Research in the History of Economic Thought and Methodology

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AN INQUIRY INTO THE NATURE AND CAUSES OF THE WEALTH OF NATIONS, BOOK I: ITS RELATIONSHIP TO ADAM SMITH’S FULL MORAL PHILOSOPHICAL VISION

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Jerry Evensky

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1. INTRODUCTION

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In the “Preface” to his Principles of Political Economy first published in 1848, John Stuart Mill cites as his intellectual mentor not David Ricardo with whom he came of age as an economist, but Adam Smith who’s Wealth of Nations appeared thirty years before Mill was born and seventy-two years before Mill wrote his “Preface.” In that “Preface”, Mill writes that “The Wealth of Nations is in many parts obsolete, and in all, imperfect” (Mill, p. 5). Nevertheless Mill reaches back to The Wealth of Nations as a guide for his own explorations. Listen to how Mill describes that text: The most characteristic quality of that work, and one in which it most differs from some others which have equalled or even surpassed it as mere expositions of the general principles of the subject, is that it invariably associates the principles with their applications. This of itself implies a much wider range of ideas and of topics, than are included in political economy, considered as a branch of abstract speculation. For practical purposes, political economy is inseparably intertwined with many other branches of social philosophy. Except on matters of mere detail, there are perhaps no practical questions, even among those which

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Research in the History of Economic Thought and Methodology, Volume 21-A, pages 1–47. Copyright © 2003 by Elsevier Science Ltd. All rights of reproduction in any form reserved. ISBN: 0-7623-0996-2

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JERRY EVENSKY approach nearest to the character or purely economical questions, which admit of being decided on economical premises alone. And it is because Adam Smith never loses sight of this truth; because in his applications of Political Economy, he perpetually appeals to other and often far larger considerations than pure Political Economy affords – that he gives that well-grounded feeling of command over the principles of the subject for the purposes of practice . . . (Mill, pp. 4–5).

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Mill’s words here establish him as a worthy successor to Smith, for he appreciates two key features of Smith’s work: Its dimensionality and its practicality. Smith’s Inquiry into the Nature and Causes of the Wealth of Nations represents but one dimension of his full moral philosophical vision. As such, Smith’s story of the connecting principles which determine from whence we derive out daily bread – his work in Political Economy – cannot be fully understood or appreciated unless those principles are set into the context of his full moral philosophy. Furthermore, as Mill appreciates, Smith’s moral philosophy is intended to be a rich, practical analysis of the human condition. It is not a project in metaphysics. In my work to date, I have endeavored to represent the dimensionality and practicality of Smith’s moral philosophy that is the context within which The Wealth of Nations must be read if it is to be read in Smith’s own terms. Briefly that context can be described as follows. For Smith the great machine of the universe is the work of a deity.1 The hand of the deity, an invisible hand, arranged all the springs and wheels of the universe and set them into motion. That universe the deity created, all of nature, has functioned smoothly and elegantly from the outset. All that is except for humankind. For reasons that only the deity can know, humankind is flawed. We suffer human frailty. Natural philosophy was in Smith’s day the study of the “invisible connecting principles” that order that elegant nature that surrounds humankind. Moral philosophy was the study of that flawed dimension of the universe: humankind. Humankind was Smith’s subject. He was a moral philosopher. Smith’s moral philosophy is based on the premise that the deity is benevolent. Based on this faith Smith believed that while humankind’s course was, is, and will always be a challenge, it is one that offers hope for progressive improvement in the human condition. That progress emerges because the deity imbedded human nature with instincts and inclinations and with the capacity to reason and to choose. In combination these instincts, inclinations, and capacities can, with or without intention, lead to constructive actions that enhance the possibility of progress. Thus, while Smith saw humankind as flawed, he believed that it was progressing through stages toward an ideal case – a limiting condition that humankind could approach but could never absolutely achieve.

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Smith’s purpose is practical. He seeks to represent the connecting principles that guide progress so that we can, as a society, choose paths that more directly approach the ideal. His practical purpose motivates his method. It is simultaneously empirical and theoretical. Based on his personal observation and on his understanding of history and anthropology, Smith imagines and represents in his work the invisible connecting principles – those springs and wheels arranged by the deity which are beyond our vision – that regulate and guide the evolution of humankind. He presents his case for his vision by offering a story of the history he “knows” that is consistent with the principles he imagines, and by conjecturing beyond the past he “knows”, to describe the path of the prehistory of this evolution. In his story individual societies progress, stagnate, decline, and often disappear, but through an evolutionary process that favors the progressive elements of these societal experiments humankind progresses. In my previous work I’ve presented Smith’s deistic belief, his understanding of human nature, his story of humankind’s progressive evolution, and the role of social constructs (e.g. religion), socialization (e.g. inculcating values), and political institutions in this evolutionary process. In this piece I begin to represent those connections Mill correctly saw and cited between Smith’s larger moral philosophy and his work in the domain of Political Economy. My objective here is to walk the reader through The Wealth of Nations and as I do so to represent how that narrative fits into the scope and method of Smith’s larger moral philosophical story. The Wealth of Nations focuses on the material dimension of humankind’s evolution. Material well-being is not for Smith the ultimate metric of a society’s or of an individual’s overall well-being. It is, however, a central issue in his story of humankind’s evolution because material well-being is instrumental in realizing the higher forms of human achievement, and the material well-being of the least among the working class is for Smith a pretty good metric of the quality of a society’s progress.2 The essential, instrumental role of material progress in Smith’s story of humankind’s progress is reflected by Smith’s analysis of the latter as occurring in four stages, each identified by ever more sophisticated systems of production: hunting and gathering, pasturage, agriculture, and commerce. The last, the commercial stage, is the most productive. But the raison d’être of commerce is not for Smith material wealth. The merit of commerce is that it is the system of production and exchange that is consistent with and that can only be fully developed under a “liberal plan of equality, liberty, and justice” (WN, p. 664). Smith’s ultimate value is liberal society – a social constitution within which justice insures the security and the independence of every individual. For Smith free and fair commerce and a free and fair society go hand in hand. 3

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Much of The Wealth of Nations focuses on this fourth, commercial stage of humankind. It is the ultimate stage in Smith’s story of humankind’s evolution, and it is a rudimentary version of this stage that he believe he sees in Britain – in his opinion the best, most advanced society to date.3 But while the commercial stage is the ultimate focus of The Wealth of Nations, a significant portion of that story is devoted to weaving a theoretical explanation and an empirical representation of the evolution of humankind through the four stages. In the process Smith tries to identify the essential conditions that made liberal society possible, for those are the conditions that must be nurtured if the nascent British experiment in liberal society is to succeed. Indeed, his revisions to The Wealth of Nations, and to those made to The Theory of Moral Sentiments after The Wealth of Nations was published, reflect his concern that mercantilists were undermining the British experiment by undermining the liberal constitution4 that sustains that experiment. As Mill suggests, Smith’s method is simultaneously empirical and theoretical. His theory is based on empiricism, his experience and understanding of history and anthropology. In turn, his understanding of his experience and his reading of history and anthropological cases are framed by his theory. Based on the course he “sees” in the history of humankind, he forms his vision of the ideal, limiting case toward which he believes humankind is evolving: A perfectly just, harmonious, and fruitful liberal society in which all are independent, the least do well, and the highest earn their riches. This image of the ideal case then becomes a point of reference for his theoretical and empirical analysis of those forces that have nurtured progress and those that have impeded it – or in the case or the mercantilists, are impeding it. An Inquiry Into The Nature and Causes of the Wealth of Nations explores the material dimension of human progress. Smith believed that a key to material progress is increasing productivity. Thus, what better place to start The Wealth of Nations than with the words: The greatest improvement in the productive powers of labour, and the greater part of the skill, dexterity, and judgment with which it is anywhere directed, or applied, seem to have been the effects of the division of labor (WN, p. 13).

Now let’s see how as Smith’s story of The Wealth of Nations unfolds, it fits into his larger moral philosophy.

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2. BOOK I, CHAPTER 1: OF THE DIVISION OF LABOUR

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The basic principles of the division of labor are familiar to any introductory economics student. By dividing up the labor of society each individual can

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increase his or her individual productivity. This is so because in focusing on one task individuals can enhance their “dexterity”, can save time “commonly lost in passing from one species of work to another”, and can become more inventive (WN, p. 17). Smith suggests that the benefits of this increased productivity are obvious if we simply reflect, as he obviously has, on our own experience. Consider for example, he says, “[t]he woollen coat” of “the most common artificer or day-labourer in a civilized and thriving country” (WN, p. 16). In a classic example of his use of the familiar to represent a rich and complex idea, Smith imagines all the hands involved in producing such a coat including among the many cited: the “ship-builders, sailors, sail-makers, rope-makers, [that] must have been employed in order to bring together the different drugs made use of by the dyer, which come from the remotest corners of the world!” (WN, p. 23). Smith asserts that thanks to all these hands doing their part in this divided labor of production “it may be true, perhaps, that the accommodation of a European prince does not always so much exceed that of an industrious and frugal peasant, as the accommodation of the latter exceeds that of many an African king, the absolute master of the lives and liberties of ten thousand naked savages” (WN, p. 24). Here in the course of exemplifying the productivity of the division of labor Smith introduces a theme that is a constant in his moral philosophy and one we will hear expressed again and again in The Wealth of Nations. Systems built on dependence both demean the individual and are less productive. Smith admires the maturity and independence of the “industrious and frugal peasant” he cites. While that peasant may be the least among the working class in material wealth, he represents a figure Smith respects much more than many a rich person. Smith summarizes his point about the division of labor as follows: It is the great multiplication of the productions of all the different arts, in consequence of the division of labour, which occasions, in a well-governed society, that universal opulence which extends itself to the lowest ranks of the people. Every workman has a greater quantity of his own work to dispose of beyond what he himself has occasion for; and every other workman being exactly in the same situation, he is enabled to exchange a great quantity of his own goods for a great quantity, or, what comes to the same thing, for the price of a great quantity of theirs (WN, p. 22).

In this summary Smith anticipates where his story will go: To the process of exchange. Indeed, he uses this technique throughout Book I, constantly preparing the reader for the unfolding story by anticipating and/or framing what is to come. But imbedded in this summary is also a theme that enters the fabric of the story here and weaves its way through the entire story, a theme drawn from Smith’s larger moral philosophy. Note the phrase “wellgoverned society.” 5

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Smith appreciated that by definition the division labor creates interdependence and that for interdependence to be constructive there must be rules for interaction (e.g. standards of property rights and exchange). His understanding of history suggested to him that the more constructive these rules, the more finely and successfully the division of labor can be developed. Thus, his reference to a “well-governed society.” How societies’ rules for interpersonal interaction evolved and how those of the reasonably well-governed British society emerged, these are the dimensions of Smith’s moral philosophical story that he presents respectively in The Theory of Moral Sentiments and in the book on jurisprudence he never got to write – a story we nevertheless know from his students’ lecture notes of his jurisprudence course. The Theory of Moral Sentiments and his Lectures on Jurisprudence explore, respectively, the socially institutionalized ethics of interpersonal behavior – of the little “g” government, and the laws of political institutions – of big “G” Government. These are the dimensions, social and political, of Smith’s moral philosophy that provide the context within which he sets his story of The Wealth of Nations. Chapter 1 sets the scene for the story that will unfold. He identifies and examines the ultimate source of increasing productivity – the division of labor. He frames the story in the context of his larger moral philosophy by introducing the issue of “well governed society.” He anticipates and prepares our mind for concepts to come by introducing the concept of exchange and by observing that “[t]he nature of agriculture . . . does not admit of so many subdivisions of labour, nor of so complete a separation of one business from another, as manufactures” (WN, p. 16). This latter point becomes important because, as we will see, Smith believed that the biggest explosion of material wealth occurs in the move from the agricultural to the commercial stage and it is this point about the division of labor in agriculture vs. manufactures that explains this explosion. Now having set the scene for the story of The Wealth of Nations, in Chapter 2 Smith picks up the story with the human foundation of the process.

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3. BOOK I, CHAPTER 2: OF THE PRINCIPLE WHICH GIVES OCCASION TO THE DIVISION OF LABOUR

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The division of labor, from which so many advantages are derived, is not originally the effect of any human wisdom, which foresees and intends that general opulence to which it gives occasion. It is the necessary, though very slow and gradual consequence of a certain propensity in human nature which has in view no such extensive utility; the propensity to truck, barter, and exchange one thing for another (WN, p. 25).

