problems. There were hints of these ideas in 19th-century economic literature, but well-developed formulations did not emerge until the late 20th century (there is now an extensive literature; see the discussion in Ravallion 2013a).
This version of the institutional-failures idea saw poverty as a social ill that can be avoided through public action in a capitalist market economy. Furthermore, doing so came to be seen as perfectly consistent with growth in such an economy. Indeed the right policies were expected to contribute to that growth by removing material constraints on the freedom of individuals to pursue their own economic interests.
Steps in the transition
The ascendancy of the institutional-failures view was highly uneven over time, with long periods of inaction and many set-backs. However, two significant historical steps can be identified, which I dub the First and Second Poverty Enlightenments. The First Poverty Enlightenment was in the 20 or so years prior to the turn of the 19th century. Popular critiques of prevailing social hierarchies blossomed in London and Paris, in the latter case famously culminating in the French Revolution. The philosophical writings of Immanuel Kant, Jean-Jacques Rousseau, Smith and others articulated a new respect for poor people as people, not merely serving some purely instrumental role as means of production. The economy itself came to be seen as a means for promoting all human welfare.
Smith’s (1776) influential critique of the mercantilist view that a country’s progress should be judged by its balance of trade was an important step in opening the way to (eventually) seeing progress against poverty as a goal for development, rather than a threat to it. Smith also argued in favor of promotional antipoverty policies, such as public subsidies to help cover schooling costs of the ‘common people’. But on this and other social issues, Smith was evidently far more progressive than most of his peers or near-term followers. Classical economists such as Thomas Malthus and David Ricardo were hostile to the idea of antipoverty policy, pointing to adverse incentive effects, although (not for the last time) such effects were almost certainly exaggerated, such as in the intense and influential early 19th-century debates on reforming England’s Poor Laws (Ravallion 2013a). While the recognition that institutions were at least partly responsible for poverty was a crucial step, it would be a long time before we saw the emergence of comprehensive antipoverty policies that could promote as well as protect.
The Second Poverty Enlightenment came in the period around 1960-80, with continuing influence today. This saw both a steeper pace of decline in the global poverty rate and intellectually stronger and better-informed arguments for antipoverty policy. Mass attention to poverty also reached its historical peak. This is evident if one enters the word ‘poverty’ in the Google Books Ngram Viewer; there was a sharp increase in the 1960s and by the first decade of this decade references to ‘poverty’ as a proportion of all published words reached its highest value in 300 years, in both English and French. The institutional failures interpretation had clearly become dominant over the utility of poverty. Debates continued of course. Some still blamed poor people for their poverty. Some did not see poverty as a global concern. However, a reasonably broad consensus emerged that poverty was morally unacceptable and across the globe – including in the newly free countries of the developing world – there was new optimism about the scope for fighting poverty. While mistakes happened, and some optimistic but ill-conceived plans were soon frustrated, numerous policy innovations emerged in both rich and poor countries. Incentive effects were still debated, though with better evidence to draw on. A combination of directly promotional policies with robust pro-poor growth in a reasonably open market economy came to be seen as key to fighting poverty. Old-style protection policies also came to incorporate incentives for promotion, such as transfers to compensate poor families for the costs (including foregone labour income) of schooling their children.
While the foundation for the transition in thinking was laid in the First Poverty Enlightenment, it was really only by the latter half of the 20th century that it came to be understood that freedom, self-fulfillment and overall prosperity required (amongst other things) that people were not held back by poverty and that governments had a responsibility to help assure that they were not. Philosophical and economic thought played an important role (in the writings of John Rawls, Amartya Sen and others), but so too did more popular works (such as by Michael Harrington and JK Galbraith). The state was seen to have a role in assuring that all individuals had access to the essential material conditions for their own fulfillment – arguably the most important requirement for equity, but also the key to breaking out of poverty traps. Good public education, sound health systems and financial inclusion all came to be seen as crucial elements for the next generation of poor families to escape poverty, for good.
Three mutually reinforcing factors stand out in explaining both this shift in thinking and falling poverty incidence globally: new technology, new knowledge and political voice (Ravallion 2013a). New technologies created economic opportunities and demands for new skills in the workforce, which mass schooling could provide, and a smarter workforce also needed to be healthy. New data and research on poor people influenced public thinking and policy making from the late 19th century, and also taught policymakers about the efficacy of their policy responses. Popular writings, social novels and plays also helped transform knowledge into public awareness. Success of the (often painful) struggles for broad political representation came roughly hand-in-hand with better informed policy debates and better policies, and were reinforced by new knowledge and awareness.
Conclusions
We live in a far less poor world than 200 years ago and it is a world that has become generally smarter at fighting poverty. The causation undoubtedly goes both ways between our progress against poverty and the transition in thinking. It is a lot harder to make rapid progress against poverty when there is a lot of it, and mainstream thinking 200-plus years ago could not easily entertain the idea of a world without poverty. With some painfully long lags (the time it took before real wage rates rose in the wake of the industrial revolution is especially notable), the heavy lifting out of absolute poverty in Western Europe and North America was eventually done through technical progress, economic growth and (crucially) complementary progress in basic health and education. Opportunities were created, and in due course policies emerged to assure that a great many people could take advantage of those opportunities. Then new options opened up for more focused and effective direct interventions emphasising both promotion and protection. Antipoverty policies have both fuelled, and been fuelled by, rising overall affluence.
With the global incidence of extreme poverty now at its lowest level, and public attention and knowledge at their highest point, the ideal of a world free of such poverty is surely closer than ever. But history also warns against complacency. Just as the heavy lifting in the successful developed countries of today was not easy, the poorest countries today face huge challenges. With a sustained effort, building on past experience, it should be possible to come close to eliminating extreme poverty by 2030 or so (Ravallion 2013b). But less optimistic scenarios can also be readily identified, returning to the more sluggish progress of the past.
References
Colquhoun, Patrick (1806), Treatise on Indigence, London, Hatchard.
Ravallion, Martin (2013a), “ The Idea of Antipoverty Policy ”, NBER Working Paper 19210.
Ravallion, Martin (2013b), “ How Long Will It Take To Lift One Billion People Out Of Poverty? ”, World Bank Research Observer.
Sala-i-Martin, Xavier and Maxim Pinkovskiy (2010), “ African poverty is falling … much faster than you think ”, VoxEU.org, 6 December.
Smith, Adam (1776), An Inquiry into the Nature and Causes of the Wealth of Nations, Electronic Classic Edition, Pennsylvania State University.
Essay_poverty&econ.thought[1].docx
Lessons from a history of thought on poverty
Martin Ravallion 13 August 2013
Poverty is in ascendency as a policy issue – but it has not always been that way. This column, based on the author’s “The Idea of Antipoverty Policy”, recounts how mainstream thinking until well into the 19th century saw little scope for fighting widespread chronic poverty. The revolution came with a deeper understanding of how market and governmental failures interact with inequality to both perpetuate poverty and retard development more broadly. New policies for fighting poverty emerged and now extreme absolute poverty is at an historic low. History suggests, however, that continued progress is not assured.
We have also seen a marked transition in thinking about poverty. Observations of poverty have long interacted with prior ‘theories’ (including ideologies) to yield an ‘interpretation’ of the causes of that poverty, with possible implications for action. Two stylised interpretations can be distinguished in past thought, both scholarly and popular.
· In the ‘utility of poverty’ interpretation, some people are poor largely because of the choices they make and there is little reason to think that they have the potential to be anything else than poor;
And their poverty is seen as necessary for the country’s economic success, which requires a large number of people eager for work, and avoiding hunger is seen as a necessary incentive for doing that work. The view of Patrick Colquhoun (1806), the founder of the modern police force, is a fair representation: “Poverty is a most necessary and indispensable ingredient in society, without which nations and communities could not exist in a state of civilization. It is the lot of man – it is the source of wealth”. This appears to have been the dominant mainstream view until well into the 19th century, and versions of this view survive today, though it is clearly no longer dominant.
Past advocates of the ‘utility of poverty’ saw little hope for poverty reduction through technical progress and economic growth, given the claimed lack of ‘moral restraint’ amongst poor people. Classical economists (from Adam Smith to John Stuart Mill) acknowledged the logic of policies for mass education to change behaviours and thus assure more pro-poor growth in a capitalist market economy. But there was little enthusiasm for public intervention to foster basic schooling for all children until the late 19th century. There was reasonably broad support within the elites for policies that helped protect people from transient poverty due to downside risks even when mass poverty was taken for granted (England’s Old Poor Laws, dating from Elizabethan times, were an early and seemingly successful example of such policies). But public action to reduce chronic poverty had few advocates.
· The second, alternative, interpretation sees poverty as stemming in large part from market and other institutional failures;
One version came to prominence in the socialist movements of the mid-19th century, whereby poverty was seen as an inevitable consequence of capitalism. Similarly to the classical economists, Karl Marx was skeptical of the prospects of poverty-reducing growth under capitalism, but not because of the moral failings of poor people; rather he believed that full-employment would be impossible, and the ‘reserve army’ of the unemployed would hold back any wage gains.
As economic analysis deepened, a version of the institutional-failures idea emerged in which market failures interact with initial inequalities to impede progress against poverty. For example, credit constraints entail that children in poor families do not attract the investments – in nutrition, health care and schooling – they need to eventually escape poverty. Threshold effects, such as the existence of a (positive) lower bound to human capital in order to be productive, create the potential for poverty traps. General equilibrium effects, notably on the distribution of labour earnings given unequal human capital endowments, entail that the benefits of labour-augmenting technical progress are shared quite unequally. Governments fail in not adequately addressing these problems. There were hints of these ideas in 19th-century economic literature, but well-developed formulations did not emerge until the late 20th century (there is now an extensive literature; see the discussion in Ravallion 2013a).
This version of the institutional-failures idea saw poverty as a social ill that can be avoided through public action in a capitalist market economy. Furthermore, doing so came to be seen as perfectly consistent with growth in such an economy. Indeed the right policies were expected to contribute to that growth by removing material constraints on the freedom of individuals to pursue their own economic interests.
Steps in the transition
The ascendancy of the institutional-failures view was highly uneven over time, with long periods of inaction and many set-backs. However, two significant historical steps can be identified, which I dub the First and Second Poverty Enlightenments. The First Poverty Enlightenment was in the 20 or so years prior to the turn of the 19th century. Popular critiques of prevailing social hierarchies blossomed in London and Paris, in the latter case famously culminating in the French Revolution. The philosophical writings of Immanuel Kant, Jean-Jacques Rousseau, Smith and others articulated a new respect for poor people as people, not merely serving some purely instrumental role as means of production. The economy itself came to be seen as a means for promoting all human welfare.
Smith’s (1776) influential critique of the mercantilist view that a country’s progress should be judged by its balance of trade was an important step in opening the way to (eventually) seeing progress against poverty as a goal for development, rather than a threat to it. Smith also argued in favor of promotional antipoverty policies, such as public subsidies to help cover schooling costs of the ‘common people’. But on this and other social issues, Smith was evidently far more progressive than most of his peers or near-term followers. Classical economists such as Thomas Malthus and David Ricardo were hostile to the idea of antipoverty policy, pointing to adverse incentive effects, although (not for the last time) such effects were almost certainly exaggerated, such as in the intense and influential early 19th-century debates on reforming England’s Poor Laws (Ravallion 2013a). While the recognition that institutions were at least partly responsible for poverty was a crucial step, it would be a long time before we saw the emergence of comprehensive antipoverty policies that could promote as well as protect.
The Second Poverty Enlightenment came in the period around 1960-80, with continuing influence today. This saw both a steeper pace of decline in the global poverty rate and intellectually stronger and better-informed arguments for antipoverty policy. Mass attention to poverty also reached its historical peak. This is evident if one enters the word ‘poverty’ in the Google Books Ngram Viewer; there was a sharp increase in the 1960s and by the first decade of this decade references to ‘poverty’ as a proportion of all published words reached its highest value in 300 years, in both English and French. The institutional failures interpretation had clearly become dominant over the utility of poverty. Debates continued of course. Some still blamed poor people for their poverty. Some did not see poverty as a global concern. However, a reasonably broad consensus emerged that poverty was morally unacceptable and across the globe – including in the newly free countries of the developing world – there was new optimism about the scope for fighting poverty. While mistakes happened, and some optimistic but ill-conceived plans were soon frustrated, numerous policy innovations emerged in both rich and poor countries. Incentive effects were still debated, though with better evidence to draw on. A combination of directly promotional policies with robust pro-poor growth in a reasonably open market economy came to be seen as key to fighting poverty. Old-style protection policies also came to incorporate incentives for promotion, such as transfers to compensate poor families for the costs (including foregone labour income) of schooling their children.
While the foundation for the transition in thinking was laid in the First Poverty Enlightenment, it was really only by the latter half of the 20th century that it came to be understood that freedom, self-fulfillment and overall prosperity required (amongst other things) that people were not held back by poverty and that governments had a responsibility to help assure that they were not. Philosophical and economic thought played an important role (in the writings of John Rawls, Amartya Sen and others), but so too did more popular works (such as by Michael Harrington and JK Galbraith). The state was seen to have a role in assuring that all individuals had access to the essential material conditions for their own fulfillment – arguably the most important requirement for equity, but also the key to breaking out of poverty traps. Good public education, sound health systems and financial inclusion all came to be seen as crucial elements for the next generation of poor families to escape poverty, for good.
Three mutually reinforcing factors stand out in explaining both this shift in thinking and falling poverty incidence globally: new technology, new knowledge and political voice (Ravallion 2013a). New technologies created economic opportunities and demands for new skills in the workforce, which mass schooling could provide, and a smarter workforce also needed to be healthy. New data and research on poor people influenced public thinking and policy making from the late 19th century, and also taught policymakers about the efficacy of their policy responses. Popular writings, social novels and plays also helped transform knowledge into public awareness. Success of the (often painful) struggles for broad political representation came roughly hand-in-hand with better informed policy debates and better policies, and were reinforced by new knowledge and awareness.
Conclusions
We live in a far less poor world than 200 years ago and it is a world that has become generally smarter at fighting poverty. The causation undoubtedly goes both ways between our progress against poverty and the transition in thinking. It is a lot harder to make rapid progress against poverty when there is a lot of it, and mainstream thinking 200-plus years ago could not easily entertain the idea of a world without poverty. With some painfully long lags (the time it took before real wage rates rose in the wake of the industrial revolution is especially notable), the heavy lifting out of absolute poverty in Western Europe and North America was eventually done through technical progress, economic growth and (crucially) complementary progress in basic health and education. Opportunities were created, and in due course policies emerged to assure that a great many people could take advantage of those opportunities. Then new options opened up for more focused and effective direct interventions emphasising both promotion and protection. Antipoverty policies have both fuelled, and been fuelled by, rising overall affluence.
With the global incidence of extreme poverty now at its lowest level, and public attention and knowledge at their highest point, the ideal of a world free of such poverty is surely closer than ever. But history also warns against complacency. Just as the heavy lifting in the successful developed countries of today was not easy, the poorest countries today face huge challenges. With a sustained effort, building on past experience, it should be possible to come close to eliminating extreme poverty by 2030 or so (Ravallion 2013b). But less optimistic scenarios can also be readily identified, returning to the more sluggish progress of the past.
References
Colquhoun, Patrick (1806), Treatise on Indigence, London, Hatchard.
Ravallion, Martin (2013a), “ The Idea of Antipoverty Policy ”, NBER Working Paper 19210.
Ravallion, Martin (2013b), “ How Long Will It Take To Lift One Billion People Out Of Poverty? ”, World Bank Research Observer.
Sala-i-Martin, Xavier and Maxim Pinkovskiy (2010), “ African poverty is falling … much faster than you think ”, VoxEU.org, 6 December.
Smith, Adam (1776), An Inquiry into the Nature and Causes of the Wealth of Nations, Electronic Classic Edition, Pennsylvania State University.
goodwin.pdf
History of Political E c o n o m y 12:4 0 1980 by Duke University Press
Toward a theory of the history of economics
Craufurd D. Goodwin, Duke University
Over the past decade there have been numerous attempts to apply and adapt innovations in the history and philosophy of science to the his- tory of economics. Success has been limited. The two writers whose ideas have been most influential are Thomas K u h n and Imre Lakatos.’ Their structure of scientific revolutions and methodology of scientific research programs, respectively, are now quite well known to most historians of economics, either directly through their own writings or indirectly through the interpretive work of Mark Blaug, Spiro Latsis, and others.2 Thus far the verdict on the direct applicability of these models is “not proven.”
I t seems high time that historians of economics begin to propose their own models for the development of their subject. W h y have they not done so to date? I t is possible that this is because they have ac- cepted implicitly the common belief (or hope) of the economics profes- sion that the economics discipline is structurally like the physical sci- ences and should not, therefore, require any distinctive explanatory models of its own. A n y model to help understand the development of economics which had distinct characteristics different from those of models for the natural and physical sciences might seem to imply that economics is, somehow, less scientific than these “hard” sciences. The well-known inferiority complex of social scientists in the presence of their more established brethren prevents them from appreciating that difference in form is not the same thing as difference in quality. I n - deed it may be that the growing popularity of the Lakatosian approach to the history of economics over that of K u h n and other philosophers of science is because it grew out of the history of mathematics, that dis- cipline for which modern economists have the highest regard.
1 . Thomas S. Kuhn, The Structure ofScientiJic R e v o l u t i o n s , 2d ed. (Chicago, 1970); Imre Lakatos “Falsification and the Methodology of Scientific Research Programmes,” in lmre Lakatos and Alan Musgrave, e d s . , Criticism a n d the G r o w t h of K n o w l e d g e (London, 1970), pp. 91-195.
2 . Mark Blaug, “ Kuhn versus Lakatos or Paradigms versus Research Programmes in the History o f Economics,” in Spiro J . Latsis, e d . , Method a n d Appraisal in Eco- nomics (Cambridge, 1976), pp. 149-80. See also Latsis’s article, “ A Research Pro- gramme in Economics,” in the same volume, pp. 1-41. Contributions in H O P E include Bronfenbrenner (vol. 3), Kunin and Weaver (vol. 3 ) , Karsten (vol. 5 ) , and Ben-David (vol. 7). For a recent review of the issues see T. W. Hutchinson, O n Revolutions a n d Progress in Economic K n o w l e d g e (Cambridge. 1978), c h . I 1 .
Goodwin - Toward a theory 61 1 B u t w h y is it important to propose and to test models especially ap-
propriate for understanding the history of economics? There are at least three reasons. First, without such models historians are strictly limited in how far they can go in understanding their subject. There are, of course, some questions which can only be answered through the conventional historical narrative and biographical approach: for exam- ple, how great books are written, how schools are formed, or how such institutions as journals and professional societies evolve. B u t for un- derstanding large movements in the discipline, especially as the profes- sion grows in numbers of practitioners, subdivisions, and volume of published research, this method often breaks down. Second, models of scientific development are an effective device for teaching the history of economics, especially to students who are deeply imbued already with social science methodology. The practice of organizing a large quantity of empirical material around a set of hypothetical relation- ships comes more naturally to most of the students who are studying the subject than does the attention to individual persons and events be- stowed by the conventional historian. But finally, and perhaps of greatest interest at the moment, the perspective on modern economics which can come from robust models of the development of the disci- pline can give to historians of the subject an exceptionally useful role in ministering to the health of the profession.
This is a time of unusual uncertainty among economists, compar- able perhaps to the decades of the 1860s or 1930s. The self-confidence of the 1960s has been replaced by embarrassment over an inability to provide answers to such problems as stagflation and productivity de- cline. Moreover, economists have failed to predict or solve the energy problem, and seem to be of less and less use to the developing world. There is a growing sense that perhaps the subject has reached a plateau of achievement in its current mode.3 I n these circumstances in the same way as a psychoanalyst helps a patient understand his psychiatric problem by probing childhood events, the historian of economics may assist an ailing discipline by helping it to understand the course of its development, and its limitations.
The theoretical speculations of K u h n and Lakatos are certainly an excellent beginning from which to construct distinctive models to ex- plain the development of economics, or perhaps the social sciences in general. The places where these two pioneer models appear to be falsified by the history of economics may suggest where new models might yield predictions with greater empirical content.
But where does the history of economics most obviously not con- 3. For a discussion of these issues see T. W . Hutchison, Knowledge and Ignorance
in Economics (Oxford, 1977).
612 History of Political Economy 12:4 (1980)
form to the models of K u h n and Lakatos? First, with respect to Kuhn, one must struggle very hard to identify candidates for truly revolution- ary episodes (in the Kuhnian sense): perhaps marginalism, maybe Keynes, but arguably not even these. Certainly there were no crucial experiments or total gestalt switches as Kuhn perceived them in the physical sciences. The problem with the Lakatos model on the other hand is that we have to stretch mightily to see more than one strong re- search program in existence at any one time in economics. Yet it is through competition among rivals that Lakatosian progress occurs. And any economist knows it takes more than one to have competition. Conflict and dispute over artifacts and propositions in a Lakatosian protective belt there have been aplenty in economics, but not struggles between rival programs with distinctive structures, and separate hard cores and heuristics. Challenges to marginal economics from the Marx- ians and Institutionists are the nearest approximations to competition between rival SRP’s, and in both cases it was a very uneven contest. Moreover, the hard core of a Lakatosian model, with propositions which are truly metaphysical and beyond test, looks strangely unlike that of the dominant economic research program over its relatively short lifespan to date.
What then might a model uniquely constructed to explain the his- tory of economics look like? Only an outline can be suggested here. This might be a hybrid model that has elements drawn from both Kuhn and Lakatos, but with distinctive features as well. First of all, the Lakatosian notion of a research program with a core, heuristics, and protective belt as the structure in which scientific activity takes place remains persuasive. However, because economics may have evolved with only a single research program, motion has to be explained in some way other than by competition among rival programs. Progress must occur through change in the components of this single SRP, change which to a substantial degree is externally induced.
Economic science as an easily visible research program in a loose Lakatosian sense appeared for the first time during the late eighteenth century when a community of scholars came to agree more or less on a set of basic principles and operating procedures, recognizable as a Lakatosian hard core, which they could use as the basis for producing auxiliary propositions and artifacts in a Lakatosian protective belt. What we refer to as economic thought prior to that time might be viewed as groping for an expression of these principles, and in a few cases the formation of an artifact or two, but without the supporting structure of heuristics and the other paraphernalia of a well-developed research program. After the outlines of a program had been specified in
Goodwin - Toward a theory 613
the works of the classical economists the positive and negative heuris- tics then grew naturally out of the core principles.
The essential character of much scientific activity, as Lakatos sets it forth, seems to correspond as well to economics as to any other sci- ence. It recognizes the necessity for scientists to accept simplification so as to cope successfully with a chaos of facts, in essence to close off some questions so that others may be answered. But for the develop- ment of economics the Lakatosian portrayal of the scientific hard core as fixed and metaphysical seems inappropriate; instead the hard core of the economics SRP is populated by principles which are indeed ba- sic to the scientific enterprise, but are also subject to change over the life of the program. It may be that through change in these basic princi- ples of the research program scientific progress in economics takes place.
The principles at the hard core of economics may be categorized under several heads. First, there are methodological principles which prescribe how the scientific enterprise is to proceed and, when trans- lated into heuristics, tell economists what to do and what not to do. In recent years this category has been dominated by the principle that progress is to be made only through precise specification of models in mathematical form and their statistical testing with quantified data. The negative heuristic which grows out of this principle is that little is to be gained scientifically from excursions into most other branches of knowledge except perhaps to spread the economists’ own word as mis- sionaries for tools in the protective belt. As a result economics has come to include a series of territorial imperatives such that any econo- mist who makes such excursions is viewed with suspicion as “not rig- orous” and probably unreliable. The second category of principles in the hard core of economics concerns the behavioral characteristics of the units of analysis, mainly households and firms. For economists over most of the life of the subject these principles have specified ra- tional purposive behavior interpreted as utility and profit maximiza- tion. The third category of principles might be labeled institutional and contains the subject’s agreed position on various contextual matters such as values, collective goals, and the character of social phenomena other than the markets which are the main focus of the economists’ at- tention.
Progress in the economics discipline appears to have proceeded roughly as follows. On the basis of a certain set of agreed principles the scientific community has constructed a superstructure or protective belt of models, concepts, and other artifacts which, to the extent that they predict novel facts, has made economics progressive in the
614 History of Political Economy 12:4 (1980)
Lakatosian sense. When the presence of anomalies has been coped with by ad hoc reasoning, economics has become what Lakatos calls degenerative. Excuses are introduced to give theory narrower and nar- rower applicability. The process of degeneration in a research program may be a close analog of a phenomenon familiar to all economists, di- minishing returns as represented in a production function. Only so much of a superstructure can be built on a given foundation of basic principles; only so much protective belt can be constructed around a given hard core. The existence of fixed core principles with their de- rived heuristics amounts to the constraint of fixed factors in the pro- duction process. The activity of professional economists operating in their conventional mode is the variable factor in the production of eco- nomic knowledge. After a certain point their marginal productivity de- clines. In the physical sciences, Lakatos would argue, enrichment of the scientific enterprise (or relief from the constraint of fixed factors) occurs when a new and better SRP triumphs over a weaker one. But, it would appear, this replacement has not happened in economics, per- haps because of fundamental differences between economics and the natural and physical sciences.
