An Outline of the history of economic thought - Introduction pps

Great Clarendon Street, Oxford OX2 6DP Oxford University Press is a department of the University of Oxford.. It furthers the University’s objective of excellence in research, scholarship

AN OUTLINE OF THE HISTORY OFECONOMIC THOUGHT

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An Outline of the History of Economic

Great Clarendon Street, Oxford OX2 6DP

Oxford University Press is a department of the University of Oxford.

It furthers the University’s objective of excellence in research, scholarship,

and education by publishing worldwide in

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by Oxford University Press Inc., New York

# Ernesto Screpanti and Stefano Zamagni, 2005

The moral rights of the authors have been asserted

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First published 2005 All rights reserved No part of this publication may be reproduced, stored in a retrieval system, or transmitted, in any form or by any means, without the prior permission in writing of Oxford University Press,

or as expressly permitted by law, or under terms agreed with the appropriate reprographics rights organization Enquiries concerning reproduction outside the scope of the above should be sent to the Rights Department,

Oxford University Press, at the address above

You must not circulate this book in any other binding or cover and you must impose the same condition on any acquirer British Library Cataloguing in Publication Data

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on acid-free paper by Biddles Ltd., King’s Lynn, Norfolk

ISBN 0–19–927913–6 (Hbk) 978–0–19–927913–5

ISBN 0–19–927914–4 (Pbk) 978–0–19–927914–2

1 3 5 7 9 10 8 6 4 2

PREFACE TO THE SECOND ENGLISH

EDITION

Our satisfaction in writing the second English edition of this book is easy toimagine: not only are we assured of the utility of our work, but also have theopportunity to enlarge and revise it We have attempted to do this in variousways We have removed oversights and errors; we have made a few additionsand expanded a little on all chapters; we have re-written and simplifiedvarious parts which students had found obscure or difficult to understand;lastly, we have updated the bibliography, with the aim of offering usefulsuggestions for further reading

More substantial integrations have been made to chapters 1, 2, 4, 9 and 11

In the first chapter we felt it necessary to recall the role played by humanismand the Renaissance in the birth of political economy and, in particular, thecontribution they made to the formation of ‘civil humanism’, a philosophicalapproach that fell into disuse following the advent of utilitarianism, but nowappears set for a second revival In the chapter on Smith we have integratedour exposition of the interpretations of his thought by recalling the one that

is today considered the most convincing, that of Smith as an institutionalisteconomist The chapter on Marx has also been enlarged to recall his concept

of man and his investigation into the social and institutional conditions ofcapitalist production, two of the most topical parts of his thinking Lastly,

in chapter 9, we have separated treatment of the post-Keynesian approachfrom the so-called ‘new Keynesian macroeconomics’, by further expanding

on both and pointing out the important differences that distinguish the twoschools We have also added a summary paragraph with a simple diagramcomparing the views of the various contemporary schools of macroeconomics

In chapter 11 we have added extensive paragraphs on evolutionary games andthe theories of growth and complexity

In addition, we have introduced a new chapter—the twelfth—whichdeals with the current situation of economic science The state of crisiswhich has beset our discipline over the last thirty years appears even moreevident today than when we wrote the first edition of this book Now webelieve it to be a healthy crisis and in chapter 12 we have endeavoured toexplain why A crisis can also be a revolution We do not pretend to knowwhat will happen in economic science over the next twenty years or so, but

it seemed important to us to clarify the reason why, in our opinion, we are

in the middle of a crisis of foundations that may make history begin againfrom Adam

Finally, a formal change has been made which we hope will be useful forstudents We have removed many references to relevant works from the maintext and entered them in special bibliographic lists at the end of each chapter

Only those references to fundamental works, which no student can afford tooverlook, have been left in the text.