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This opening sentence of Chapter 2 reflects the structure of Smith’s story very nicely. The process of change in humankind moves at a “slow and gradual” pace because it is evolutionary. This evolution is not the calculated consequence of “human wisdom, which foresees or intends,” but rather it is in significant measure the unintended consequence of beneficial traits like “the propensity to truck, barter, and exchange . . . found in no other race of animals” (WN, p. 25). This is the invisible hand of the benevolent deity at work. That hand arranged the connecting principles, including this propensity, in such a way that the unfolding course of events ultimately serves humankind. Is this propensity “one of those original principles in human nature” or is it “the necessary consequence of the faculties of reason and speech”? Smith considers the former “more probable”, but goes on to say that the answer to this question “belongs not to our present subject to enquire” (WN, p. 25). I note Smith’s agnosticism on this point, because it is indicative of the way he approaches moral philosophy more generally. Smith is not into metaphysics. His purpose is to tell a compelling story of humankind’s evolution and to imagine the principles of that process so as to inform policy. In what follows we will see several points at which Smith delves into metaphysical questions, but then moves on to the more functional process of constructing the language and assumptions of his story. Here he reflects on the origin of the propensity to truck, barter, and exchange but quickly moves on noting only that whatever the origin “[i]t is common to all men” (WN, p. 25). The assumed condition in place, the metaphysics are left behind. Having established the human propensity underlying exchange, Smith introduces the human incentive to produce for exchange that is requisite if the division of labor is to work. By choosing a labor that makes us productive enough to generate a surplus of a commodity others want and then presenting that surplus for exchange, we give others the incentive to reciprocate: “He will be more likely to prevail if he can interest their self-love in his favour, and shew them that it is for their own advantage to do for him what he requires of them” (WN, p. 26). Or in his classic statement of self-love as a spring for action:

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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. We address ourselves, not to their humanity but to their self-love, and never talk to them of our own necessities but of their advantages (WN, pp. 26–27).

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This may be the most famous passage in all of Smith’s work. It is surely the most dangerous if it is read out of context. Smith’s immediate point here is straightforward. Self-love is the spring for human action, and it can serve us. What is not on this page is the context. In Smith’s full moral philosophical 7

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story the benefits of self-love are premised on the presence of a “well-governed society.” In Smith’s day liberal society, including the widespread interaction of autonomous individuals through markets, was a very new experiment. He was trying to understand the invisible connecting principles that made constructive liberal society possible. He shared with those predecessors and contemporaries who had or were also trying to understand this nascent liberal experiment a deep fear of unbridled self-interest. There was a shared keen sense that in the absence of some government over self-love, the potentially fruitful market process would degenerate into a Hobbesian war of all against all, or in modern terms a “rentseeking” society. Smith’s contemporaries, the Physiocrats, suggested that the solution lay in Government – a despotime legal. Smith rejected this. He believed that the only source of government in a liberal society that would not undermine the very freedom the society was supposed to represent was an internal government based on a personal commitment to a commonly held set of civic values. In The Wealth of Nations Smith does not retell the story of ethics that he laid out in the Theory of Moral Sentiments, nor does he explain the role of the state in contributing to the development of civic ethics that he presents in his Lectures on Jurisprudence. Nevertheless, this larger context of evolving values and civic ethics underlies the possibility that the butcher, brewer and baker can indeed benefit from serving one another’s interests. Reading this most famous passage from The Wealth of Nations without that context in mind can easily lead to a significant misreading of Adam Smith. Here in Chapter 2 it is clear that The Wealth of Nations must be read in the context of Smith’s larger moral philosophy. In the course of his analysis of the human foundation of the division of labor, Smith identifies two common human traits, the propensity to truck, barter and exchange and self-love, that respectively give rise to the division of labour and encourage us to exploit it. Before he leaves the subject of the human foundation of the division of labor he is careful to note that [t]he difference of natural talents in different men is, in reality, much less that we are aware of; and the very different genius which appears to distinguish men of different professions, when grown up to maturity, is not upon many occasions so much the cause, as the effect of the division of labour. The difference between the most dissimilar characters, between a philosopher and a common street porter, for example, seems to arise not so much from nature, as from habit, custom, and education (WN, pp. 28–29).

This reflects another constant in his moral philosophy. We may turn out very differently, but we are all molded from the same “coarse clay” (TMS, p. 162).

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This perspective on humankind is closely connected with Smith’s story of how humankind evolves. We each have within us the capacity to be shaped in many different ways. What we actually become is significantly effected by “habit, custom, and education,” the social constructs into which we are born. But habit, custom, and education are not static. Through the unintended and intended consequences of individuals, habit, custom, and education evolve. This evolution of social constructs is one of the simultaneous forces, along with evolving political and market forces, that determine the direction of a society’s and more largely of humankind’s evolution.

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4. BOOK I, CHAPTER 3: THAT THE DIVISION OF LABOUR IS LIMITED BY THE EXTENT OF THE MARKET

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Having established the human foundation of the division of labor, Smith moves on in Chapter 3 to explain the conditions that limit the division of labor. The principle that the division of labor is limited by the extent of the market is pretty straightforward. There is no reward for great productivity or very specialized production if there is not sufficient effective demand to vent one’s surplus. Thus, the pursuit of greater productivity, the finer division of labor, is only justified by the extent of the market. The extent of the market is a function of transportation possibilities and costs – including transaction costs. In his day “water-carriage” was by far the greatest avenue to a wide market. Thus, nations that had access to navigable routes through coastal ports and/or navigable rivers were at a tremendous advantage in terms of market development. Always the empiricist, to make his case Smith turns to history. The nations that, according to the best authenticated history, appear to have been first civilized, were those that dwelt round the coast of the Mediterranean sea. That sea, by far the greatest inlet that is known in the world, having no tides, nor consequently any waves except such as are caused by the wind only, was, by the smoothness of its surface, as well as by the multitude of its islands, and the proximity of its neighbouring shores, extremely favourable to the infant navigation of the world; when, from their ignorance of the compass, men were afraid to quit the view of the coast, and from the imperfection of the art of ship-building, to abandon themselves to the boisterous waves of the ocean . . .. Of all the countries on the coast of he Mediterranean sea, Egypt seems to have been the first in which either agriculture or manufactures were cultivated and improved to any considerable degree . . .. The extent and easiness of . . . inland navigation was probably one of the principal causes of the early improvement of Egypt (WN, pp. 34–35).

Smith has now transformed his story from one about human nature to one about human societies and their possibilities. As his story unfolds the extent of the 9

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market becomes the tipping point that determines how societies grow within a given stage and which societies evolve from stage to stage. The advancement of Britain rests, according to Smith, at least in part on the good fortune that as an island it has many opportunities for coastal trade, and that the island has a large navigable river. Notice again as he tells the story how the empirical is the woof to the theoretical warp, and his concern for credibility of sources. In the Egypt story just cited he begins “according to the best authenticated history”, but when he moves from the Egyptian example and suggests that “[t]he improvements in agriculture and manufactures seem likewise to be of very great antiquity in the provinces of Bengal in the East Indies, and in some of the eastern provinces of China; [(he adds a caveat)] though the great extent of this antiquity is not authenticated by any histories of whose authority we, in this part of the world, are well assured” (WN, p. 35). Smith clearly wants us to appreciate that while history is his resource, he does not treat all histories as equally credible. He cites this history with the caveat, but he does cite it because the story the history tells is consistent with the theoretical framework he is constructing and thus seems plausible. Again, this is classic Smith. There are times when the line between history and “conjectural history”, as Smith’s biographer Dugald Stewart (1980) referred to it, gets blurred in Smith’s story. Conjectural history was Stewart’s term for Smith’s story of what happened in times and places of which Smith has no credible knowledge. Smith’s stories are constructed conjectures based on his extrapolation of what the natural course of events would have been if his principles are valid. Thus, he can write that “[t]he improvements in agriculture and manufactures seem likewise to have been of very great antiquity in the provinces of Bengal in the East Indies, and in some of the eastern provinces of China” because, given the great rivers there that allow for an extensive market that story seems plausible, and he provides the caveat.5 As he closes his presentation on the extent of the market, Smith adds one other caveat. He notes that “[t]he commerce . . . which any nation can carry on by means of a river which does not break itself into any great number of branches or canals, and which runs into another territory before it reaches the sea, can never be very considerable; because it is always in the power of the nation who possess that other territory to obstruct the communication between the upper country and the sea” (WN, p. 36, emphasis added). He cites the Danube as an example. This point is made in passing, but it lays essential groundwork in our mind for a theme that is going to be central to the story of The Wealth of Nations as it unfolds: Nations can use their power to limit other nations’ access to markets and thus diminish the extent of the

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market and in turn the possibilities of the division of labor in those other nations.

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5. BOOK I, CHAPTER 4: OF THE ORIGIN AND USE OF MONEY

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With the extension of the division of labor trade becomes more complex. In a complex trading environment barter clogs the system, so general equivalents emerge. Initially cattle, salt or the like function as a general equivalent, but eventually metals play this role since they are less perishable and more finely divisible (WN, p. 39). But raw forms of metals posed problems of assaying, so stamps were affixed to warrant quality. This was “the origin of coined money” (WN, p. 40). But there was still the issue of quantity, so to address this, full stamps “covering entirely both sides . . . and sometimes the edges” (WN, p. 41) were introduced. Money remains problematic, however, because of debasement – a revenue trick that Smith equates with fraud. Chapter 4 closes with an introduction to the topic he will address next: value. He tells us that his purpose in the next section is to determine the “real measure of . . . exchangeable value; or, wherein consists the real price of all commodities”, to identify “what are the different parts of which this real price is composed or made up”, and to understand the forces that cause the “the market, that is the actual price of commodities” to vary at any given time from their “natural or ordinary” price (WN, p. 46). He prepares us for the issue by clarifying the distinction between value in use and value in exchange. Ironically, “[t]he things which have the greatest value in use have frequently little or no value in exchange; and, on the contrary, those which have little or no value in exchange have frequently little or no value in use” (WN, p. 44). For example “[n]othing is more useful than water” and yet is has very little value in exchange, while “[a] diamond . . . has scarce any value in use”, but has immense exchange value (WN, pp. 44–45). This diamond-water paradox is not so strange if one considers that exchange value depends, as he will tell the story in Chapter 7, on the relationship between the quantity supplied and effective demand. For Smith diamonds represent a peculiar case in which the quantity supplied cannot be continuously expanded by additional labor to meet the effective demand. (Uniquely excellent vineyards are an example he cites in Chapter 7.) This constraint on supply causes the price to be higher than the cost of production. In more normal cases, such as water (under normal circumstances) quantity can be expanded continuously by additional applications of labor and the exchange value is determined in the process of production. It sounds simple, 11

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but he warns us that “perhaps, after the fullest explication which I am capable of giving of it, [it may] appear still in some degree obscure” 6 (WN, p. 46).

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6. BOOK I, CHAPTER 5: OF THE REAL AND NOMINAL PRICE OF COMMODITIES, OR OF THEIR PRICE IN LABOUR, AND THEIR PRICE IN MONEY

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Smith begins Chapter 5 with an assertion that “[l]abour . . . is the real measure of the exchangable value of all commodities.” It represents the “toil and trouble of acquiring” a commodity and thus it reflects its real worth (WN, p. 47). But labor is rarely embodied in a pure, unaided form in the production process and the demands of various kinds of labor are different, so labor embodied becomes a muddled image. Smith turns therefore to the concept of labor commanded: How much labor will a commodity exchange for? He recognizes that it is “an abstract notion” (WN, p. 49), but he believes that it represents a purer image of the amount of labor value a commodity has. Subsequently when he discusses the value of a commodity in the abstract he consistently uses the labor command notion as his measure.7 But it is an abstract measure and Smith is not into metaphysics. He wants to represent what he imagines to be the real story of human experience, so he needs a measure of value that he can actually use.8 He needs a metric that will allow him to make intertemporal comparisons of value as he tells his evolutionary story of change in the material well-being of individuals and nations that is to follow. As he says: “In such a work as this . . . it may sometimes be of use to compare the different real values of a particular commodity at different times and places . . .” (WN, p. 55). The measure he settles on as the best available, consistent metric of value over the long term is corn. Upon all . . . accounts . . . we may rest assured, that equal quantities of corn will, in every state of society, in every stage of improvement, most nearly represent, or be equivalent to, equal quantities of labour, than equal quantities of any other part of the rude produce of land. Corn accordingly, it has already been observed [in Book I, Chapter 5], is, in all the different stages of wealth and improvement, a more accurate measure of value than any other commodity or sett of commodities (WN, p. 206).

Here Smith is not only explaining his choice of corn as the constant measure, but he is making it clear as to why he needs such a measure. His is going to be telling a story of humankind’s evolution “in every state of society, in every stage of improvement.” If he is to make comparisons of human material improvement across the four stages of humankind’s history he needs an index with which to transform nominal values into real values for direct intertemporal comparison. Again and again throughout the story he reminds us that corn is

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his index, his metric of value (WN, pp. 206, 217, 248). More than half way through the work he is still reminding us that “[w]oollen or linen cloth are not the regulating commodities by which the real value of all other commodities must be finally measured and determined. Corn is . . . [It plays it’s role as intertemporal metric well because t]he real value of corn does not vary with those variations in its average money price, which sometimes occur from one century to another” (WN, p. 516). Smith’s caveat at the end of the last chapter is correct. After two centuries of examination, dissection, and debate his conception of value is still “obscure”. So if Smith did not feel he had done the subject of value justice, why did he leave it in this form? In 1784 he returned to The Wealth of Nations and made very significant additions and corrections, but the only significant change in this chapter is an additional paragraph (after the original second paragraph) in which he distinguishes wealth from direct “political power” (WN, p. 48). In 1789 he makes very significant changes to the Theory of Moral Sentiments, but still the essence of this “obscure” chapter stands. I believe that the reason Smith did not return to the issue of value is that he had accomplished what he wanted in this chapter.9 His objective was not metaphysical, to reveal the source of value. His purpose was immensely practical. He needed an intertemporal metric or index of value in order to make price comparisons as he tells the evolutionary story of change in humankind’s material condition. He does offer a metaphysical perspective about value. He believed it is based on labor. But as in that earlier propensity to truck, barter and exchange case, here too he is not concerned about the metaphysics.10 If his metaphysics is muddled, so be it.11 It has no bearing on the story that follows.