Progress in economics beyond the elaboration of tools in the pro- tective belt (comparable to Kuhn’s puzzle-solving) has occurred through changes in the basic principles which constitute the core of the subject at any one time. This change in core principles has happened in three different ways. First, another branch of science becomes sud- denly fashionable and therefore thought to be worthy of economists’ attention (e.g., evolutionary theory in biology in the late nineteenth century). A change in focus then occurs in economics, not because of testing in its own protective belt, but because a new principle enters the core and a new positive heuristic dictates that economists draw upon this external body of knowledge. Second, a change in social values may gradually seep into the consciousness of economists and bring about a change in institutional principles in the core (e.g. that uni- versal suffrage is desirable, or that poor countries require special atten- tion from the more developed world.) Third, major social or economic convulsions may dictate to the economics discipline that it reexamine its entire modus operandi and, if necessary, change one or more core principles dramatically. This third type of phenomenon is in some re- spects analogous to the physical scientist’s crucial experiment which jolts the consciousness of a discipline and becomes the trigger for a sci- entific revolution. A n obvious feature of economic science is that op- portunities for controlled, laboratory experiments are few and far be- tween. Moreover, use of ceteris paribus conditions, and conditional
Goodwin - Toward a theory 615
forecasts, protects the scientists from decisive falsification where an hypothesis is unquestionably disproved. However, the lay public in the society in which economists live do not accept these rules for scientific protection. Occasionally they rise up and declare that an anomaly ex- ists, and in effect announce that the Emperor has no clothes.
Three examples of how such external “crucial experiments” have affected economics dramatically illustrate this point. I n each case ex- ternal events have led to turmoil within the discipline and some funda- mental reconstruction of the subject’s core principles.
The first example is the vaguest; it is the accumulation of social, po- litical, and economic problems during the late nineteenth century and the mounting pressure for answers to questions about these problems. Policymakers at that time found little in the theoretical constructs of the classical economists to indicate whether income distribution should be related to the process of production in some semi-mechanical way, or whether the division of the national product was bound to be an unpredictable outcome of struggle among organized groups in society. In addition they were uncertain whether the “contradictions” of a capitalist society proclaimed by Marx (depressions, monopolies, unemployment, etc.) were real and getting worse, or were merely an imaginary spectre. Did the economic system require some fundamental reforms to restore efficiency and justice, as claimed by Henry George and others? Classical economics had no clear response. Into this intel- lectual vacuum, perceived outside the discipline, jumped Jevons, Marshall, Walras, Menger, and their brethren, many of them attracted to the subject, it should be noted, by such large questions as these. It is hard to contend that the resulting marginal revolution was not then to some extent a response to external perception of anomalies in the eco- nomics of the time, a phenomenon analogous to a crucial experiment which leads to the reconstruction of a discipline. Acceptance of utility maximization by the marginalists was in accord with the political changes which had taken place in recent decades, while the precise ex- position they were able to provide of a competitive market system af- forded an effective response to radical critics in the important struc- tural debates of the day.
The second example of an external crucial experiment was the Great Depression of the 1930s, which forced economists to take ac- count of what amounted to a really giant anomaly for prevailing theory. This “experiment” like the others did not occur in a scientific labora- tory under controlled conditions; it was of overwhelming scientific import all the same. The public simply would not allow the economics profession to neglect this anomaly behind the defense of ceteris paribus
616 History of Political Economy 12:4 (1980)
conditions. I n response, some economists embraced Keynesian doc- trine and were led to widespread acceptance of a new scientific core principle-that full employment is not the natural state of an economic system, and hence achievement of desired social goals to the fullest ex- tent possible may require direction from the central hand of govern- ment. The depression does not in itself explain the creative genius of Keynes, but it certainly helps to illuminate the motivation behind his work, the vigor of the research community in which he lived, and the enthusiastic audience he faced.
The third example of an external crucial experiment, of facts falsi- fying accepted theory, is the behavior of large corporations after World War 11, which could not be explained convincingly using only the tradi- tional assumption of profit-maximizing behavior, even under those complex models of imperfect competition devised in the 1930s and 1940s which Latsis has called situational determinism. One response to this anomaly of corporate behavior was the introduction by Herbert Si- mon and others of more complex behavioral postulates drawing on a body of decision theory outside economic^.^
What is common to all these incidents is the circumstance that events outside the discipline precipitated a major change in the basic core principles upon which some or all of the parts of the science oper- ated. The changes were more fundamental than mere artifactual inno- vation in a protective belt. Yet no Kuhnian revolutions took place or Lakatosian research programs replaced less successful competitors. The new foundations given to economics from the effects of these out- side stimuli in each case led to more effective superstructures or tools in the protective belt. Progressivity was achieved in consequence of external events which changed the basis upon which economists worked. As soon as the new foundation was established, momentum within the discipline carried scientific progress forward with the famil- iar operation of the heuristics and the construction and testing of new models and refinements. The point to emphasize is that long-term prog- ress in the discipline seems to require both this internal forward move- ment in the protective belt and the repeated external shocks which jolt the core or foundation of basic principles.
There is danger in this discussion of seeming merely to repeat the tiresome old arguments between the internalists and externalists, giv- ing preference to the latter. The contention is, rather, that the history of economics cannot be understood without both approaches. More- over, it is essential to integrate the two and specify their relationship so
4. Professor Simon has described in a fascinating way the progress of his work, and its reception, in a lecture delivered in Stockholm, December 8, 1978, when he received the Nobel Prize in Economic Science. Herbert A . Simon, “Rational Decision Making in Business Organizations,” American Economic Review 69 (Sept. 1979): 493-5 13.
Goodwin - Toward a theory 617
as to avoid the familiar fallacy of the externalists in merely postulating plausible relationships ad hoc among theoretical development, ideol- ogy, social environment, and a wide range of other circumstances which seem to afford reasonable explanation for scientific develop- ment. The argument here is that scientific activity within an SRP, as described in Lakatos’s internalist model, has indeed been the principal function of economists since at least the late eighteenth century and ex- plains much of what they still do. However, in the normal course of its progress the economics discipline while operating in this mode has functioned in an area of diminishing returns in terms of its capacity to yield novel content-to explain hitherto inexplicable events. The out- side world enters the picture in two respects-both of which may be peculiar to the social sciences. First, because of the unpredictable course of history the questions the discipline sets out to explain are often increased before the explanation is complete. For example, Keynesian theory was constructed mainly to understand equilibrium levels of income at less than full employment, but was soon called upon to explain stagflation. Thus the normal weakening in the capacity of a body of theory to explain additional facts is accelerated in economics by an increase of these facts, and incidentally an audience for devices is created. Second, the circumstances of the outside world and espe- cially activities in other intellectual disciplines effect changes in the hard core of the discipline and provide the basis upon which new spec- ulations can be made and new activities can be carried on in the protec- tive belt. I n this way the process of diminishing returns in the research program is arrested.
Some light may be cast on the process of growth in economics by the early Lakatos, of his doctoral thesis, Proof and Refutations, as well as by his better-known later work. I n this first book he describes the “simple pattern of mathematical discovery” as consisting of four stages:
1 . Primitive conjecture. 2. Proof (a rough thought-experiment or argument, decomposing
the primitive conjecture into subconjectures or lemmas). 3 . ‘Global’ counterexamples (counter examples to the primitive
conjecture) emerge. 4. Proof re-examined: the ‘guilty lemma’ to which the global
counter example is a ‘local’ counterexample is spotted. . . . The theorem-the improved conjecture-supersedes the primitive conjecture with the new proof-generated concept as its para- mount new feature.s
5. Imre Lakatos, Proofs and Refutations: The Logic of Mathematical Discovery, ed. John Worrall and Elie Zahar (Cambridge, 1976), app. I , p. 127.
618 History of Political Economy 12:4 (1980)
Lakatos does not tell us how any of these four stages proceeds in gen- eral, but from his examples in the history of mathematics it would ap- pear that the motive force is internal, depending upon flashes of bril- liance for the initial speculation as well as for what follows. It may be that only the second and fourth stages-proof and refinement stages -in economics have proceeded internally. The crucial first stage of conjecture and the third stage of discovering counterexamples require contact with the outside world. Indeed failure to establish and nurture this contact may retard economic science and keep it perpetually in the second or “proof” stage, forever decomposing the primitive conjec- ture into additional and more refined lemmas and in the process nar- rowing its borders. I n this picture, isolation leads not only to rigor and sophistication but also to arrested development.
Finally, what are the implications of this model for the present? First of all, the model predicts that progress in economics will be asso- ciated with major external policy challenges or what society takes to be such challenges. This should give good cheer because society today faces no shortage of policy challenges, and therefore of external crucial experiments. Second, the model suggests that the inspiration for large leaps of progress in economics lies outside the subject itself, in the ma- terial that makes up the foundation of core principles. To achieve progress, therefore, economists should be encouraged to move adven- turesomely outside their subject and, in the fashion of the marginal- ists, Keynes, or Simon, to incorporate ideas from other areas of knowl- edge. Historians of economics, themselves working outside the main research programs of economics, may even help persuade the profes- sion to abandon one of its current core principles which prescribes nar- rowness and technocracy for its practitioners. Might it not be that the widespread questioning heard today about the very purpose of economic growth and change could lead economists to seek light on this subject from the humanities and the arts-fields from which the modern grad- uate student in economics is effectively screened professionally by rules and conventions? The simple-minded juxtaposition of work and leisure and the concept of human welfare as goods and services per capita surely need continual critical examination by persons accus- tomed to dealing with complex subjects like human creativity and fulfill- ment. Third, if the model suggested here is in fact a fair picture of how economics progresses, there is a real danger in economists’ adhering to patterns of behavior copied from the physical sciences. Physics or astronomy or mathematics may grow through Kuhnian revolutions or competing Lakatosian research programs, the scientists in both cases being insulated effectively from the outside world and from most other
Goodwin * Toward a theory 619
fields of inquiry. But if, as it is argued here, economics does not pro- gress this way and its current practitioners do copy the isolation of their fashionable counterparts in other sciences, they will cut themselves off from the very sources of the progress they have achieved in the past-refreshment derived from other subjects and contact with the world. A false model acquired by analogy may achieve just the oppo- site of what it sets out to accomplish-retrogression and stagnation rather than rigorous forward movement.
Two final points may be suggested in concluding these comments about an approach to a theory of the history of economics. First, if economists do insist on taking models for the development of their sub- ject from elsewhere rather than constructing new ones, a closer anal- ogy than the physical sciences may be engineering. Much of what economists do is more comparable to the designing and fabricating of structures for social use than to the laboratory work of the physicist. And the tests which face the engineer and the economist are certainly comparable. If an automobile or a building is poorly designed its weak- ness will become obvious, perhaps fatally so, to the consumers. If a fis- cal policy does not achieve the goals predicted for it by the economists, the results are equally clear to the members of society. And in both cases claims by the engineer or economist that ceteris paribus condi- tions were not fulfilled will have little protective value outside the pro- fession.
Second, over the last two decades there has been an unparalleled involvement of economists at the highest levels of policymaking. It is customary now for economists to be found not only in cabinet posts and on the Council of Economic Advisers but at all other levels of au- thority, in the media, and in the think tanks which offer policy advice. If the development of economics were wholly isolated from the policy world, as the development of nuclear physics (as opposed to nuclear engineering) is from strategic development, the close involvement of economists in policy would have no significance for the development of the subject. But if the relationship is very close, via changes in the core principles this new intense involvement by the profession in pol- icy may be significant indeed. The effects may be good or bad de- pending upon one’s values. But they cannot be ignored either by histo- rians of economics or by leaders of the profession who worry about the future of the subject.
An earlier version of this article was delivered as the presidential address to the History of Economics Society, University of Illinois, May 1979.
History of Political Economy-1970-Bronfenbrenner-205-24_Marx.pdf
The Vicissitudes of lhlarxian Economics
M . Bronfenbrenner
I
M Y SUBJECT is Marxism since Marx; more specifically, Marxian economics since volume 1 of Bas Kapitat (1867). My purpose is t o contribute t o the explanation of when and where Marxian economics has flourished, when and where it has declined. I limit myself to times and places where the ‘‘free market i n ideas” includes both most varieties of Marxism and many of its principal rivals. Thus, I shall not consider countries where a form of Marxism is a secular religion, like the Soviet Union since 1917, nor countries where Marxism is officially taboo, like Germany under the Nazis.
2. The facts to be explained are reasonably well known. In time, Marx’s masterpiece fell originally on deaf ears and threatened to sink without trace. Friedrich Engels wrote at least nine reviews under different pseudonyms in a n effort t o get the volume noticed at all. Interest in Marxism, including Marxian economics, rose in continental Europe during a generally depressed period from the 1870s through the early 1890s; Marx remained relatively neglected in the English- speaking countries. By the date of Engels’ death (1895) the claim of Marxism to constitute the only “scientific” socialism was taken seriously on the Continent, even when it was not accepted. A decliue set in a t about the t u r n of the century, marked by the rise of a revisionist heresy which dominates most social democratic parties of western Europe. The key volume was Eduard Bernstein’s Evotzc- tionary Xocialism (1899). The decline continued during generally prosperous times, well into the years of World War I. I n English- speaking countries, it was more than offset by the initial availability of Marx’s Capital in English; in fact English appreciation of Marx
Mk. BRONFENBRENNER is Professor of Economics at Carnegie-Mellon Uniuersity.
History of Political Economy
Published by Duke University Press
206 HISTORY OF POLITICAL ECONOMY
lagged Continental and especially German-language appreciation by approximately m e generati0n.l
3. A Marxist revival, shared by western Europe and America, this time without lag, dates from the Russian revolutions of 1917. It proceeded slowly through the Soviet Union’s first decade, following suppression of Bolshevik revolutions in central Europe. Marxist re- vival accelerated when the Soviet Union’s first two Five-Year Plans (1928-38) coincided with the Great Depression (1929-39). It has continued ever since, save for a pause in the decade 1955-65 following the failure of the anticipated postwar depression t o appear on sched- ule, even after the suspension of major hostilities in Korea. The Marxist revival continues today ; if anything, it has accelerated since approximately 1964. Marxism has provided one important r o o t of the so-called New Left, the other roots being anarchism and utopian- ism not elsewhere classified.
4. In space, Marxism has enjoyed its greatest strength in emerg- ing nations. By emerging nations I mean the less developed countries (LDC’s) which are poor, are undergoing the traumatic process of fairly rapid industrialization, and are o r have recently been subject t o colonial or sphere-of -influence domination by foreigners. These three attributes may exist singly o r in combination; any one is suf%cient t o support an exciting Marxian left. Marxism has been weakest in self- satisfied and self -confident countries like late-Victorian England and the “new era” America of the 1 9 2 0 ~ . ~ Today, some form of Marxian economic analysis is important, though not necessarily dominant, among intellectual circles in the representative LDC ’s of Asia, Black Africa, and Latin America and t o a lesser extent in the Middle East and Arabic Africa. It occupies a similar position in
1. The first English translation of Das Kapital dates from 1886 and includes only the first volume. The second translation, covering all three volumes, dates from 1906-9. There is no complete English translation of the later (rheoriea op SurpZus Value, which were to form volume 4, but a volume of selections appeared in 1951.
2. Marxism was strong in Hohenzollern Germany and Hapsburg Austria, t w o societies which seem in impressionistic retrospect to have been a s smug and d f - c o n t e n t e d a s either Victorian England or jazz-age America. I cannot under- stand the difference completely. My guess is t h a t Austrian and German Marxiam flourished primarily among .minorities sub ject t o discrimination, particularly in ;the Jewish community.
History of Political Economy
Published by Duke University Press
BRONFENBRENNER . VICISSITUDES OF MARXISM 207
Japan, which is no longer an LDC. As an amateur Japanologist, I shall consider the contemporary Japanese case separately.
I1
5. The outline of my thesis may be apparent already-that is, that objective conditions have been more important than abstract intellectual merit in accounting f o r both the rises and the declines of Marxian economics. I should like t o be permitted two digressions be- fore I attempt t o support the thesis further.
6 . First digression. Although a flourishing Marxist movement has been a product of social and economic malaise, it has not been the sole such product. The circumstances which foster Marxism also foster alternative movements, with which Marxists have lived in varying degrees of antagonism and symbiosis. Examples, in the last quarter of the nineteenth century, were anarchism and narodism in Europe and Russia, populism and the free silver and single tax move- ments in America. During the Great Depression there were varieties of fascism and anti-Semitism in Europe; there were the New Deal, Technocracy, and funny-moneyism in the United States. At the pres- ent day, the international New Left includes utopian, anarchist, and pacifist elements along with its Marxian ones.3 Marxism’s rivals range from CEPALism (structuralism) in Latin America to Moslem fanaticism in .the Middle East and the potentially fascist “new reli- gions ” of Japan?
7. Xecond digression. Many Marxists claim that the “utility revo- lution’’ of the 1870s in academic economics was an attempt to evade the Marxian extensions of the classical, o r Ricardian, system. The argument is not that Jevons o r Menger or Walras set out to refute Marx. It is rather that the rapid acceptance of their views contrasts suspiciously with the bored rejection of similar ideas from, e.g., Say, Senior, and Gossen prior t o the publication of Das Kupital. Maurice
3. One thing the New Left lacks is important new substantive ideas. Its originality seems entirely tactical.
4.The most important Japanese “new religion’’ of the 1960s has been the Sbka Gakkai (Value-Creation Society). It springs from the Nichiren sect of Buddhism ; Nichiren himself combined superpatriotism with his theology.
History of Political Economy
Published by Duke University Press
208 HISTORY OF POLITICAL ECONOMY
Dobb, the dean of Marxian economists in Britain, has put the matter this way:
It is, at least, a remarkable fact that within ten years of’the appearance of the first volume of Kapital, not only had the rival utility principle been enunciated independently by a number of writers, but the new principle was finding a recep- tivity to its acceptance such as very few ideas of similar novelty have ever met. . . .
After all, the new departure consisted more of a change of form than of substance, as Marshall always emphasized. That so many of the economists of the last quarter of the century should have advertised their wares as such an epoch-making novelty, and tilted their lances so menacingly a t their fore- bears, seems to have an obvious, if unflattering, explanation ; namely, the dangerous use t o which Ricardian notions had been recently put by mar^.^
8. Such assertions embody conjecture without evidence. I have no hard evidence on the other and perhaps less plausible side. Let me, however, raise certain questions. I n the first place, was not the utility revolution largely won, in the Anglo-Saxon countries and in France, before Marx’s work became well known? In the second place, was not the dominant German antithesis to classical economics, the principal instrument of anti-Marxism, historicism with a nationalist slant, rather than the utility theory of a somewhat provincial and declining Austria? And in the third place, were not the utility and productivity theories of 1870-1900 substantially improved, by their brush with the differential calculus, over their precursors of the previous generation B
I11
9. To resume the main thread of the argument, there are three claimants t o responsibility for the survival value of Marxian economic
5. Dobb, Political Economy and Socialism (London, 1937), pp. 25, 136. He has repeated this analysis in pamphlet literature; see, e.g., Dobb, N ~ T X as an Economist (New Pork, 1945), pp. 26 f .
History of Political Economy
Published by Duke University Press
BRONFENBRENNER . VICISSITTJDES OF MARXISM 209
thought. The first ground is its intrinsic superiority as technical economics. The second ground is its presentation, including i,ts link- ages with all the other elements in Marxian social philosophy. The third ground is its responsiveness to what Freud has called civiliza- tion and its discontents. My thesis is that the third ground is the most important (and the first ground possibly least important), and that the tide of Marxism rises and flows, both temporally and geo- graphically, with ,the discontents of civilization. This thesis is, I think, consistent with Marx’s own materialistic interpretation of history and with his associated “ epiphenomenal” explanation of ideology, although Marx, like Freud, exempted his own theory from the general rule.
10. The professional bias of economists inclines them to the view that the validity (generality, elegance, and rigor) of an economic theory is associated closely with its longevity. We recall ,the closing pages of Keynes’s General Theory, about the ideas of economists being “more powerful than is commonly understood. Indeed t h e world is ruled by little else. Practical men, who believe themselves t o be quite exempt from any intellectual influences, are usually the slaves of some defunct economist. Madmen in authority, who hear voices in the air, are distilling their frenzy from some academic scribbler of a few years back. I am sure that the power of vested interests is vastly exaggerated compared with the gradual encroach- ment of ideas.
11. Would it were so! There are certainly intellectual domains in which Keynes is right and in which full-fledged “scientific revoku- tions’ ’ have driven their predecessors all but completely from the field.7 One thinks of Newtonian and Einsteinian revolutions in physics, Darwinian and Mendelian revolutions in biology, Coperni- can and Galilean revolutions in astronomy, the demises of phlogiston chemistry and social-Darwinist anthropology, and so on. But eco- nomics is made of sterner stuff. “Discredited” doctrines have long half-lives ; economists may never have experienced a full-fledged scientific revolution, precisely because vested interests are involved.
6. J. M. Keynes, The General Theory of Employment, Interest, and Money
7. On “scientific revolutions’’ a basic discussion is Thomas S. Kuhn, The (New York, 1936), p. 383.
Structure o f Scientific Revolutions (Chicago, 1962).
History of Political Economy
Published by Duke University Press
210 HISTORY OF POLITICAL ECONOMY
I n the face of guidelines, guideposts, and iancomes policies, who will confirm the demise of the medieval justurn pretium? Can any ob- server or participant in international trade or finance, on however small a scale, proclaim the passing of mercantilism in any form, however crude o r however primitive 41
12. Consider now three issues selected almost at random from the intellectual history of Marxism. If Lord Keynes had told us the whole t r u t h in the passage cited, the first two of these issues might have been nails i n the coffin of Marxism, whereas the third might be raising it from the dead. Actually, none of the three has furnished more than technical debating points in either direction.
13. Oldest of our three issues in point of time is the transforma- tion problem, as between values and prices. How, under pure compe- tition, are relative ‘ ‘ prices of production ’ ’ aligned with relative “values” in terms of socially necessary labor time, when the produc- tion processes for different outputs involve different organic composi- tions of capitaly8 I need not bore you with all the alternative hy- potheses, some of them traceable to particular scriptural passages in Marx or Engels, who apparently never checked these passages for consistency. A*t one extreme, Bohm-Bawerk suggested in 1896 that failure to solve this conundrum convicts Marx of a “great con- tradiction ” important enough to invalidate the entire structure of his theoretical system. A t another extreme, Mrs. Robinson suggested i n 1942 the scrapping of Marx’s labor theory of value as excess bag- gage. A t a third extreme, Meek has proposed forgetting the whole
8.An outline introduction to the transformation problem may not be entirely unwelcome. Let the value (in hours of homogeneous labor) of a unit of com- modities i and j be W , and W j respectively. W , is composed (in the same units) of constant capital C, (depreciation and raw materials consumed in production), variable capital Vi (the value of consumption goods consumed by production workers, not the number of hours worked, per unit of output), and surplus value S, (covering payments to both property owners and indirect labor). Similarly for W j . I f we define the rate of profit P’ in i-production a s
and similarly in j-production, problems arise. We know t h a t S d V , = S j / V , a t equilibrium, in order that workers’ wages and hours may be the same in the two industries. We also know that the organic composition of capital, C J V o in i-pro- duction is generally different from the organic composition Cj/Vj in j-production. We know, finally, that P’ must be equal between commodities a s an equilibrium condition, to avoid migration of capital between industries. How can all these conditions be fulfilled simultaneously 9
SJ(C, + 7,) = ( S J V , ) / P + ( C J V , > l
History of Political Economy
Published by Duke University Press
BRONFENBRENNER VICISSITUDES O F MARXISM 211
problem as piddling and unimportant, despite the high-level intel- lectual and logical issues involved, since Marx was not, after all, much concerned with price t h e ~ r y . ~ Rather than repeat my own incom- pletely informed and less extreme position, I c m simply express my doubt whether the status of Marxism would depend significantly, a t any place o r time, upon anyone’s choice among the extremes. After all, the interwar Marxist revival was well under way before Great Depression macroeconomics had shaken Bohm-Bawerk ’s authority and while most of our predecessors were still crediting Bohm-Bamerk with demolition of the Marxian structure.
14. My second issue is Viennese in origin, like Rohm-Bawerk’s critique of 1896. It is also anti-Marxian, but less exclusively eco- nomic. It pertains t o Marxian dynamics, perhaps more fundamentally than Bohm-Bawerk’s ‘ ‘great contradiction” ‘charge pertains to Marxian statics. According t o the Vienna School of logical-positivist philosophy, any meaningful proposition pertaining to the external world should be a t least conceptually refutable by evidence. Con- versely, any nonref utable proposition is tautologous o r meaningless o r both. This criterion has been applied by Murray Wolfsm to the Marxian forecasts of the eventual replacement of capitalism by some form of socialism, leading in turn t o communism.1° Since these pre- dictions are devoid of specificity as to time o r place, they are essentially irrefutable and theref ore meaningless. Neither can Marx’s predictions be regarded as confirmed by, for example, Russian, Chinese, o r Cuban experience, since it is by no means certain that such leaps from late feudalism o r early capitalism straight t o socialism were what Marx had in mind. Indeed, Karl Kautsky, the direct intellectual heir of Marx and Engels, felt sure in 1917-18 that the Bolshevik revolution in backward Russia was entirely premature and could end only ia defeat o r in Napoleonic dictatorship. We need not deal here with ‘ ‘ The Proletarian Revolution and the Renegade Kautsky. ”11 The
9.Eugen von Bohm-Bawerk, Earl Marx and the Close of His System, ed. P. Sweezy (New Pork, 1949); Joan Robinson, A n Essay on Marxian Economics (London, 1942), chap. 3 ; Ronald Meek, Studies in the La.bor Theory of Value (London, 1956), chap. 5, sec. 4, pp. 186-200.
10. Wolf son, A Reappraisal of Marxian Economics (New Pork, 1966). 11. This is the title of Lenin’s counterblast to Kautsky, reprinted in V. I.
Lenin, Against Revisionism (MOSCOW, 1959), pp. 384-478.