Let us conclude by thanking friends and colleagues who have taken itupon themselves to read and comment on the integrations to this edition:Elettra Agliardi, Luigino Bruni, Luca Fiorito, Nicholas Theocarakis, CarloZappia, and Luca Zarri

vi preface to the second english edition

PREFACE TO THE FIRST EDITION

Our experience in the teaching of economics and its history has made onething plain to us: that keeping the two subjects separate, if it was ever jus-tified, is certainly not today In the face of the crisis of the theoreticalorthodoxies of the 1950s and 1960s, the flowering of innovations in recentyears, and the numerous rediscoveries of traditional wisdoms, it is no longer

an easy task to teach economic principles We feel it necessary, therefore, toteach economic theory by paying careful attention to its history We havetried to satisfy this need in our book, and this already says a great deal aboutthe way it has been conceived We have endeavoured to present traditionaltheories as living matter, as well as presenting modern theories as part of ahistorical process and not as established truths

On the one hand, we have tried to resist the double temptation ofrereading the past only in the light of the present and explaining the presentonly by the past, or, to be more precise, to avoid searching in the traditionaltheories for the seeds of the modern theories and explaining the latter assimple accumulations of knowledge On the other hand, we have attempted

to distance ourselves from the implicit banality of the great historiographicalalternatives, such as ‘internal’ and ‘external’ history or ‘continuism’ and

‘catastrophism’ We have also tried to avoid the dichotomy which still existstoday, and which seems to us to cause misleading simplifications, betweenthe ‘pure’ historians of thought, who dedicate themselves exclusively tostudying ‘facts’, and the ‘pure’ theorists, who are only interested in theevolution of the logical structure of theories We believe that knowledge ofthe ‘environment’ in which a theory is formed is just as important asknowledge of its logical structure, and we do not accept the view that ananalysis of the emergence of a theory must be considered as an alternative tothe study of its internal structure This historical outline is, therefore, neither

a collection of discoveries nor a portrait gallery

Our choice to give a fair amount of historical weight to modern opments has entailed the problem of where to end our narrative This cannotbut be a subjective decision We have chosen the 1970s, but we have reservedthe right to break this rule each time we felt it necessary—for example, in thecase of research work and debates which produced important results in the1980s but which began earlier The only precaution we have taken in thesecases has been to avoid citing names and titles, with a few exceptions, andlimiting ourselves to outlining the essential elements of the most recenttheoretical developments

devel-The reader accustomed to traditional history books may be surprised bythe large amount of space we have reserved for the thought of the last fiftyyears—approximately half the extent of a book that still remains (all things

considered) fairly concise If there is an imbalance of this type, however, webelieve it is that we have dedicated too little space to modern theories.Quantitative historiographical research has shown, whichever index is used,that scientific production has grown at an exponential rate in the lastfive centuries, with the remarkable consequence that certainly more than

70 per cent of the scientists who have ever lived are living today, and perhaps

a great many more The decision to devote less than 70 per cent of our book

to modern theory was, in fact, prudent

Finally, we have no wish to avoid certain difficulties, or, rather,responsibilities, connected with our endeavour to treat the present ashistory We are well aware of the danger of the attempt to be wise in thesense advocated by William James, who believed that the art lays in knowingwhat to leave out We realize that this danger becomes greater the smallerthe distance from the material dealt with and the larger the quantity ofmaterial about which decisions must be made; but we believe that theseresponsibilities must be faced We do not know whether we have been wise inthis sense, or to what degree, but we are convinced of one thing: even if wehave omitted many things from this book, the resulting selection has beenjustified, in fact necessitated, by the importance of the material upon which

we focus

This book is not directed to a specialist public, nor solely to a studentaudience We also hope to reach the educated person, or, rather, the personwho wishes to educate herself or himself Specialist training is not, therefore,necessary to understand this book; a basic knowledge of economics, how-ever, especially the main themes of micro- and macroeconomics, would be ofhelp This is true for most of the book There are, however, sections, espe-cially those dealing with the modern theories, in which the analytical diffi-culties cannot be avoided without falling into the trap of oversimplification

In these cases, which we have tried to keep to a minimum, we have chosen toavoid banality and to ask the reader for a little more effort

This knowledge of the audience to whom the book is directed may help inunderstanding several things about its structure; we have chosen, forexample, to avoid weighing down the narrative with footnotes, a choice thathas often restricted us, but which we hope will benefit the reader On theother hand the bibliographies presented at the end of each chapter do notpretend to be complete; they contain, apart from details of works quotedfrom, only a short guide to further reading