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7. BOOK I, CHAPTER 6: OF THE COMPONENT PARTS OF THE PRICE OF COMMODITIES This chapter begins with the words: In the early and rude state of society which precedes both the accumulation of stock and the appropriation of land . . . (WN, p. 65).

These words encompass several of the central elements of Smith’s story. First the reference to “the early and rude state” reflects his four stages theory, the first of those being this rude state. Secondly, his orientation of the rude stage as preceding “the accumulation of stock and the appropriation of land” reflects two of the most significant forces in his story of humankind’s evolution. Appropriation of land is a seminal development in humankind’s evolution because it makes possible the agricultural stage of production, the stage in which 13

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our capacity to support large civilizations emerges. And as his story unfolds, accumulation, more than any other factor, is the engine of improvement for it is accumulation that provides the resources for the ever finer division of labor. After reviewing the returns to production in a rude state wherein the entire product goes to labor since all production is from unaided labor, Smith introduces the liberating and complicating factor of accumulation. It is both complicating and liberating because it empowers the complexity and productivity of the division of labor. It is further complicating because it makes the distribution of the fruits of production more complex. The worker must receive a share and so too “something must be given for the profits of the undertaker of the work who hazards his stock in this adventure” (WN, p. 66). And so too the landlord must be compensated. “As soon as the land of any country has all become private property, the landlords, like all other men, love to reap where they never sowed, and demand a rent even for its natural produce” (WN, p. 67). Thus, with the “the accumulation of stock and the appropriation of land” the component parts of price must encompass a return to the worker (wage), to the undertaker (profit), and to the landlord (rent). “[I]n every improved society [that is, in one that has advanced in the stages with the accumulation of stock and the appropriation of land], all the three enter more or less, as component parts, into the price of the far greater part of commodities” (WN, p. 68). In this chapter, as in the preceding ones, Smith is establishing the assumptions (e.g. the propensity to truck, barter and exchange), the principles (e.g. the division of labor enhances productivity and that commutative justice enhances efficiency and distributive justice12), and the definitions (e.g. profit) he will use. In so doing he is constructing the foundation of his story. This is the purpose of Book I of The Wealth of Nations. In these eleven chapters Smith is building the base that will support the structure of his story (e.g. the four stages), represent the dynamic of the system he will be describing (e.g. the association of accumulation with improvement), and allow rich analysis of the issues that he will be exploring (e.g. the impact of political power in markets). For example, here in Chapter 6 as he introduces the terms profit and interest, Smith distinguishes them carefully because this distinction becomes pivotal in his comparative analysis of advanced societies.

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[Profit is the return] derived from stock, by the person who manages or employs it. That [return] derived from it by the person who does not employ it himself, but lends it to another, is called the interest or the use of money. It is the compensation which the borrower pays to the lender, for the profit which he has an opportunity of making by the use of the money. Part of that profit naturally belongs to the borrower, who runs the risk and takes the trouble of employing it; and part to the lender, who affords him the opportunity of making this profit . . . (WN, p. 69).

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Later in Book I, Chapter 9 he clarifies his use of profit and interest further, distinguishing between “neat or clear profit” and “gross profit” (WN, p. 113). The net profit is the “lowest ordinary rate of profit . . . sufficient to compensate ‘the risk . . . [and to provide] a sufficient recompence for the trouble of employing the stock” (WN, pp. 113–114). The “interest on money . . . [l]ike rent on land, . . . is a neat produce which remains after completely compensating the whole risk and trouble of employing the stock” (WN, pp. 847–848) Thus, for Smith profit is a return to productivity activity, but interest “[l]ike rent on land” is not. Based on this distinction Smith describes the distributive condition in a “well governed society” that has exploited all of the current domestic opportunities for the division of labor as follows:

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In a country which had acquired its full complement of riches, where in every particular branch of business there was the greatest quantity of stock that could be employed in it, as the ordinary rate of clear profit would be very small, so that usual market rate of interest which could be afforded out of it, would be so low as to render it impossible for any but the very wealthiest people to live upon the interest of their money13 (WN, p. 113).

“Holland [which “in proportion to the extent of its territory and number of people, is a richer country than England” (WN, p. 108)] seems to be approaching near to this state” (WN, p. 113). In contrast, he notes that in “China [which] seems to have been long stationary . . . [t]welve percent . . . is said to be the common interest of money . . . and the ordinary profits of stock must be sufficient to afford this large interest” (WN, pp. 111–112). He argues that this high interest rate in China is a function of “laws and institutions . . . [that] establish the monopoly of the rich” (WN, p. 112). This digression on profit and interest allows us to appreciate what Smith is doing in Chapter 6. He is setting out a language of distribution that will be an essential tool for his complex analysis of national growth, stagnation, and decline – a central thread in his story of The Wealth of Nations that is to follow. As he concludes Chapter 6, Smith asserts that If the society was annually to employ all the labour which it can annually purchase, as the quantity of labour would increase greatly each year [since given the division of labor, labor can produce more than its own subsistence], so the produce of every succeeding year would be of vastly greater value than that of the foregoing. But there is no country in which the whole annual produce is employed in maintaining the industrious. The idle everywhere consume a great part of it; and according to the different proportions in which it is annually divided between those two different orders of people, its ordinary or average value must either annually increase, or diminish, or continue the same from one year to another (WN, p. 71).

Again Smith is framing our mind for what is to come. Increased accumulation is the engine of growth because it is accumulation that finances the ever finer 15

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division of labor. Increasing accumulation is possible where “the produce of every succeeding year would be of vastly greater value than that of the foregoing.” But whether increasing production in a given year leads to accumulation, growth, further increases in accumulation and in turn further growth depends significantly on the proportions of the current accumulation that are applied to “productive and unproductive labour” (WN, p. 330). This part of the story – his analysis of productive vs. unproductive labor – is still a long way off (Chapter 3 of Book II), but Smith alludes to the issue here for as he is building the foundation of the story to come he is preparing us for what is to come.

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8. BOOK I, CHAPTER 7: OF THE NATURAL AND MARKET PRICE OF COMMODITIES

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Having defined and analyzed the component parts of commodities, Smith turns to definitions and analysis of natural and market prices. The natural level of a commodity’s price (or of a distributive share – wage, rent, and profit) is that level which is ordinary and customary for that society in the given neighborhood. Here Smith’s uses “neighborhood” to encompass the extent of the market. What is natural is determined by the “general circumstances” in the market (WN, p. 72). The natural price of a commodity reflects “what it really costs the person who brings it to market [the real cost of production] . . . where there is perfect liberty” (WN, pp. 72–73). Again his purpose in Book I is to establish a conceptual frame of reference for further analysis. The key to the frame he is constructing here is the phrase “where there is perfect liberty.” This is Smith’s shorthand for the freedom and thus the fluidity of movement of people and resources that exists in a liberal society. Having established the concept of natural price, Smith introduces market price. Market price is the actual price at which a commodity is sold. The market price is determined by the relationship between the “effectual demand” (WN, p. 73) – the quantity demanded at the natural price, and the quantity actually supplied in the market. If the effectual or effective demand is equal to the quantity supplied, the market price will equal the natural price. If the effective demand is greater (less) than the quantity supplied, the market price will be higher (lower) than the natural price. Given perfect liberty the market price will oscillate around the natural price, the degree of oscillation depending on the volatility of the quantity supplied. “[Y]et sometimes particular accidents, sometimes natural causes, and sometimes particular regulations of police, may, in many commodities, keep up the market price, for a long time together, a good deal above the natural price”14

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(WN, p. 77). Smith cites as examples of these, respectively: trade or manufacturing secrets, particularly productive land (e.g. a unique vineyard), “exclusive privileges of corporations, statutes of apprenticeship, and all those laws which restrain, in particular employments, the competition . . .” (WN, p. 79). Here again Smith is both building the foundation for the analysis to follow and framing our minds by anticipating some central issues in that analysis. His reference to “particular accidents, sometimes natural causes, and sometimes particular regulations of police” reflects a constant thread in his story: Events in humankind are never as simple as straight theory suggests because there are invariably these disturbing forces that affect the dynamics. His interest is in theory only so far as it affords us a point of departure for understanding the real course of human events. Thus, his analysis builds a theoretical foundation then focuses on how we can represent the actual twists and turns of real human events caused by the inevitable disturbing forces. For example, here he notes that a market price can be sustained at an artificially high level by “exclusive privileges of corporations, statutes of apprenticeship, and all those laws which restrain, in particular employments, the competition . . ..” This one line in Book I, Chapter 7 becomes the central theme of Book III, “Of the different Progress of Opulence in different Nations.”

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9. BOOK I, CHAPTER 8: OF THE WAGES OF LABOUR

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Having defined and analyzed price terms, Smith returns to the component parts – first wages. Smith’s analysis of wages begins in the rude state before the “appropriation of land and the accumulation of stock.” In that world “the whole produce of labour belongs to the labourer” (WN, p. 82). From that point of departure he quickly transitions to the more advanced and complex case of a world in which the laborer works for “the owner of stock . . . [In this case w]hat are the common wages of labour depends . . . upon the contract usually made between those two parties, whose interests are by no means the same” (WN, p. 83) He continues: It is not . . . difficult to foresee which of the two parties must, upon all ordinary occasions, have the advantage in the dispute, and force the other into a compliance with their terms. The masters, being fewer in number, can combine much more easily; and the law, besides, authorises, or at least does not prohibit their combinations, while it prohibits those of the workmen (WN, p. 84).

This segment of his story reflects Smith’s basic values with respect to distributive justice and his ongoing concern with respect to commutative justice. As I noted earlier, Smith’s metric of a good society is how the least among the working class are doing. His concern here is that the natural asymmetry of 17

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power in labor markets can artificially depress wages. This concern is deepened by his awareness that the political power structure and thus the legal system are often stacked against the workers.15 Having expressed this concern, he goes on to argue that the best state for workers is the advancing state. In such a world accumulation outstrips the population, and thus there is a competition for the available workers which raises wages. In contrast, in the stationary state as population grows it outstrips the level of accumulation. In such a world “the competition of the labourers and the interests of the masters would soon reduce them [the workers] to this lowest rate which is consistent with common humanity” (WN, p. 89). Smith asserts therefore that “[i]t is not the actual greatness of national wealth, but its continual increase, which occasions a rise in the wages of labour . . . [And since high wages encourage population growth, t]he most decisive mark of the prosperity of any country is the increase in the number of inhabitants” 16 (WN, pp. 87–88). And what is his best predictor of how any given state will fare given this metric of success? The “nature of its laws and institutions” (WN, p. 89). In Smith’s story of humankind’s evolution, there are two kinds of limits. There is the ultimate limit set by the deity – that ideal liberal society of independent beings enjoying perfect liberty, making the most for all, and doing well for the least. This is the point of reference against which all societies can be compared to determine their level of advancement. Then there are the artificial limits a society imposes on itself by “the nature of its laws and institutions”. Smith highlights this in Chapter 8 as he compares China where the laws and institutions (e.g. the monopoly of the rich cited above) have caused it to stagnate with the “present [declining] state of Bengal” where “[w]ant, famine, and mortality” prevail, and with the excellent material conditions in British American colonies. These last two cases make a particularly stark comparison because they are both run by the British. So to what does Smith ascribe the difference in the conditions of these latter two cases?

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The difference between the genius of the British constitution which protects and governs North America, and that of the mercantile company which oppresses and domineers in the East Indies, cannot perhaps be better illustrated than by the different state of those countries (WN, p. 91).

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To understand Smith’s Inquiry into the Nature and Causes of the Wealth of Nations it is essential that one understand his story of government in the evolution of humankind’s succession of experiments in social construction. In hunting and gathering there is very little government because there is minimal interdependence and the very small size of the interdependent groups makes consensus possible. In pasturage Government (the political entity) begins to

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grow as the increasing size of society means more interdependence even as the emergence of property rights in animals require rules of ownership and intercourse. In agriculture Government becomes much larger still because society is much larger and thus interdependence becomes much greater, and because property rights in land are exponentially more complex than such rights in livestock. In Smith’s story the transition from agriculture to commercial society requires strong Government for the ever more complex issues of contract in the fluid environment of markets. But he believed that for a liberal, market society to flourish and approach its potential, the enforcement of rules by Government must ultimately give way to the enforcement of rules by government – by commonly accepted and broadly adhered to civic ethics. Big “G”, political, Government plays an essential instrumental role in this evolution because it provides the stability of security along the way and it is an essential medium for building consensus on the common rules as liberal society matures. But Government enforcement ultimately becomes an impediment to a liberal society – a fluid free space within which independent individuals interact.17 This larger vision of humankind’s evolution and its possibilities is the context within which The Wealth of Nations must be read. Every reference to the “nature of its laws and institutions,” to the collusion of masters based on unbridled selfinterest, to the monopoly of the rich is yet another reference to this context. Having made his case in Chapter 8 that the progressive state is one in which the laws and institutions are most just and that such a state is the best case for workers, Smith reminds us of why that matters: Is this improvement in the circumstances of the lower ranks of the people to be regarded as an advantage or as an inconveniency to the society? . . . [W]hat improves the circumstances of the greater part can never be regarded as an inconveniency to the whole. No society can surely be flourishing and happy, of which the far greater part of the members are poor and miserable. It is but equity, besides, that they who feed, cloath and lodge the whole body of the people, should have such a share of the produce of their own labour as to be themselves tolerably well fed, cloathed, and lodged (WN, p. 96).

