A Companion to the History of Economic Thought - Chapter 15 doc

Dunbar – the first American to be accorded the title of “Professor of Political Economy” – observed that American scholarship as yet had contributed nothing to fundamental economic knowle

C H A P T E R F I F T E E N

American Economics

to 1900

William J Barber

15.1 INTRODUCTION

To judge by the distribution of Nobel Prizes in economics over the past three decades or so, it would appear that American economics – for good or ill – has come to occupy a position of world preeminence This has not always been so To the contrary, if we roll the clock back to consider the “state of the art” during the first century of the nation’s existence, the United States was largely on the periphery of major intellectual developments in the discipline Indeed, when the country’s centennial was celebrated in 1876, American economists had an inferiority complex Writing on this occasion, Harvard’s Charles F Dunbar – the first American to be accorded the title of “Professor of Political Economy” – observed that American scholarship as yet had contributed nothing to fundamental economic knowledge In his reading, American economics to date had been derivative, stagnant, and sterile He further held that most of the domestic restatements of doctrines formulated abroad were flawed (Dunbar, 1876,

pp 124–54) Foreign observers tended to echo this appraisal

The question thus needed to be asked: What could account for the backward-ness of American intellectual achievement in this discipline? Numerous answers

to this question were offered and each identified a pertinent aspect of the national reality Creative intellectual production, it was suggested, should not be expected in an environment in which the challenge of taming a vast continent was the primary claimant on energies “Do-ers,” in other words, should not be expected to be “thinkers.” The abundant resource endowment, so welcome in other respects, might also account for an apparent lack of original thinking in political economy In the absence of perceived scarcity, stimuli to provoke hard-nosed analyses were blunted Properties of America’s federal system of govern-ment might also account for the country’s seeming backwardness in economic

analysis Issues that deserved to be analyzed at the national level had been dis-persed to the jealously guarded jurisdictions of individual states This feature of the polity obstructed analytic progress on such matters as banking and currency

It could plausibly be argued as well that the politics of states’ rights stunted detached reflection in debates over free trade versus protection, even though tariffs were within the constitutional mandate of the federal government International realities – not just national ones – framed the context for American political economy up to 1900 After all, those wishing to acquire insight into the discipline did not need to rely on home production They could look overseas and import ideas ready made Given the absence of copyright protection for foreigners, it may even have been more cost-effective for American publishers to pirate ideas in book form from abroad than to sponsor local authorship

At the same time, there was always vigorous discourse on economic topics Certainly colonial America did not lack for it There were lively exchanges in public debates over such matters as the uses and abuses of paper money and over the “Mother Country’s” practices in shaping colonial trade patterns In the run-up to the American Declaration of Independence, protests over Britain’s use

of its taxing powers gathered considerable momentum Moreover, the “Founding Fathers” in the first decades of the Republic had displayed a plenitude of ingenu-ity in crafting the instruments of a Federal political order and in establishing the credibility and creditworthiness of a novel form of government Arguably, nothing in all this activity would qualify as a contribution to systematic economic analysis Though a number of contemporary commentators took note of this shortcoming, the age of the economic treatise was not born until 1820

As befitted the sectional diversity of the country, the first generation of Amer-icans to produce systematic treatises on political economy did not speak with one voice All of them, however, were obliged to come to grips with a common set of questions Were economic concepts designed in the “Old World” transferable

to the “New?” Should European formulations be rejected out of hand, or could they

be made serviceable with modifications? Or was an altogether different approach

to political economy called for in a young nation that had already severed its political links with the Mother Country? A review of the ways in which a repre-sentative sample of contributors responded will illustrate the variations played

on these themes

15.2 THE PIONEERING NATIVE VOICE: DANIEL RAYMOND

(1786–1849)

The author of the first full-scale treatise produced on American soil, Daniel Raymond, chose to issue a full-throated plea for a declaration of American

intellectual independence His objective, as he put it in Thoughts on Political Economy

(published in 1820), was “to break loose from the fetters of foreign authority – from foreign theories and systems of political economy, which from the dissim-ilarity in the nature of governments, renders them altogether unsuited to our country” (Raymond, 1820, pp v–vi)