History of Political Economy
Published by Duke University Press
212 H I S T O R Y O F P O L I T I C A L E C O N O M Y
point is, once again, simply that even if Kautsky had been 100 percent right in 1917-18, and even if Wolfson is 100 percent right today, and even if the world adhered completely to logical-positivist tenets in academic philosophy, the progress of Marxism would hardly have been affected.
15. My third and last intellectual issue involves a n innovation more sympathetic t o Marxism. It concerns the somewhat esoteric Two Cambridges controversy in capital theory. Standard neoclassical capital theory, defended by the American Cambridge, puts physical capital on a. par with physical labor in production and distribution economics. It also denies that capital is indirect labor, in any sense more fundamental than that in which labor is indirect or “human” capital. The position of the British Cambridge, which dates back directly t o Piero Sraffa in ;the 1920s (and eventually to Marx and Ricardo), was f o r many years merely a n oral tradition, but was put into controversial writing by Joan Robinson in 1953. This position concludes that in a world of heterogeneous capital goods, as distin- guished from homogenizable “capital jelly’’ o r “meccano sets,” the values of particular capital goods may depend upon the ratio between wages and capital rents, i.e., upon the income distribution. It would thus be illegitimate t o speak of a given, quantity of capital (in a production function) except in the Marxian sense of labor applied indirectly.12 It seems t o follow, among other things, that the entire neoclassical structure-production functions, marginal pro- ductivities, and all that-needs drastic revision. Also, if this view is correct, it is easy to see how Marx returns into’ his own. Once again, this is no place to probe the details of the controversy, which become very techzlical indeed.13 My only interest here is t o inquire rhetori- cally, whether its outcome, if ,there ever is an unequivocal one, will affect seriously the rise o r the decline of Marxian economics.
12. I owe to a n unpublished paper by Murray Brown, “Respecification of tho Neo-Classical Production Model in the Heterogeneous Capital Case, ’ ’ mimeo- graphed (Buffalo, 1969), the ingenious suggestion that a unit of consumption g o o d e R i c a r d o ’s ‘ ‘ corn ”-could serve as a unit for capital measurement in the English Cambridge system just a s well a s Marx’s ( ‘ socially necessary labor. ’)
13. For a n extraordinarily lucid account of the several issues, generally favorable to the English as against the American Cambridge, see G . C. Harcourt, ‘ Some Cambridge Controversies in the Theory of Capital, ’ ’ Journal of Eco-
nomic Literature 7 (June 1969) : 369-405.
History of Political Economy
Published by Duke University Press
BRONFENBRENNER VICISSITUDES OF MARXISM 213
I V
16. It may surprise many economists who have tried without success to swallow Das Kapital in large doses in any language when we ask them t o consider the stylistic and rhetorical advantages of Marxism over its rivals. These advantages are two i n number. Neither denies the frequent turgidity and prolixity of Das l i u p i t a l itself as an essay i n persuasion. Each explains rather why these flaws are unimportant.
17. Marx’s first advantage is his overpowering breadth, including the complementarities between the several parts of his system. Keynes (for example) was likewise distinguished for breadth among the economists of his day, but he seldom if ever relates his probability theory or his aesthetics to economic matters, so that no aspect of his thinking is systematically buttressed by the others. It is entirely *otherwise for Marx and Marxism. A t the present time, Marx’s early philosophical and sociological writings, particularly as they relate to psychological alienation, glamorize his economics for people who k n o w no economics themselves-and even for some who think they k n o w enough to downgrade Marx as “ a minor post-Ricardian” in our disci- pline narrowly interpreted. Similarly, Marx’s fame as the economist who made socialism scientific glamorizes his philosophy of history among philosophers and historians, and his theory of the state in a elass society among sociologists and political scientists.
18. Nor is this mutual glamorization between the parts of the Marxian whole a mere matter of hokum and press-agentry. Again comparing Marx with Keynes, I recently reread certain of Marx’s essays covering the career of Napoleon I11 and Keynes’s more celc- brated Economic Consequences of the Peace. I n my eyes, Marx comes off the better of the two, precisely because he brings a complete system of thought to bear upon the special problems of France during the twenty-three years from 1848 ;to 1871. Whereas Keynes is content to let us sneer at certain “ f a t figures i n the public eye” as clowns, villains, pedants, or simple nonentities, Marx shows us at least plausibly why such persons as “Napoleon the Little ”-and for t h a t matter, this Napoleon’s immediate precursors and successors-come
History of Political Economy
Published by Duke University Press
214 HISTORY OF POLITICAL ECONOMY
to power, who maintains them i n power, and how the process relates to the communist scares of 1848 and 1871.
19. The Marxian “essays” just cited were in most eases prepared either as newspaper “think pieces” or as political pamphlets for work- ing-class audiences. This brings us to the next great literary ad- vantage of Marxism. The same Marx who could ‘‘turn off ” the public with the first chapter of Das Kapital was also the author of political pamphlets without equal i n the modern world. In economics, there are Value, Price, and Profit and Tage-Labor and Capital, which be- tween them form the upper limit to many a true believer’s knowledge of economic science. In historical and political philosophy, there is the Communist Manifesto, doubtless the greatest of them all, and the later Critique of the Gotha Program. In current history, the most influential have been the three ‘ ‘ French ” pamphlets : Class Struggles in Prance, The 18th Brumaire of Louis Bonaparte, and The Civil War in France. What is more, Marx’s disciples continued i n the pamph- leteering tradition after the Master’s death, most successfully in the cases of Engels, Lenin, and (in our own day) Mao Tse-tung and Che Guevara. Whether we agree or disagree with their conclusions, we must grant t h a t their works are not turgid, that they avoid jargon (above the sloganeering level), that they aim directly at a public largely self-educated, that they are of reasonable length, and t h a t they specialize in tying together pieces from disparate disciplines.
20. What has ailed similar efforts by our better academic econ- omists, Keynes again included? Some are too belletristic or assume too much in their readers by way of background. Some are too short and scrappy, some too long for our rapid-fire age. Perhaps most of them are treated only as potboilers in the writing, what with deadlines to be met, Great Books t o be assembled, Washington o r Timbuctoo to be revisited, movers and shakers to be advised, perhaps even classes to be met. Possibly there is in the writers’ thinking no unifying principle so thorough and pervasive as the Marxian. I would myself deny that the scientific quality of their work is m y higher. A t any rate, none of us has yet indited an academic-economic equivalent to the Corn- muwist Manifesto or Value, Price, and Profit. Keynes is a n example of one who failed, to whatever extent he tried. Perhaps one of our
History of Political Economy
Published by Duke University Press
BRONFENBRENNER VICISSITUDES OF MARXISM 215
contemporaries may yet succeed in this particular arena ; Milton Friedman among the orthodox and J. K. Galbraith among the dis- senters would be on anyone’s list of “most likely t o succeed”; thus far, however, neither of them has in fact succeeded.
V
21. The vicissitudes of Marxian economics do not seem to be dominated by its validity with a capital V. Neither do its stylistic felicities provide a sufficient explanation. I have suggested that these vicissitudes are dominated rather by Ithe state of economic and social malaise, by the acuteness of civilization’s discontents. Such a case one can never really prove, but one can indicate in more-or-less or- ganized fashion certain of the discontents responsible f o r the recent and current Marxian revival. To be meaningful, such a study should approach a multiplici-ty of countries and periods, with widely differ- ing circumstances. The best I can do is to consider the United States (since approximately 1929) and Japan (since the close of WorJd War 11) ; I do not know any LDC well enough to discuss the situatiou there. But as America and Japan are different although related, and as Japan has experienced reconstruotion-allied closely to develop- ment-as well as economic prosperity, we should expect t o find their discontents overlapping but not identical.
22. First, the United States. Taking the long view, a cyclical trough of American radical economics, including Marxism, came on August 3, 1929, when Thorstein Veblen died eleven weeks before Wall Street’s Black Thursday.14 It has been rising for the subsequent generation, if one excepts a putative ‘ ‘ American celebration ’ ’ during the 1950s. The rise has been a t an increasing rate since approximately 1960. No
14. This is not to claim Veblen a s a Marxist. H e was a severe, if sympathetic, critic. Marx was a major influence on his own thought, second only t o Darwin. I n Veblen’s last decade, after the Russian Revolution, his sympathy for the Soviet experiment may have moved him somewhat closer to Marxism than his published works indicate. See Douglas Dowd, ed., Thorstein Veblen (New Pork, 1965), pp. 24, 72-78, 114-17; also Veblen “The Socialist Economics of Karl Marx,” reprinted in The Development of Economic Thought, ed. H. W . Spiegel (New Pork, 1952).
History of Political Economy
Published by Duke University Press
216 HISTORY OF POLITICAL ECONOMY
inflection point is in sight, let alone a peak. Plausible explanations include the following set of eight causes.
(1) The American economy has not attained-let alone main- tained-high employment from 1929 to the present day without the aid of a hot or cold war, a swollen military budget, and the inflation- a r y victimization of fixed-income groups. Economists have of course devised and “proved” blackboard theorems to the effect that it could do so. The relevance of such theorems is dubious in the absence of historical evidence.
( 2 ) Our dark-skinned racial minorities, Negro and Spanish-speak- ing, were once confined largely to semi-invisible rural areas, where their plight could be blamed on the special wickednesses of people in white sheets o r ten-gallon hats. They have now moved to visible urban ghettos, where scapegoats more personal than “ the system” are harder to come by.
( 3 ) Our liberal tradition has been dented by Joe McCarthy, George Wallace, and their imitators. Similar outbreaks of star- spangled fascism are possible again, centering on the issue of who lost Vietnam.
( 4 ) A t the time of Veblen’s death, the USSR was shifting gears from a New Economic Policy-widely misinterpreted as a capitalist comeback-to the first of its centralized Five-Year Plans. The suc- cessive Soviet plans have not only “worked” but have served as models for other countries, with varying degrees of centralization and varying commitments to socialism. Bluntly, the socialist alternative has proved its viability in the period since 1929. Such technical in- novations as electronic computers, input-output analysis, and the new science of operations research have played a role on the socialist side of the conflict.16 A t least as important have been socialist methods of enlisting the enthusiasm of youth, as witness not only Mao’s Red Guards but the international student movement from SDS to Zenga- kuren.
( 5 ) Despite our classroom concern with diminishing marginal utility, including the marginal utility of income as a whole, economists have failed to conjure with its effects upon both tastes and ideology.
15. This conjecture i s developed in my “Economic Consequences of Tech- nological Change,” in ‘Va.lues and t h e Future, ed. Kurt Baier and Nicholas Rescher (New York, 1969), pp. 457-60.
History of Political Economy
Published by Duke University Press
BRONFENBRENNER * VICISSITUDES OF MARXISM 217
What seems to be happening in the American middle class is that the marginal utilities of both income and wealth have declined sharply, following the recent spurts in national product, national wealth, and “affluence. ” This decline in the marginal utility of income and wealth, as against alternatives like leisure, awareness, equality, and Love, may be a perf eatly rational explanation for manifestations which our critics call ‘ ‘sick, ’ ’ as per the London Economist’s characterizatioii of the United States as “the neurotic trillionaire.” One writer goes so far as to suggest that the marginal utility of the G.N.P. now exceeds zero only when the increment goes into the public sector o r the pockets of poverty.16
Evidence of that neglected phenomenon, the rising substitutability of leisure and Love f o r income and wealth, is the flowering of drop- out and counter-culture communities in large cities, woodland wilder- nesses, and academic slums. What with gifts, sharing, and part-time employment, affluence has opened and ‘ ‘ sold ” this alternative t o segments of society that are economically much broader, and estheti- cally much less gifted, than populated Soh0 o r the Left Bank in the last century at comparable standards of living.
(6) Consider next two externalities of American affluence, namely, pollution and automation. Under the first head we can add t o the obvious air and water pollutions noise pollution, food pollution, peo- ple pollution-overpopulation, overcrowding, housing shortages-and time pollution-commuting, queueing, and perhaps boredom. Some of these pollutions are traceable to the coincidence of afauence and urbanism rather than affluence alone. They may be relieved eventually by the replacement of obsolete metropolises by uniform, quasi-sub- urban “conurbations” like Boswash o r Chipitts. Others may yield t o technological changes like the contraceptive pill o r some practical substitute for the gasoline engine. But all these things take time, which may run out for the capitalist ideology before the vested in- terest in urban property, existing technology, and such “ponderous vendible intangibles ” can be bought off o r bankrupted.
As for the automation problem, this m,ay be a macroeconomic buga- boo if it be taken t o imply unemployability a t any positive wage, o r
1 6 . Paul Goodman, Compulsory Niseducation and the Community of Scholars (New Pork, 1964), p. 11.
History of Political Economy
Published by Duke University Press
218 HISTORY OF POLITIC& ECONOMY
drastic shift of the income distribution from labor to ~ r 0 p e r t y . l ~ But as a barrier ;to “interesting” and “meaningful” jobs at the wages aflluent-society members consider their birthright, it shows no signs of abating.
( 7 ) We have mentioned Vietnam in passing. It deserves fuller treatment, in view of the possibility of repetition nearer home. This increasingly unpopular intervention has forced unpleasant career and life-style decisions, sometimes also life-and-death decisions, on an entire generation. The indifferent have been polarized by these de- cisions into establishment types and radicals. The radicals are by no means all Marxists, but Marxian thoughts and slogans, economic and sociological, have entered into ;the thinking and emoting of the entire group.
(8) There must also be included a profound disillusionment with the liberal-labor demigods which had, by and large, substituted for Marxism during the 1940s and 1950s. The political heirs of Franklin Roosevelt set up the military-industrial complex under the aegis of the Cold War. They acquiesced in the Bay of Pigs, the Dominican intervention, and above all in the Vietnamese one. The trade-union movement accepted, if it did not precisely seek, junior partnership in both the Cold War and the emerging garrison state. Like any other monopoly, it engaged in monopolistic restrictionism, which took on racist overtones as blacks migrated northward and found themselves excluded. The world’s leading black economist has said : “ The trade unions are the black man’s greatest enemy in the United States.”18 Disillusionment has also spread from institutions t o individuals. By unhappy chance, if nothing more, n o liberal leader since John I?. Kennedy has succeeded, either in America o r overseas, in matching more than momentarily the mass appeal of a remarkable quartet of basically Marxist leaders from the socialist camp: Mao Tse-tung and Ho Chi-minh from Asia, Fidel Castro and Che Guevara from Latin America. The closest Western approach has been that great liberal and free-enterpriser, Charles de Gaulle !
17.For a rebuttal t o automation pessimism, see Herbert A. Simon, The Shape of Automation (New York, 1965), chap. 1; a n d f o r my own compromise position, ‘‘ Notes on Aggregate Supply and the Automation Problem, ” Doshisku daigaku keizaigaku ronso (in English; Kyoto, Oct. 1964).
18. Sir W. Arthur Lewis, “ Black Power and the American University, ” Uni- versity: A Princeton Quarterly, no. 40 (Spring, 1969), p. 10.
History of Political Economy
Published by Duke University Press
BRONFENBRENNER VICISSITUDES OF MARXISM 219
VI
23. I f the American case included the whole of civilization’s dis- contents, J a p a n should be a happy country; and if our present thesis were correct, Japanese Marxism should then be on the downgrade, which it decidedly is not. Consider three Japanese advantages in particular.
( 1) The Japanese ‘ ‘ economic miracle ”-roughly, a 10 percent annual growth rate sustained with minor interruptions over nearly a twenty-year period-has not been a creature of the defense budget. On the contrary, the Japanese defense budget has been held in the neighborhood of 0.8 percent of the G.N.P., despite American urgings to raise the percentage.
(2) J a p a n has refrained from external military adventures since 1945 and also from the conscription which would be required to support them. Both external adventures and military conscription are clearly banned by Article 9 of the Occupation-imposed “Peace Constitution” of 1946.l9
( 3 ) J a p a n has “racial” problems, involving primarily Koreans and a quasi-untouchable outcaste group formerly called eta and now called Shilzheimiiz or Buraku-min. In seriousness, however, these problems compare to the Puerto R i c m problem on the American East Coast. J a p a n has no counterpart to the American Negro problem.
24. With no Vietnam, no black militance, no military-industrial complex i n the background, American Marxism would surely be less important than it is. Yet Japanese Marxism is more flourishing than American. A Japanese bill of particulars against capitalism in gen- eral, a n d particularly against America seen as the predominant capitalist power and symbol of the capitalist system, includes the fol- lowing seven matters.20 Many of them have no American equivalents,
1 9 . I t is at least probable that the very existence of “Self-Defense Forces” is illegal a s well, but (in the absence of conscription or of movements of troops overseas) no Japanese has been able to acquire the status of party in interest required to test the issue.
20.In attempting to understand the postwar boom in Japanese Marxism, I have had access to a n unpublished paper by E o j i Taira, “Welfare Deficiencies of Economic Growth in Japan, ” mimeographed (Stanford, Calif., 1969), which supplements and updates my own views with special reference t o the effects of
History of Political Economy
Published by Duke University Press
220 HISTORY OF POLITICAL ECONOMY
just as Vietnam and the race problem have no significant Japanese ones.
(1) Capitalism in Japan involves the need t o expand overseas to protected markets and sources of raw materials. Capitalism outside Japan involves something similar, plus discrimination against imports and immigrants from Japan. This combination of capitalisms led Japan into the China Incident of 1937-41, which was Japan’s Viet- nam. The China Incident in turn led t o the disastrous Pacific War of 1941-45, which ended with Hiroshima and Nagasaki. Japan’s present capitalist prosperity was founded on the logistic support of the U.S. war effort in Korea. It is maintained t o an important degree by the logistic support of the U.S. war effort in Vietnam and of U.S.-supported regimes elsewhere in east and southeast Asia (notably Korea, Taiwan, Vietnam, and Thailand). I n short, capitalism means war. (This is not the place t o argue against this simplistic view of recent Japanese political and economic history, which I personally consider less than half true. My only point is that a large and growing percentage of Japanese believe it implicitly.)
( 2 ) A capitalist power, the United States, continues to hold naval and air bases on Japanese territory, and has been ruling by military law approximately a million of ethnic Japanese inhabitants of Oki- nawa and the other Ryukyu Islands. Capitalism is the system of the oppressor.
( 3 ) Japan knows what atomic war is, and is threatened by its resumption insofar as U.S. bases on Japanese soil, and Japanese in- dustry supporting U.S. military activities elsewhere in Asia, attract the lightning from Russia o r from China. A turn to socialism would break off Japan’s special relationship with the United States and eliminate the danger of atomic war from Japanese soil.
(4) Japanese Pan-Asianism, with its anti-Caucasian overtones, was never pro-capitalist, capitalism being a white man’s economic system. (So was Marxism before 1949, but that does not matter.) Pre-1941 Japanese Pan-Asianism wax nationalist, military, and anti- communist, as exemplified by the Greater East Asia Co-Prosperity Sphere and the doctrine of Eight Corners (of the Orient) Under One
the (‘ economic miracle. ’) I have no intention, however, of implicating Professor Taira in my own conclusions.
History of Political Economy
Published by Duke University Press
BRONFENBRENNER VICISSITUDES OF MARXISM 221
(Imperial Japanese) Roof. Since 1945, Japanese Pan-Asianism has taken the form of sympathy with Asian popular movements fighting either white colonial rulers o r indigenous governments supported by Western powers. The chief beneficiaries of this sympathy have been the People’s Republics of China, North Korea, and North Vietnam. All are professedly Marxist ; increased Japanese sympathy for Marx- ism in general has profited from Japanese sympathy f o r these Marxist governments.
( 5 ) Being neither fools nor illiterates, the Japanese are well in- formed about the various American discontents we have just outlined. These American discontents provoke a reaction in the Japanese, who see little future in following a capitalist road leading to the American dump of problems. This reaction is important because it foilows the overselling of American institutions and ways of life, during the halcyon days of the Occupation, as necessary o r even sufficient in- gredients f o r solution of all the world ’s problems, including Japan ’s.
( 6 ) The “economic miracle” is itself a disappointment to Tard Yamada, who is Japan’s John Q . Public, Jacques Bonhomme, or Ivan Ivanovitch. For one thing, the gains have been maldistributed, going largely to owners of equity securities and urban land, particularly the latter. Also, the gains have been achieved substantially by forced saving o r forced frugality, meaning infiation, to such an extent that the left-wing slogan of b u k k a baizd has been a successful rebuttal to the government’s shotoku The proceeds of Japanese saving, both forced and voluntary, have been channeled into increase of plant capacity, at the expense of both desired consumption and public services. Tard Yamada can complain, with reason, that while Japan produces at the contemporary Western level, his own living standard is that of Italy or of western Europe twenty years ago. One social critic speaks of the contradiction in the life of the average Japanese who commutes every day between one of the world’s richest nations, Industrial Japan, and one of the world’s poorest, Household Japan.22 As f o r public services, particularly the amenities associated with the welfare state, it is more than statistically significant that the ‘ ‘ Hirsch-
21. These expressions mean, respectively, ‘ ‘ doubling of prices ’ ’ and ‘ ‘ doubling 22.Professor Michio Nagai of the Tokyo Institute of Technology, quoted by
of income. ’ ’ Taira, p. 15.
History of Political Economy
Published by Duke University Press
222 HISTORY OF POLITICAL ECONOMY
man ratio” between social overhead capital expenditures (SOC) and directly productive activities ( D P A ) has been falling steadily, con- trary to the experience of other developing economies.23 I n the summer of 1969 the Economic Planning Agency of the Japanese government published a Kokurnin seikatsu hakusho [White paper on the people ’s livelihood] according to whose admittedly crude statistical indices Japan’s relative rank was only 44.0 percent in ‘ ‘ environmental factors ’ ’ (mainly public services) as against 67.8 percent i n ‘ ‘ private factors” (mainly supplied in the private economy) .24 Statistics such as these, and still more the facts behind them, led the Planning Board to speak, in language unusual for economic reports, of “seich8-keixai no k u n b [the anguish of a growth economy]. ”
Tokyo is the world’s largest city, with two other major metropolises, Kawasaki and Yokohama, within 25 miles of its center.25 For this reason, and also because much Japanese gasoline is of low quality, certain of Tokyo’s pollution problems give the West a fore- taste of things to come. De t e fabula Izarratur, as M a n reminded 8 still bucolic Germany when recounting the woes of industrializing Britain. Among the worst of Japan’s pollution problems, and among those most provocative of discontent, is carbon monoxide in the at- mosphere. Apparently, 10 parts of this colorless, odorless, tasteless gas-a ,by-product of incomplete combustion-per million parts of atmosphere as a whole suffice for toxic effects; 100 parts per million are fatal. The rush-hour level in downtown Tokyo, near the Imperial Palace, has been measured a t 78 parts per million. Taira reports t h a t “in the districts of Tokyo where air pollution is severe, the residents
( 7 )
23.Taira, p. 13, citing Albert 0. Hirschman, The Strategy of Economic Do- velopment (New Haven, 1958) , chap. 5 .
24. Each of a number of socioeconomic indicators i s classi6ed as ((personal” or 4(environmental.” This i s not always easy, as in the case of housing space in a country where public housing is widespread. F o r each indicator the estimated per capita availability in J a p a n is expressed as a percentage of the estimated per capita availability in whatever industrial nation ranks highest i n t h a t par- ticular indicator. Usually the top-ranking position is held by the United States, the United Kingdom, or Sweden. Simple (unweighted) averages of the per- centages for ‘ t personal ’ ’ and ( t environmental ’ ’ indicators give the figures in the text. F o r more detail, including precise references to Eokumin seikatvii hakusho, see Taira, pp. 17-20.
25.Osaka i s roughly half the size of Tokyo, but i t s satellite metropolises of Kobe and Kyoto are larger than Kawasaki and Yokohama, and equally close.
History of Political Economy
Published by Duke University Press
BRONFENBRENNER VICISSITUDES OF MARXISM 223
shut themselves up in their houses as tightly as possible, and breathe . . . with the help of oxygen-producing devices which can be bought at about $100 apiece,” while for those who must go out in rush hour, “some talk is even heard of anti-pollution attire much like an astro- naut’s space suit as a serious commercial proposition.”26
V I I
25. In summary, the rises and declines of Marxian economics as an influential branch of social thought depend very little upon its in- tellectual validity, as judged by our usual technical standards. More important for the long-run viability of Marxian economics have been two advantages: embodiment in an impressive system of social philos- ophy, and the availability of a wide range of effective materials for an equally wide range of intellectual interests and levels. More im- portant in explaining the ebbs and flows of Marxian economics has been the state of civilization and its discontents. Marxism ebbs and flows with the ebbs and flows of these discontents as felt subjectively. To judge by either America or Japan, these subjective discontents have little correlation with the gross national product per capita or with its growth rate o r with the other measured indexes of economic prosperity. Or rather, while a sufficiently low level of measured well- being or a suiliciently high rate of unemployment is at times sufficient encouragement for Marxism, ;their reversal is not a sufficient condition for its discouragement.
26. This i n t u r n implies some conclusions discomforting to non- Marxists and more particularly to active anti-Marxists. Marxism will apparently be with us indefinitely, until at least one of the following three things occur. (1) Marxism may be replaced by some even more effective form of radical and revolutionary ideology, such as anar- chism has a t times seemed likely to become. (2) The discontents of capi- talist civilization may be reduced to such levels, complacent in retro- spect, as the decade before 1914 and the quinquennium before 1929 in
26. Taira, pp. 24 f. This author adds t h a t the ‘ I atomized and privatized be- havior” of the Japanese, brought on by postwar capitalism, “may make this kind of solution more likely than social control of environmental problem^!'^ (ibid., p. 25).