Furthermore a progressive state with “a liberal reward for labour . . . increases the industry of the common people” (WN, p. 99) and it increases opportunity for independence of workers. This independence is important because it not only makes workers more productive, it makes them less vulnerable to the simplistic hyperbole of a “man of system” (TMS, p. 233) who in difficult times offers simple but appealing solutions to complex problems. The progressive development of liberal society requires thoughtful discourse. Smith believed that the dynamics of the market system that improved the lot of labor and made workers more independent contributed to the maturity of many workers as participants in this discourse. 19

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His one very significant caveat to this was that the division of labor can become so refined that these tasks make a large number of the lowest ranks of workers “as stupid and ignorant as it is possible for a human creature to become” (WN, p. 782). At this stage it is the responsibility of the state is to insure that education ameliorates this tendency and enhances the maturity of the common people. The state . . . derives no inconsiderable advantage from their instruction. The more they are instructed, the less liable they are to the delusions of enthusiasm and superstition . . . They are more disposed to examine, and more capable of seeing through, the interested complaints of faction and sedition, and they are, upon that account, less apt to be misled into wanton or unnecessary opposition to the measures of government. In free countries, where the safety of government depends very much upon the favorable judgment which the people may form of its conduct, it must surely be of the highest importance that they should not be disposed to judge rashly or capriciously concerning it (WN, p. 788).

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In Smith’s vision of liberal society it is not the police that make the state strong. It is the people. In such a society the “nature of its laws and institutions” are evolving most constructively where they enhance the maturity of the citizens.

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10. BOOK I, CHAPTER 9: OF THE PROFITS OF STOCK

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Smith’s story of profits is central to his larger evolutionary story. The division of labor increases productivity. This greater productivity means that in each successive cycle of production the aggregate wealth increases. This increase in wealth represents a greater pool of stock for accumulation. Where there is perfect liberty, in a liberal society, this accumulated stock flows to its best advantage. Returns from what are initially the best opportunities are driven down until at some point the returns from alternative opportunities become equally attractive. This diffusion of the available stock across the entire economy continually drives down the rate of profit and extends the margins of investment. The degree of this effect on the rate of profit and on the extent of the margin is determined by the quantity of stock available. The limiting point of this dynamic is in a country fully stocked in proportion to all the business it had to transact, [where] as great a quantity of stock would be employed in every particular branch as the nature and extent of trade would admit. The competition, therefore, would everywhere be as great, and consequently the ordinary profit as low as possible. But perhaps no country has ever yet arrived at this degree of opulence (WN, p. 111).

One reason why no country has reached this condition is that, as Smith understands very well “[t]he proprietor of stock is properly a citizen of the

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world, and is not necessarily attached to any particular country” (WN, pp. 848–849) At some point, as the opportunities for the domestic employment of stock are filled and the domestic rate of profit falls, stock will spill over into the larger international arena. Holders of stock will move out in search of attractive risk adjusted rates of return. This story of stock and its spilling into ever wider spheres of opportunity is the central theme of Book II: “Of the Nature, Accumulation, and Employment of Stock.” Here in Chapter 9, Book I he lays the groundwork for Book II. At the outset of Chapter 9, Smith briefly explores the statutory history of the British rate of interest. In the course of that story he weaves in the impact of religion in that dynamic.18 This then segues into a comparative analysis of interest rates in Europe. As his context sensitive theory suggests, more mature laws and institutions bring progress and progress means lower interest rates. But lower interest rates bring bitter complaints from the merchants and mastermanufacturers. Complaints that, as we have seen, he denigrates as patently selfserving. This style, setting his theory into historical perspective in order to show how the theory works in context, becomes more and more the method of the text as Smith has more and more of his theoretical framework to work with.

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11. BOOK I, CHAPTER 10: OF WAGES AND PROFIT IN THE DIFFERENT EMPLOYMENTS OF LABOUR AND STOCK

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The opening paragraph of Chapter 10 is a capsule image of the dynamics of competition and of the effect of such competition on the allocation of resources and the distribution of returns in the ideal liberal order. In such a society all resources are used to their best advantage (most efficiently) and the returns to those resources are driven to the level of “ordinary” (WN, p. 118) or normal returns – just enough compensation to cover the opportunity cost of a given allocative choice. The whole of the advantages and disadvantages of the different employments of labour and stock must, in the same neighbourhood, be either perfectly equal or continually tending to equality. If in the same neighbourhood, there was any employment evidently either more or less advantageous than the rest, so many people would crowd into it in the one case, and so many would desert it in the other, that its advantages would soon return to the level of other employments. This at least would be the case in a society where things were left to follow their natural course, where there was perfect liberty, and where every man was perfectly free both to chuse what occupation he thought proper, and to change it as often as he thought proper. Every man’s interest would prompt him to seek the advantageous, and to shun the disadvantageous employment (WN, p. 116).

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This is not to suggest that in the ideal case every allocation of a resource will receive the same rate of return. Immediately following this opening paragraph he notes that the “[p]ecuniary wages and profit, indeed, are every-where in Europe extremely different according to the different employments of labour and stock” (WN, p. 116). In Part I of Chapter 10 he explores the natural causes of differences in different employments of labor and stock. In Part II he explains those differences that result from artificially created impediments that distort the natural course of events and thus lead to unnatural differences in the relative returns of different employments of labor and stock. This distinction between natural and artificial differences in returns, turns on Smith’s concept of “perfect liberty.” In the limiting case of the ideal liberal society, there is perfect liberty and thus there are no distortions and so there are no sustained, artificially high or low returns. But private collusion and/or public power can be used to create artificial market advantages that in turn generate sustained artificial distributive advantages.19 Indeed, these public and private sources of power are often complements to one another. Recall the “[m]asters [who] are always and every where in a sort of tacit, but constant uniform combination . . . sometimes . . . to sink the wages of labour below this [natural] rate.” When the workers form a “defensive combination” and “clamour” for higher wages, “[t]he masters upon these occasions are just as clamorous upon the other side, and never cease to call aloud for the assistance of the civil magistrate, and the rigorous execution of those laws which have been enacted with so much severity against the combinations of servants, labourers, and journeymen” (WN, pp. 84–85). This is an example of an ongoing thread that is woven throughout The Wealth of Nations: the dynamics of individuals’ interests and Government policy. This thread is important because it is one of those that stitches Smith’s story in The Wealth of Nations to the larger story he laid out in The Theory of Moral Sentiments and the Lectures on Jurisprudence. Government is an instrumental structure in Smith’s full story. Its power can be used to protect society, as through the military, to improve society, as through education, or to create or exploit advantages, as just cited. The ultimate source of the force that moves the social dynamic lies not in Government, however. It lies in individual citizens. In Smith’s story the strongest spring that moves an individual is self-love, but the direction of that movement depends on the person’s balance of sentiments: The balance among self-love, justice, and beneficence that lies in the breast of the individual. The “laws and institutions” of a society – the constraints and values embodied in Government, religion, and social mores – are essential factors in determining the balance of sentiments in each individual. But given each person’s unique biography, the balance in each individual is unique. It is the full force of all those unique individual citizens pursuing “the

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ordinary business of life” (Marshall, p. 1),20 interacting with one another and with Government and in the process reshaping one another and Government, that determines the society’s course. To the degree the balance of sentiments of individuals is consistent with the deity’s design that course will be most natural and toward the ideal. To the degree it is not, distortions occur and the society can stagnate or decline. Part I of Chapter 10 explores distribution in the natural, undistorted condition. Part II explores the case of distortions.

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Part I: Inequalities [In Wages and Profits] Arising from the Nature of the Employments Themselves

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In Part I Smith examines the question: What causes variations in wages and profits when there is perfect liberty and no artificial advantages are sustainable? He cites five basic sources of variation. First it is possible that different employments offer different psychic benefits, “agreeableness or disagreeableness” (WN,p. 116). Second there are differences in the psychic and pecuniary cost of acquiring the human capital necessary for the employment. Third is “the constancy or inconstancy of employment” (WN, p. 116). Fourth is the degree of trust required. Fifth is “the probability or improbability of success,” (WN, pp. 116–117) the risk factor. He asserts that all five of these affect wages, but only the first and last affect profits. Having laid out the conditions that given rise to naturally occurring differences in different employments, he then proceeds to tell stories that exemplify his points. His stories are at one and the same time familiar, theoretical, and empirical. He chooses examples that are familiar, sets them into his theory of stages, and uses current events and history as evidence that his analysis of differential returns in the context of these stages is not only intuitively appealing but is empirically valid. So for example, he begins with hunting and fishing – activities that would be very familiar to his audience. He makes the point that while these were “the most important employments of mankind in the rude state of society,” in the advanced state they have become “amusements.” “In the advanced state of society, therefore, they are all very poor people who follow as a trade, what other people pursue as a pastime. Fishermen have been so since the time of Theocritus”21 (WN, p. 118). In another example he reflects his view of his own work when discussing risk as it relates to investments in human capital. He asserts that “in the liberal professions” the “probability that any particular person shall ever be qualified for the employment to which he is educated . . . [is] very uncertain.” He initially compares the bet to “a perfectly fair lottery, [a zero sum game in which] those who draw the prizes ought to gain all that is lost by those who draw the blanks” 23

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(WN, p. 122). So given the great expense of the investment and the great risk of failure, one would expect the return to be very high in the liberal professions. But it is not so high as the theory predicts. The reason is twofold. First as in most lotteries, the game is not zero sum but negative sum because “the chance of gain is naturally overvalued, [a fact] we may learn from the universal success of lotteries”22 (WN, p. 125). Second a great deal of the benefits are psychic. To excel in any profession, in which but few arrive at mediocrity, is the most decisive mark of what is called genius or superior talents. The public admiration which attends upon such distinguished abilities, makes always a part of their reward; a greater or smaller in proportion as it is higher or lower in degree. It makes a considerable part of the reward in the profession of physick; a still greater perhaps in that of law; in poetry and philosophy it makes almost the whole (WN, p. 123).

This from a professor of moral philosophy. Smith’s story here in Chapter10, Part I is a sequel to and an enrichment of the “natural” level logic presented in Chapter 7. If perfect liberty prevails there can within a given market be no sustainable advantage in the return to any specific allocation. There can, however, be differences in the natural level of wages and profits across employments due to differences in the nature of the employments. Five factors affect relative wages. Two of these affect the profits of stock, but the primary natural determinant of differences in profit is variation in risk (WN, p. 127).23 Toward the end of Part I, Smith makes a passing point about profits that anticipates a very important element in his unfolding story of The Wealth of Nations. He notes that

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In small towns and country villages, on account of the narrowness of the market, trade cannot always be extended as stock extends. In such places, therefore, though the rate of a particular person’s profits may be very high, the sum or amount of them can never be very great, nor consequently that of his annual accumulation. In great towns, on the contrary, trade can be extended as stock increases, and the credit of a frugal and thriving man increases much faster than his stock. His trade is extended in proportion to the amount of both, and the sum or amount of his profits is in proportion to the extent of his trade, and his annual accumulation is in proportion to the amount of his profits (WN, p. 130).

Here again, as in Chapter 9, Smith is anticipating and framing our mind for Book II: “Of the Nature, Accumulation, and Employment of Stock.” The story there will turn on how if “trade can be extended as stock increases”, this vent for increasing stock encourages growing accumulation and provides an engine for the expanding wealth of the nation. But before we get there, Smith has to fill out his analysis of distribution, because distribution and especially distortions in distribution have a significant impact on a society’s ability to accumulate and are the rule rather than the exception in the story of humankind’s actual progress.

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Part II: Inequalities Occasioned by the Policy of Europe

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Having established his theoretical structure and his empirical method for analyzing distributive differences, Smith now offers a rich historical example to support his proposition that distortions of perfect liberty have distributive consequences. This proposition is important to his larger story of The Wealth of Nations because these distributive consequences generally impede or discourage accumulation. Lacking accumulation the engine of material progress is denied its fuel and the nation can suffer stagnation or decline. And as we saw earlier in his comparisons of the American colonies, China, and Bengal, this story of the progress, stagnation, or decline of a given society often turns on the degree to which its laws and institutions do the distorting. And so as always the structure of laws and institutions is never far from the heart of the story of The Wealth of Nations. In the case of the inequalities occasioned by the policy of Europe, these inequalities are largely the consequence of laws and institutions. The “policy of Europe, by not leaving things to perfect liberty, occasions other inequalities [beyond the natural ones] of much greater importance” (WN, p. 135). These policies create distributive distortions in three ways. They artificially reduce the amount of labor or stock in a market by limiting access. They artificially bloat the amount of labor or stock in a market by enforcing allocation. They obstruct “the free circulation of labour and stock, both from employment to employment and from place to place” (WN, p. 135). “The exclusive privileges of corporations are the principal means” of artificially reducing the amount of labor or stock in a market by limiting access (WN, p. 135). Smith points to laws of apprenticeship in incorporated trades as a classic case in point. He traces the story of these incorporations24 to the “Statute of Apprenticeship” in England in 1562. From there he traces the twists and turns of law. He observes along the way that “by interpretation its operation has been limited to market towns” (WN, 137), noting that this interpretation was based on expediency given the limited extent of the market in country villages. He continues:

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By a strict interpretation of the words too the operation of this statute has been limited to those trades which were established in England before the 5th of Elizabeth, and has never been extended to such as have been introduced since that time. This limitation has given occasion to several distinctions which, considered as rules of police, appear as foolish as can well be imagined (WN, p. 137).