Finally, we should like to express our gratitude to the many colleagues andfriends who have kindly and generously agreed to read and comment on thefirst drafts of our book, or on parts of it In particular we would like tomention Duccio Cavalieri, Marco Dardi, Franco Donzelli, Riccardo Faucci,Giorgio Gattei, Augusto Graziani, Peter Groenewegen, Vinicio Guidi, GeoffHodgson, Alan Kirman, Jan Kregel, Marcello Messori, Pierluigi Nuti,Fabio Petri, Pier Luigi Porta, Maurizio Pugno, Piero Tani, and Warrenviii preface to the first edition

Young Of course any inadequacies or mistakes in this book are our own soleresponsibility Our thanks also go to Andrew Schuller and Anna Zaranko ofOxford University Press for their perceptive editorial work and advice.

E S

S Z.ix

preface to the first edition

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PART I FROM THE ORIGINS TO KEYNES

1.1.1 The end of the Middle Ages and scholasticism 19

1.1.2 Communes, humanism and the Renaissance 22

1.1.3 The expansion of ‘Mercantile’ capitalism 27

1.1.4 The Scientific Revolution and the birth of political

1.2.2 Mercantilist commercial theories and policies 34

1.2.3 Demographic theories and policies 36

1.2.4 Monetary theories and policies 38

1.3 Some Forerunners of Classical Political Economy 43

1.3.1 The premisses of a theoretical revolution 43

1.3.2 William Petty and ‘political arithmetick’ 45

1.3.3 Locke, North, and Mandeville 47

1.3.4 Boisguillebert and Cantillon 49

2 TheLaissez-Faire Revolution and Smithian Economics 54

2.1.1 The preconditions of the Industrial Revolution 54

2.1.2 Quesnay and the physiocrats 55

2.1.3 Galiani and the Italians 58

2.2 Adam Smith 65

2.2.1 The ‘mechanical clock’ and the ‘invisible hand’ 65

2.2.2 Accumulation and the distribution of income 68

2.2.4 Market and competition 72

2.2.6 Smith as an institutionalist 77

2.3.2 Bentham and utilitarianism 83

2.3.3 The Smithian economists and Say 85

3.1.1 Thirty years of crisis 90

3.1.5 Profits and over-production 96

3.1.6 Discussions on value 973.2 The Disintegration of Classical Political Economy in

3.2.1 The Ricardians, Ricardianism, and the classical tradition 100

3.2.2 The anti-Ricardian reaction 102

3.2.4 Gossen and von Thu¨nen 107

3.2.5 The Romantics and the German Historical School 1093.3 The Theories of Economic Harmony and Mill’s Synthesis 111

3.3.1 The ‘Age of Capital’ and the theories of economic harmony 111

3.3.3 Wages and the wages fund 115

3.3.4 Capital and the wages fund 1183.4 English Monetary Theories and Debates in the Age of

3.4.1 The Restriction Act 121

3.4.2 The Bank Charter Act 124

3.4.3 Henry Thornton 127

4.1.1 The birth of the workers’ movement 133

4.1.2 The two faces of Utopia 134

4.1.3 Saint-Simon and Fourier 135

4.2.1 Sismondi, Proudhon, Rodbertus 138

4.2.3 The Ricardian socialists and related theorists 140

4.3.1 Marx and the classical economists 142

4.3.2 Exploitation in the production process 146

4.3.3 Exploitation and value 148

4.3.4 The transformation of values into prices 151

4.3.5 Equilibrium, Say’s Law, and crises 154

4.3.6 Wages, the trade cycle, and the ‘laws of movement’ of

4.3.7 Monetary aspects of the cycle and the crisis 159

5 The Triumph of Utilitarianism and the Marginalist Revolution 163

5.1.1 The ‘climax’ of the 1870s and 1880s 163

5.1.2 The neoclassical theoretical system 165

5.1.3 Was it a real revolution? 167

5.1.4 The reasons for success 170

5.2.1 Logical calculus in economics 173

5.2.2 Wages and labour, interest and capital 176

5.2.3 English historical economics 179

5.3.1 Walras’s vision of the working of the economic system 180