History of Political Economy
Published by Duke University Press
224 HISTORY OF POLITICAL ECONOMY
the United States. ( 3 ) Some “opium of %he people” may take on a certain potency long departed from the organized religion to which Marx attached the phrase. As of 1970, none of these three outcomes s e e m immediately likely to occur. Certainly no variant of academic economics shows any signs of acquiring the psychedelic potency of topquality opium for the people. We c m accordingly expect Marxian economics to be with us actively for many years to come, albeit with small likelihood of displacing other varieties present and future in the fashion of true ‘ ‘ scientific revolutions. ’ ’
History of Political Economy
Published by Duke University Press
History of Political Economy-1972-Winch-325-43_marginalism3.pdf
History of Political Economy 2312 0 1991 by Duke University Press CCC 00 18-270219 1 /$1.50
Menger, Wieser, Bohm-Bawerk, and the Analysis of Economizing Behavior
A . M . Endres
1. Introduction According to received historiography Lionel Robbins’s Essay on the Nature and Significance of Economic Science (1932), borrowing ex- pressly from Austrian economics, defined economics as a science of choice. Economics was considered a study of allocative behavior, of choices to distribute given scarce means among given competing ends. This definition finally superannuated the older classical restriction on the scope of economics to the causes of material welfare (Robbins 1984, 2 I ) . Immediately upon stating his definition Robbins acknowledged the Austrian economists Menger, Mises, and Strigl as precursors.’ It is now acknowledged that the influence of Menger on Robbins’s definition was distant and diffuse and that the treatment of economizing as exclusively a study of the pure logic of choice was not fully established until the arrival of later, “second-generation” Austrian contributions (O’Brien 1988, 26-27, 184 n. 45). Rather than Menger (1871) it was Strigl(l923) which forged strong links with Robbins’s position in the Essay (Fraser 1937, 30; Hutchison 1981, 226). To the “first-generation” Austrians, particularly Menger, is correctly attributed the establishment of “foun- dations of what later has been called the pure logic of choice” (Hayek 1978, 276; Stegmiiller, 1973, 286-87). My object here is to demonstrate that Menger, Wieser, and Bohm-Bawerk suggested additional, although not identical, foundations for broader analyses of economizing be- havior.
Menger, Wieser, and Bohm-Bawerk were open to including within the ambit of “economics” various ethical, psychological, and even bio- logical matters. That is, they believed that the analysis of economizing was dependent for its further advancement on interdisciplinary insights
Correspondence may be addressed to the author, Department of Economics, University of Auckland, Private Bag, Auckland I , N e w Zealand.
1 . F. W. Fetter, an Austrian-American writer, was also mentioned (Robbins 1984, 16 n. I ) . In the Essay Robbins included frequent references t o the work of other Austrian economists, including Wieser, Bohm-Bawerk, Mayer, Amonn, Kaufmann, Rosenstein- Rodan, and Morgenstern.
279
280 History of Political Economy 23:2 (1991)
which needed to, but might not be, developed paripassu if the bound- aries of economics were drawn too rigidly. B y contrast it was precisely a desire to “delimit the spheres of economics and other social sciences” which had motivated Robbins’s quest for a new definition of economics as an autonomous discipline (1984, xxxv). Contemporary reviewers of the Essay noticed that while the scope of‘economics had in one sense been broadened by Robbins’s definition to include all allocative pro- cesses involving purposive behavior, in another sense economists were called back from investigating “peripheral” matters which rested on the frontiers of ethics, psychology, sociology, and the like (Souter 1933, 378, 382-83; Fraser 1937, 29, 34). For instance, as is well known, Robbins insisted that preferences or the desired ends of human behavior be taken as stable, given data by economists. Moreover, insofar as the ends of Robbinsian allocative behavior were regarded as desirable or conferring “utility” for the economizer, these ends begged no ethical or psychological questions in Robbins’s estimation (1984, 32, 56 n. 2, 84- 86). All this was entirely compatible with “second-generation” Austrian preoccupations. Strigl ( 1923), for example, attempted to depsycholo- gize the utility concept with which the ends of economizing were associ- ated.
Here we need to specify a distinction between the general Austrian concern with theories of economizing which had substantial identity with later, more refined formulations of the logic of choice, and the concern of Menger, Wieser, and Bohm-Bawerk to go beyond the restric- tive logic-of-choice framework. It would be misleading to draw the contrast too sharply, principally because Menger, Wieser, and Bohm- Bawerk evidently did not see conflict between the two lines of inquiry. Nevertheless the great “first-generation” Austrian triumvirate would have seen pure logic-of-choice analysis as too limiting. In ways which were not altogether uniform or systematic, they explored other ap- proaches.2 Accordingly, emphasis here has been placed on the more generously drawn boundaries for the analysis of economizing as con- ceived by Menger, Wieser, and Bohm-Bawerk. I have been led perforce to offer a close textual analysis of much-neglected aspects of “first- generation” Austrian theories on the nature, scope, purpose, and pro- cess of economizing behavior.
2. These explorations, among other things, opened up a sharp doctrinal division prior to 1930 between Menger, Wieser, and Bohm-Bawerk and “second-generation’’ Austrians, including Mayer, Mises, Rosenstein-Rodan, and Strigl. As one contemporary familiar with Austrian economics concluded, there were “two quite distinct lines of development among those who profess allegiance t o the established [Austrian] tradition” (Sweezy 1934, 176; see also Kauder 1965, 105).
Endres * Menger, Wieser, Bohm-Bawerk 281
2. Menger’s Concept of Economizing Behavior
1. First Principles Economizing was described by Menger in the Principles (1871) as a complex of purposive human actions striving to achieve needs satisfac- tion (Bedcrfnissefriedigung) (1 16).3 N o special motive such as self- interest was implied by his definition.4 Knowledge of a causal relation- ship between the ends of economizing and available quantities of goods was an important presupposition; otherwise an individual’s activities would have no purpose. Economizing for the individual agent (wirt- schaftendes Individuum) involved ( 1 ) a desire to possess units of a good which are perceived to be related to needs satisfaction (possession and knowledge); (2) choice between the more important needs and needs that must be left unsatisfied (needs ranking and choice); (3) satisfaction ’of needs “in the most appropriate manner” with a given quantity of goods (nonmaximization); and (4) conservation of a good’s useful prop- erties for the satisfaction of future needs (conservation and futurity) (1950, 95-96). By “goods” in this discussion Menger meant economic goods, that is, scarce goods relative to requirements for them. These goods are “scarce means” and human needs can roughly be equated with “ends” in logic-of-choice analysis. However, in ways that advanced beyond Robbinsian logic-of-choice strictures Menger proceeded to de- limit the nature of economic phenomena, to investigate the structure of needs, to speculate on the interrelationships between economic activity and the development of needs through time, and to retain the principle of nonmaximization. With the exception of the last issue, which has been treated at length elsewhere, let us consider these matters seri- atim.5
3. All page references to the Principles refer to Menger 1950, the English translation of the original 1871 edition, unless otherwise stated. Menger 1871 is used for “equivalent” German terms where necessary. Menger 1923 is also referred to where there are signifi- cant changes from Menger 1950.
4. Cf. Menger [1883] 1985, 87, where self-interest is said to be “by far the most common and most powerful” motive for economizing.
5. The principle of nonmaximization has been a source of puzzlement for scholars. Menger’s concept of economizing can be viewed as a serial process incommensurable with static, strictly mathematical maximization. That Menger rejected any idea of maxi- mizing behavior in the mathematical sense is clear from his disavowal of continuity and differentiability in the numerical delineation of scales of importance for needs satisfaction, originally noted by Stigler (1937, 239) and Noyes (1948, 2: 1292-99). More recently, Jafft5 (1976,522), Pribram (1983,290), and Endres (1984) have seen Menger’s nonmaximization principle as setting him apart from other leading marginalists, Jevons, and Walras. Pro- crustean histories of economic thought which classify Menger’s concept of economizing as a mere verbal and/or imprecise version of the sophisticated mathematical marginalist choice models of Jevons, Walras, and Pareto will no longer suffice. Since nonmaximiza-
282 History of Political Economy 23:2 ( I 991)
2. The Scope of Economizing Economizing was explained in Menger’s Investigations into Method (1883) as “premeditative activity aimed a t satisfying o u r material needs”-as activity which assured satisfaction of needs for final con- sumption goods. Producers’ goods could also be considered to involve economizing since their use satisfied the four principles of possession and knowledge, ranking and choice, nonmaximization, and conserva- tion and futurity, but economizing o n this level only provided for mate- rial needs indirectly ([1883] 1985, 216). Menger employed the terms “material” and “economic” interchangeably. Commentators have thus criticized his definition of the scope of economizing because it was still apparently in the classical, materialist mold.6 Lachmann (1978) claimed that for this reason, among others, Menger was a n “incomplete subjec- tivist.” Passages in t h e Investigations suggest that Lachmann’s inter- pretation deserves qualification. “Political economy,” wrote Menger, “cannot provide understanding of human phenomena in their total- ity . . . but it can provide understanding of one of the most important sides of human life.” This statement was preceded by the assertion that of all human endeavors, those involving “anticipation and provision of material (economic) needs a r e by far the most common and most impor- tant” ([1883] 1985, 87, emphases his). The predominant, though not exclusive, attention of political economy is o n material phenomena, and t o this extent Menger’s emphasis diverged from later Austrian views. Close textual study suggests that the materialist restriction o n econo- mizing was only a matter of emphasis. It was for Menger simply more usual that the purpose of economizing was satisfaction of material needs. In the Principles he had already sensed the importance of a spe- cial class of relationships ( Verhultnisse) and intangible goods-friend- ship, business connections such as goodwill, love, religious fellowships (1950, 54-55)-goods which may be subject t o economizing. Menger complained that these goods may b e mistakenly ignored. H e did not agree with the “unconscious working of the materialistic bias of o u r time which regards only materials and forces (tangible objects and labour services) as . . . goods” (54).7 It is therefore not readily so apparent that Mises, Lachmann, and others are justified in doubting Menger’s commitment t o subjectivism.
tion is a well-documented departure for Menger’s economizer from homo oeconomicus in the work of Jevons, Walras, and Pareto, i t will not be pursued further here.
6. Originally Mises ([I9331 1960, 167-73), followed by Lachmann (1977,48), Vaughn (1978, 61), and White (1985, xiii-xiv).
7 . Menger’s subsequent disagreement with Bohm-Bawerk on this very issue, which had profound implications for later divisions in Austrian capital theory, is discussed. in Endres 1987a.
Endres - Menger, Wieser, Bohm-Bawerk 283 Mises’s (1933) position was also founded on a putative “notorious
slip” in Menger’s Principles-a slip all the more deplored by Mises because it was not excised from the 1923 edition of the Principles. Upon defining goods, Menger considered a special class of imaginary goods including most cosmetics, charms, divining rods, and love potions. Despite being subject to economizing behavior, these had imaginary- goods status because they “are incapable of actually satisfying the needs they are supposed to serve.” Economizers misperceived these goods as being related to specific needs either because these needs were mis- takenly assumed to exist or because the attributes were erroneously ascribed to things that did not really possess them (Menger 1950’53). In Mises’s interpretation this did not make imaginary goods any less eco- nomic goods, because it was the subjective opinions of economizers that something will satisfy their needs which were singularly important. Menger (1950, 53) argued that as civilizations progress, increasingly improved knowledge of the connection between things and needs- satisfaction reduced the number of imaginary goods and increased the range of “true goods” available. Thus one plausible interpretation is that Menger’s theory of economizing “required that he make room for er- r o r . . . and this meant that he had to judge some past beliefs as mistaken if there were to be any meaning in the notion of improved knowledge” (Vaughn 1989, 1201). Comparatively shallow, if not erroneous, insights into the causal connections between goods and needs could still prove satisfying for economizers. More accurate connections between the specific attributes of things and particular needs would, of course, be far more satisfying.
3 . The Structure of Needs One element in modern Austrian disenchantment with Menger’s work after Mises’s original critique has remained intact. This concerns a patently objective structure of human needs postulated by Menger in the Principles.8 The well-known table in the chapter on value depicts a hierarchy of needs (1950, 127). A choice between a comfortable bed and a chessboard was said by Menger to result in forgoing a chessboard if a person did not initially possess a bed (123). Consumption of some things, often up to satiety, must take precedence over consumption of other economic goods. Menger’s illustrative hierarchy was: water, food,
8. Most historians of economic thought have ignored this aspect of Menger’s study, being content instead to praise his suggestive, but inchoate comments on the nature of needs. Menger is invariably considered to have advanced this aspect of the subject further than Jevons and Walras (Howey 1960, 25; J d E 1976, 519). Marshall (1920, 77n.) recog- nized Menger’s achievement when he noted that “Menger gave great impetus to the subtle and interesting studies of wants and utilities by the Austrian school of economists.”
284 History of Political Economy 23:2 ( I 991)
clothing, shelter (including a comfortable bed), transportation, recrea- tion (including a chessboard), and tobacco (122-28). It is not so much that Mengerian needs had a physiological basis, as suggested by Lach- mann (1986,55) and White (1985, xiv), since Menger (1923,4-5n.) later provided a tripartite classification of needs: in the second edition of the Principles he listed physiological, altruistic, and egotistical needs cate- gories, therefore revealing that he was thinking of much more than mere physiological requirements. It is more correct to interpret Menger’s attempt to classify needs as consistent with his conception of economiz- ing individuals who, because of limited perception, were incapable of making finely calibrated choices across all needs dimensions simulta- neously. Menger’s impressionistic scheme in which preferences were ordered lexicographically, where certain needs must be satisfied in varying degrees before others were contemplated, was designed for individuals with limits on their information-processing faculties and individuals with limited knowledge.
Unlike Jevons, Menger did not seek to restrict the subject matter of economizing to some subset of the needs hierarchy. Jevons (1879, 25- 27) restricted economizing to the “lowest rank of feelings” in the “hier- archy of feelings,” by which he appeared to mean physiological and materialistic needs. As one reviewer of Menger’s Collected Works re- marked, Menger so broadened the theory of needs “as to take every . . . impulse to action of whatever sort” into the ambit of economizing behavior (Sweezy 1935, 727). However, this was to oversimplify Men- ger’s position. In the Investigations he maintained that a “contrast does in truth exist between the specifically economic propensity (directed toward satisfying the need for goods) and others-the noneconomic drives of humans from which and in the midst of which real social life arises, a social life whose reality should not be presented solely as the result of the economic propensity ([ 18831 1985, 75 n. 26, emphasis mine). I n this passage Menger admitted that there were other, non- economic propensities and other goals toward which human activity was directed. For him, economizing was not all-inclusive, as it is in modern microeconomic applications of the logic of choice. The ultimate end of human activity in general, variously described by Menger as “welfare” or “well-being’’ and by later Austrians as “utility,” was not exclusively the result of economizing, since that would include all possi- ble goals whereas not all purposive actions satisfied the four principles of economizing.
Menger nevertheless gave the undeniable impression that by confer- ring a structure of ordered importance on human needs, there was some objective, universal basis to this structure (Silverman 1990). It is in this
Endres - Menger, Wieser, Bohm-Bawerk 285
specific sense that he may be regarded as an “incomplete subjectivist.” In this Menger followed a long tradition of German classical and histori- cal economics to which Kudler, Rau, F. B. Hermann, Schaffle, and Roscher (among others) were significant contributors. Banfield had communicated the message to English-speaking scholars when he ex- plained that “there is an inseparable connection between the bodily and intellectual wants and enjoyments of men. The important economical result to be deduced from this is the classification of our wants. . . . An examination of the nature and intensity of man’s wants shows that this connection between them gives to political economy its scientific basis. The first proposition of the theory of consumption is that the satisfac- tion of every lower want in the scale of wants creates a desire of a higher character. If the higher desire existed previous to the satisfaction of the primary want, it becomes more intense when the latter is removed” ([ 18481 1973, 11). Menger would have endorsed Banfield’s claim of an “inseparable connection” between physiological and other needs. Georgescu-Roegen (1966, 201) went so far as to resurrect a “Banfield- Menger” theory of wants upon which he constructed the foundations of a lexicographic preference model. Menger’s analysis of wants was par- ticularly sophisticated since it allowed for subjective complementarity between goods. He saw no one-to-one correspondence between needs and goods. “Usually,” he wrote, “not a single good, but a quantity of goods stands opposite not a single concrete need, but a complex of such needs” (1950, 129; see also 301). Food may satisfy physiological needs, but simultaneously the type of food, its preparation, and mode of con- sumption may also serve altruistic needs for fellowship or even egotisti- cal needs for social distinction.
From two revealing comments it becomes clear that Menger was unhappy with lack of progress in the analysis of needs-complexes on the boundaries, first, of economics and biology and, second, of economics and psychology. The first comment, which appeared in the second edition of the Principles, directed economists to consider biological data in order that economizers’ needs be understood: “The theory of needs is of fundamental importance for economics, and at the same time [is] a bridge which leads from the natural sciences especially biology to the social sciences” ( 1923, l).9 Pribram ( 1 983, 29 1 ) reported that Menger was interested in bringing the results of biological studies to the fore in the theory of needs so as to provide a stronger basis for the theory of economizing behavior. Evidently time was not on Menger’s side and he
9. This comes close to Marshall’s conviction that “the Mecca of the economist is economic biology” (Pigou 1925, 3 18).
286 History of Political Economy 23:2 (1991)
was forced to rely on successors in Vienna who did not follow his programmatic suggestion to construct linkages between economics and biology. 10
Menger’s second comment, which his successors were to take seri- ously, concerned the weak psychological basis of the theory of needs. He defined value as nothing inherent in external things or goods, but merely a judgment that economizing individuals made about the impor- tance of goods at their disposal (1950, 117, 121). He understood the necessity for more penetrating analyses of the psychological bases of individual judgments. The table of needs satisfaction in the Principles which classified needs in a hierarchy, although derived intuitively and not from a formal psychological theory, was nonetheless suggestive of “a difficult and previously unexplored field of psychology” ( 1 950, 128). Here, while the allusions were no more than fragmentary, Menger fore- shadowed the direction for further necessary research linking econom- ics and psychology. Further, these hints are enough to conclude that Menger would have rejected a requirement of the pure logic of choice that hypotheses about economizing behavior be stated independently of noneconomic implications and insights. 1 1 Certainly Robbins’s claim that “the Mengerian tables were constructed in terms which begged no psychological questions” (1984, 84) cannot be sustained. l 2
It remains to be established what sort of psychology Menger en- visaged. Some too-generous speculation has suggested that the Men- gerian economizer’s subjective judgment of valuation could be inferred or assessed, supposedly in a manner consistent with Menger’s propos- als for further inquiry, by analyzing consumption data gleaned either from budget studies or from psychological or physiological experi- ments, or from “data” derived from introspection and/or the Verste- hende method (Sweezy 1935, 730). Consistent with later developments in the Austrian tradition, Hayek (1978, 227) and Addleson (1986, 10) have seen in Menger’s concept of “observing” economizing behavior the method of Verstehen (interpretive understanding in the sense that Max Weber developed the concept). This amounts to an excursion into
10. Also Menger’s biologistic interpretationof macro-social formations as “organic,” that is, as unintended consequences of the actions of individuals, has not gone unnoticed in the literature (Alter 1982, 154). Few scholars have noticed Menger’s call for developing links between microeconomics and biology, ‘advancing beyond mere organicist meta- phors; in connection with the theory of economizing behavior.
1 1 . J a f E (1976,522) was unrestrained in his praise of Menger’s proposals to “discover the laws governing market phenomena which can be traced t o their ultimate genetic determinants in man’s physiological and social nature” (emphasis mine).
12. As well, there is no evidence available to support the claims, first of Myrdal(1953, 16) and later of Grass1 (1986, 148), that Menger turned toward psychology as a conse- quence of realizing the shortcomings of psychological hedonism. Their claims may have been true of Menger’s followers, but not of Menger.
Endres - Menger, Wieser, Bohm-Bawerk 287
social psychology, because it attempts to comprehend subjectively the meaning of human decisions in terms of tacit societal rules influencing them. Pribram (1983, 281) has argued that Menger made the needs hierarchy intelligible through “psychological introspection.” Introspec- tion is “psychological” t o the extent that it consists in examining, as a social scientist, one’s own reactions o r conscious experience in a given situation. Beyond the case of a n isolated individual a method would have t o be designed t o explain economizing as a social phenomenon involving interacting economizers. This method entails “getting inside the thoughts” of economizers as well. Menger’s (1888,41-43) attempt to define the popular form and content of “capital” which economists should adopt provided a splendid example of his use of this method. Imagining himself in the position of a farmer, first, in a predominantly barter economy and, second, in a highly developed monetized economy, he outlined how in both situations the popular, everyday concept of capital was a pecuniary calculation. However, the former excluded from the calculation possibly inherited, immovable property such as land, whereas the latter did not.
Insights from introspection and the Verstehende method were crucial to the development of economic theory in the Austrian tradition. There- fore, it is hardly surprising that Menger’s work gave impetus for further work in these contiguous fields among both his economist followers Wieser and Bohm-Bawerk, and the Austrian psychologists Meinong and Ehrenfels (Eaton 1930, 92-93, 1 1 3 ) . ’ 3
4. The Growth of Needs There is o n e further aspect of Mengerian economizing behavior that deserves elaboration because it is not compatible with the logic-of- choice approach t o the economic order a s a medium of needs satis- faction in which economic activities are reduced t o a strictly defined mechanics relating means t o ends. Menger’s treatment of needs in a “progressing economy” demonstrated the importance of economizing behavior in developing an individual’s awareness of new needs created by that behavior. That is, he was interested not just in the organization of means relative t o ends, but also in changes brought about by their con ti nual interact ion.
In the Principles economic progress was underpinned by a growth in knowledge that connects economic goods with the satisfaction of human needs. Economizers were empowered with the ability t o perceive more
13. Kauder (1965, 13) referred to a weak unidirectional influence of pure psychological analysis on first-generation Austrian economics. In fact Menger’s work also influenced the development of Austrian psychological studies. Fabian and Simons (1986) have given due attention to this matter.
288 History of Political Economy 23:2 (1991)
elevated needs and novel connections between goods and their well- being (Menger 1950, 74). Needs not only arose from recurring physio- logical impulses-“our nature”-they also arose from “our previous development” (Menger [ 18831 1985,2 17- 18). Menger’s economizer was not so constituted that the activity of economizing always left needs intact. Menger cited the “penetrating” work of A . E. F. Schaffle with approval in this connection. On Menger’s reading, Schaffle broached but did not solve the difficult problem of the reciprocal relationship between economizing activity and human needs (1950, 300-301).14 Needs were often reevaluated endogenously during the consumption process-a process that involved both conscious “thought and experience” (1950, 109). Menger referred frequently to changes in human needs (1950, 52, 148), to the “disappearance of human needs” (63), to changes in needs through an economizer’s life cycle (23 1 -32), to uncertainty about whether certain needs will be felt in the future (81), to the capacity of human needs to grow infinitely (82-83), and to increases in human requirements as knowledge expands (102-3).15 The further an economy progresses beyond satisfying physiological needs and the stronger its economic development, the less stable will both needs and the suitability of means for satisfying those needs become. In a progressing economy needs and the economizing behavior which they motivated constantly look toward new and more evolved plateaus of well-being. Previous neglect of Menger’s enunciation of the principle of needs-growth can be attributed to doctrinal convention in selecting, as the “core” of the Principles, portions of his work on choice theory with their attendant adumbrations of a weak concept of marginal utility and static subjectiv- ist or “exact” laws of economizing ( Wirtschuftlichkeit), premised on conditionally fixed needs, omniscience, and self-interest. ‘ 6
In the more dynamically subjectivist variants evident in the Principles economizing was not fundamentally a striving for given ends in the
14. Banfield (1848) carried this idea from German- to English-speaking economists. It is well known that Alfred Marshall’s theory of the relationship of economic activities to the expansion of needs adjusted to or created by them was drawn from Banfield, Her- mann, and other influential German economists (see Parsons 193 I ) . Menger’s perspective on the growth of needs also hailed from German sources.
15. The Principles do not therefore always employ the assumption of “constant tastes” (Alter 1982, 156; cf. Endres 1984). Howey (1960, 154) and Lachmann (1978, 58) have maintained that Menger’s analysis of economizing was generally static. Streissler (1972) on the other hand has appreciated Menger’s attempt to formulate a dynamic, developmen- tal theory of demand.
16. O’Driscoll and Rizzo (1985, 28) define static subjectivism as a situation where economizers rank needs ordinally with full knowledge of prices and choice constraints. Static subjectivism is apparent in Menger’s “exact” or pure theory of value, which depended on the assumptions of a constant ordinal needs ranking, the absence of error, and “ever constant self interest” (Menger 1950, ch. 4, passim). Economizers’ choices were fully determinate given these conditions (Menger [ 18831 1985, 84, 216-19).
Endres - Menger, Wieser, Bohm-Bawerk 289
logic-of-choice sense; rather it was the basis for further striving. The way to economic progress was through expanding knowledge in order to create a larger quantity, higher quality, and wider variety of goods for needs satisfaction. Knowledge expanded and assisted economizing in the dual sense of helping individuals understand causal connections between goods and well-being and enabling greater “control of the less proximate conditions responsible for human welfare” (1950,74, 109). In an originative, well-documented reinterpretation of Menger’s Principles Streissler (1972) emphatically reveals its dynamic subjectivist bent. 17 For Menger the dynamic subjectivist, the goal of economizing was to modify restraints on choice and elevate the human condition by growing through a process of needs satisfaction on to successively higher planes of well-being.