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Completing his review of this foolishness in England he compares the state of these laws in England with those in France and Scotland. 25 25

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He then turns to his explanation of why they are foolish – they are a selfinflicted distortion. They violate perfect liberty for they are “manifest encroachment upon the just liberty both of the workman, and of those who might be disposed to employ him” 26 (WN, p. 138). But while this injustice is abhorrent to Smith, he is not against regulation per se. In a world of imperfect beings, to the degree we are imperfect there is a case to be made for the magistrate imposing rules that insure just intercourse. So do apprenticeship laws qualify as reasonable police by the magistrate? No. According to Smith the justification of the apprenticeship laws was that they are a means of insuring that quality work will be brought to the market. But, he argues, insufficient workmanship “is generally the effect of fraud, and not of inability; and the longest apprenticeship can give no security against fraud. Quite different regulations are necessary to prevent this abuse. The sterling mark upon plate, and the stamps upon linen and woollen cloth, give the purchaser much greater security than any statue of apprenticeship” (WN, pp. 138–139). This apprenticeship case highlights an important point about Smith’s attitude toward Government in his story of humankind’s evolution. In the latter stages of humankind’s evolution as freedom in markets unfolds, the role of Government is directly proportional to the number of citizens who do not share a commitment to a mature, common set of civic values. Where there are such people there will be fraud and Government has a responsibility to deal with fraud. But a responsible Government carries out its policing powers by the least intrusive policing (regulations) possible. Where Government does more, it is “impertinent as well as oppressive” (WN, p. 138) and such overbearing action is often evidence of a motive other than insuring just interaction among individuals. It can reflect rent-seeking or rent-maintenance behavior. This is precisely the purpose Smith sees in the overbearing apprenticeship laws about which he writes that “[i]t is to prevent this reduction of price [that would come with free competition], and consequently of wages and profit, by restraining that free competition which would most certainly occasion it, that all corporations, and her greater part of corporations laws, have been established” (WN, p. 140). While apprenticeships serve the master and the apprentice, they do not serve the market for by eliminating competition they reduce the incentive for “diligence and attention” by the worker (WN, p. 140) and thus reduce the efficiency and increase the cost of production. If the market distortion caused by apprenticeships was eliminated “the public would be the gainer, the work of all artificers coming in this way much cheaper to the market” (WN, p. 140). In order to explain the source of the power that enables traders and artificers to enjoy the protection of apprenticeship laws Smith returns to a theme he

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presented earlier in his analysis of the relationship between masters and workmen – collusion27 and power. The ability of traders and artificers to collude and thus their power derives from their location together in towns. He argues that historically “[t]he government of the towns corporate was altogether in the hands of the traders and artificers” (WN, p. 141). Given this power the various trades allowed one another to form corporate constraints limiting entry into their trades, making it possible for all of them to exploit the unorganized people in the country. While in many parts of Europe this power of corporation was the complete prerogative of the town, “[i]n England . . . a charter from the king was . . . necessary. But this prerogative of the crown seems to have been reserved rather for extorting money from the subject, than for the defence of the common liberty against such oppressive monopolies” (WN, p. 140). The consequence of this distortion of power was a distortion of distribution. Towns got a disproportionate share of the social product and thus were able to accumulate much more than the country. But to the degree there is liberty, markets do work their magic. The engrossment of accumulation in the towns led to an engorgement of accumulation, and this meant falling profit rates. Smith describes the ensuing dynamic as follows:

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It [the accumulated stock] then spreads itself, if I may say so, over the face of the land, and by being employed in agriculture is in part restored to the country, at the expence of which, in a great measure, it had originally been accumulated in the town. That everywhere in Europe the greatest improvements of the country have been owing to such overflowings of stock originally accumulated in towns, I shall endeavour to show hereafter; and at the same time to demonstrate, that though some countries have by this course attained to a considerable degree of opulence, it is in itself necessarily slow, uncertain, and in every respect contrary to the order of nature and of reason. The interests, prejudices, and laws and customs which have given occasion to it, I shall endeavour to explain as fully and distinctly as I can in the third and fourth books of this enquiry (WN, p. 145).

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As Smith makes clear, this brief summary is a rich representation of significant themes in his story of The Wealth of Nations that will unfold more fully in Books III and IV. Let’s take a moment to reflect on what these themes are. First and foremost, consider the premise of the paragraph just cited. Private and public power, collusion among tradesmen and political prerogative to create corporations respectively, were used to create distortions of distribution and in turn skewed opportunities for accumulation. This is what the towns accomplished. But, rising accumulation means lower profit rates, and where capital stock enjoys perfect liberty it will overflow from the towns “spread[ing] itself . . . over the face of the land”. In the case of England, and as he will show – in the case of Europe more generally, this very unnatural course of events did not lead to stagnation or decline, but it did result in a “necessarily slow, uncertain” progress of opulence. 27

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This slow, uncertain progress, “in every respect contrary to the order of nature and of reason,” is the consequence of political structures that existed for the purposes of “extorting money . . . [rather] than for the defence of the common liberty against . . . oppressive monopolies.” Having explored apprenticeship as a policy of Europe that limits access to markets, Smith then turns to subsidies for training that artificially glut a market. His example is the subsidization of education for those who are intended for the clergy28 and the attendant spillover effect in the market for “men of letters” (WN, p. 148). While this glut is inefficient, Smith sees a positive unintended consequence of the distortion. It reduces the cost of education, in turn expanding access. Since Smith views education as a key tool for building a thoughtful citizenry, more access – whatever the reason for it – is good for society’s progress. The last distorting policy of Europe he identifies is those “absurd laws” (WN, p. 151) that limit the mobility of labor and stock. For example, because of the poor laws “it is often more difficult for a poor man to pass the artificial boundary of a parish, than an arm of the sea or a ridge of high mountains, natural boundaries which sometimes separate very distinctly different rates of wages in other countries” (WN, p. 157). In Smith’s story of The Wealth of Nations prefect liberty is very important because it allows the free flow of labor and stock to their best advantage. This free flow not only eliminates all distributive advantages, it leads to the most productive allocation of all resources. Resources always move along the path of greatest net opportunity. Given that transport costs (including the risk) are normally lowest in the home market, resource holders naturally look at home first for opportunities. But as population and stock expand in the home market, the wage and profit returns there decline. At some point, even adjusting for transport costs, the more distant opportunities beckon and so labor and stock begin to spread over the land. This is good for the resource holders because it allows them to better their condition. In doing so this improves the performance of the economy because it allows resources to flow to their best advantage.29 The policies of Europe that lock resources in locationally artificially restrict resource flows and thus diminish the possibilities for the division of labor, for increased accumulation, and consequently for greater productivity and growth. As Smith lays out his theory of distribution in Chapter 10 his purpose is practical, not metaphysical. He is putting together the analytical structure he will use in Book II where he presents his dynamic growth theory and in Book III where as he demonstrates the power of that theory in the context of European history. In Chapter 11 Smith adds the last piece to his analytical structure before he begins the growth theory of Book II.

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But before we move on to Chapter 11, one last point from Chapter 10 is worth highlighting. In the course of discussing the perverse effects of apprenticeship laws on the diligence and industry of workers, Smith contrasts those workers with the “common farmer.” He writes that [t]he common ploughman, thought generally regarded as the pattern of stupidity and ignorance, is seldom defective in his judgment and discretion. He is less accustomed, indeed to social intercourse than the mechanick who lives in a town. His voice and language are more uncouth and more difficult to be understood by those who are not used to them.30 His understanding, however, being accustomed to consider a greater variety of objects, is generally much superior to that of the other, whose whole attention from morning till night is commonly occupied in performing one or two very simple operations. How much the lower ranks of people in the country are really superior to those of the town, is well known to every man whom either business or curiosity has led to converse much with both (WN, pp. 143–144).

This quotation reflects some important characteristics of Smith’s method and vision. With respect to method, we hear Smith the empiricist asserting that to the degree it is possible the way to know your world is to experience it. There are many places in Smith’s work where his references to day to day life reflect a life rich in observation.31 And again we hear his concern with the division of labor creating dullness of mind. Smith is concerned with the least among the working class both because their well being is his metric for a good society, and because their maturity is the primary determinant of the stability of a mature, liberal society. The key to the progress in the liberal experiment is to exploit the benefits of the division of labor while insuring that the least among the working class have the personal maturity of the yeoman farmer. Education is the policy tool for making this happen. For Smith the term “lower ranks” does not imply inferior beings. He has immense respect for the independent yeoman farmer. We are all made from the same coarse clay.

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12. BOOK I, CHAPTER 11: OF THE RENT OF LAND

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In Chapter 11 of Book I Smith adds the last tool to his analytical tool kit – the concept of rent on land. As always, his concern is not with the metaphysics of rent. Rent is important because of the role it plays in the progress of opulence and because it provides a very clear signal of that progress. In the opening pages of this very long chapter Smith defines rent and establishes its relationship to wages and profits. Unlike wages or profits (net of interest), rent is not a return to productive activity. “The rent of land . . . is natu29

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rally a monopoly price” 32 (WN, p. 161). Here his language suffers a bit. Earlier he contrasted natural price, “the lowest which can be taken . . . for any considerable time,” and monopoly price, “the highest which can be got” 33 (WN, pp. 78–79). Yet this monopoly price, rent, has a natural level – the ordinary level that equally well-cultivated and fertile land in a given neighborhood can command. An unnatural rent would be “the rent of some vineyards in France” – a rent above the level of “equally fertile and equally well-cultivated land in its neighbourhood” 34 (WN, p. 78). Smith’s adoption of natural rent is a reflection of his usage of natural here as meaning “ordinary”. Since even where there is perfect liberty much of the land receives a rent, the ordinary level of that rent is the natural level for that neighborhood. This ordinary level of rent is, along with the ordinary wages and profits, a component of the natural price of a product. But rent enters into the price in a different way than wages and profits. The latter two are built into the price because together they constitute the cost of production – the supply cost that must be covered if a product is to be brought to market. Rent on the other hand “depends upon the demand” (WN, p. 162). If demand is sufficient to raise price above the cost of production, then “the surplus part of it will naturally go to the rent of the land” (WN, p. 161). This is so because in a competitive environment the landlord will extract “the highest [rent] the tenant can afford to pay in the actual circumstances of the land” (WN, p. 160). Having established the concept of rent and the relationship of rent to price, Smith moves on to his consideration, first, of those parts of the produce which always afford some rent; secondly, of those which sometimes may and sometimes may not afford rent; and, thirdly, of the variations which, in the different periods of improvement, naturally take place in the relative value of those two different sorts of rude produce, which compared both with one another and with manufactured commodities . . . (WN, p. 162).

He makes it clear in this transition that his story of rent is going to be told in the context of his evolutionary analysis of humankind’s progress. Indeed, the value of the rent concept is that it offers Smith a rich tool for analyzing transitions in this evolutionary story.

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Part I: Of the Produce of Land Which Always Affords a Rent

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To set the scene here Smith reviews the conditions that determine rent, the “fertility” and the “situation” of the land (WN, p. 163). By situation he means the extent of the market. Ceteris paribus, the greater the extent the higher the rent. The extent of the market is largely a function of transportation costs (including risk). “Good roads, canals, and navigable rivers, by diminishing the

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expense of carriage, put the remotest parts of the country more nearly upon a level with those in the neighbourhood of towns. They are upon that account the greatest of all improvements” (WN, p. 163). These improvements extend the market and, ceteris paribus, increase rents. This point anticipates a key role rent plays in Smith’s story. Ceteris paribus, higher rents are a sign of greater improvements and progress. He observes that “not more than fifty years ago . . . some of the counties in the neighbourhood of London, petitioned the parliament against the extension of the turnpike roads into the remoter counties” (WN, 164). Those in the proximity of London feared that the outlying areas, having cheaper labor, would undercut their position in the London market and thereby reduce rents in the local area. In fact, however, “[t]heir rents have risen, and their cultivation has been improved since that time” (WN, p. 164). As his theory predicts, the extension of the market did raise rents. So what is the dynamic that underlies this process of rising rents? In classic form, Smith begins his analysis in the rude state. He sets the scene for this story with the following premise:

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A corn field of moderate fertility produces a much greater quantity of food for man, than the best pasture of equal extent. Though its cultivation requires much more labour, yet the surplus which remains after replacing the seed and maintaining all that labour, is likewise much greater. If a pound of butcher’s-meat, therefore, was never supposed to be worth more than a pound of bread, this greater surplus would everywhere be of greater value, and constitute a greater fund both for the profit of the farmer and the rent of the landlord. It seems to have done so universally in the rude beginnings of agriculture. But the relative values of those different species of food, bread and butcher’s-meat, are very different in different periods of agriculture (WN, p. 164).