These were high aspirations indeed They were expressed by a man who had decided to study the subject in order to relieve boredom as an under-employed lawyer in Baltimore Persuaded that the absence of an American treatise on political economy was a “reproach to the nation,” he persisted in his endeavor Raymond mounted a frontal attack on core propositions that Adam Smith had advanced in

the Wealth of Nations The nation, in Raymond’s view, should be understood as

an organic “unity” which transcended the aggregate of its individual members This conception suggested that the public interest and private interests might diverge Optimal growth in national wealth – which he defined as the “capacity for acquiring the necessaries and comforts of life” – required guidance from above He further charged Smith with error in the importance assigned to “parsimony” to fuel “accumulation.” To the contrary, Raymond held that consumption was the force driving expansion in productive capacity From that point of view, emphasis

on saving invited disaster The “present distress of our country,” Raymond wrote, arose entirely from “the circumstance that consumption does not equal pro-duction.” This led to “surplus” in the form of unsold output, which depressed economic activity It was the duty of the legislator “to make provision for its immediate consumption” (Raymond, 1820, p 55) The measures that Raymond had in mind were shelters for home enterprise from foreign competition and spending on public works For Raymond, “full employment” – and he used that expression – deserved top priority That goal could be achieved if the informed legislator intervened to push production to the limits of its potential The workings

of an invisible hand could not be trusted to produce that result

15.3 MUTATED CLASSICISM IN TEXTBOOK LITERATURE: THE CASE OF

THE REVEREND FRANCIS WAYLAND (1796–1865)

Imported ideas got a more appreciative hearing from the first cohort of Amer-icans authoring textbooks in political economy than they did from Raymond The conditions of their production were such that more respectful references to learned authorities seemed appropriate In the early American colleges, it was standard practice for the president – who, in the denominationally linked institutions, was invariably a clergyman – to lecture to seniors on “moral philosophy.” The Reverend Francis Wayland, author of the most widely read work on political

economy before the Civil War, came to the topic via this route His Elements of

Political Economy, first published in 1837, was a codification of lectures he had prepared in connection with his presidential duties at Brown University in Rhode Island Wayland’s approach to the subject matter was heavily influenced by his background as a clergyman Within his perspective, the “invisible hand” should

be understood as the “Divine hand.”

Wayland drew heavily on the later classical tradition, as transmitted primarily

by J.-B Say and J R McCulloch He accepted fully its conclusions about the bene-ficence of free markets and the wisdom of careful limits on governmental partici-pation in economic activity But his message was not just a clone of the European originals On a number of significant points, he re-wrote standard doctrine

His adaptation of European thought to the American environment banished later classicism’s preoccupation with the dismal prospects associated with the approach

of the stationary state This outcome seemed inapplicable in the United States, where land scarcity posed no threat and the Malthusian population devil was nowhere in evidence Classical teaching on the “unproductiveness” of labor in the services sector also required revision: those “laborers” engaged in the “industry of discovery and investigation” created knowledge that advanced the welfare of the community and were, therefore, productive Ricardo’s account of rent as flowing exclusively from the “natural and indestructible powers of the soil” was particu-larly objectionable Rents were also determined by the attractiveness of land for commercial, industrial, and residential purposes In addition, the Ricardian account

of agricultural development – which presupposed that cultivation began on high-fertility acreages and was subsequently extended to inferior ones – was out of touch

with the reality of America’s westward expansion (Wayland, 1838, passim).

Imported ideas could thus provide an organizational frame for economic dis-course But when adapted to the perceived structural “facts” of the American economy and adjusted for ideological compatibility with the dominant religious tradition, much in the originals dropped out in translation America offered the promise of a happy future in which uninterrupted progress and social harmony could prevail

15.4 A RENEWED CALL FOR IMPORT REJECTION:

THE CONTRIBUTION OF HENRY C CAREY (1793–1879)

While bowdlerized versions of European classicism formed the orthodoxy in academic instruction, a vigorous statement of heterodoxy flowed from the pen of Philadelphia’s Henry C Carey His central message amounted to an appeal for a