3 . Wieser on the Purpose of Economizing Behavior
The openness exhibited by Menger to questions which in the logic-of- choice scheme of things would have been classed as “noneconomic” was continued, though not necessarily in a manner Menger would have countenanced, by Wieser. In Wieser’s work we find that after some hesitation he concluded that the ends of economizing behavior summa- rized by his expression “highest possible utility” could not be purified of philosophic or ethical connotations. Consistent with a concentration on the pure logic of choice the majority of Austrian economists from the early 1920s onward eliminated philosophical discussion concerning welfare goals or, alternatively, the ends of economizing. Rosenstein- Rodan’s survey of marginal utility theory epitomized the prevailing view when it stated that “all modern economists refuse to discuss the purpose of human action” ([1927] 1960, 79). In the furor of the Methodenstreit Menger (1985, 234-37) had insisted on disjoining the domains of ethics and economics. In the Principfes-especially, though not exclusively, in the 1923 edition (4-5n.)-this interdiction was explicitly relaxed when he distinguished between physiological, altruistic, and egotistical needs. 18
It is not immediately apparent that Wieser can be classified apart from Austrian economists post- 1920, especially if his early work is consid- ered in isolation. For example, his first paper, presented before Knies’s seminar in 1876 (reprinted in Wieser 1929, 377-404), was set in a deter-
17. “Dynamic subjectivism” a s defined by O’Driscoll and Rizzo (1985, 24-25) pre- supposes some ignorance and learning. I t incorporates the passage of real, historical change into the corpus of choice theory.
18. Kauder (1965,.13, 125) noted Menger’s wavering in the Principles between pro- nouncing o n the ends of economizing or remaining noncommittal about them.
290 History of Political Economy 23:2 (1991)
ministic, proto-logic-of-choice framework. In Natural Value ( 1889) he explained that economic goods yield utility, which was to say that they satisfied the economizer’s wants. The word “want” signified “every human desire whether . . . justifiable or unjustifiable, necessary or unnecessary, material or immaterial. Bodily well-being, idle delights, artistic pleasure, moral satisfaction may be all classed together as ob- jects of human want” ([I8891 1930, 6). After outlining Gossen’s law of want satisfaction Wieser referred to something that Menger had pre- viously recognized as being worthy of fuflher investigation: the rela- tionship between economic activities and the growth of wants. Gossen’s law only applied at a moment of time to “wants which are entirely developed.” Wants may be observed in some circumstances to grow “by repetition and exercise . . . and become purified and elevated.” In the latter case Gossen’s law must be regarded as inadequate because an economizer’s desire for satisfaction “does not [necessarily] weaken but rather stimulates it by constantly contributing to its development, and particularly, by giving rise to a desire for variety” (8-9). Wieser was prepared, like Gossen, to reduce all wants ultimately to a common denominator-satisfaction or utility. There was presumably no limit to the scope of the economizer’s marginal utility calculations. Thus “higher wants” which came into existence after “the necessaries of life” were secured were subject to the law of diminishing marginal utility (9). The needs for food and for vanity were “classed together” so far as the application of goods to these wants gave rise to a value magnitude which was reducible to the common utility standard (12). Mere Wieser en- dorsed a neutral utility concept, that is, one kind of utility applicable across all categories of want-from physiological to moral require- ments-and purified of all utilitarian or ethical connotations (Kauder 1965, 127).’9 In this view an economizer’s use of goods implied that they had the potential of being desired, not that the goods ought to be desired. The theory of economic value could therefore be developed independently of moral or philosophical considerations.
In Social Economics (1914) Wieser repudiated neutral utility. In the pure theory of the “simple economy” which he propounded in that work, economizing activity was undertaken by a single, isolated mind which foresaw wants and considered their satisfaction “without error or
19. While not mentioning Wieser, Kauder pointed out that the “cleansing o f utility from egotistical, altruistic and ethical motives was favoured by economists inside and outside the Austrian camp” (1965, 128). H e listed Slutsky, Rosenstein-Rodan, and Mises a s supporters of neutral utility. Robbins’s Essay is full o f praise for Austrian economists who, in contrast t o Jevons, showed that utility theory was “capable o f being defended in absolutely non-hedonistic terms” (1984, 85). A s demonstrated below, Wieser rejected hedonism, but that is not to say he rejected other ethical connotations which may conceivably arise from the explication o f utility theory.
Endres - Menger, Wieser, Bohm-Bawerk 291 passion .” Moreover, economizing proceeded “without loss of energy” ([ 19 141 1927, 19-20). Wieser advanced beyond Menger’s brief refer- ences to psychology when explaining this curious statement. Wieser’s choice principle was a corollary of the fundamental postulate of con- scious economizing behavior. It related the notion of purpose to mental motor stimuli. The first stimulus to economizing was conscious pur- poseful desire which drove human effort to satisfy wants. Second, this was interconnected with unconscious kinetic impulse: “an active motor stimulus that is massed under tension and strives to be discharged” (18). Desire for gain was necessary but insufficient to urge economizers to strive for want satisfaction. When coordinated, conscious purpose and motor stimuli produced volition, defined as “impulse controlled by purpose.” In their economizing activities it was likely that a group of interacting individuals, whose volition moved them to exert their full power to attain goods, would generate friction, error, conflict, and wasted effort as well as gains. I t was in this sense that in the idealized simple economy, the isolated fully informed individual avoided such losses of “energy” (1 8- 19).
For Wieser, economic analysis was concerned with market exchange and pricing. It was “not concerned with the direct satisfaction of needs.” Rather it studied demand for marketed goods and services. The “psy- chological nature of human needs” was therefore not part of the prov- ince of economics but a problem far “scientific psychology” ([1914] 1927, 22-24; see also 1929). Wieser’s attempt to distinguish between pure or scientific (wissenschaftliche) psychology and the casual, intro- spective psychology (innere Beobachtung) used by economists in order to analyze economizing behavior was unconvincing. Frequently in So- cial Economics some pure psychology (and also the literature of psy- chology) was relied upon to give substance to the axiom of conscious economizing, which would otherwise have enjoyed an unacceptable elusiveness of content. His analysis of the structure of wants breached the boundaries of economics and scientific psychology (22-25). Ap- plied, introspective psychology was nonetheless useful in providing Wieser with grounds for rejecting the equimarginal principle. Like Men- ger, Wieser ([1889] 1930, 14-15) considered that economizers did not evaluate goods in infinitely small amounts, but only in discrete portions. In Wieser’s analysis this insight was an introspection on the psychology of the human mind.
Wieser crossed into the debate on ethics and economics by pronounc- ing on the appropriateness of certain activities on the demand side. His earlier position on neutral utility would have been untenable if econo- mizers’ goals were ranked and assessedfor them. Yet this was precisely Wieser’s procedure. A dualism of wants or needs (terms he used syn-
292 History of Political Economy 23:2 (1991)
onymously) was established: “healthful vital needs” and those which were “merely pleasurable.” The first required satisfying because they ensured “sound continuance” of life. Such satisfaction led to “strength and vitality”; it excited the motor stimuli and gave “impulse to progress still to be achieved” ([1914] 1927, 31). By contrast, when the merely pleasurable needs were gratified the motor stimuli were dulled, all the more so if “degenerative and luxurious desires” came to the fore. In the simple economy the economizer avoided “gross excess;” which was described as a lamentable outgrowth of striving forahe greatest possible satisfaction from an ever-growing expansion of the means of gratifica- tion. Such striving was uncontrolled; Wieser set out to posit permissible boundaries of desire which would not be exceeded. “It is assumed,” he wrote, that throughout the structure of the simple economy and a well- ordered social economy, “human activity is directed to wholesome, vital needs and to permissible needs of enjoyment” (32-33). What were permissible needs? We referred positively to the “laudable sentiment of frugal contentment” and “moderation in our simple needs” and nega- tively to economizing that incited “excessive acquisitive efforts” or led to “degeneration either directly or by the tempting, circuitous path of over-refinement” (32, 33). Of course, he argued, the proper appraisal of needs was a task for philosophy and ethics; but this admission did not limit the intrusion of broad value premises into his economic theory.20 He hastened to separate “hedonistic philosophic views” from his analy- sis. The economic principle of maximum utility, which was developed within the bounds of “permissible” needs, was, he believed, harmoniz- able with “ascetic views” (33).*1
Menger’s principle of conservation and futurity stated without elabo- ration that one condition for successful economizing was that a good’s useful properties be maintained so future needs could be served by them. How were future needs valued? Wieser maintained that this was an ethical problem, which he had no hesitation pronouncing upon: “Efficient economy requires that the future satisfaction and need shall not be deemed less important than the vividly experienced desire of the moment. It is essential that every strong person or people shall maintain a sense of enduring values. They may not be impaired by passing solicitation” ([1914] 1927, 36). There is nothing in this example or in others provided in Social Economics to suggest that the ends of econo-
20. It is rare to find o n e kind word for any Austrian economist in Myrdal(1953), but o n this point he congratulates Wieser: “without value judgements the whole notion of social conduct of economic affairs is meaningless. I t is v, Wieser’s greater merit to have seen this clearly” (154). Wieser also held that such judgments were necessary for analyzing individ- ual conduct in the simple economy case.
21. Wieser’s utility theory was colored by an ascetic outlook, the political roots of which were enunciated by Kauder (1958, 421-23).
Endres - Menger, Wieser, Bohm-Bawerk 293
mizing behavior were for the economist, a la logic-of-choice theory, given data; that d e gustibus non disputandum e s t .
In conclusion, in Natural Value we find an exaggerated emphasis on neutral utility. Wieser was motivated in his early work to remove the misleading association of hedonism with the ends of economizing be- havior. This is not to say that he rejected all ethical referents of econo- mizing. Indeed in Social Economics he connected utility theory with asceticism. This did not constitute an ex post facto apology for his earlier overemphasis on neutral utility. Instead it was a more com- prehensive and mature statement of “first-generation” Austrian eco- nomics untrammeled by restrictions which were later placed on the domain of choice theory.
4. Bohm-Bawerk’s Appeal to “Pure” Psychology Bohm-Bawerk’s Positive Theory of Capital (first edition, 1888) provides further evidence for not conflating “first-generation” Austrian analysis of economizing with later, narrower logic-of-choice theories. Bohm- Bawerk rejected the notion of economics as an autonomous science of allocative behavior. He opened his study by reaffirming the unity of all sciences, referring inter alia to the importance of conducting economic theorizing with the assistance of theorems established in contiguous disciplines, especially psychology (1959, 2:3-4).
Value theory is the subject matter of the first part of book 3 of Positive Theory. There Bohm-Bawerk prefaced his discussion with a distinction between intrinsic value (Eigenwert) and extrinsic value (Wirkungs- wert).** Some goods are valuable for their own sake and are therefore intrinsically valuable. Others are valuable as instruments for promoting ends-both material and psychic-that lie outside themselves (extrin- sic value). Economic values are extrinsic in that economizers’ valua- tions of goods are “a reflection of a more basic valuation which [they] accord to the life and welfare purposes which goods serve to attain” (1959,2: 121). Two issues arise from this statement. First, how much of a reflection of “more basic valuations” are economic valuations? On this point Bohm-Bawerk remained mute. Evidently “more basic” valuations do not come within the domain of economic analysis insofar as they can be isolated at all. Economic value is not a perfect reflection of “basic” valuation; otherwise Bohm-Bawerk’s distinction between two different spheres of valuation-one relating to ultimate ends and the other to means-would be unhelpful. As he was obliged to concede, the value of all goods was intrinsic (2:121). It is not crucial that he realized the
22. This distinction was developed by the Austrian psychologist-philosopher C . von Ehrenfels in the 1890s. On Ehrenfels s e e Eaton 1930. Bohm-Bawerk (1959, 2:421) cited Ehrenfels.
294 History of Political Economy 23:2 (1991)
transparency of a distinction borrowed from the fledgling literature of pure psychology (notably Ehrenfels’s work). What matters is that he believed that value and price theory could not be written without refer- ence to psychology. Second, what role do economists have in evaluating how well economizing behavior, following principles laid down in the theory of economic value, actually accords with intrinsic, “life and welfare purposes”? Must economists analyze intrinsic goals, or is such an endeavor already implicit in the theory of economic value? Affirma- tive answers to either part of the latter question beg deeper philosophi- cal issues that Bohm-Bawerk eventually found unavoidable.
As his treatise proceeded, the economic value of a good was said to be determined by the magnitude of its marginal utility (2: 143). Marginal utility calculations were apparent in many seemingly incomparable ac- tivities: “Everyone knows from his own experience that the fourth or fifth course of a banquet arouses far less appetite than did the first. . . . Similar sensations can arise in the course of a concert, a lecture, a walk or a game that continues for an unduly long period. This will apply, indeed, to virtually all physical and intellectual enjoyments, as well” (2: 139, emphasis mine). Selfish or altruistic actions also took marginal utility into account (2:424, n. 19). It was argued that marginal utility was the decisive point “of every explanation of man’s economic behaviour.” The epithet “economic” referred to any purposive activity that used scarce means to satisfy needs, which in turn were ranked in order of precedence in the economizer’s mind (2:140-43). Ranking may be in error. Economizing was affected not by the true importance attaching to goods, but by “the opinion that we have formed of them whether right or wrong” (2:432, n. 93, emphasis his). While the possibility of Menger’s imaginary goods was granted, Bohm-Bawerk noted that the intellec- tual demands of economizing without extensive error were reduced by memory and learning (2:200-204). Lastly, economizing involved intra- personal, ordinal measurement of the welfare gain from consumption in terms of the pleasure and displeasure incurred (2: 15 1-55, 3: 136).
Chapter 10 of Capital and Interest, written on the occasion of the third edition (191 2), is entitled “Some Psychological Considerations Supplementing Our Theory of Value” (1959,184). In that chapter Bohm- Bawerk abjured adherence to “antiquated philosophy,” specifically re- ferring to hedonistic approaches which maintained that there were no extrinsic values and no intrinsic values other than pleasure and freedom from pain. Nevertheless he trenchantly defended as part of his marginal utility theory the use of terms reminiscent of hedonism such as “plea- sure,” “displeasure,” and “satisfaction” to describe the economizer’s’ maximand (2: 184-85). For the economist, “it matters not whether it be only pleasure and pain, or whether it be in addition other things that are
Endres - Menger, Wieser, Bohm-Bawerk 295 ‘desirable’ and ‘worthy of being desired,’ ‘odious’ o r ‘worthy of odium.’ The only thing that is important is that people do love and hate s o m e - thing” (2: 188, emphasis his). This admonition is far from being persua- sive in its attempt to remove all vestiges of hedonism from his analysis? Also, it did not obviate the necessity for Bohm-Bawerk to explain the scope and content of the economizer’s maximand: the “life and welfare purposes” referred t o indefatigably in Positive Theory.
If the tools of marginal utility theory described economizers’ mental processes involved in “striving after well-being” (1959,2: 189), what was the precise scope of marginalism? Usually, wrote Bohm-Bawerk (in contrast with his previous [ 18881 position but consistent with Menger’s earlier interdiction in the Investigations), marginal utility did not apply t o activities concerning “glowing enthusiasm for lofty ideas and elemen- tal outbursts of the primal instincts.” It was not fit for analyzing human behavior in these domains. Further, it “is not in the lofty and exalted strata of human endeavour, but rather in its low-lying regions that marginal utility has its habitat and performs its function of determining the value of goods.” In short, marginal utility applied only t o satisfac- tion of “banal and prosaic needs” (2: 189).24
Eugen Slutsky (1927,545-47) attempted t o expose two distinct value theories in Bohm-Bawerk’s work, one based on the pain-pleasure cal- culus which was formulated in the 1880s and one, incomplete, based o n “higher values” written a t the turn of the century. Slutsky’s proposal was speculative and unconvincing. It attributed more to Bohm-Bawerk’s 1912 additions to Positive Theory than is warranted by textual evidence. Bohm-Bawerk’s position was not, however, as “perplexing” a s Kauder (1965, 129) has presented it. Like Wieser, Bohm-Bawerk prepared a response to criticism of hedonistic elements in his original value theory only t o find in responding that he needed a substitute once hedonism was jettisoned.25 As we saw, Wieser resorted to asceticism. Bohm-Bawerk’s dualism of higher and lower needs, which conveniently corresponded with Ehrenfels’s spurious distinction between intrinsic and extrinsic
23. See also Fabian and Simons 1986, 86. Rosenstein-Rodan ([I9271 1960, 101) ac- cepted that in the struggle against hedonism “Bohm-Bawerk himself pronounced against i t , ” as if a mere pronouncement were sufficient to neutralize his utility theory from hedonist linkages. In the Essay Robbins (1984, 84) also accepted Bohm-Bawerk’s pro- nouncement at face value.
24. Why should ordinary bread-and-butter needs be described as banal? Kauder (1958, 422) demonstrated that the intellectual and political influences on Bohm-Bawerk led him to advocate “social quietism,” that is, social stability ahead o f economic progress. This entailed both that the rich should desist from spending on luxuries and a steady, unchanging consumption among the masses.
25. Bohm-Bawerk (1959, 3: 139) complained of the “disturbing influence which the unsettled dispute of hedonism” exerted on his work.
296 History of Political Economy 23:2 (1991)
value, was constructed to appease the critics.26 It is therefore under- standable why he was so keen to “carefully step over the boundary line” into the field of pure psychology for support. Here we also find the rationale for his appeal to the authority of “modern German psycholo- gists” (1959,121,193). It gave him an excuse, however weak, to retain an unadulterated marginal utility theory in the face of criticism. In his estimation dating from the 19 12 edition of Positive Theory, “economic phenomena. . . have their roots in psychological ground and it becomes the province of economic science to trace those roots far enough into that ground to make the explanation which it evolves . . . convincing” (2: 192).
5. Conclusion Menger, Wieser, and Bohm-Bawerk were aware of possibilities for ethi- cally and/or psychologically nonneutral analyses of economizing be- havior. Menger advanced beyond the boundaries of what is now known as the pure logic of choice. He investigated both the hierarchical struc- ture and growth of needs. Although on different bases, Wieser and Bohm-Bawerk separately established dualism-of-needs concepts; these concepts enabled them to retain the authority to discuss the scope and purpose of economizing and to counter the charge of hedonism. Wieser used his concept to link the ends of economizing with the ethical prin- ciple of asceticism, whereas Bohm-Bawerk defended his concept by drawing on a branch of pure psychology which he thought sufficient to distance his analysis from the felicific calculus. The “second- generation’’ Austrians were uncomfortable with all this. Mises, for example, was apprehensive about the penetration of ethical issues into economics. He railed against the needs-hierarchy notion evident in the writings of Menger and Bohm-Bawerk, partly because it was implied that needs exhibit an objective structure according to which econo- mizers should act and also because some needs, especially in Bohm- Bawerk’s analysis, were considered beyond the scope of economizing (Mises [1933] 1960, 167, 170ff.; 1949,95).
The main focus of doctrinal investigations in attempting to discover the uniqueness of early Austrian contributions has been on the inten- tionality and purposefulness of economizing in contrast with Jevons, Walras, and Pareto, whose impulse was to model choice mechanisti- cally. Menger, Wieser, and Bohm-Bawerk certainly approached the analysis of economizing by the well-documented route pointing in the direction of a pure logic of choice. Above I have identified further lines of inquiry suggested by the early Austrians which utilized a range of
26. Ehrenfels’s intrinsic-extrinsic distinction was soon discarded by other contributors to the Austrian school o f psychology (Fabian and Simons 1986,87ff.).
Endres - Menger, Wieser, Bohm-Bawerk 297
interdisciplinary insights from biology, psychology, and ethics so as further to understand, in particular, the process of choice and the ends of economizing behavior. In grounding the foundations of “second- generation” Austrian economics in the rather static logic-of-choice framework, Mises and his followers denied themselves fruitful oppor- tunities for interdisciplinary research.
References Addleson, M. 1986. “Radical Subjectivism” and the Language of Austrian
Economics. In Subjectivism, Intelligibility and Economic Understanding, edited by I. M. Kirzner. London: Macmillan.
Alter, M. 1982. Carl Menger and “Homo Oeconomicus.” Journal of Economic Issues 16: 149-60.
Banfield, T. [1848] 1973. The Organisation of Industry. 2d ed. New York: A. M. K. Reprints of Economic Classics.
Bohm-Bawerk, E. [1888, 19123 1959. Capital and Interest, vols. 1-3. Translated by G. D. Huncke et al. South Holland, Ill.: Libertarian Press.
Eaton, H. 1930. The Austrian Philosophy of Values. Norman: University of Oklahoma Press.
Endres, A. M. 1984. Institutional Elements in Carl Menger’s Theory of De- mand: Comment. Journal of Economic Issues 18:897-904.
. 1987a. The Origins of Bohm-Bawerk’s “Greatest Error” : Theoretical Points of Separation from Menger. Zeitschrift fur die gesamte Staatswissen- schaft 143.2:29 1-309.
. 1987b. Subjectivism, Psychology and the Modern Austrians: Comment. In Psychological Economics: Issues, Tensions and Prospects, edited by P. Earl. Boston: Kluwer.
Fabian, R., and P. Simons. 1986. The Second Austrian School of Value Theory. In Austrian Economics, edited by W. Grassl et al. London: Croom Helm.
Fraser, L. 1937. Economic Thought and Language. London: A. & C. Black. Georgescu-Roegen, N. 1966. Analytical Economics: Issues and Problems.
Cambridge: Harvard University Press. Grassl, W. 1986. Markets and Morality: Austrian Perspectives on the Economic
Approach to Human Behaviour. In Austrian Economics, edited by W. Grassl. London: Croom Helm.
Hayek, F. 1978. The Place of Menger’s Grundsatze in the History of Economic Thought. In New Studies in Philosophy, Politics, Economics and the History of Ideas, edited by F. Hayek. London: Routledge.
Howey, R. 1960. The Rise of the Marginal Utility School 1870-1889. Lawrence: University of Kansas Press.
Hutchison, T. 1981. The Politics and Philosophy of Economics. Oxford: Basil Blackwell.
Jaffk, W. 1976. Menger, Jevons and Walras De-homogenised. Economic Inquiry
Jevons, W. 1879. Theory of Political Economy. 2d ed. London: Macmillan. Kauder, E. 1958. Intellectual and Political Roots of the Older Austrian School.
. 1965. A History of Marginal Utility Theory. Princeton: Princeton Uni-
14:511-24.
Zeitschrijl fur Nationalokonomie 17:4 1 1-25.
versity Press.
298 History of Political Economy 23:2 (1991)
Lachmann, L. 1977. Capital, Expectations and the Market Process. Kansas
. 1978. Carl Menger and the Incomplete Revolution of Subjectivism.
. 1986. The Market as an Economic Process. Oxford: Basil Blackwell.
City: Sheed Andrews & McMeel.
Atlantic Economic Journal 657-59.
Marshall, A. 1920. Principles of Economics. London: Macmillan. Menger, C. 187 1 . Grundslitze der Volkswirthschaftslehre. Vienna: Braumuller.
. [I8831 1985. Investigations into the Method of the Social Sciences.
. 1888. Zur Theorie des Kapitals. Jahrbucher f u r Nationalokonomie und
. 1923. Grundsatze der Volkswirthschaftslehre. 2d ed. Vienna: Holder.
. 1950. Principles of Economics. Translated by J . Dingwall et al. Glencoe,
Mises, L. [ 19331 1960. Epistemological Problems of Economics. Translated by
Edited by L. White. New York: New York University Press.
Statistik, n.s. 17: 1-49.
Ill.: Free Press.
G. Riesman. Princeton: Princeton University Press. . 1949. Human Action: A Treatise on Economics. London: W. Hodge.
Myrdal, G. 1953. The Political Element in the Development of Economic The-
Noyes, C. 1948. Economic Man in Relation to His Environment. 2 vols. New
O’Brien, D. 1988. Lionel Robbins. London: Macmillan. O’Driscoll, G., and M. Rizzo. 1985. The Economics of Time and Ignorance.
Parsons, T. 1931. Wants and Activities in Marshall. Quarterly Journal of Eco-
Pigou, A., ed. 1925. Memorials of Alfred Marshall. London: Macmillan. Pribram, K. 1983. A History of Economic Reasoning. Baltimore: The Johns
Hopkins University Press. Robbins, L. 1932. A n Essay on the Nature and Significance of Economic
Science. 1st ed. London: Macmillan. . 1984. A n Essay on the Nature and Significance of Economic Science.
3d ed. London: Macmillan. Rosenstein-Rodan, P. [ 19271 1960. Marginal Utility. Znternational Economic
Papers 10: 7 1 - 106. Silverman, P. 1990. The Cameralistic Roots of Menger’s Achievement. HOPE
22, special issue on Carl Menger. Slutsky, E. 1927. Zur Kritik der Bohm-Bawerkschen Wertbegriffs und seiner
Lehre von der Messzbarkeit des Werts. Schmollers Jarbuch f u r Gesetz- gebung 51541-60.
Souter, R. 1933. The Nature and Significance of Economic Science in Recent Discussion. Quarterly Journal of Economics 48:377-413.
Stegmiiller, W. 1973. Entscheidungslogik (rationale Entscheidungstheorie). Berlin: Springer.
Stigler, G. 1937. The Economics of Carl Menger. Journal of Political Economy
Streissler, E. 1972. To What Extent Was the Austrian School Marginalist?
Strigl, R. 1923. Die okonomischen Kategorien und die Organisation der Wirt-
Sweezy, A. 1934. The Interpretation of Subjective Value Theory in the Writings
ory. London: Routledge.
York: Columbia University Press.
Oxford: Basil Blackwell.
nomics 46: 101-40.
451228-50.
HOPE 4~426-41.
schaft. Jena: G. Fischer.
of the Austrian Economists. Review of Economic Studies 1 : 176-85.
Endres * Menger, Wieser, Bohm-Bawerk 299
. 1935. Collected Works of Carl Menger. Quarterly Journal of Economics
Vaughn, K. 1978. T h e Reinterpretation of Carl Menger. Atlantic Economic Journal 6:60-63.