In the rude state the vast majority of land is uncultivated, the domain of free grazing cattle. As a result butcher’s-meat is cheap relative to corn. Smith cites evidence from “Byenos Ayres, . . . [as] told by Ulloa,” (WN, p. 164) to support this image. But as cultivation extends into the wilds, the scope of grazing becomes constrained and more distant from centers of population relative to the land under cultivation. As this dynamic continues the supply of butcher’s-meat from the unimproved lands lags behind the demand and so “the price of butcher’smeat becomes greater than the price of bread” (WN, p. 164). As the price of butcher’s-meat rises, the rents on the more distant uncultivated lands will rise. Smith notes that the union of Scotland and England (1707) which opened up English markets to cattle from the Scottish highland had precisely this effect. Then, as is his style, he notes that while there is a general rule, there are great variations in reality due to geographic circumstances. He cites for example 31

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the case in which a place is so populous relative to its hinterland that importation of corn is required. “Holland is at present in this situation, and a considerable part of ancient Italy, seems to have been so during the prosperity of the Romans” (WN, p. 166). These exceptions serve Smith, for by demonstrating that his analysis can represent them as peculiar circumstances that are consistent with his basic principles, he extends the reach and thus the credibility of his analysis. Over a number of pages he explores cases of rents that seem peculiar,35 like those that come from land producing “finer fruits” (WN, p. 170), or wine (WN, pp. 171–172), or sugar (WN, p. 173), or tobacco (WN, p. 174). In each case he identifies the natural or artificial peculiarity that makes for such high rents. Such natural conditions include the nature of the soil and the climate. Examples of artificial conditions include the case of wine in which the “laws . . . at present restrain the free cultivation of the vine” (WN, p. 171), and the case of “[t]he cultivation of tobacco [which] has . . . been most absurdly prohibited through the greater part of Europe” in order to make it pass through the custom house and thus make the collection of taxes easier (WN, p. 174). Having shown that the analysis can comfortably encompass the peculiar cases, he turns to corn for it is the basic food of Europe, and “[e]xcept in peculiar situations . . . the rent of corn land regulates in Europe that of all other cultivated land” (WN, p. 175).

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Human food seems to be the only produce of land which always and necessarily affords some rent to the landlord. Other sorts of produce sometimes may and sometimes may not, according to different circumstances. After food, cloathing and lodging are the two great wants of mankind (WN, p. 178).

In the rude state with land plentiful relative to population, clothing and lodging are available in “super-abundance” (WN, p. 178) relative to the demand, but not so food. “[N]inety-nine parts” “of the labour of the whole year” (WN, p. 180) must be spent on getting sufficient food. But when by the improvement and cultivation of land the labour of one family can provide food for two, the labour of half the society becomes sufficient to provide food for the whole. The other half, therefore, or at least the greater part of them, can be employed in producing other things or in satisfying the other wants and fancies of mankind. [And so begins the division of labor] (WN, p. 180).

Note the closing line “satisfying the other wants and fancies of mankind.” As Smith writes shortly after: “The desire of food is limited in every man by the narrow capacity of his stomach; but the desire of the conveniencies and

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ornaments of building, dress, equipage, and household furniture, seems to have not limit or certain boundary” (WN, p. 181). It is this characteristic in human nature, combined with the production possibilities that flow from the division of labor, that drives the use of land as humankind evolves. Smith’s analysis of rent is his way of tracking and representing this dynamic. Improvement in food production is the foundation of all other improvements. Given the limits of our capacity to eat, increased productivity in agriculture makes surpluses possible. These surpluses can support a greater population. The surplus production in agriculture becomes value used to demand non-agricultural commodities – items for which our desires are limitless. Demand for all these “conveniencies and ornaments” is largely socially determined since we desire them largely for conspicuous consumption. The affect on rents, Smith’s metric for demonstrating the effects he is describing, is that as society advances nonagricultural rents emerge and eventually surpass agricultural rents. As always there are peculiar exceptions, which can be understood as consistent with the larger story if we appreciate the implications of the peculiarity. For example, at the end of Part II Smith notes that mining rents behave differently than the normal case. The level of mining rents is relative to the fertility of the best mine, because prices for the mined materials are generally determined by scarcity. This is in contrast to the more general case of surface rents wherein the rents generally moves to a natural level because the quantity can expand to meet the effective demand.

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The increasing abundance of food, in consequence of increasing improvement and cultivation, must necessarily increase the demand for every part of the produce of land which is not food, and which can be applied either to use or ornament. In the whole progress of improvement, it might therefore be expected, there should be only one variation in the comparative values of those two different sorts of produce. The value of that sort which sometimes does and sometimes does not afford rent, should constantly rise in proportion to that which always affords some rent . . . This accordingly has been the case with most of these things upon most occasions, and would have been the case with all of them upon all occasions, if particular accidents had not upon some occasions increased the supply of some of them in a still greater proportion than the demand (WN, p. 193).

Smith’s brief digression at the end of Part II to explain the nature of rents in mining, sets the scene for his major case study in Part III – a long “Digression concerning the Variation in the Value of Silver during the Course of the Four last Centuries.” That “Digression” is a case study in the kind of 33

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“peculiar accidents” Smith cites in the opening paragraph of Part III quoted above. In his long “Digression” on silver, Smith both develops the reach of his tools of analysis (in this case rent) and he prepares the reader for the more complex and more rich analysis of humankind’s evolution with not only “peculiar accidents” but purposeful distortions. Silver makes an important case for several reasons. It is the commodity most often used as money, it is a commodity that has a global market,36 and it is the commodity considered by Mercantilists – mistakenly in Smith’s view – as a measure, with gold, of wealth in society. Smith divides his analysis of the changing value of silver relative to corn (his long term metric of value) into three periods: From 14th century to 1570, from 1570 to 1640, from 1640 to date. He begins by establishing as a point of departure that “[f]rom these different facts [(he cites and arranges information from an array of historical sources37)], therefore, we seem to have reason to conclude that about the middle of the fourteenth century, and for considerable time before, the average or ordinary price of the quarter of wheat38 was not supposed to be less than four ounces of silver, Tower-weight.” (WN, p. 197) Then according to Smith, beginning in the middle of the 14th century, the price of silver rose. He explains this rise as follows: As European societies increased productivity and expanded in population the effective demand for silver outstripped the quantity supplied. But if the value silver was constant until the 14th century and then growth caused it to start rising, what caused the take off in growth? Smith writes: In the end of the fifteenth and the beginning of the sixteenth centuries, the greater part of Europe was approaching towards a more settled form of government than it had enjoyed for several ages before. The increase of security would naturally increase industry and improvement; and the demand for the precious metals, as well as for every other luxury and ornament would naturally increase with the increase of riches (WN, p. 199).

Again, a central theme of Smith’s moral philosophy threads its way through his story. Better laws and institutions mean more security. More security means more growth because it encourages greater accumulation and more investments in productive human or physical capital. As he tells his story of silver’s rise Smith observes that his assertion that it rose is contrary to “the opinion . . . of the greater part of those who have written upon the price of commodities in ancient times . . .” (WN, p. 199). He cites three reasons for this difference. His reasoning reflects his attachment to empiricism and his consequent deep concern for empirical credibility. First he says that those other works did not carefully distinguish real from nominal values. Second, in some cases they used data that was sloppily “transcribed” (WN, p. 201). Third, other works took examples of low prices in ancient times

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as indicative of average prices. But this is misleading because in those more “turbulent and disorderly societies” prices were more volatile – so while lows may have been very low, the highs may have been very high, leaving the average above what is estimated.39 Having explained the empirical weaknesses of these contrary analyses he notes that “at the end of this chapter” he will lay out all of his data so that the reader can review it, and he explains his view on the strength and weakness of these data. He then goes on to defend, yet again, his choice of corn as his metric of value. Labour . . . is the real measure of the value both of silver and of all other commodities . . .. [W]e may rest assured, that equal quantities of corn will, in every state of society, in every stage of improvement, most nearly represent, or be equivalent to, equal quantities of labour, than equal quantities of any other part of the rude produce of land. Corn, accordingly, it has already been observed, is, in all the different stages of wealth and improvement, a more accurate measure of value than any other commodity or sett of commodities (WN, p. 206).

As I suggested when I discussed his analysis of value in Chapter 5. Smith’s concern with value is not metaphysical, it is empirical. He needs a consistent measure to tell his story of humankind’s evolution as reflected in its history. Corn serves that purpose. When he gets to the second period of his analysis, 1570 to 1640, there is no issue of empirical debate on the value of silver. All agree it was going down, and the reason is clear. “The discovery of the abundant mines of America, seems to have been the sole cause of this diminution in the value of silver in proportion to that of corn . . .. [Even though t]he greater part of Europe was, during this period, advancing in industry and improvement . . . the increase of the supply [of silver] had, it seems, so far exceeded that of demand, that the value of that metal sunk considerably” (WN, pp. 210–211). This peculiar accident of “discovery” reversed the natural course of events, but by 1636 this peculiar event was over and the natural course was renewed. Smith’s analysis of the third period begins in 1636. In this last period of his analysis he highlights the effect of human events that mitigated or even temporarily reversed the natural course – the rise of silver. The three events he cites are the civil war – which disrupted trade and thus raised the price of corn, the bounty on the exportation of corn, and the “great debasement of the silver coin” (WN, p. 212). And yet, these disturbing forces notwithstanding, the trend is up because “[s]ince the discovery of America, the greater part of Europe has been much improved. England, Holland, France, and Germany; even Sweden, Denmark, and Russia, have all advanced considerably both in agriculture and in 35

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manufactures” (WN, p. 220). At the same time growth in America and the East Indies, was also expanding the demand for silver. Smith uses a lot of data to tell this story. In the course of so doing his commentary is punctuated with comments like “Mr. Gregory King, a man famous for his knowledge in matters of this kind” (WN, p. 215), or “three very faithful, diligent, and laborious collectors of the prices” (WN, p. 216), or “and as there seems to be no reason to doubt of the good information of either” (WN, p. 222), or “[s]everal other very well authenticated, through manuscript, accounts, I have been assured, agree . . .” (WN, p. 227). This is Smith the empiricist making the case that the history on which he is basing his story is a credible history. Smith also observes in the course of his story that “[t]he Spanish colonies are under a government in many respects less favourable to agriculture, improvement, and population than that of the English colonies . . . [but] a fertile soil and happy climate, the great abundance and cheapness of land, a circumstance common to all new colonies, is, it seems, so great an advantage as to compensate many defects in civil government” (WN, pp. 221–222). Again, this reflects the dimensionality of Smith’s analysis of the conditions that encourage or discourage progress. Defects of civil government are at best a drag on progress and, as we have seen in the case of China and Bengal, can lead to stagnation or decline.

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Variations in the Proportion Between the Respective Values of Gold and Silver/Grounds of the Suspicion that the Value of Silver Still Continues to Decrease

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While, as the title of the first of these two short sections suggests Smith addresses questions about the relative value of gold and silver here,40 his real concern remains the flow and credibility of his larger story. So after some consideration of the relation between gold and silver, he returns to issues of silver value in recent years. In particular he addresses the effect that the reductions of taxes on silver have on his argument that silver is rising in value. One can hear his pained awareness that the case is not so clear when he writes: That, notwithstanding this reduction, the value of silver has, during the course of the present century, begun to rise somewhat in the European market, the facts and arguments which have been alleged above, dispose me to believe, or more properly to suspect and conjecture; for the best opinion which I can form upon this subject scarce, perhaps, deserves the name of belief (WN, p. 233).

This is a very forthright and honest statement that his assertion that it has been so, is based on: (1) His understanding of events; and (2) His principles which

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imply that as a society advances, barring any new discoveries, there will be a rise in the value of precious metals. The first allows him to suspect this course, the second to conjecture it. As I wrote much earlier, there are times when the line between history and “conjectural history”, as Smith’s biographer Dugald Stewart (1980) referred to it, gets blurred in Smith’s story. One of the charms of Smith is that he is humble enough to recognize this himself.

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Different Effects of the Progress of Improvement upon the Real Price of Three Different Sorts of Rude Produce

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In exploring the effects of the progress of improvement upon the real price of three different sorts of rude produce Smith is introducing into his analysis something similar to what we would refer to in modern theory as elasticity of supply. His three different sorts of rude produce exhibit something like perfectly inelastic supply, perfectly elastic supply (beyond the rude state), and an intermediate case respectively:

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These different sorts of rude produce may be divided into three classes. The first comprehends those which it is scarce in the power of human industry to multiply at all. The second, those which it can multiply in proportion to demand. The third, those in which the efficacy of industry is either limited or uncertain (WN, pp. 234–235).