5.3.2 General economic equilibrium 183

5.3.3 Walras and the articulation of economic science 187

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5.4 Carl Menger 189

5.4.1 The birth of the Austrian School and the Methodenstreit 189

5.4.2 The centrality of the theory of marginal utility

6 The Construction of Neoclassical Orthodoxy 196

6.2 Marshall and the English Neoclassical Economists 198

6.2.2 Competition and equilibrium in Marshall 200

6.2.3 Marshall’s social philosophy 202

6.2.4 Pigou and welfare economics 203

6.2.5 Wicksteed and ‘the exhaustion of the product’ 205

6.2.6 Edgeworth and bargaining negotiation 207

6.3.1 Clark and the marginal-productivity theory 209

6.3.2 Fisher: inter-temporal choice and the quantity

6.4 Neoclassical Theory in Austria and Sweden 215

6.4.1 The Austrian School and subjectivism 215

6.4.2 The Austrian School joins the mainstream 217

6.4.3 Wicksell and the origins of the Swedish School 2186.5 Pareto and the Italian Neoclassical Economists 223

6.5.1 From cardinal utility to ordinalism 223

6.5.2 Pareto’s criterion and the new welfare economics 226

6.5.3 Barone, Pantaleoni, and the ‘Paretaio’ 227

7.1.1 Economic hard times 232

7.1.2 Money in disequilibrium 234

7.1.3 The Stockholm School 236

7.1.4 Production and expenditure 238

7.1.5 The multiplier and the accelerator 241

7.1.6 The Harrod–Domar model 243

7.2.1 English debates on economic policy 245

7.2.2 How Keynes became Keynesian 249

7.2.3 The General Theory: effective demand and employment 251

7.2.4 The General Theory: liquidity preference 254

7.3.1 The level of income and its distribution 258

7.4.1 Equilibrium and development 262

7.4.2 The trade cycle and money 265

8.1.1 The first signs of dissent 270

8.1.2 Sraffa’s criticism of the Marshallian theoretical system 271

8.1.3 Chamberlin’s theory of monopolistic competition 273

8.1.4 Joan Robinson’s theory of imperfect competition 275

8.1.5 The decline of the theory of market forms 2788.2 The Theory of General Economic Equilibrium 280

8.2.1 The first existence theorems and von Neumann’s model 280

8.2.2 The English reception of the Walrasian approach 284

8.2.3 Value and demand in Hicks 286

8.2.4 General economic equilibrium in Hicks 287

8.3.1 Robbins’s epistemological setting 291

8.3.2 The Pareto criterion and compensation tests 2928.4 The Debate on Economic Calculation under Socialism 295

8.4.2 The neoclassical socialism of Lange and Lerner 296

8.4.3 Von Hayek’s criticism 298

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8.5 Alternative Approaches 299

8.5.1 Allyn Young and increasing returns 299

8.5.3 Institutional thought in the inter-war years 304

8.5.4 From Dmitriev to Leontief 308

8.5.5 The reawakening of Marxist economic theory 313

PART II CONTEMPORARY DEVELOPMENTS OF

ECONOMIC THEORY

9.2.1 Generalizations: the IS-LM model again 325

9.2.2 Refinements: the consumption function 328

9.2.3 Corrections: money and inflation 330

9.2.4 Simplifications: growth and distribution 333

9.3.1 Act I: money matters 335

9.3.2 Act II: ‘you can’t fool all the people all the time’ 337

9.3.3 Act III: the students go beyond the master 340

9.3.4 Was it real glory? 3439.4 From Disequilibrium to Non-Walrasian Equilibrium 346

9.4.1 Disequilibrium and the microfoundations of

9.4.2 The non-Walrasian equilibrium models 347

9.5.1 Anti-neoclassical reinterpretations of Keynes 351

9.5.2 Distribution and growth 353

9.5.3 Money and the instability of the capitalist economy 358

9.5.4 Heterodox microfoundations of macroeconomics 360

9.6.1 A distant Hicksian background 363

9.6.2 Nominal rigidities 365