“new” American approach to the economic process in which tariff shelter for home industries played a strategic role When setting out his views, he took sharp aim at Malthus and Ricardo This was a step beyond Raymond, who had focused on Smith and had ignored Ricardo For Carey, Malthusian teaching on the causal linkage between population growth and subsistence wages was misguided To refute it, he introduced a “principle of association” which held that enlarged populations – when concentrated geographically – promoted the division of labor, raised productivity, and brought benefits to all The concept of

“diminishing returns” should thus be replaced by one of “increasing returns.” The Ricardian rent theory was also wrong Carey asserted that extension of the cultivated area had proceeded historically from the inferior to the superior lands – the reverse of the Ricardian sequencing Although he gave too much weight to this alleged “fact,” his essential argument on this point was that productivity in agriculture could expand through time as a result of technological improvements and gains in labor efficiency Clustering the manufacturing and agricultural sectors would generate mutually reinforcing growth and bring this result to pass The desired outcome, however, could not be accomplished under a regime of free international trade In Carey’s opinion, that position amounted to nothing

less than a British conspiracy to lock the American economy (and much of the rest of the world, for that matter) into the dependent status of a primary producer Not only did this suppress economic advance; it tended also to contaminate the “New World” with the class conflicts of the “Old World.” The class divisions that had provided the organizing categories of Ricardian economics should have no place on the American continent Instead, a “harmony of interests” should prevail But it would have to be contrived through policy intervention to promote balanced expansion of industry and agriculture

Carey was the first American to attract much attention abroad Lots of it was unflattering John Stuart Mill, for example, saw fit to denounce his muddles in

his Principles (Mill, 1848, pp 181–3, 922–5) and Marx attacked him as a “naive harmonizer” in Das Kapital (Marx, 1867, p 563) In Germany, on the other hand,

translations of his works found sympathetic audiences, aided in part by Friedrich List’s efforts in promoting them At the minimum, Carey did something to reduce America’s trade deficit in the international traffic in economic ideas

15.5 THE “PECULIAR INSTITUTION” AS PART OF THE NATIONAL

REALITY BEFORE THE CIVIL WAR

American writers assigned high priority to social harmony and typically held that the United States offered unique opportunities for its realization The institu-tion of slavery in the Southern states meant, however, that American society had

a fundamental disharmony imbedded in its very structure To what extent, then, did this national reality influence American political economy in the first half

of the nineteenth century? Whether one regarded the “peculiar institution” as malignant or benign, its existence was the overarching issue in political discourse prior to the Civil War

Among authors of works on political economy, many who regarded slavery as repugnant chose to exclude it from their central purview, treating it instead as a moral and legal question Wayland, for example, adopted this posture He was not blind to abuses within the system, but argued that they should be corrected

by uplifting the moral character of masters and slaves alike Nor did he support proposals that Congress should legislate slavery out of existence In his view, the federal government had no constitutional authority to do so: disposition of this matter properly belonged to the respective states

Others insisted that slavery had to be dealt with head-on in American political economy Raymond, for example, took this position, writing that “an American treatise would be very imperfect” if it “should omit so important a subject” (Raymond, 1820, p 438) In his judgment, the slave system had a significant – and negative – impact on the growth of national wealth because it artificially suppressed the potential contribution of labor to production This institution bred a mind-set in the South that encouraged laziness in its white population and also compromised labor efficiency among blacks Raymond regarded the

“peculiar institution” as a national blight and held that its elimination would remove a brake on economic progress

Carey was even more outspoken in denouncing slavery and in insisting that its discussion belonged within the sphere of economic analysis His approach was totally

in character The British commercial system, he maintained, was responsible for slavery’s survival in the United States Free trade had locked the South into an eco-nomic structure based on cheap labor to produce primary commodities for export This evil could be remedied if Carey’s “national system” were adopted A climate

of economic expansion – nurtured by protection to support the coordinated devel-opment of farm and factory – would raise the demand for labor And, as he put it,