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This demarcation of responsiveness of supply is the theoretical framework within which he tells his story of the take off of agriculture. In this case as always, Smith is endeavoring to tell a story of humankind’s evolution that uses his theory as an organizing principle to richly represent the actual course of human events. What follows might well be referred to as Adam Smith’s manure theory of agricultural take off. Beyond the rude state cattle fall into the perfectly elastic supply case cited above. In the rude state the supply of cattle is so plentiful that the price is zero. As cultivation advances and absorbs grazing land the quantity supplied falls. This occurs just as population is expanding and effective demand for butcher’smeat is rising. As a result the value of cattle begins to rise and at some point “at last it gets so high as to render them as profitable a produce as any thing else which human industry can raise upon the most fertile and best cultivated land” (WN, p. 237). Beyond that point the price stabilizes at cost of production – the perfectly elastic supply case. Cattle are important in Smith’s story of humankind’s progress because “[t]he increase of stock [(here he means cattle stock)] and the improvement of land are two events which must go hand in hand . . .” (WN, p. 239). His reasoning turns on the important role of cattle manure in the improvement of agriculture 37

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– manure is by far the best fertilizer. The story Smith tells of cattle and the role of herds in progress reflects a rich understanding of farm management practices. Till the price of cattle . . . has got [“so high that that it is profitable to cultivate land in order to raise food for them” (WN, 237)] . . . it seems scarce possible that the greater part, even of those lands which are capable of the highest cultivation, can be completely cultivated. In all farms too distant from any town to carry manure from it, that is, in the far greater part of those of every extensive country, the quantity of well-cultivated land must be in proportion to the quantity of manure which the farm itself produces; and this again must be in proportion to the stock of cattle which are maintained upon it. The land is manured either by pasturing the cattle upon it, or by feeding them in the stable, and from thence carrying out their dung to it. But unless the price of cattle be sufficient to pay both the rent and profit of cultivated land, the farmer cannot afford to pasture them upon it; and he can still less afford to feed them in the stable. It is with the produce of improved and cultivated land only, that cattle can be fed in the stable; because to collect the scanty and scattered produce of waste and unimproved lands would require too much labour and be too expensive. If the price of cattle, therefore, is not sufficient to pay of the produce of improved and cultivated land, when they are allowed to pasture it, that price will be still less sufficient to pay for that produce when it must be collected with a good deal of additional labour, and brought into the stable to them. In these circumstances, therefore, no more cattle can, with profit, be fed in the stable than what are necessary for tillage. But these can never afford manure enough for keeping constantly in good condition, all the lands which are capable of cultivating (WN, p. 238).

In short, the expanding demand for butcher’s-meat raises its price and ultimately encourages systematic cattle raising. Higher concentrations of cattle mean more manure. More manure means greater productivity in agriculture. Greater productivity in agriculture sustains a larger population, greater division of labor, expanding wealth, and greater demand for butcher’s-meat – which in turn helps agriculture. This threshold effect and the centrality of cattle and manure in improvement leads Smith to observe that “[o]f all the commercial advantages . . . which Scotland has derived from the union with England . . . [the] rise in the price of cattle is, perhaps, the greatest” (WN, pp. 239–240). But, he observes, the benefits of union have not spread quickly over the face of the country because the “obstructions to the establishment of a better system [such as endemic poverty that precludes accumulation], cannot be removed but by a long course of frugality and industry . . .” (WN, p. 239). Given these kinds of obstacles, this manure-based “take off” invariably occurs “late . . . in the progress of improvement” (WN, p. 241). Nevertheless, as it unfolds it has a profound impact of progress because the increased improvement of agriculture is the foundation for larger population, the subsequent associated growth in demand for products, and the ever finer division of labor. Indicative of this Smith writes that “the compleat improvement and cultivation of the country . . . most certainly is, the greatest of all publick advantages . . .” (WN, p. 245) – and it all begins with manure.

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Following his analysis of the price of cattle for butcher’s-meat, Smith turns to poultry, swine and dairy products. As with the butcher’s-meat, all these products must compete with corn for land use, so for lands to be devoted to them the price must rise enough to cover the opportunity cost of corn production. Smith notes that for some rude products this rise is not so predictable because of peculiarities of production. For example, joint production of mutton and wool – two products that have very different extents of the market. As he explores this joint production issue, we again see Smith’s analysis reflect a concern for careful empiricism and his continuous highlighting of the role of laws and institutions as a source of distortions in the natural course of events. With respect to empiricism, as he traces the price of wool calculating real and nominal movements, Smith cites “many authentick records” from the time of Edward III, but he notes that he was “not able to find any such authentick records concerning the price of raw hides in antient times” (WN, 248–249). As for peculiar circumstances that distort price movements, in the case of wool Smith asserts that the “degradation both in the real and nominal value of wool, could never have happened in consequence of the natural course of things. It has accordingly been the effect of violence and artifice . . .” (WN, p. 248). He then goes on to identify the laws that thanks to the political influence of the clothiers have confined domestic wool to the home market and have encouraged competition from other countries.

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Conclusion of the Digression Concerning the Variations in the Value of Silver Having made his case that in the natural course of progress the price of most rude provisions will rise but not necessarily all in lock step, Smith uses his logic to join the current debate about the value of silver. Responding to these who see this rise in provisions as representing a fall in the value of silver, he writes that [t]he greater part of the writers who have collected the money prices of things in antient times, seem to have considered the low money price of corn, and of goods in general, or, in other words, the high value of gold and silver, as a proof, not only of the scarcity of those metals, but of the poverty and barbarism of the country at the time when it took place. This notion is connected with the system of political economy which represents national wealth as consisting in the abundance, and national poverty in the scarcity of gold and silver; a system which I shall endeavour to explain and examine at great length in the fourth book of this enquiry.

Smith is referring here to Mercantilist thought. According to the Mercantilists, more (less) precious metal is more (less) wealth for the nation. Since, ceteris 39

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paribus, less metal means higher price for the metal, Mercantilists cite “the high value of gold and silver, as a proof, not only of the scarcity of those metals, but of the poverty and barbarism of the country at the time when it took place.” Smith believes he has established the framework he needs in order to debunk this Mercantilist confusion. He has demonstrated that “the real wealth of Europe . . . [is] the annual produce of its land and labour . . . [and that t]he increase of the quantity of gold and silver in Europe, and the increase of its manufactures and agriculture, are two events which, though they have happened nearly about the same time, yet have arisen from very different causes . . .” (WN, p. 255). To support his position Smith observes that if the prices of provisions are all the same simple constant function of the quantity of silver, then a change in silver should affect all provisions the same. But as he has just demonstrated empirically and explained theoretically, the prices of different provisions have increased differently. For Smith this focus on silver is absurd. To debate whether the silver buys less because it is falling or because commodities are rising “is to establish a vain and useless distinction . . .. The real wealth of a country [is] the annual produce of its land and labour . . . [and since] land constitutes by far the greatest, the most important, the most durable part of the wealth of every extensive country” (WN, p. 258) the best metric of material progress is not what is happening to the price of silver but what is happening to the rent on land. At this point Smith turns from the narrower question of material progress to the more general question of social progress. He’s just established that in the course of material progress, as the wealth of the nation increases, the price of animal foods increases to varying degrees. How does this affect the least among the working class? Does that imply a shrinking subsistence for the poor? No, says Smith. The very extension and improvement of cultivation that goes hand in hand with rising animal food prices, lowers the prices of vegetable foods. “The circumstances of the poor through a great part of England cannot surely be so much distressed by any rise in the price of poultry, fish, wild-fowl, or venison, as they must be relieved by the fall in that of potatoes” (WN, p. 259). Indeed, with progress comes not only lower vegetable prices, but also, ceteris paribus, lower prices for manufactures.

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Effects of the Progress of Improvement upon the Real Price of Manufactures

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In a progressing society the price of manufactures will fall as the division of labor increases the productivity of workers. Smith has great faith in the

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productivity of technological improvement that is a product of and grows with the division of labor. His only caveats are the effect on the mental state of workers cited above and the possibility of upward pressure on raw commodity prices for manufacture (e.g. “barren timber (WN, p. 260)). But with respect to input prices he is generally sanguine that increased productivity will reduce cost of production and product prices. He cites for example a watch. “A better movement of a watch, than about the middle of the last century could have been bought for twenty pounds, may now perhaps be had for twenty shillings” (WN, p. 260). And he believes that with the increased productivity, workers incomes rise. So the net effect of higher incomes and the lower costs of vegetable foods and manufactures is to increase the standard of living among the workers.

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Conclusion of the Chapter

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I shall conclude this very long chapter with observing that every improvement in the circumstances of the society tends either directly or indirectly to raise the real rent of land, to increase the real wealth of the landlord . . . (WN, p. 264).

So if the landlords understand their long term interests they will understand that their interests are at one with the “general interest of the society” and thus “[w]hen the publick deliberates concerning any regulation of commerce or police, the proprietors of land never can mislead it, with a view to promote their interest of their own particular order; at least, if they have any tolerable knowledge of that interest” (WN, p. 265). Unfortunately, however, of the three great orders – those who live by rent, by wages, and by profits – the landlords seem to be least able and least interested in understanding their own interest. Smith ascribes this to the fact that they need not exert themselves or compete in order to enjoy the return that comes to them. The interests of the worker, like that of the landlord, is “strictly connected with that of society, [but also like the landlord] he is incapable either of comprehending that interest, or of understanding its connection with his own” (WN, p. 266). Same malady, but virtually an opposite reason. While for the landlords everything comes too easily so they have no incentive to care, for the workers everything comes so hard they haven’t the time to care or the means to educate themselves if they did care. The third great order, the employer of stock, puts the engine of the progress that is always to the benefit of landlords and workers into motion with his accumulation. Ironically, he is the one for whom fortune moves inversely with that progress because, as Smith has demonstrated, the rate of profit falls with progress. 41

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JERRY EVENSKY The interest of this third order, therefore, has not the same connection with the general interest of the society as that of the other two. Merchants and master manufacturers are, in this order, the two classes of people who commonly employ the largest capitals, and who by their wealth draw to themselves the greatest share of the publick consideration (WN, p. 266).

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Since they are constantly engaged in the management of their own interest, unlike the landlords they are acutely aware of their interest. Since they are the holders of most of the productive stock of society, unlike the workers they have the means to pursue their interest. This interest is always in some respects different from, and even opposite to, that of the publick. To widen the market and to narrow the competition, is always the interest of the dealers. To widen the market may frequently be agreeable enough to the interest of the publick; but to narrow the competition must always be against it, and can serve only to enable the dealers, by raising their profits above what they naturally would be, to levy, for their own benefit, an absurd tax upon the rest of their fellow-citizens. The proposal of any new law of regulation of commerce which comes from this order, ought always to be listened to with great precaution, and ought never to be adopted till after having been long and carefully examined, not only with the most scrupulous, but with the most suspicious attention. It comes from an order of men, whose interest is never exactly the same with that of the publick, who have generally an interest to deceive and even to oppress the publick, and who accordingly have, upon many occasions, both deceived and oppressed it (WN, p. 267).

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13. CONCLUSION

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This warning is an appropriate place for Smith to end Book I. It reflects his purpose and his concern, and it anticipates the rest of his story. His purpose is to represent the process that has allowed and that can lead to progress for humankind in general, and Britain in particular. His concern is with those laws and institutions in general, and in Britain in particular, that impede that progress. Book II lays out the core of the Smith’s theory of the dynamics of material progress: The story of accumulation, productive and unproductive labor, capital flows, and growth that can lead to greater wealth of the nation and progress. Book III examines how laws and institutions have impeded that progress in Europe and how nevertheless the power of the invisible hand has prevailed – so far. To the casual observer that history would seem entirely inconsistent with natural progress as Smith represents it. Indeed, Smith says, it is an unnatural evolution and the reason it is unnatural has to do with the peculiar conditions caused by human laws and institutions. This is for Smith the great strength of his analysis. His is not the story of a man of system who treats humankind as chess pieces that are moved by events they cannot affect. His is a much more complex story of human events in which

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individuals can and do make choices that affect the progress of events. Given human frailty, the effect of human action is often to distort the natural progress. Thus, the path of human progress is strewn with societies that fail. But as the European case laid out in Book III makes clear, in spite of the distortions caused by human’s laws and institutions, the hand of the designer of the universe (the invisible hand of the deity) has arranged the pins and springs and wheels of the mechanism such that the intention of the designer – benevolence – seems to ultimately prevail. Book IV examines alternative stories of political economy and why his is superior. Chapter VII of that Book, “Conclusion of the Mercantile System,” is the most significant revision Smith makes to The Wealth of Nations and it reflects his very practical concern with and commitment to the well being of the liberal experiment in general and the British experiment in particular. And finally in Book V the role of the state in this process of progress is explicitly examined. But it all begins in Book I. There, as I hope I’ve made clear, Smith builds the framework and frames our mind for the analysis that is to come.