. Carl Menger. In The New Palgrave: A Dictionary of Political Economy, 2:438-44. London: Macmillan.
. 1989. T h e Mengerian Roots of the Austrian Revival. In Proceedings of the H . E . S . Society, 3:1192-1242 (Richmond, Va.). Now also in HOPE 22, special issue o n Carl Menger (1990).
Wieser, F. [1889] 1930. Natural Value. Translated by C. Malloch. London: Macmillan.
. [I9141 1927. Social Economics. Translated by F. Hinrichs. N e w York: Green berg.
. 1929. Gesammelte Abhandlungen. Tubingen: Mohr.
5017 19-30.
White, L. 1985. Introduction. In Menger 1985.
Instructions for submission of your papers.docx
Instructions for submission of your papers
ECO322 Y
First term paper
1. Due date : Monday December 8, 2014 in the Economics Department Office , 3274 Kaneff Centre with Amber Shoebridge the department secretary.
Time: by 4pm that day.
Format: Paper – hard copy format.
2. Submission on TURNITIN.Com is mandatory. Instructions:
Log onto : www.turnitn.com
Create an account for yourself as a student.
You will need the course ID and password for submission:
ID: 9112904, password: ECO322utm
Upload your papers under: ECO322 Term 1 paper.
This must be done between Dec 8 and Dec 10.
And then rest up and have a good break.
Instructions for submission of your papers[1].docx
Instructions for submission of your papers
ECO322 Y
First term paper
1. Due date : Monday December 8, 2014 in the Economics Department Office , 3274 Kaneff Centre with Amber Shoebridge the department secretary.
Time: by 4pm that day.
Format: Paper – hard copy format.
2. Submission on TURNITIN.Com is mandatory. Instructions:
Create an account for yourself as a student.
You will need the course ID and password for submission:
ID: 9112904, password: ECO322utm
Upload your papers under: ECO322 Term 1 paper.
This must be done between Dec 8 and Dec 10.
And then rest up and have a good break.
Lecture1-Sept11.pptx
Department of Economics
University of Toronto at Mississauga
ECO322- History of Economic Thought
Fall 2014/Spring 2015
HISTORY OF ECONOMIC THOUGHT
THE STUDY OF DEAD (usually white) MEN
Rules of Engagement:
Reading
Thinking
Writing
Agenda for today
Welcome message
Course outlines and such and such
Brief Introduction to the course
Pre-Classical History – setting the stage
Ancient times
Feudalism and pre-classical thought
Europe
India and China
Course outline
Instructor:
Shalini Sharma
3270, Kaneff Center
Tel: (905) 569 4487
Office hours: Tuesdays 5:00 pm to 6:30 pm or by appointment
Objectives:
The course first explores the central ideas that have dominated controversies in the method and history of science. With this material as background, several episodes in the development of economic theory are studied. The goal is an understanding of the structure of economics and its relation to the contemporary understanding of scientific method.
Course outline
Texts:
The following are required texts for the course as they will guide you through the basic material:
Bo Sandelin et. Al A short history of economic thought, 2nd Ed. Routledge
Robert Heilbroner, The Worldly Philosophers: Lives, Times and Ideas of the Great Economic Thinkers, Simon & Schuster
Sandelin is a conventional and schematic presentation of the development of economic theory, while Heilbroner is a must-read classic for every economics student; it is entertaining, rich with anecdotes while providing students with the great sweep of the history of economics.
There will be readings periodically assigned from current writing as well to provide the relevance of past economic thought.
Class notes are provided on BB but please note that these notes contain just the framework of the lecture and will be meaningless without taking class notes and doing the readings.
Course outline
General Progression of the Course
Pre Capitalist thought- Greeks, Christendom and Medievalism (before 1760)
Early Capitalist – Mercantilism, Physiocrats, Classicism (1760 – 1890)
Marginalism – (1890 to date)
Critiques of Capitalism – (1890 to date)
Modern and Neo-classical economic thought – (Post war to date)
Grading and Evaluation
This is a writing course with essentially three pre-requisites:
Reading Thinking Writing
In order to fulfill the requirements of this writing course, you need to complete the readings. It is really very hard to bluff your way through! In order to write anything at all, you need to think about what you read.
Remember that writing skills have benefits not only beyond this course and your university GPA, but is a life-skill. As advanced university students you are expected to already know the following: how to introduce a subject and an argument; identify a central thesis and explain it; how to support your thesis with evidence and documenting and citing source materials. In addition, you must be able to differentiate between revising an essay and proof reading and editing an essay.
Course outline
| 20% | In- class 5 minute quiz – 12 quizzes, drop 2, , each quiz is worth 2% |
| 25% | First Term Paper due Last Day of Class in Fall session |
| 55% | Final Term Paper due Last Day of Class in Winter session |
Quizzes
In –Class and short. Covers materials and readings assigned and covered in class lectures. These are SURPRISE/POP quizzes and are designed to make sure that you are up to date in your knowledge and understanding of the class materials discussed
First Term Paper:
This is a paper of maximum length 8 pages (and minimum of 6 pages) that covers some theoretical and institutional themes of the course. You can choose ONE of the following TWO themes.
In this paper, you will discuss:
Theoretical themes in the Literature
Institutional Themes
Course outline
| Theoretical Themes | Institutional Themes |
| 1. Wages 2. Profits 3. Rent 4. Interest rates 5. Price levels 6. Employment 7. Growth rates 8. Human welfare 9. Prices of consumer goods and services 10. Foreign exchange rates 11. International trade 12. International investment 13. Migration 14. Economic fluctuations Human nature, human behavior 16. Money 17. Labour 18. Capital……….and more | 1. The market 2. Guilds and trade unions 3. Banks 4. Business firms 5. The Church as economic actor 6. Colonies and empires 7. The state as economic actor 8. Slavery 9. Property rights 10. The military 11. The legal system 12. The family 13. Government 14. Democracy and other forms of political systems 15. Feudalism |
Course outline
Second Term Paper (Final Paper)
This is a harder and longer task in THREE parts.
PART 1:
Choose choosing ONE topic from the following theme and writing about it in General:
III. Methodological Themes
1. Were there paradigms in all of the five periods/schools? What were they?
2. How has economic rhetoric evolved through the five periods/schools?
3. Can the development of economics be understood best as a facet of the history of science, or perhaps as part of intellectual history?
4. What light is cast by the sociology of science (the sociology of scientific knowledge or science studies)?
5. Are there distinctive national styles (and prejudices) in the history of economics?
6. What role has religion played in the development of economics?
7. What role has mathematics played?
8. How about the impact of statistics and other forms of measurement?
9. What has been the impact of history?
10. Political theory?
11. Anthropology?
12. Psychology?
13. Theories and prejudices about race and gender?
The maximum length of part 1 is 6 pages (minimum 4 pages).
Course outline
PART 2:
Revise your first term paper based on comments received.
PART 3:
Build a central thesis that relates your ideas and treatment from your revised term paper 1 (part 1) and your introduction in part 2 towards a central thesis, with evidence from the literature to support your thesis. Specifically, you should:
Integrate Parts 1 and 2 - in order to reach conclusions about them taken together
You are asking the question about how the methodological theme you chose in Part 1 deals with the specific concept or economic institution you have written about in Part 2.
Does the methodological topic in Part 1 improve overall the explanatory power of the discipline in its’ treatment of the economic concept or institution you discussed in Part 2?
What conclusions can you draw about the topic you discussed in Part 1 in its treatment of the concept or institution discussed in Part 2? Is it limited or unconstrained by historical times?
The key is to select topics from I, II, III with care because you need to come up with conclusions that relate I and III, or alternatively, II and III.
Introduction to HET
Engage with primary texts to get a feel for the author’s own voice, and form an opinion about the readings
What was Smith’s theory about the Invisible hand and how relevant has it been in explaining the working of systems? Is it seamless?
Was Smith unambiguous in the application of Laissez – Faire?
Identify the main ideas of classical political economy, neoclassical economics
and Keynesian economics.
Where do the tenets of monetary and fiscal policy come from? Is it from the classicists?
How were wages viewed by the Marginalists? By the classicists?
Identify the major themes of economic thought prior – post to Adam Smith.
How did economies function prior to Western Capitalism?
What is the Asiatic Mode of production and how did the thinkers write about it?
Identify economic conditions and intellectualism that developed the particular ideas of thinkers
How did mercantilism and the Age of Reason contribute to the taxonomy developed by Smith?
Identify the major ideas associated with each school or author studied, and
thereby comprehend the origins of contemporary theory
Labour theory of Value Josef Allois Schumpter
Creative Destruction Adam Smith
Division of Labour Karl Marx
Surplus Value David Ricardo
Without understanding history, we are condemned to repeat it
Aim of this course:
Practical economists, who believe themselves to be quite exempt from any
intellectual influences, are usually the slaves of the historical mix of ideas,
techniques, events, institutions and incentives existing at the time they produce
economic ideas……. Keynes
Questions: Are economists objective in the same way as say a physicist may be?
An Indian economics professor was trying to explain the Hindu theory of Karma to his class………
Economics follows the same empirical method as natural scientists do
Theory--------------------- ------------------- Test with data
Economics is based on principles.
Methodological principles: Empiricism –model specification heuristic principles- mathematically defined
Behavioural principles: Axioms (U maximization for example, think of another?)
Institutional principles: based on values and goals (where do these come from)
Santayana, burke (churchill)
11
Left and Right
Left, right and objectivity
What makes an economic thinker (economist) different from others?
Well – economists are human too.. ;-)
Economists recognize a fundamental pattern of behaviour
Homo Economicus: Rational and optimizing man
Follow an empirical method.
Theory, observe and junk or accept theory
Accept theory as framework for reality
Food for thought: Is economic reality easily observable and testable like the natural world is?
Set up of the course
Pre capitalist economic systems in different parts of the world
Feudalism
The Age of Reason, Enlightenment and Mercantilism and pre-classical political economy
The Classicists- Smith, Ricardo, Malthus, Marx
John Stuart Mills and the Marginalist Revolution & Mathematical Economics The Institutionalist School Walras and physics
Institutionalists and the issues with market economies
Marx
Schumpeter
Keynesians
Robinson, Sraffa, Kalecki and Kaldor- Cambridge School
Post colonial developments in economics – Harrod Domar, Neoclassical growth theory, monetarism and the decline of the Welfare State,
Monetarism and summarizing current debates (obviously not ‘dead’ white men anymore)
The arc of economic thought
Are we in the wilderness post 2008?
What ideas to apply to get out of world wide funk?
New Post Keynesians
New neo-classicists
Bewildering complexity of economic systems because of several simultaneous levels of operation
Post –Industrial West
Industrializing East
Subsisting South
Demographic Transition
Where do we go from here?
What are the challenges?
Where does the questioning of methodologies, behavioural axioms and institutional values start in economic theory development
Importance of a historian of economics lies in providing assistance to colleagues in understanding the course of its development and so its limitations
Material for next week
Next week: Scientific method in question Reading assignment : Mclosky and Goodwin
How has economics progressed - some general ideas
Provide some examples of outside events that reconstructed economics- or did it?
Has economics been successful in explaining events and economic realities of the past? Is it fool proof – what have been the shortfalls?
Is economics a scientific discipline? What is science?
Are physics and math good models for economists?
The way forward ?
Development of ideas in the Ancient World
Greek philosophers
Bo Sandelin – chapters 1 and 2.
Lecture2.pptx
Department of Economics
University of Toronto at Mississauga
ECO322- History of Economic Thought
Fall 2014/Spring 2015
Scientific methods and Economics
Defining economics
Discussion on Science and Economics –II-VII
The Progress of economics
Where to start? At the very beginning
Scientific method and Economics - I
Is economics a science?
Economics? - define “ Economics is what Economists Do” – Jacob Viner
What does that tell us? - So what do economists do ?
Historically varied definitions of economics
Smith: Science of a statesman
Jean Baptiste Say: Laws governing production, distribution and consumption of national wealth
J.S. Mill: treats production and distribution of wealth as they depend on the laws of human nature
Marshall: study of mankind in the ordinary business of life
Keynes: How activities and consumption served to influence character and behaviour
Modern definitions?
Lionel Robbins: basis made for rational behaviour
Discussion point: All human behavior is rational. True/False?
What is your opinion? Provide one example of either or.
Economics is fluid in terms of definition
2
Scientific method and Economics -II
The progress of Economic Science linking method and mandate
What are the economic projects that you have come across or read about?
What are the topics taken up in those projects to your knowledge?
Our question: Does economics exist as a science?
Scientific method: a discussion
What are the images that come to mind when you think of THE SCIENCES?
Science is both a body of knowledge and a process
Courtesy: http://undsci.berkeley.edu
Substitute ‘economic ‘ for ‘natural’ on this list: using heterodox checklist as opposed to this orthodox one
Does economic methodology stand up to this checklist?
Current methods in economics
White lab coats a fat textbook, white lab coats and microscopes, an astronomer peering through a telescope, a naturalist in the rainforest, Einstein's equations scribbled on a chalkboard, the launch of the space shuttle, bubbling beakers …. All of those images reflect some aspect of science, but none of them provides a full picture because science has so many facets:
Economics is a science then because it makes the checklist in its’ current form. Well, maybe…
3
Scientific method and Economics - III
Economic Science
Science is thought of as an embodiment of correct answers
How do we know those answers are correct? What is acceptable knowledge?
Pre-Socratic Sophists
Finding the correct answer from a whole set of possible and deeply thought through processes
Argument and discussion and ‘correct’ answer selected iff
All possible alternatives are identified. Can we ever know?
All competing answers are refuted. Is that always conclusive?
Problem of rhetoric
Establishment of ‘authority’ in knowledge creation
Galileo: Truth of one’s knowledge cannot be decided by dictat but by the real world
Basics of modern empiricism
Francis Bacon: With science there is always a rationale for the truth of ones’ knowledge
Scientific method and Economics - IV
Bacon and the essence of science
Whenever knowledge is true, it may be true by
Being manifest in nature
We can get to it by observation
To err is sin - wait until gathered facts through observation are true
Hence scientific method is
Careful and unprejudiced
Based on data collection or information gathering
Logical demonstration (proof) of knowledge derived from data
Application of this method to Newton: Newton and the apple?
Newtonian gravity based on above process
All knowledge of the world can be shown to be based on real world experiences
All knowledge is based on fact or experience and/or logical proofs
Do you see this as an objective methodology? [Yes/No]
Humans bring subjectivity to science even when developing laws
Humans understand and collect facts relevant or relative only to the TIME
E.g: Newtonian gravity v/s relativity
Scientific method and Economics - V
Induction in science
Problems with logical proofs is that theory of infinite regress
Implication is that we have believe that certain ‘facts are true’ always
What is the difference then between science and religion?
David Hume: there is no objective logic that does the job of providing a logical proof of ones’ knowledge based only on experience
Truth of particulars General truth
Knowledge (even science) cannot be completely objective
Study of knowing via induction is the knowing the MIND of the knower
Scientific method and Economics - VI
Scientific knowledge is factual and demonstrable
Difficult to separate HOW one knows from WHAT the facts are and WHAT may be proved
How do I know is based very much on my psychology
E.g. the example of mean income versus median income in Toronto
Bacon: eliminate subjective influences in process of establishing facts
Make logical basis of knowing non -psychological
Logical positivism: verification, verification, verification
purge science of talk about nature's unobservable aspects
Classical empiricism: rejection of innate, in-born knowledge or concepts
Theories cannot go beyond fact
Theories only represent our experience
http://www.youtube.com/watch?v=GiPe1OiKQuk
If scientific method itself is open to debate and interpretation what about economics?
But we are very small and systems are extremely complex and we are not soothsayers
7
Scientific method and Economics - VII
Conventionalism in economics
As in science, reliance on induction leads to some kind of objective authority
As we go backward through induction – there is no end to infinite regression so we end up using some kind of irremovable TRUTH often using math – some BEST truth/theory
Objective authority
Decision rules for acceptance of theory
All theory is
Catalogue of facts
Classification systems
Languages
All theory is acceptance by use of some criteria, e.g. statistics
We “know” when we accept particular theories
Errors come from being irrational
Economic methodology is based on
Conventionalism in the short run
Inductivism in the long run
How to accept “BEST” theory in the short run without inductive logic
Scientific method and Economics - VII
Criteria for choosing BEST truth between competing theories
Most simple
Most general (aggregate)
Most verifiable
Most falsifiable
Most confirmed
Less disconfirmed
Thus economists tend to be concerned mostly with practical problems
Whether phenomena are right or wrong ignored (the ethics are ignored)
Can there actually exist a “BEST” theory?
Sure, if the theory meets the criteria above
Are the criteria foolproof
Practice of economics lies in accepting the criteria as BEST only because the theory using it is BEST
Circular logic at BEST
E.g. law of diminishing MU may be selected because it is simple but it could be diminishing due to altruism rather than utility
So is economics a science?
How has economics progressed - some general ideas
Provide some examples of outside events that reconstructed economics- or did it?
Has economics been successful in explaining events and economic realities of the past? Is it fool proof – what have been the shortfalls?
Is economics a scientific discipline? What is science?
Are physics and math good models for economists?
The way forward ?
Overiew: The Progress of Economics
The Progress of Economics
History of economics has to be modelled and tested – seen by way of the time it was written in because
Without such models there are great limits posed on understanding the discipline at large by way of its philosophy
Understand economic methodology better
Perspective developed on the subject or specific topic being studied
Breakdown in economic understanding recently of bubbles for example because of this inadequacy
Breakdown by economists of understanding energy problem
Economic methods involve
Model specification from theory developed and accepted as THE TRUTH
Quantified with data
Statistically tested
Interpretation? It all lies in the specification – what you put in or take out
Theory is expected to inform the behaviour of specific economic agents like households and firms
Theory is expected to reflect the TRUE behaviour of these agents
Statistical testing is objectively expected to confirm or disprove the theory
Interpretation comes from the values attributed by the individual researcher to the economic question
The Progress of Economics
Process of development of economics
As certain truths have been developed a belt models, concepts and artifacts have been developed as they predict novel facts
What to do with anomalies
Narrow definition of the field ( so ignore anomalies)
Have those economic truths changed? How? What causes change in economic science?
Introduction of new principles. How does this happen?
Changing social values. Examples?
Actual historical events Examples?
Easiest to see the impact of external experiments of events that have led to turmoil in the discipline and some fundamental reconstruction
Industrial Revolution and reforms to restore justice and efficiency
Marshall, Walras , Menger marginalist revolution
Great Depression Keynes (what was his contribution in one sentence?)
Behaviour of corporations after WWII ??????
Response of economists was to broaden the belt of tools they used but essentially used the same belt of ideas.
The Progress of Economics ……
Requires a balance of internal additions to foundation of existing ideas AND
External shocks and jolts for re-evaluation of the subject
Economic science appears to suffer from diminishing returns (what do we mean by that? )
Unpredictability of human history makes obsolescence in economics
How can the obsolescence be halted?
Policy challenges
Borrow from other disciplines
Axiomatic orthodoxy must be removed
Balancing the proximity to engineering approaches with cross disciplinary approaches allows the field to grow
We study how economics developed through the eyes of the thinkers and practitioners
Setting the stage: World Systems
Pre-capitalist economic forms
Markets have existed for as long as humans can remember
Co-existed with other economic forms based on power
What came first? - economic forms or economic thought?
Robinson Crusoe economy?
Ancient thinking:
Old Testament
Private property, division of labour, market exchange and money
Trade and exchange from earliest
Sumer – Ur : construction of first cities
Indus Valley
Older Vedic period
Yellow River China, Yangtse
Greece and democracy
Rising trading classes in conflict with landed aristocracy
reliance of agriculture on export market
growing power of money leading to impoverishment and enslavement of free peasants
stratification into economic classes and property ownership
CONFLICT, CONFLICT, CONFLICT and collapse of Greece
Lecture3(1).pptx
Department of Economics
University of Toronto at Mississauga
ECO322- History of Economic Thought
Fall 2014/Spring 2015
Economic Science and Progress
Setting the Stage- world systems
Ancient Economic thought
Greek Ethicists
Ancient Rome
Chinese thought
Arab-Islamic Ideas
Indian Ideas
Summing up
Economic history – Empires and new institutions
Feudal Europe
Progress requires….
A balance of internal additions to foundation of existing ideas AND
External shocks and jolts for re-evaluation of the subject
Economic science suffers from
obsolescence in economics due to unpredictability of human history
How can the obsolescence be halted?
Borrow from other disciplines
Axiomatic orthodoxy must be removed
Balancing the proximity to engineering approaches with cross disciplinary approaches allows the field to grow
Understand the evolution of ideas and human history better
Hence,
We study how economics developed through the eyes of the thinkers and practitioners
Setting the stage: World Systems
Pre-capitalist economic forms
Markets have existed for as long as humans can remember
Co-existed with other economic forms based on power
What came first? - economic forms or economic thought?
Robinson Crusoe economy?
Ancient thinking:
Old Testament
Private property, division of labour, market exchange and money BUT usury is frowned upon
Trade and exchange from earliest
Sumer – Ur : construction of first cities
Indus Valley
Older Vedic period
Yellow River China, Yangtse
Greece and democracy
Rising trading classes in conflict with landed aristocracy
reliance of agriculture on export market
growing power of money leading to impoverishment and enslavement of free peasants
stratification into economic classes and property ownership
CONFLICT, CONFLICT, CONFLICT and collapse of Greece
Plato and Aristotle
Plato’s Republic
against excessive commercialism and deeply suspicious of rising commercial classes
Recognizes
division of labour from the natural inequalities of human skill
multiplicity of human wants
specialization v.s self sufficiency
need for a commercial entity because of specialization
no recognition of efficiency with specialization
Recognizes
caste and division of labour
power of aristocracy
rulers and ruled
class antagonism is absent in the ideal REPUBLIC
Benevolent rulers, guardians and auxilliaries
For benefit of community and society
Freed from greed!
How would Plato look at our modern world?
Athens: class conflict and injustice
But democratic
Sparta: Aristocratic and tyrannical
Plato provides a ‘ROMANTIC’ view of economy and society
Plato and Aristotle
Aristotle is not an aristocrat
Case for private property and case against communal property – incentive argument
Strong proponent of division of labour based on inherent skills:
ruling classes: based on age
soldiers statesmen priests
ruled: farmers, craftsmen and labourers
slavery: some people are slaves by nature
Contribution:
lays foundation of use – value v/s exchange- value
As men depend more and more on exchange need to develop money
Self sufficiency less need for money
Trade great need for money
Money for exchange ONLY
usury is ‘unnatural’
Dichotomy of money and capital
Money for exchange v/s money capital towards limitless accumulation
Food for thought: Where else do you hear about ‘usury’ and the evil effects of usury?
Romans, Christendom
Roman empire large and rich but poor in philosophers and thinkers and economists!
Slavery mainstay from conquests
Class conflict and keeping empire in line sows seeds of empire destruction
Individualist basis of commerce v/s Greek community based economy
unrestricted individualism v/s Aristotle’s ethical element limiting the rights of property
Aristotilean ethics grounding for Canon Law of Middle Ages
Roman law basis for legal doctrines of capitalism
Roman society Patricians, plebians and proletarians
Does this apply to modern times?
Church develops as a feudal institution as Roman Empire declines – 5.A.D to 1450 A.D
Early Church is revolutionary- Christian ideas are revolutionary against Greco-Roman backdrop
Christian ideas are forward looking – Plato and Aristotle – merely an aristrocratic dislike of growth and commercialism
Non European economic thought
Until 1500s economies of Asia (Indian subcontinent and China were vaster than Europe
Economic production conditions
River valley civilizations (Indus and Yellow –River)
Coincident with latter period of Greek Philosphy
Chinese Chou Dynasty
Confucianists, Legalists and Moists (not Maoists.. ;-)
Coincident with the decline of Monarchy and emergence of independent states
Rising productivity, monetizationa nd specialization, cities and market places and contrast between rich and poor faster
Confucian ideas:
Morality is the core
Sanctioned social and economic hierarchy
Common good not individual gain
Pragmatic recommendations
Taxes derive from productive abilities (limited to 1% of land produce)
Government spending adjusted to government revenue
Extreme lavish living or parsimony is frowned upon
Mandate of ruler is the well – being of people
Non European economic thought
While there is no unrest in China as in Greece general moral turpitude creates new thought
Legalists
Social order and economic progress would result from strict centralized control of rewards and punishments
Avarice is norm rather than exception
Moists
Chaos and misery resulting from Confucian complacency
Inherent belief in moderation and lack of ostentation, social mobility, order and peace
Advocate of division of labor focusing on advantages of specialization
Strong state and disciplined hierarchy with strong soverign
Strict militarianism and authoritarianism
What is the single uniting principle behind Greek economic thinking and now Chinese?
Any generalizations you may draw?
Non European economic thought
Arab - Islamic thought (700 – 1200AD) :
Pinnacle of world power with influence stretching from Europe to China and India
Organization, social progress, literature and science
Forms a bridge between Indian and Greek wisdom
Indo-Arabic numerics
Reintroduction of Aristotle to the West
Economics is merely THE means to the an END
Economics Ethics
Ethics are divine (Shariah – so comparison’s with Greek ethics is difficult – no discussion and refinement possible)
Innovations
Development of a social welfare function (utility and disutility)
Discussion of markets but it is ALWAYS subordinate to ethics
Profiteering is a no-no
Understanding of economic activity as divided into primary, secondary and tertiary sectors
Division of labour via needle making (mimics another famous economist who wrote about Div. of labour almost 1000 years later)
Bullion possesses only exchange value
Usury is forbidden
Non European economic thought
Ancient Indian thought:
Based in metaphysics and religion
Hedonism is frowned upon – moderation is the only way to live
Individual happiness is inseparable from social happiness
Accumulation of wealth is advocated BUT inseparable from the sharing of wealth
Limits on usury placed
Social organization: Caste
How is this different from Plato?