“when two masters seek one laborer, the latter becomes free” (Carey, 1853, p 303) Slavery as a distinctive feature of the national reality conditioned the flow of American political economy in yet other ways In the early decades of the nineteenth century, a number of Southern states were in the vanguard of the country’s intellectual life Largely immune from the theological correctness that was super-imposed on political economy as presented in the Northeast, they had easier access

to avant-garde European thought This was particularly noteworthy in the 1820s

in Jefferson’s Virginia and in the state of South Carolina, where Thomas Cooper (1759–1839) and Jacob Nunez Cardozo (1786–1873) produced defenses of free trade, argued on Ricardian lines The promising sparks in Southern political economy were soon snuffed out Creative thinkers who could not subscribe to the regional “orthodoxy” on slavery were silenced or departed for more congenial surroundings Those who accepted the “orthodoxy” dissipated intellectual energies

in their attempts to defend the “peculiar institution.”

15.6 A SPECIAL CASE OF ANALYTIC ORIGINALITY

While Americans conspicuously lagged Western Europeans in the creation of analytic breakthroughs, the environment of the New World was not inherently hostile to conceptual innovation in economics A genuinely original advance in

economic theorizing was published in Boston in 1834 under the title Statement

of Some New Principles on the Subject of Political Economy, Exposing the Fallacies of the System of Free Trade, and of Some Other Doctrines Maintained in “The Wealth of Nations.” The author, John Rae (1796–1872), was a Scotsman who had emigrated

to Canada in 1822, where he found employment as a schoolmaster As far as political economy was concerned, he was largely self-taught (though he had taken a degree at the University of Aberdeen and had studied medicine for several years at the University of Edinburgh) Despite the subtitle of his major work, the book was not a militantly protectionist tract To the contrary, the quali-fications to Adam Smith’s case for free trade were argued primarily on “infant industry” grounds From Rae’s perspective, the “legislator” had a positive role to play in shaping policies to promote capital accumulation and to provide a cli-mate favorable to economic progress These conclusions emerged in the context

of his inquiry into the “laws” regulating the increase or diminution of “wealth”

in various nations of the world Rae’s agenda was clearly congruent with the spirit of classical economics in the tradition of Smith What made Rae’s position distinctive was the way he explained the process of capital accumulation

Rae clearly broke new ground when analyzing the conditions that influenced

“the effective desire of accumulation.” An analogous conception in mainstream classical economics held accumulation to be primarily a function of saving aris-ing from the profits of a capitalist class Rae instead argued that the strength or weakness of the accumulative principle involved questions of intertemporal choice

in which decisions about sacrificing present goods for future ones were heavily conditioned by social and cultural conditions The moral of this part of the tale was that a society in which the accumulative principle was strong would create more capital instruments – and would thus grow faster – than one in which the accumulative principle was weak In support of this proposition, he drew – among other things – on his observations of conditions in the New World Much of the explanation of the apparent poverty of North American Indian tribes – and, he added, of Asians and Africans in general – could be traced to the weakness of the accumulative principle in their cultures The condition of the accumulating soci-eties (e.g., Britain, Holland, and Western Europe more generally) stood in marked contrast

Rae’s analysis identified the conceptual core of what would later become the accepted neoclassical theory of interest This aspect of his thought left no mark

in his lifetime and had to be rediscovered a quarter-century after his death Although it is a bit of a stretch to count Rae as a contributor to American eco-nomics, his example at least demonstrates that valuable and fundamental economic ideas could germinate in the soil of the New World, despite the fact that they went unappreciated by his contemporaries

15.7 THE LANDSCAPE OF THE LATE NINETEENTH CENTURY

After the Civil War, the contours of political economy in America shifted Slavery was off the national agenda The new threat to social harmony came from other directions As the country moved into a mature phase of industrialization, strife between capital and labor took ugly turns New questions emerged about both the efficiency and the fairness of a market system increasingly dominated by

“bigness.” Meanwhile, some lingering issues concerning the functioning of the nation’s money and credit system, as well as America’s place in the international monetary order, awaited resolution Meanwhile, a long-standing controversy between advocates of free trade and advocates of protection had taken on an added dimension of complexity As a central part of its program to finance mobil-ization during the Civil War, the Federal government had raised tariff schedules

to unprecedented heights and the beneficiaries of that policy were determined to resist reductions in the shelters they had come to enjoy

The events of the Civil War had bred a new consciousness about the potential

of tooled knowledge to ameliorate social and economic problems This sentiment motivated the creation of an American Social Science Association (ASSA) in 1865 This Boston-based organization was inspired in the post-bellum flush of enthusi-asm for social reforms Its organizers charted an ambitious program As they set out the Association’s overall purpose in the Constitution:

Its objects are, to aid the development of Social Science, and to guide the public mind to the best practical means of promoting the Amendment of Laws, the Advancement of Education, the Prevention or Repression of Crime, the Reformation

of Criminals, and the Progress of Public Morality, the Adoption of Sanitary Regula-tions, and the diffusion of sound principles on questions of Economy, Trade, and Finance (As quoted in Haskell, 1977, p 161)

It was presupposed here that the collection and dissemination of facts on social and economic conditions would be sufficient to mobilize the public behind remedies for perceived ills In the vernacular of the time, investigation should be accompanied by agitation and then by action This initiative, it is worth noting, was applauded by the leading British economist of the day In correspondence with the officers of the ASSA (who had invited him to be their guest in the United States), John Stuart Mill remarked:

What you say about the new start which the mind of America has been led to make

by her long and arduous struggle, is exactly what I foresaw from almost the very beginning I wrote in January, 1862, and often said in the years following, that if the war lasted long enough, it would very likely regenerate the American people, and

I have been seeing more and more clearly since it closed, that to a considerable extent it has really done so, and in particular, that reason and right feeling on any public subject has a better chance of being favorably listened to, and of finding the national mind open to comprehend it, than at any previous time in American history (Mill, 1870)

The post-bellum climate had clearly generated a substantially increased demand for expertise to guide the shaping of economic and social policies Indeed, the ASSA took as part of its charge to investigate such topics as pauperism, the “relation of employers and employed,” hours of labor, the national debt, tariffs and taxation, the control of markets, the value of gold, and “all questions connected with the currency.” But there was a bottleneck on the supply side: the country then lacked a cadre of trained personnel equipped to deal dispassion-ately with these issues And this, in turn, frustrated the ASSA’s capacity to carry out its mission The backgrounds of the few whom the organization identified

to conduct economic studies will illustrate the nature of the problem David A Wells (1828–98), who was called to head one of ASSA’s investigative depart-ments, had moved from a prewar career as a successful author and distributor of scientific manuals – during which he had identified himself with Carey’s brand

of protectionism – to an appointment in 1866 as Commissioner of the Revenue in the Federal government His experience in that post had convinced him that the wartime fiscal policy built around high tariffs had bred serious inefficiencies in the country’s manufacturing sector and he then became one of the nation’s most uncompromising champions of free trade (Wells was to acquire a considerable international reputation: his various honors included election by the French Academy to the seat vacated by the death of John Stuart Mill.)

By 1874, the ASSA had managed to attract two men with professorial titles – William Graham Sumner (1840–1910) and Francis Amasa Walker (1840– 97), both

of Yale – to assist in its work In view of the fact that academic appointments for specialists in political economy were then a rarity, this was noteworthy Sumner’s call to such a position was virtually by accident: he had been trained as a clergy-man and had been brought to Yale because a newly installed president had deputized him to deliver the custom-honored lectures to seniors on political economy/moral philosophy Once there, Sumner became one of the nation’s most outspoken advocates of a Spencerian version of Social Darwinism Walker (whose father had written a political economy textbook that sustained the tradi-tion launched by the Reverend Francis Wayland) thus had an in-house exposure

to the subject matter, but he also brought other qualities to the table: he had served as superintendent of 1870 Federal census (a job he was to repeat in 1880) and he had reached general officer rank in the Union Army at the prodigiously young age of 25

Over time, the pool of competence in political economy was to grow In the 1870s, three American institutions awarded a total of three doctorates in political economy; the decade of the 1880s saw the award of 11 such degrees by five institutions But there was still a scarcity of home-grown Ph.D.’s The major suppliers of advanced work in political economy to young Americans were the universities in Germany, to which they migrated in considerable numbers The “Germanization” of a significant body of recruits to political economy was

to have formidable consequences In the first instance, it sharpened a divide that was already latent among those engaged in serious work on economic issues Those with a German exposure tended to identify themselves as members of a