Kautilya’s Arthashastra:
Exposition on the material aspects of life
How to acquire wealth and manage statehood
State craft much like Machiavelli
Real politik Idealism
State must be strong
Means justifiable in service of the state
Ancient Economic Systems and Theory
Economic organizations
Empire building: Rome
Autonomous cities
Indus Valley, Yellow River
City States:
Greece
Both cases production and exchange relatively uncomplicated – varying degrees of archaism in units
Control of production limited by labour, distribution affecte by physical and environmental consitions
Lack of abundance in supply meant that demand had to be regulated
How to regulate demand?
Why did Hedonism prosper in the Roman times? Why no similar discussions of economicus and ethics?
Economic History: Waning of empires and institutions
Decline of Roman Empire: Byzantine
http://www.youtube.com/watch?v=ExWfh6sGyso
Conditions in the East (India and China) are stable yet stagnant
Setting the stage: World Systems and Feudalism
Pre-capitalist economic forms
Markets have existed for as long as humans can remember
Co-existed with other economic forms based on power
Setting the stage: World Systems and Feudalism
Feudalism
Money and exchange for trade alone
Barter and currency depending on kingdom
Money usually bullion
European
Feudalism
Asian feudalism organized the same way WITHOUT the Church
Few kingdoms like these in Africa
Hunter gather, nomadic life in Middle East (Bedouins) and Arabs, Native Americans
Serfs and feudalism
Characteristics of Feudalism
Low level of technique
Subsistence production
Ownership of resources in the hands of few
No free labour
Political decentralization
Outcomes
System inhibits growth and expansion
Self-sufficiency
Do cities form? Why do cities form?
Concentration of economic power facilitates accumulation of capital by owners for trading purposes
Slow evolution towards increasing skill and specialization in production for trade
Emergence of trading towns and posts
Money used as medium of exchange
http://www.youtube.com/watch?v=fxGqcCeV3qk
Lecture4.pptx
Department of Economics
University of Toronto at Mississauga
ECO322- History of Economic Thought
Fall 2014/Spring 2015
Jumping ahead to the Middle Ages
The Scholastics
Decline of Feudalism
Discovery and the AGE OF REASON
Mercantilism
Mercantilists
Mercantilists beget Capitalists
Transitioning towards early capitalism (laying the ground for what comes later)
Economic History in wane of empires and resulting institutions
Setting the stage: World Systems and Feudalism
Pre-capitalist economic forms
Markets have existed for as long as humans can remember
Co-existed with other economic forms based on power
Setting the stage: World Systems and Feudalism
Feudalism
Money and exchange for trade alone
Barter and currency depending on kingdom
Money usually bullion
European
Feudalism
Asian feudalism organized the same way WITHOUT the Church
Few kingdoms like these in Africa
Hunter gather, nomadic life in Middle East (Bedouins) and Arabs, Native Americans
Serfs and feudalism
Characteristics of Feudalism
Low level of technique
Subsistence production
Ownership of resources in the hands of few
No free labour
Political decentralization
Outcomes
System inhibits growth and expansion
Self-sufficiency and village level, small scale production
Do cities form? Why do cities form?
Concentration of economic power facilitates accumulation of capital by owners for trading purposes
Slow evolution towards increasing skill and specialization in production for trade
Emergence of trading towns and posts
Money used as medium of exchange
Feudalism in Europe and pre-classical economic thought
Canon Law in the Middle Ages (Europe)
self sufficiency v/s growth (morality drives the economy)
Economic reality in Europe:
Private property important
Trade between small towns and expansion of markets
Thinkers: St. Thomas Aquinas the most significant of the Scholastic Tradition
Individual rights are meaningless without concern for community
Wealth acquisition is part of the imperfections of man’s earthly life
Charity is a must and altruism is core of thought
Trade is only justified if it leads to ‘common good’ (different from utility)
Recognizes fluctuations around ‘just’ price for goods
in bad times where seller would incur loss higher than ‘just’ price
Money is just to facilitate (natural) exchange to satisfy wants
Money is ‘barren’ does not bear fruit (unnatural)
As economies expand, is this view sustainable? Explain
Why is feudalism incompatible with economic growth?
http://www.youtube.com/watch?v=fxGqcCeV3qk
Feudalism in the world and a growing economy
With the fifteenth and sixteenth century Age of discoveries and New world exploration
Channels of profitable investments grow such Doctrainaire views unsustainable
Series of ‘exceptions’
penalties (interest) levied with delays of repayment (St. Thomas)
reward for risk undertaken by lender
Reformation: Martin Luther, Calvin
No sin in usury
Protestant Ethic (Max Weber -much later of course)
Spirit of capitalism and the decline of Church influence, Canon Law and feudalism
Feudalism’s decline, Separation of Church and Economy
Commercial capitalism
Science, new discoveries gave rise to need for new economic thought
Who are the major names from the 15th – 16th century Europe in science and mathematics?
new methods of farming gives rise to ‘surplus’ agricultural unemployment shift to towns and cities
Commerce and markets destroys subsistence farming
Creation of merchant –manufacturers
employment of semi-independent craftsmen
Mercantilism
Economic measures designed to secure political unification and national power
monetary, protectionist instruments towards this end
Feudalism’s decline, Separation of Church and Economy: Nation State
Geographical units change and expand
Feudalism – small units and fiefdoms
What is the economic implication of this for trade?
As nobles acquire power the most powerful prevail and exert control
Development of strong monarchies
England
France
Spain
Russia
States require strong bureaucracies
Rise of middle skilled classes
Mercantilists Bureaucracies
Define a mercantilist
Contrast the philosophy of the Mercantilist with a typical Scholastic
Who are the Mercantilists?
Merchants profit equated to national good
Trade and commercial expansion is the core
Monopolies and protection of merchants advocated
Wealth is accumulated in money or in bullion for the nations coffers
It is always better to sell goods to other than to buy goods from others, for the former brings a certain advantage (accumulation of money, bullion) and the latter inevitable damage’ (outflow of the same)--- Johann Joachim Becher
Mercantilists also against usury
Increases the cost of selling and reduces their profits
Preservation of stocks of precious metals by restricting international flows
Only bullion carried real store of value
Ratio of the values of two currencies corresponded to bullion content
Exchanges that took place at ratio par pro pari (??)
Exch rate< par bullion gets drained from country
Imports and home consumption discouraged
Exports and re-exports encouraged
Which one?
Mercantilism, early colonialism and rise of early industrial age
Bullion, reserves in specie in excess restriction of imports nursing of industries flourishing of home manufactures
Colonies acted as exclusive markets for manufactures of mother countries
supply cheap raw materials
supply cheap labour
10
How foundations of industry were laid….
Protectionist policy
Tariffs, embargoes on imports
prohibition of the export of tools and skilled craftsmen and bullion
encouragement of the import of raw materials or home production
strict quality controls
subsidies to developing industries
Mercantilism had abolished
Medieval restrictions and fostered strong nation states
Nation states fostered trade
Trade fostered early capitalism
How do you think?
Early capitalism developed into mature industrial capitalism
Who benefits from Mercantilism?
How do you think Mercantilism gave rise to capital accumulation?
11
Individual Mercantilists
Gerard de Malynes ,(Belgium, 1586-1641)
Contributions
The economic world was out of control and destabilizing
Suspicious of bankers, lending, usury
Thought foreign exchange was some kind of “cloaked usury”
Purely monetary transactions had lost sight of “just price”
Profits should be regulated by the government
Thomas Mun (1571-1641), England
Contributions
Director of East India Company
Needed to defend East India’s practice of exporting gold
Mercantilist view of the wealth of nations
Understands quantity theory
Taxes are a necessary evil
Sir William Petty (1623-87), England
Contributions
Developed concept of national income
Disutility theory of interest
Backward bending labor supply curve
Prefers consumption tax to income tax
Velocity of money and its impact on the quantity theory
Specialization and division of labor
Understand economic rents
Relationship of capital to production
Labor theory of value
Growth of Industrial Capitalism and Political Economy – Pre Classical Conditions
Early industrial age: 1600s-1800s
Characteristics:
State regulation of economic life is breaking down: England and France
Unrestricted individualism
Complex differentiation of guilds
Smaller older export guilds replaced by great colonial companies
Name them?
Trade progressed
monopoly rights of mercantilist houses reducing but industrial houses on the rise
growth of factory system
Scientific discoveries of this age?
Production in
Mercantilist era
Purchase raw materials
process in workshops (guilds)
sell in ever widening markets
Industrial era
Physical capital in production
factory production
wage – hired labour
Do you see any mercantilist ideas in operation in the modern era?
Clue: Korea’s Chaebol
The Growth of Industrial Capitalism in Europe
Restrictions on trade and domestic industry abolished by STRONG state
Flourishing industries in England by 1700
Mining, salt, copper , brass, ordnance, alum and nail making
Labour saving machinery is still to be used
Technological progress predates the AGE of Industrial Capitalism but its use lagged as vested commercial interests were in conflict with it
The merchant created the industrialist
Labor, land and raw materials are the fuel of industrial capitalism
Land is bought and sold
Previous view of land as holy
Serfdom disappears wage labourers
Enclosure movement pushes peasants off common open arable land
Commercialization of land
Things got worse for most people for a very long time before they got better!
Lecture5.pptx
Department of Economics
University of Toronto at Mississauga
ECO322- History of Economic Thought
Fall 2014/Spring 2015
Mercantilism (recap)
The Mercantilists
The Age of Mercantilists
Transitioning to Industrial Capitalism
Locke, Hume, Law, North, Hobbes
The Age of Reason
Physiocracy as a precursor to Classicism
System of thinking that justifies economic policies, practices, measures and philosophies concerning the interventionist role of the STATE in the economy but especially foreign trade
Primary duty of the state is to
Enhance and maintain both national wealth and national power
National wealth consists solely or primarily in its supply of precious metals
National Wealth National Power
Strategy:
Exploit local mines for bullion
Acquire bullion through foreign trade iff X >M bullion inflow
Outcomes
Great incentive for wars and conquests and competition between European powers in the New World
Mercantilism defined
Quick summary of the life and times of Mercantilist thinking
Growth via trade – acquiring and holding national power and prestige is the aim
Export led growth
Import substitution and protectionism
Export led growth inflow of bullion prices rise stimulates production
Iff the specie is not hoarded
Key: inflow of bullion
Consolidation of STATE power
England, France, Spain (Isabella and Ferdinand onwards)
Subduing of town and local government and feudal nobles
Portugal, Spain, France, England, Dutch Republic search for precious metals (Spain & Portugal)
warfare to seize and hold colonies + trade routes
Map of Mercantilist powers
Countries with spheres of influence – where they have captive markets and sources of raw materials
4
Individual Mercantilists
Gerard de Malynes ,(Belgium, 1586-1641)
Contributions
The economic world was out of control and destabilizing
Purely monetary transactions had lost sight of “just price”
Suspicious of bankers, lending, usury- (medieval outlook)
Thought foreign exchange was some kind of “cloaked usury”
Trade deficits imply that wealth or specie is lost to another country
M>X drains country of reserves
Exchange rates make sure that the country is in trade balance
Pro pari – Value of bullion in currency between various countries should always be at parity
Undervaluation of one currency outflow of specie because imports are dear and exports are cheap X>M
Revaluation upwards of one currency in terms of the other outflow of specie because of luxury imports by the agents of trade
Bankers and traders are not to be trusted foreign exchange is just prone to speculation where the people who trade have incentive to undervalue currency
Profits should be regulated by the government since it is inspired by merchant self interest
Thomas Mun (1571-1641), England
Contributions
Director of East India Company – what was this and why was the ‘export’ of bullion an issue?
Needed to defend East India’s practice of exporting bullion
Outflow of specie was not the result of speculative bankers and traders (Malynes)
Export surplus returned to England as treasure if export strategy adopted
If goods may be produced domestically, their IMPORT should be banned
Refrain from consumption of imports
Even transportation must be done on DOMESTICALLY made ships
Impetus to England’s shipping industry (Navigation Act)
Exports and Re-exports (even the slave trade)
Individual Mercantilists
Sir William Petty (1623-87), England
Contributions
Best way of getting richer is selling more dearly than bought (production and exchange)
Empiricist (Hobbesian in view)
Developed concept of national income
Understand economic rents
Capitalization rates and land value
Labor theory of value
Specialization and division of labor
Precursor of ‘surplus value’
Disutility theory of interest- usury is unfair
Mercantilist view but cannot explain Irish poverty despite being a net exporter
Devised the idea of ‘velocity of circulation’ of money
Individual Mercantilists : the first ‘REAL’ Economist
Growth of Industrial Capitalism and Political Economy – Pre Classical Conditions
Early industrial age: 1600s-1800s
Characteristics:
State regulation of economic life is breaking down: England and France
Unrestricted individualism
Complex differentiation of guilds
Smaller older export guilds replaced by great colonial companies in early Mercantilism
Name them?
Trade progressed during later Mercantilism
monopoly rights of mercantilist houses reducing but industrial houses on the rise
growth of factory system
Scientific discoveries of this age?
Production in
Mercantilist era
Purchase raw materials
process in workshops (guilds)
sell in ever widening markets
Industrial era
Physical capital in production
factory production
wage – hired labour
Do you see any mercantilist ideas in operation in the modern era?
Clue: Korea’s Chaebol
http://www.gpb.org/georgiastories/videos/mercantilism
The Growth of Industrial Capitalism in Europe
Restrictions on trade and domestic industry abolished by STRONG state
Flourishing industries in England by 1700
Mining, salt, copper , brass, ordnance, alum and nail making
Labour saving machinery is still to be used
Technological progress predates the AGE of Industrial Capitalism but its use lagged as vested commercial interests were in conflict with it
The merchant created the industrialist
Labor, land and raw materials are the fuel of industrial capitalism
Land is bought and sold
Previous view of land as holy
Serfdom disappears wage labourers
Enclosure movement pushes peasants off common open arable land
Commercialization of land
Things got worse for most people for a very long time before they got better!
Growth of Industrial Capitalism and Political Economy – Pre Classical Thought I
Machiavelli, Hobbes, Bacon and Spinoza: freedom of the individual from institutions like monarchy and subordinate position of religion to secular polity
John Locke:
Rational agent model
Coincidence of self-interest and general interest
All government is limited in its powers and exists only by the consent of the governed.
All people are born free
Would you place such a philosophy within the Greek or Roman tradition?
Growth of Industrial Capitalism and Political Economy – Pre Classical Thought II
The Physiocrats: Quesnay and Turgot (1756-1776) ‘Rule of Nature’
Labour:
Sterile labour (unproductive) and Productive
Subsistence labour
can create surplus wealth over subsistence
This distinction is best seen in agriculture
Tableau economique
Taxes create distortions
Land is the source of all wealth
Markets should be unconstrained by government
First model of circular flow of economy
Growth of Industrial Capitalism and Political Economy – Pre Classical Thought II The Physiocrats
| Farmers | Proprietors (Land owners) | Sterile Workers (Manufacturers) |
| +5 million livres of value (New in kind) | No value created | +2 million livres of goods from previous period |
| - 2 (food + costs) | + 2 million as rent | |
| + 3 produit net | - 1 million for food | |
| (2/3 food +1/3 raw materials) | - 1 million for manufactures | - 1 million manuf goods + 1 million cash |
| + 2 million cash (left from t-1) | 0 net cash | |
| - 2 million cash as rent | - 1 million manuf goods | |
| + 1 million cash (food) | + 1 million cash | |
| + 1 million cash (raw mat) | 1 million cash + 1 million food | |
| - 1 million cash manuf | - 1 million cash | |
| + 1 million cash food | + 1 million raw materials | |
| + 2 million cash (holdover) Reinvest in next period | + 2 million food + raw materials for next period |
0 man. goods
0 cash
Growth of Industrial Capitalism and Political Economy – Pre Classical Thought II The Physiocrats
Food flows from farmers to landlords and sterile workers
Manufactured goods held by farmers and landlords
No surplus of manufactured goods held by sterile workers (hence subsistence)
Sterile workers only ‘transform’ the value created by farmers into manufactured goods no ‘creation’ of new value
Components of Natural Order:
Right to enjoy the benefits of property
exercise labour
follow self interest- utilitarianism
Growth of Industrial Capitalism and Political Economy –The Classicists
Why are the classical economists called the Classical Economists?
Who are the classical economists?
Lecture6.pptx
Department of Economics
University of Toronto at Mississauga
ECO322- History of Economic Thought
Fall 2014/Spring 2015
Locke, Hume, Law, North, Hobbes
The Age of Reason
Physiocracy as a precursor to Classicism
Growth of Industrial Capitalism and Political Economy – Pre Classical Thought I
Machiavelli, Hobbes, Bacon and Spinoza: freedom of the individual from institutions like monarchy and subordinate position of religion to secular polity
John Locke:
Rational agent model
Coincidence of self-interest and general interest
All government is limited in its powers and exists only by the consent of the governed.
All people are born free
Would you place such a philosophy within the Greek or Roman tradition?
Growth of Industrial Capitalism and Political Economy – Pre Classical Thought I
Choose the Hobbes!
Thomas Hobbes Leviathan
Treatise on human nature
Basis of a social contract
Power must protect the Commonwealth
Religious emancipation a la Spinoza
Appearance of this philosophy coincides in Britain with
Decline of mercantilist houses (except the British East India Company)
Decline of monopolies and rise of small factories and competition
Growth of industrial production
Wind and water (steam) energy in place of human/animal energy in production
Labour saving techniques and machinery introduced in production
Uneven development in Europe
Most of the above developments are limited to England and to lesser extent France
Growth of Industrial Capitalism and Political Economy – Pre Classical Thought II
The Physiocrats: Quesnay and Turgot (1756-1776) ‘Rule of Nature’
Labour:
Sterile labour (unproductive) and Productive
Subsistence labour
can create surplus wealth over subsistence
This distinction is best seen in agriculture
Tableau economique
Taxes create distortions
Land is the source of all wealth
Markets should be unconstrained by government
First model of circular flow of economy
Physiocratic view comes from Cantillon who views land as the source of all wealth and labour as the power that produces it
Growth of Industrial Capitalism and Political Economy – Pre Classical Thought II The Physiocrats
| Farmers | Proprietors (Land owners) | Sterile Workers (Manufacturers) |
| +5 million livres of value (New in kind) | No value created | +2 million livres of goods from previous period |
| - 2 (food + costs) | + 2 million as rent | |
| + 3 produit net | - 1 million for food | |
| (2/3 food +1/3 raw materials) | - 1 million for manufactures | - 1 million manuf goods + 1 million cash |
| + 2 million cash (left from t-1) | 0 net cash | |
| - 2 million cash as rent | - 1 million manuf goods | |
| + 1 million cash (food) | + 1 million cash | |
| + 1 million cash (raw mat) | 1 million cash + 1 million food | |
| - 1 million cash manuf | - 1 million cash | |
| + 1 million cash food | + 1 million raw materials | |
| + 2 million cash (holdover) Reinvest in next period | + 2 million food + raw materials for next period |
0 man. goods
0 cash
Growth of Industrial Capitalism and Political Economy – Pre Classical Thought II The Physiocrats
Food flows from farmers to landlords and sterile workers
Manufactured goods held by farmers and landlords
No surplus of manufactured goods held by sterile workers (hence subsistence)
Sterile workers only ‘transform’ the value created by farmers into manufactured goods no ‘creation’ of new value
Components of Natural Order:
Right to enjoy the benefits of property
exercise labour
follow self interest- utilitarianism
Growth of Industrial Capitalism and Political Economy –The Classicists
Why are the classical economists called the Classical Economists?
Who are the classical economists?
The Classical Economists: ADAM SMITH ‘father of economics’
The Wealth of Nations
Reveals the economic mechanism of modern society
Lays bare principles that underlie the working of the capitalist system
Social and economic phenomena have laws of their own
(not all those laws were valid)
Abstract explanation of reality BUT grounded in reality
Biographical details:
1723 birth in Scotland
Educated in Glasgow and Oxford
Professor of logic and moral philosophy at Glasgow
Commissioner of Customs
Died 1790
First great work The Theory of Moral Sentiments
Contains the foundations of economic philosophy
Adam Smith: General Influences
Francis Hutcheson: Smith’s teacher
Faith in the ‘natural order’
Belonged to the later Greek Stoics
Greek Stoic Zeno, later adopted by Romans Cicero, Marcus Aurelius
Ancient Greeks (Plato and Aristotle) developed universal truths
Socratic tradition is idealistic
Mind alone is the source of knowledge
BUT Stoics were materialistic
Stoics argue that senses provide knowledge
Reliance on perception of ‘natural order’ inherent and superior to anything constructed by mankind
Superiority of natural over man-made law
Studying Smith in terms of General Themes
Underlying social and political philosophy
Economic policy
Technical Economic Content
Critiques and Inferences of the General Themes
Specific Topics
Adam Smith: General Themes -Political Philosophy
Embedded philosophy in 5 books dealing respectively with
problems of production, distribution and exchange
Capital
Different economic policies pursued by different nations
Previous systems of political economy
Public Finance
Central political theme in ALL books
Supreme beneficence of natural order
Human institutions are imperfect
Take away artificial preferences and restraints and the obvious and simple system of natural liberty will establish itself
Human conduct was actuated by
Self love, sympathy, desire to be free, sense of propriety, a habit of labour and propensity to truck, barter and exchange one thing for another
Each man was the best judge of his own interest
Each man should be left free to pursue
Each man’s advantage furthers the common good
Each individual was led by an invisible hand to promote an end which was no part of his intention
Self love is accompanied by sympathy. SO?
Adam Smith: General Themes – Economic Policy
Duties of the Government
Defense from foreign aggression
Administration of justice
Erect and maintain such public works and institutions as would not be maintained by any individual or group of individuals for lack of adequate profit
Roads, bridges, canals, harbours
Management of the currency
Inference: There are limits to the legitimacy of individual freedom
Specific reference: prohibition of small denomination notes by banks due to security issues
No less than ₤5
Too many paper notes in small denomination in circulation could cause inflation
Every individual is most anxious to obtain the greatest profit for himself BUT
He is a member of a commonwealth
Search for profits can only lead along paths ordained by the natural social order
How does division of labour affect a man’s relationship to society?
Vanity to suppose benevolence alone for any help provided
It is not from the benevolence of the butcher, the brewer, or the baker, that we expect our dinner, but from their regard to their own interest
Adam Smith: General Themes – Economic Policy
How is the common good attained when the butcher, baker, brewer pursue self interest?
Exchange
Every individual uses his property of labour for his own benefit
Production for exchange
Barter
Strong case for exchange
It is the maxim of every prudent master of a family never to attempt to make at home what it will cost him more to make than to buy
Implication with reference to Mercantilism?
Unfettered domestic and foreign exchange
Encouragements which drew more capital into an industry were considered unwise
Social good was not promoted but stultified the individual search for maximum profit and common profit
This is Laissez - Faire
Application of Naturalism to economic policy
Adam Smith: General Themes – Economic Policy
Bounties, restraints, colonial system and trade treaties favourable balance of trade and large bullion stock abandoned
Enhanced individual sections or industries
Regulations concerning wages and apprenticeship rescinded
Do you think that Smith encouraged the Race to the Bottom with this lack of regulation?
Government MUST destroy monopolistic privilege
Complete competition consistent with natural God Given liberty
http://www.youtube.com/watch?v=ulyVXa-u4wE
Lecture7.pptx
Department of Economics
University of Toronto at Mississauga
ECO322- History of Economic Thought
Fall 2014/Spring 2015
Adam Smith’s World View (Recap)
Technical economic content
Labour theory of Value
Money and Exchange
Production and Distribution
Accumulation
Taxes
Classes
Adam Smith: Philosophy and Economic Policy view summary
Upholder of ‘natural’ order in philosophy
Economic policy is dictated by philosophical view
Self interest and individual autonomy will lead to social good
Every individual uses his property of labour for his own benefit
Free exchange supports individual and social benefit
There are limits to the legitimacy of individual freedom
Restrictions on economic activity must be abolished
Trade and Exchange
Monopolies
Wage restrictions
Individual industry sops
Adam Smith: Technical economic content
Labour theory of Value
Labour is the source of the fund which originally supplies every nation with all the necessaries and conveniences of life which it annually consumes
Emancipation of ‘wealth theory’ from Mercantilism and Physiocracy
Derived from Petty (Cantillon)
Wealth of a nation depends on
Degree of productivity of labour
Amount of useful labour
Division of labour
Exchange
Money
Distribution
Adam Smith: Technical economic content
Division of labour
Raised productivity of labour
Exchange increases
Wealth Creation
Propensity to exchange division of labour
Exchange does not exist without division of labour
Which of the two statements you think is true?
For exchange to occur, it must be private then division of labour occurs
Is this true?
What is the role of markets then in ‘wealth creation’?
Division of labour is limited by market size
Dependence rises with increased division of labour
Adam Smith: Technical economic content
Labour theory of value
In use
In exchange
Exchange value
What is measure of exchange value? ‘natural exchange rate/price’
Components of ‘natural price’?
What causes change from ‘natural price’?
Where, in modern practice have you come across this concept used?
How to determine value of output?
Labour embodied
Value (or just price) of commodity Cost of producing it
Cost of production amount of labour embodied
Hence Value of a commodity = Value of labour
Labour is the measure of exchangeable value
Adam Smith: Technical economic content
Value of commodity = Amount of labour required (embodied) AND amount of labour it can command in exchange
Value of a chair = number of labour hours taken to produce it AND the quanitity of labour it can be exchanged for EMBODIED in other goods
So what is wealth?