“new school.” As the more militant among them saw matters, the methods and the conclusions of an “old school” that had looked to English political economy for inspiration should be denounced Deductive reasoning in economics was held to be suspect: proper procedure called instead for direct empirical investiga-tion of economic reality Similarly, the noinvestiga-tion that economic “laws” could be identified – ones with universal validity throughout time and space – needed to

be purged No less important in the “new school” program was rejection of the

“old school’s” veneration of laissez-faire The message that instead should be

conveyed was that state intervention could make a constructive contribution to economic improvement The mid-1880s witnessed escalation in the rhetorical warfare between members of these rival camps This meant, in turn, that possession

of an advanced degree in political economy was not itself an adequate badge of professional identification One needed to inquire further into the particular

“school” to which an aspiring professional belonged

15.8 “NEW SCHOOLERS” VERSUS “OLD SCHOOLERS”

IN THE 1880S

The battle lines between the rivals in the American Methodenstreit of the 1880s

were sharply drawn at the Johns Hopkins University, an institution founded in

1874 with the primary charge to compete with German universities (and all other comers, for that matter) in the production of graduate students with

doctoral degrees in the liberal arts and sciences Two strong personalities with interests in political economy were on the scene there Simon Newcomb (1835– 1919), an astronomer–mathematician economist, occupied a professorial chair

in mathematics He was a man with a flair for abstract model-building, whose wide-ranging interests included formulation of a sophisticated version of the quantity theory of money His hostility toward governmental intervention

in economic affairs had made him a natural leader of the “old school.” Richard

T Ely (1854–1943), with a doctorate from the University of Heidelberg, held an appointment as an associate in political economy, an untenured position Writing from the German historical perspective, he regarded himself as in the vanguard

of the “new school” and called for the scholar to be actively engaged in setting the world to rights

Hostilities between these two went public in 1884 Ely fired the opening salvo

in an essay that attacked the sterility of the methods of the “English” school He asserted that “mathematico-economic works” represented “a not very successful attempt to develop further the older abstract political economy” and that “works which have advocated the application of mathematics to economics form no essential part of the development of economic literature” (Ely, 1884, pp 5–64) Newcomb’s ire was aroused and he asked Daniel Coit Gilman, President of Johns Hopkins, for “an opportunity to say a few words about your department

of political economy before the impulse which has been given me by Dr Ely’s pamphlet entirely dies out It looks a little incongruous to see so sweeping and wholesale an attack upon the introduction of any rational or scientific method

in economics come from a university whose other specialties have tended in the opposite direction” (Newcomb, 1884a) Newcomb indicted Ely’s position

in print in November 1884, characterizing Ely’s work as an example of funda-mental intellectual confusion and as an “irrational” proceeding (Newcomb, 1884b,

pp 291–301)

The two men re-aired their differences publicly in 1886 in Science, the journal of

the American Association for the Advancement of Science (It should be noted that the American Association for the Advancement of Science – following the lead of its British counterpart – created a section on Economic Science and Statis-tics that became operational in 1882.) Ely and Newcomb then restated familiar positions Ely maintained that concern with what ought to be was inherent in the work of the political economist; that economists should seek to understand the “laws of Progress” and to show how they could be directed to promote the economic and social growth of mankind; and that the ethical ideal was “simply the Christian doctrine of talents committed to men, all to be improved” (Ely,

1886, pp 529–33) Newcomb, on the other hand, maintained that it was a “contra-diction in terms” to regard discussion of what should be as “science”; that the principle of “noninterference” in economic affairs also favored progress, but sought its achievement by giving individuals the widest possible latitude for choice; and that public intervention was suspect because governments were incapable

of acting on “sound business principles” (Newcomb, 1886a, pp 538–42) In an

unsigned review of Ely’s book, The Labor Movement in America (1886), Newcomb

was even more outspoken in his denunciation of Ely’s work, saying it displayed