Wealth is generated and can be >,< or proportional to
-Quantity of other men’s labour that can be bought
-Produce of labour embodied in goods purchased?
Value of the product of labour in Good 1 proportional to value of labour in Good 2
Value of the product of labour in Good 1 proportional to amount of labour in Good1
So which is it?
Adam Smith: Technical economic content
Money:
Why is money necessary with division of labour given what we’ve discussed so far?
Gold and silver show too much fluctuation in the
Amount of labour required to produce it
Amount it can be exchanged for
Labour is real money is nominal
Amount of necessaries and convenience of life commanded by labour
How much labour can money buy
Setting prices
Deer Beaver
Given an amount of X what is the value/quantity of labour?
Given an amount of labour how much commodity may be obtained?
No Resolution
Adam Smith: Technical economic content
Capital accumulation
When do you have ‘accumulation’ of capital?
Goods sold must pay labour
Value of product
Land
Labor
Capital
Natural Price
Bottlenecks? effect on prices?
Existence of capital(ists) difficult to reconcile LTV
Adam Smith: Technical economic content
Wages
Profits are deducted from the value of a commodity after subsistence wage has been paid
Again – surplus value
Profits:
Profits = f(stock of capital) inconsistent
Interest: wherever a great deal can be made by the use of money, a great deal will commonly be given for the use of it
Interest ~ profits
Owners of physical capital are the ones who profit from its use and sale
Wages and profits
Inverse relationship
As capital rises competition lowers profits competition increases demand for labour wages rises
Profits ≥ risk exposure
Surplus appropriated never higher than wages + rent + risk
Rent are price of production BUT ‘residual’ effect or differential precursor to Ricardian Rent
Forget about Marx… What would Adam Smith say to this?
Adam Smith: Accumulation and capital again
Competition and mobility reduces differentials or net advantages that exist in profits or wages
Restriction of competition produces inequalities of wages and profits
Winner-takes-all creates problems
Level playing fields
Rent seekers (land) benefits from
Population growth
Progress in agriculture and cultivation
Problem with analyzing productivity and accumulation
Increasing output improvement in labour productivity AND/OR increasing labour input
Labour productivity improvementgreater use of machinery capital accumulation equals increased savings from revenue increased productivity above subsistence increased capital accumulation and use increased output increased labour????
No resolution
Chicken and egg !
Adam Smith: Accumulation and capital again
Productive labour
Creates value
Creates surplus value
Produces some thing tangible
Result in capital accumulation
Physical capital
Maintenance alone
Stock
Circulating
Disappears into consumption if not reinvested in ‘refreshing’ fixed
Fixed
Only way a nation can grow
Smith and Taxes
Taxes….. Have to paid and endured
Maxims of taxation
Equality, certainty, convenience and economy
Tax to raise revenue
Whom to tax?
Labour?
labour would get hurt unless capitalist could raise prices of output
Capital?
Hmmmm…
Land?
Get them. They (landlords) get their income without any labour- they love to reap where they have not sowed!
Smith and Classes
Belief in natural order led Smith to be critical of intervention
Civil law needed for protection of property rights
State action should be devoted to avoiding privilege
It was unnecessary in primitive communities because there was hardly anything to protect
However he did not fear that any disturbance of natural harmony could result from the existence of private property
Inequalities in distribution of property was harmful to prosperity of economy
Natural forces would be destructive to position that were not built on contribution to common good
Optimism and Adam Smith!
Lecture8.pptx
Department of Economics
University of Toronto at Mississauga
ECO322- History of Economic Thought
Fall 2014/Spring 2015
Adam Smith’s World View (Recap)
Technical economic content
Labour theory of Value
Money and Exchange
Production and Distribution
Accumulation
Taxes
Classes
Profits, wages and rents
Profits are NOT just another type of wage
Related to the stock of capital each capitalist possesses
Real value of all commodities
labour
capital
land
Deduction (or surplus) appropriated as capitalist and landlord as profit and rent
Remember capitalist holds capital stock which is the produced means of production
Characteristics of growth and wages
Wages and profits are inversely related
With competition profits fall but demand for labour rises
Wages rise
Income and wealth rises
With growth, profits fall or profits fall with progress of society
Forget about Marx… What would Adam Smith say to this?
Blind application of Smith:
LTOV increasingly productive labour
Plateaued real wages
Returns to capital increasing sharply (stocks and profits)
Adam Smith: Mobility, Accumulation and capital
Competition and mobility reduces differentials or net advantages that exist in profits or wages
Restriction of competition produces inequalities of wages and profits
With free movement wages equalize as do profits across sectors
We use this even today
Winner-takes-all creates problems
Level playing fields
Problem with analyzing productivity and accumulation
Increasing output improvement in labour productivity AND/OR increasing labour input
Labour productivity improvementgreater use of machinery capital accumulation increased savings from revenue
However savings come from increased productivity above subsistence increased capital accumulation and use increased output increased labour????
No resolution
Chicken and egg !
Adam Smith: Accumulation and capital again
Productive labour
Creates value
Creates surplus value
Produces some thing tangible
Result in capital accumulation
Capital is produced by productive labour alone
Physical capital
Maintenance alone immediate consumption
Stock
Circulating
Disappears into consumption if not reinvested in ‘refreshing’ fixed
Fixed
Only way a nation can grow
Smith and Taxes
Taxes….. Have to paid and endured
Maxims of taxation
Equality, certainty, convenience and economy
Tax to raise revenue
Whom to tax?
Labour?
labour would get hurt unless capitalist could raise prices of output
Capital?
Hmmmm…
Land?
Get them. They (landlords) get their income without any labour- they love to reap where they have not sowed!
Smith and Classes
Belief in natural order led Smith to be critical of intervention
Civil law needed for protection of property rights
State action should be devoted to avoiding privilege
It was unnecessary in primitive communities because there was hardly anything to protect
However he did not fear that any disturbance of natural harmony could result from the existence of private property
Inequalities in distribution of property was harmful to prosperity of economy
Natural forces would be destructive to position that were not built on contribution to common good
Optimism and Adam Smith!
Smith and Classes
Adam Smith – 1723 to 1790
Events and Environment
Tug and pull in the Americas
French and Indian War
Indian subcontinent
Who won?
The Stamp Act in the colonies
The Declaration of Independence, 4th July 1776
British surrender in1781
1785: Igniting the BIG BANG of the Industrial Revolution
Steam engines (James Watt)
Spinning Jenny (Arkwright)
The Power Loom
Age of Industrial Capitalism Begins………………the Age of Revolution
1789: Bastile Day
Men are born free and equal in rights, ... Liberty, ... consists in being permitted to do anything which does not injure other people. ... The exercise of the natural rights of each man has not limits except those which guarantee to the other members of society the enjoyment of the same rights."(Articles 1 & 3 of The 1791 French Constitution.)
David Ricardo – the next Great Classicist
What makes Ricardo the larger than life economist
Carried work of Smith and sorted contradictions in Smith
Great insight into the workings of economic systems
Refined economic ideas while presenting new cohesive view
Biography:
1772-1823
Dutch Jewish parents settled in England
Stockbroker not an academic like Adam Smith
Rich man – landed proprietor and MP
Died early
The Principles of Political Economy and Taxation (1817)
David Ricardo
Concern: How value of production is divided by land, labour, capital
Resolution: How they are distributed depends on the stage of history in question
How to study?
Theory of Value
Theory of Wages, Profits, Rent
Theory of Accumulation
Theory of Economic Growth
David Ricardo: Theory of Value
Refresher: The trouble with Smith
All goods have value due to labour
Time Value of Labour (how much a given X exchanges for in terms of labour hours) exchange value
How valuable labour is in terms of other goods (How much is it worth)
Use value
Pre – capitalist exchange no discrepancy
e.g.: X = 10 labor, Y = 10 labor 1X is worth 1Y
Under capitalism:
Use/worth of labor in terms of how much of a commodity it commands > amount of labor embodied
Surplus Value
E.g: X is produced using captal, raw materials and labour (value added). Worth of labor in capital use 20 hrs, raw materials worth 10 hrs, value added worth 20 hrs.
Monetize it?
David Ricardo: Theory of Value
Exchange value of commodities (not to be seen in terms of only labour) BUT scarcity
Implication: NOT how much X or Y are provided to labour in exchange for labor
BUT
How much X or Y can labour produce
Labor creates value under capitalism
Current labor + Stored Labor = Current value
As capital matures and acquires durability then we’ve a problem of using the same definition above
Value given by labor in production ≠ prices which depend on wages and average profit to employ capital
David Ricardo:Wages
Subsistence wages
Mobility of labor equilibrium to natural wage
How to resolve Smith? Exchange value of labor does not equal use value of labor
Wage labour is a commodity under capitalism
Value of X = qty of labor necessary to produce X + rate of profit (value of time that capital remained dormant)
What concept does this represent in standard neoclassical treatment of economics?
Profits growth with capital inflows into production when Profits > Average Profit
13
Lecture9_A.pptx
Department of Economics
University of Toronto at Mississauga
ECO322- History of Economic Thought
Fall 2014/Spring 2015
Ricardo
Labor theory of Value (quick recap)
Wages
Profits, rents and stationary state,
Growth and stationary state,
Theory of International Trade
Say before Malthus
David Ricardo: Theory of Value
In the early stages of society, the exchangeable value of (these) commodities or the rule which determines how much of one shall be given in exchange for another, depends almost exclusively on the comparative quantity of labour expended on each. If the quantity of labour realized in commodities regulate their exchangeable value, every increase of the quantity of labour must augment the value of that commodity on which it is exercised, as every diminution must lower it. --------------------David Ricardo
What does the above mean?
Capitalist production and Value of commodities
Command value will equal embodied value if embodied value is equal to remuneration received by labour
Command value of commodity > embodied value
Depends of demand and supply of labor
Prices of wage goods
David Ricardo- Theory of value (Surplus Value)
David Ricardo: Wages and Profits
| Smith | Ricardo | |
| Profit rate | Declines with competition and capital accumulation | Inversely related to wages and cost of production. If subsistence wages rise, profits fall |
| Rent | Part of the cost of production of goods, but payment for no productive activity | Surplus appropriated and dependent on the price of output |
| Other clear contrasts | Focusses on production (accumulation of capital, division of labor etc.) | Focusses on distribution after productive activity |
David Ricardo: Wages
Subsistence wages
Mobility of labor equilibrium to natural wage (or the ‘natural price’ of labour)
Wages that allow labour to subsist and perpetuate
Wages that depend on the ‘availability’ of food that is sometimes beyond the control of nature
If equilibrium/subsistence wage is wN what happens when w> wN and when w< wN?
‘ Iron Law’
What is subsistence in one location may not be so in another
Role of capital and growth a step function upwards in the subsistence wage
Wage labour is a commodity under capitalism
5
David Ricardo: Value & Profits
LTOV works in a restrictive case only if capital and labor are used in FIXED proportions in all sectors
Labor is homogenous
Capital is used in Same proportions across different sectors
Different types of capital (just like Smith) fixed and circulating
Durability of capital is fixed
Fixed proportions of labour capital use across various sectors
Capital inputs very small
“Ricardo’s 93% labor theory of value” Stigler
One unit of cloth exchanges for 2 bushels of corn
Interpreting exchange rate?
Cloth becomes dearer or Corn becomes cheaper
The change in relative price due to changes in proportion of inputs
Or exclusive change in any one input
Changes across all sectors inhibits existence of a commodity with an ‘invariable measure of value’
Gold close approximation with constant labor-capital ratios and close to average across all other sectors
Gold as a measure of value
David Ricardo: Value & Profits & Distribution of Income
Capital affects the value of goods:
Capital used in the production an addition to value of commodity
Capital earns a rate of profit if durable
Time as well as labor provides value
E.g. Suppose 3 doses of labor and capital on a given farm produce 270 bushels of corn per year
Price per bushel of corn is $1, wage rate is $10 bushels of corn and $10 worth other necessities.
Depreciation of capital is $10 per year.
Value of X = qty of labor necessary to produce X + rate of profit (value of time that capital remained dormant)
What concept does this represent in standard neoclassical treatment of economics?
| Value of product | =270 bushels ∙$1 | =$270 |
| Wage rate | =10 ∙ $1 + $10 | =$20 |
| Wage bill | =3 ∙ $20 | =$60 |
| Depreciation | =3 ∙ $10 | =$30 |
| Total Profit | =$270 - $90 | =$180 |
| Rent? |
David Ricardo: Land Rent and Stationary State
Previous example does not talk about Rent
If all land were equally fertile, profits would grow at the same rate
Profits are the returns to capital and result in capital accumulation
Population increases require more land and labor to be used
Inferior quality of land producing 240 bushels
Better quality land MUST earn a rent
Price of corn rises to $1.125 (270/240)
Rent is the differential surplus appropriated by land
| Land Type A | Land Type B | |||
| Value of product | =270· $1.125 | =$303.75 | 240 · $1.125 | =$270 |
| Wage rate | =(10 · $1.125) + $10 | =$21.25 | 10 · $1.125 +$10 | =$21.25 |
| Wage bill | =3 · $21.25 | =$63.75 | =3 · $21.25 | =$63.75 |
| Depreciation | =3 · $10 | =$30 | =3 · $10 | =$30 |
| Rent | =$303.75-270 | =$33.75 | $270-270 | =0 |
| Profits | = $303.75 – 93.75 -33.75 | =176.25 | $270-93.75 | =176.25 |
Illustrate in graph?
David Ricardo: Land Rent, Profits, Wages and Stationary State
Profits lead to capital accumulation and population growth
More food needs to be grown
More land used in cultivation with varying fertilities
As less fertile land brought into cultivation
Better land earns higher rents
Wage rate rises (as subsistence prices go up)
Are real wages rising?
Increasing wages and rents will squeeze profits how? Let us discuss using the same example
Forecast the impact on growth, capital accumulation and profits
Key quote
When wages rise above subsistence, the ‘domestic delights’ come into play, .. And population increases
Any issues with this?
Parasitic character of landlords embedded in this Interest of the landlord was characterized as always opposed to the interest of every other class in the community’. His situation is never so prosperous as when food is scarce and dear.
David Ricardo: Economic development and International Trade
http://www.youtube.com/watch?v=U12yZXBmQmY&list=PLkmpUMEiY1o5VVJ-Z2Qhi1vEof6CO1A6q
Let the production of a unit of cloth require labor of 100 men for one year in England and a unit of wine require the labor of 120 men.
In Portugal, the cloth is produced by 90 men and wine by 80 men
| Number of workers required to produce | ||
| Cloth | Wine | |
| Autarky | ||
| England (one unit) | 100 | 120 |
| Portugal (one unit) | 90 | 80 |
| Total hours | 190 | 200 |
| With Trade | ||
| England – (2 units) | 200 | - |
| Portugal – (2 units) | - | 160 |
| Total hours | 200 | 160 |
David Ricardo: Economic development and International Trade
Mechanics of the trade
England must have an export price of cloth greater than 5/6 of a unit
Portugal must have an import price of cloth lower than 9/8
How are the gains distributed? Relate to prices above- e.g. what if the price of a unit of cloth was 5/6 with trade
Who would benefit the most?
John Stuart Mill figured out trading prices
Exchange rates are subject to change
Inflows of money through trade can raise commodity prices in a country and cease to allow trade to be profitable
David Ricardo: Summing up
Dry and abstract versus empirical and philosophical as Smith was
Economics becomes austere
Detached from principles except those generated by inner logic of own system of thought
Economic changes were deplored by many – the shift to industry from agriculture
Industry supported by Ricardo and establishes order for Pax Britannica based on gold standard and free trade
Courted controversy over the Corn Laws and antagonistic to Malthus
Liberal – sided with reformers
Free discussion of religion
Expanding franchise
Maintenance of civil liberties and supported Roman Catholics against discrimination in England
Married a Quaker and renounced Judaism
The Essence of Economic Liberalism Foundation for Karl Marx
Say before Malthus
Magic words: Supply creates its’ own demand --- Jean Baptiste Say
Process of production generates enough income to purchase output
Expenditure= Income
Other contributions:
Price measures value which measures utility
Subjective evaluation of utility
What if supply is greater then demand in one sector? =
Demand exceeds supply in another
Concept of true ‘equilibrium
No such thing as lack of aggregate demand
Circular flow of goods
What about
Hoarding
Contraction of credit
Gluts
http://www.youtube.com/watch?v=sc4HxPxNrZ0
Lecture10.pptx
Department of Economics
University of Toronto at Mississauga
ECO322- History of Economic Thought
Fall 2014/Spring 2015
Ricardo
Theory of International Trade
Say before Malthus
Malthus
Population Growth
Capital and Growth
Classical growth theory (Baumol)
From Ricardo to Mill
J.S. Mill
David Ricardo: Economic development and International Trade
Let the production of a unit of cloth require labor of 100 men for one year in England and a unit of wine require the labor of 120 men.
In Portugal, the cloth is produced by 90 men and wine by 80 men
| Number of workers required to produce | ||
| Cloth | Wine | |
| Autarky | ||
| England (one unit) | 100 | 120 |
| Portugal (one unit) | 90 | 80 |
| Total hours | 190 | 200 |
| With Trade | ||
| England – (2 units) | 200 | - |
| Portugal – (2 units) | - | 160 |
| Total hours | 200 | 160 |
David Ricardo: Economic development and International Trade
Mechanics of the trade
England must have an export price of cloth greater than 5/6 of a unit
Portugal must have an import price of cloth lower than 9/8
How are the gains distributed? Relate to prices above- e.g. what if the price of a unit of cloth was 5/6 with trade
Who would benefit the most?
John Stuart Mill figured out trading prices
Exchange rates are subject to change
Inflows of money through trade can raise commodity prices in a country and cease to allow trade to be profitable
David Ricardo: Summing up
Dry and abstract versus empirical and philosophical as Smith was
Economics becomes austere
Detached from principles except those generated by inner logic of own system of thought
Economic changes were deplored by many – the shift to industry from agriculture
Industry supported by Ricardo and establishes order for Pax Britannica based on gold standard and free trade
Courted controversy over the Corn Laws and antagonistic to Malthus
Liberal – sided with reformers
Free discussion of religion
Expanding franchise
Maintenance of civil liberties and supported Roman Catholics against discrimination in England
Married a Quaker and renounced Judaism
The Essence of Economic Liberalism Foundation for Karl Marx
Say before Malthus
Magic words: Supply creates its’ own demand --- Jean Baptiste Say
Process of production generates enough income to purchase output
Expenditure= Income
Other contributions:
Price measures value which measures utility
Subjective evaluation of utility
What if supply is greater then demand in one sector? =
Demand exceeds supply in another
Concept of true ‘equilibrium
No such thing as lack of aggregate demand
Circular flow of goods
What about
Hoarding
Contraction of credit
Gluts
Ricardo, Say and Malthus
Ricardo backs Say against Malthus with a minor quibble
While supply creates its’ own demand
Excessive savings could create unemployment via the subsistence wage
Corn Laws, Malthus and Ricardo
Let us introduce the Prophet of Doom and Gloom: Thomas Malthus
Born in Surrey and educated in Cambridge
Professor of History and Political Economy (that is a first) at East India Company’s college in Hertfordshire
Member of the Political Economy club that included members like Ricardo and Mill.
Essay on the Principle of Population pub. 1798
An Inquiry into the Nature and Progress of Rent (1818)
Principles of Political Economy (1820)
Ricardo, Say and Malthus
The GREAT CORN debate
Corn Laws were tariffs on imported grain during the early to mid-1800s
designed to keep grain prices high to favour producers in Great Britain.
| Ricardo | Malthus |
| Rent is a socially unnecessary payment (does not bring forth the supply of land) As land rents would rise (as they do with the tariffs) , they would do so at the expense of profits | Higher prices benefited workers (they are the producers of corn) Higher corn prices lead to higher real wages |
| If you took all the economists in the world and laid them end to end, they still wouldn’t reach a conclusion --GBS | |
| Costs as a determinant of value | Supply – demand framework to determine value of commodities |
| Championed capitalists | Championed landlords |
| Supported Say: The production of commodities creates, and is the one and universal cause which creates, a market for the commodities produced. Markets created by the production of goods. | Opposed Say: Possibility of gluts as capital accumulation – growing supply and stable demand decline in profits stagnation gluts What economic phenomenon is this describing? |
Malthus the Maverick – Population growth
The population, left unchecked, will grow at an exponential rate. (e.g., 1,2,4,8,16,32, … )
The food supply will grow at an arithmetic rate. (e.g., 1,2,3,4,5, … )
Argued that the population, unchecked, doubles every 25 years.
Preventive checks (reduce the birth rate)
Positive checks (increase the death rate)
Argued that poverty and misery are the natural punishment for the failure of the “lower classes” to exercise moral restraint.
Did not advocate gov’t relief for the poor.
Aid would increase the population growth rate, making matters worse.
Some of Mathus’ ideas found their way into the harsh Poor Law Amendment of 1834.
Abolished all relief for able-bodied people
The poor are themselves the cause of their own poverty – Malthus
Seeking your opinion: Is this a fair assessment?
https://www.youtube.com/watch?v=3yRh5NNiFG0
Malthus the Maverick: Gluts
Workers receive a subsistence wage
Their marginal product is more than their wage, so that their employer makes a profit.
This means, he says, that workers do not have the buying power to buy the goods they produce.
Capitalists and landlords have more income (profits) than they can spend on consumption goods. The capitalists also spend some of the income on capital goods. All in all, the capitalists do not spend all their income and landlords as well.
This leads to insufficient demand, inventories build up, lay-offs follow unemployment.
Tariffs must be laid on imports to encourage domestic consumption and taxes must be low to encourage domestic consumption
Malthus the Maverick and Ricardo the Regular
What does Malthus get the rap for being dismal and Ricardo does not?
Dismal views are shared diminishing returns to production
Expanding economy due to industrialization level of investment and K accumulation is high wages grow population growth pressure on food supply fixed quantity of fertile land rents growing diminishing returns to capital and labor in agriculture rents squeeze profits decrease in accumulation and investment STEADY STATE
Per capita subsistence wage
population
Wages, output
Total output/ national income
Y*
N*
Labour creates value, Malthusian theory, diminishing returns to agric, iron law of wages, capital accumulation , theory of profits and rents Steady State
From Ricardo to Mill
John Stuart Mill – Classical Liberalism defined
(1806-1873)
Economist, political thinker, philosopher , senior official in the East India Company
Utilitarianism - single most important contribution
Utilitarianism is a theory in normative ethics holding that the proper course of action is the one that maximizes utility, usually defined as maximizing total benefit and reducing suffering or the negatives. This theory is an economic analysis that is human-centered (or anthropocentric) and has a moral foundation
Actions are right in the proportion that they tend to promote happiness
Actions are wrong in the proportion that the tend to produce the reverse of happiness
Any thoughts?
Ardent defender of liberty committed to individual and commercial freedom
Next week: J.S. Mill and Bentham and Classical Econ. Concluded.
Lecture11.pptx
Department of Economics
University of Toronto at Mississauga
ECO322- History of Economic Thought
Fall 2014/Spring 2015
Malthus
Population Growth
Capital and Growth
Classical growth theory (Baumol)
From Ricardo to Mill
J.S. Mill
Malthus the Maverick – Population growth
The population, left unchecked, will grow at an exponential rate. (e.g., 1,2,4,8,16,32, … )
The food supply will grow at an arithmetic rate. (e.g., 1,2,3,4,5, … )
Argued that the population, unchecked, doubles every 25 years.
Preventive checks (reduce the birth rate)
Positive checks (increase the death rate)
Argued that poverty and misery are the natural punishment for the failure of the “lower classes” to exercise moral restraint.
Did not advocate gov’t relief for the poor.
Aid would increase the population growth rate, making matters worse.
Some of Mathus’ ideas found their way into the harsh Poor Law Amendment of 1834.
Abolished all relief for able-bodied people
The poor are themselves the cause of their own poverty – Malthus
Seeking your opinion: Is this a fair assessment?
https://www.youtube.com/watch?v=3yRh5NNiFG0
Malthus the Maverick: Gluts
Workers receive a subsistence wage
Their marginal product is more than their wage, so that their employer makes a profit.
This means, he says, that workers do not have the buying power to buy the goods they produce.
Capitalists and landlords have more income (profits) than they can spend on consumption goods. The capitalists also spend some of the income on capital goods. All in all, the capitalists do not spend all their income and landlords as well.
This leads to insufficient demand, inventories build up, lay-offs follow unemployment.
Tariffs must be laid on imports to encourage domestic (production)/consumption and taxes must be low to encourage domestic consumption
Malthus the Maverick and Ricardo the Regular
Why does Malthus get the rap for being dismal and Ricardo does not?
Dismal views are shared diminishing returns to production
Expanding economy due to industrialization level of investment and K accumulation is high wages grow population growth pressure on food supply fixed quantity of fertile land rents growing diminishing returns to capital and labor in agriculture rents squeeze profits decrease in accumulation and investment STEADY STATE
Per capita subsistence wage
population
Wages, output
Total output/ national income
Y*
N*
Labour creates value, Malthusian theory, diminishing returns to agric, iron law of wages, capital accumulation , theory of profits and rents Steady State
From Ricardo to Mill (a little about Papa Mill, i.e. James and Junior James Stuart)
Follower of Ricardo
Reformist and hostile to slavery
History of British India worked for the East India Company
(tried to sell the Taj Mahal to auction of the marble!)
Published Elements of Political Economy
Proponent of labor theory of value
Proponent of Malthusian population theory
(Had 9 children)
Similar view of landlords and provided the basis for Henry George’s theorm of taxing land
From Ricardo to Mill