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NOTES

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1. Smith shared this belief with many of his contemporaries, but at the same time he rejected the widely held view that one could prove the existence of a deity as designer. Smith takes a position that seems to place him between most of his contemporaries and his dearest friend David Hume. Hume rejects the design argument, the notion that one can demonstrate deductively the existence of a deity from the order of the universe. His Dialogues Concerning Natural Religion is a powerful destruction of that argument. Smith agrees with Hume that the existence of a deity is beyond proof, but Smith still believes in that existence. For him the existence of the deity is a matter of faith, not of proof. 2. “The liberal reward of labour . . . is the natural symptom of increasing national wealth . . .. “Is this improvement in the circumstances of the lower ranks of the people to be regarded as an advantage or an inconveniency to the society? . . . Servants, labourers and workers of different kinds, make up the far greater part of every great political society. But what improves the circumstances of the greater part can never be regarded as an inconveniency to the whole. No society can surely be flourishing and happy, of which the far greater part of the members are poor and miserable. It is but equity besides, that they who feed, cloath, and lodge the whole body of the people, should have such a share of the produce of their own labour as to be themselves tolerably well fed, cloathed, and lodged” (WN, pp. 91, 96). 3. It’s very important to distinguish between humankind’s improvement and human improvement. Smith did not believe that we are “better” beings than our predecessors. He did believe, however, that given the course of humankind’s evolution we can achieve more than our predecessors where we are nurtured by a more mature social order. 43

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4. It is important to note that the concept “liberal constitution” here does not refer to a political constitution, but rather to a system of civic values that may have been nurtured by political systems but that transcend political constitutions. See (Evensky, MS) for more on this. For Smith, in the ideal liberal society (the limiting case) sovereignty and government both reside in the individual citizen. Here “government” refers to a commitment to a common set of mature civic values. 5. He extends his description of this China case in Book IV, Chapter 9 (WN, pp. 680–681). 6. Hueckel (2000) does a very nice job of exploring and clarifying Smith’s analysis of value. 7. See (WN, pp. 162, 176, 185, 191–192, 194, 205, 207, 210, 224, 229, 236, 237, 255, 262, 264, 355, 356, 535) for some of the occasions on which he cites labor command as his metric. 8. As he puts it: “[T]he distinction between the real and the nominal price of commodities and labour, is not a matter of pure speculation, but may sometimes be of considerable use in practice” (WN, p. 51). 9. Glenn Hueckel (2000) offers a richly researched analysis of this Chapter 5 and its relations to the rest of Smith’s work. 10. Indicative of this, I believe that in two instances Smith altered his language to distance himself from metaphysical connotations. In Chap. 6 in two places he replaces the phrase “source of value” with the term “component part”. See editors notes (WN, p. 67). 11. I believe the subsequent obsession with this chapter reflects a retrofitting of a Ricardian mentality on Smith. Ricardo begins his Principles with a chapter “On Value” and frames the focus of the discourse on that metaphysical question. Treating Smith as if he shares Ricardo’s concern with value is, I believe, a mistake. 12. Jeffrey Young (1997) does an excellent job of developing this relationship between commutative and distributive justice in Smith’s work. 13. In the language of Keynes, the well governed society would not support a “rentier” class (Keynes, p. 376). 14. He suggests that, absent institutional constraints, the opposite case of a long term depressed price is very unlikely because producers would abandon a market in which they could not cover costs. See (WN, p. 79). 15. See (WN, pp. 643–644) for a classic example of how “[t]he avidity of our great manufacturers” has led to sever oppression of workers and in particular women. 16. Malthus’ work was still a quarter of a century away. 17. See (Evensky 1994B, 1998) for more on this. 18. As part of the history he offers here, he notes the impact of religion on the evolutionary process. His interest in the impact of religion is a constant. Later when he turns to the evolution of European universities we see this highlighted. 19. Ekelund and Tullock’s application of the term rent-seeking to mercantilism “Mercantilism as a rent-seeking society, economic regulation in historical perspective” is an apt description for the way Smith saw the problem of mercantilism. 20. Alfred Marshall’s definition of the subject of economics. 21. In the third edition Smith adds the footnote “See Idyllium xxi” (WN, p. 118). 22. “The vain hope of gaining some of the great prize is the sole cause of this demand” (WN, p. 125). He picks up this point of underestimating risk later in developing a story as to why many people underinsure, and why “young volunteers never enlist so readily as at the beginning of a new war” (WN, p. 126).

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23. Smith notes that in cases where a return includes both a wage and a profit the nature of the return can appear muddled to the casual observer. He cites for example the fact that “[a]pothecaries profit is become a bye-word, denoting something uncommonly extravagant. This great apparent profit, however, is frequently no more than the reasonable wages of labour . . .. [Reasonable because h]is reward . . . ought to be suitable to his skill and trust . . .” (WN, pp. 128–129). 24. Including an interesting note on the etymology of the term university “which indeed is the proper Latin name for any incorporation whatever” (WN, p. 136), and how the universities’ heritage and structure reflects that origin. 25. It’s interesting to note that he writes of his own context “Scotland . . . [that] I know of no country in Europe in which corporation laws are so little oppressive” (WN, p. 138). 26. “The property which every man has in his own labour, as it is the original foundation of all other property, so it is the most sacred and inviolable. The patrimony of a poor man lies in the strength and dexterity of his hands; and to hinder him from employing this strength and dexterity in what manner he thinks proper without injury to his neighbour, is a plain violation of this most sacred property” (WN, p. 138). 27. “People of the same trade seldom meet together, even for merriment and diversion, but he conversation ends in a conspiracy against the publick, or some contrivance to raise prices” (WN, p. 145). 28. A subsidy with which Smith had direct experience. Just such a subsidy, The Snell Exhibition, allowed Smith to attend Balliol College, Oxford (WN, p. 148 fn. 36). 29. Smith is describing precisely this flow process when he uses the classic “invisible hand” quotation in Book IV, Chapter 2 (WN, p. 456). 30. Smith views those who write of the rural workers “contemptuously . . . [as] very contemptible authors” (WN, p. 143). 31. In The Theory of Moral Sentiments Smith’s comments on the nature of kids (See for example TMS, pp. 89, 145, 222, 329, 335) seems to me to reflect a rich observation of kids at various ages. I have two of my own, volunteered two summers in Head Start, and taught junior and senior high school for six years, so I know something of the species. 32. As noted earlier, Smith equates interest with rent (WN, pp. 847–848). 33. In Chapter 11 he writes that “the lowest price for which it is possible to bring it [(a commodity)] to market for any considerable time together . . . is the price which affords nothing to the landlord, of which rent makes not any component part, but which resolves itself altogether into wages and profit (WN, p. 231). So he sees rent as part of the natural price in the sense of “ordinary”, he also sees rent as a monopoly price – a part of the price that is not necessary in order to encourage productive activity. 34. He returns to this issue and examines it at greater length (WN, pp. 171–172). 35. Smith’s story here is empirical and he is careful to assess his sources as he tells the story. For example, citing information on the returns to the sugar planter he adds the caveat : “If this be true, for I pretend not to affirm it . . .”, and later he writes “we are told by Dr. Douglas,” but immediately adds the parenthetical remark “(I suspect he has been ill informed)” (WN, pp. 174–175). 36. “The great market for silver is the commercial and civilized part of the world” (WN, p. 194). 37. For example he cites early corn laws that establish what he refers to as a “moderate and reasonable price of wheat” (WN, p. 198). 45

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38. Smith’s transition from using the term “corn” to “wheat” is seamless. 39. In discussing the work of others exploring historical prices he writes that “[s]uch slight observations . . . upon the prices of either corn or of other commodities, would not probably have misled so many intelligent authors, had they not been influenced, at the same time, by the popular notion, that as the quantity of silver naturally increases in every country with the increase of wealth, so its value diminishes as its quantity increases. This notion, however, seems to be altogether groundless.” (WN, p. 207) His concern with the influence of popular notions on philosophical inquiry is most evident in his History of Astronomy. See (HA, 65). 40. He rejects “Mr. Meggens’s” (WN, 229) assertion that the relative value of gold and silver is determined by the relative quantities in the market, because this ignores the demand side. Smith argues that effective demand matters and that in effect the elasticities are different for gold and silver. In particular, the value of silver is not driven down fully in proportion to its large supply because the market is more elastic at lower prices.

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REFERENCES

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Ekelund, R., & Tullock, G. (1981). Mercantilism as a rent-seeking society, economic regulation in historical perspective. College Station. Evensky, J. (1989). The Evolution of Adam Smith’s Views on Political Economy. History of Political Economy, 21(1), 123–145. Evensky, J. (1992a). Ethics and the Classical Liberal Tradition in Economics. History of Political Economy, 24(1), 61–78. Evensky, J. (1992b). The Role of Community Values in Modern Classical Liberal Economic Thought. Scottish Journal of Political Economy, 39(1), 21–38. Evensky, J. (1993a). Ethics and the Invisible Hand. Journal of Economic Perspectives, 7(2), 197–205. Evensky, J. (1993b). Adam Smith on the Human Foundation of a Successful Liberal Society. History of Political Economy, 25(3), 395–412. Evensky, J. (1994a). Setting the Scene: Adam Smith’s Moral Philosophy. In: R. Malloy & J. Evensky (Eds), Adam Smith and the Philosophy of Law and Economics (pp. 7–30). Drodrecht, The Netherlands: Kluwer Academic Press. Evensky, J. (1994b). The Role of Law in Adam Smith’s Moral Philosophy: Natural Jurisprudence and Utility. In: R. Malloy & J. Evensky (Eds), Adam Smith and the Philosophy of Law and Economics (pp. 199–220). Drodrecht, The Netherlands: Kluwer Academic Press. Evensky, J. (1998). Adam Smith’s Moral Philosophy: The Role of Religion and Its Relationship to Philosophy and Ethics in the Evolution of Society. History of Political Economy, 30(1), 17–42. Hueckel, G. (2000). On the ‘Insurmountable Difficulties, Obscurity, and Embarassment’ of Smith’s Fifth Chapter. History of Political Economy, 32(2), 317–345. Hume, D. (1947). Dialogues Concerning Natural Religion. Indianapolis: Bobbs-Merrill. Keynes, J. M. (1964). The General Theory of Employment, Interest, and Money. First Harbinger Edition. New York: Harcourt Brace Jovanovich. Marshall, A. (1936). Principles of Economics (8th ed.). London: MacMillan and Co. Mill, J. S. (1866). Principles of Political Economy with Some of Their Applications to Social Philosophy (Vol. 1). From the Fifth London Edition. New York: D. Appleton and Company.

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An Inquiry into the Nature and Causes of the Wealth of Nations, Book I. 1 2 3 4 5 6 7 8 9 10 11 12 13 14 15 16 17 18 19 20 21 22 23

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Ricardo, D. (1911). Principles of Political Economy and Taxation. London: J. M. Dent & Sons Ltd. Smith, A. (1976a). D. D. Raphael and A. L. Macfie (Eds). The Theory of Moral Sentiments (Vol. 1 of The Glasgow Edition of the Works and Correspondence of Adam Smith). General editing by D. D. Raphael and A. Skinner. Oxford: Clarendon Press. Smith, A. (1976b). Edited in two volumes by W. B. Todd. An Inquiry into the Nature and Causes of the Wealth of Nations (Vol. 2 of The Glasgow Edition of the Works and Correspondence of Adam Smith). General editing by D. D. Raphael and Andrew Skinner. Oxford: Clarendon Press. Smith, A. (1977). E. Campbell Mossner & I. Simpson Ross (Eds). The Correspondence of Adam Smith (Vol. 5 of The Glasgow Edition of the Works and Correspondence of Adam Smith). General editing by D. D. Raphael and Andrew Skinner. Oxford: Clarendon Press. Smith, A. (1978). R. L. Meek, D. D. Raphael & P. G. Stein (Eds). Lectures on Jurisprudence (Vol. 5 of The Glasgow Edition of the Works and Correspondence of Adam Smith). General editing by D. D. Raphael and Andrew Skinner. Oxford: Clarendon Press. Smith, A. (1983). J. C. Bryce (Ed.). Lectures on Rhetoric and Belles Lettres (Vol. 4 of The Glasgow Edition of the Works and Correspondence of Adam Smith). General editing by D. D. Raphael and Andrew Skinner. Oxford: Clarendon Press. Smith, A. (1980). W. P. D. Wightman & J. C. Bryce (Eds). Essays on Philosophical Subjects (Vol. 3 of The Glasgow Edition of the Works and Correspondence of Adam Smith). General editing by D. D. Raphael and Andrew Skinner, Oxford: Clarendon Press. Stewart, D. [1793] (1980). Account of the Life and Writings of Adam Smith, LL.D. In: W. P. D. Wightman & J. C. Bryce (Eds), Essays on Philosophical Subjects (Vol. 3 of The Glasgow Edition of the Works and Correspondence of Adam Smith, pp. 269–351). General editing by D. D. Raphael and Andrew Skinner, Oxford: Clarendon Press. Young, J. (1997). Economics as a Moral Science: The Political Economy of Adam Smith. Cheltenham, U.K.: Edward Elgar.

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JOHN MAURICE CLARK AND FRANK H. KNIGHT ON MARGINAL PRODUCTIVITY THEORY: A NOTE WITH SOME UNPUBLISHED CORRESPONDENCE

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Luca Fiorito

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In a recent and insightful paper on “Institutionalism Between the Wars,” Malcolm Rutherford has correctly included John Maurice Clark’s Studies on the Economics of Overhead Costs (Clark, 1923a) among the works “most often cited as paradigms of institutional research in the period up to the late 1920s.” (Rutherford, 2000a, p. 295; see also Rutherford, 2000b). In his book Clark commented on the growing importance of large-scale fixed plants and equipment in creating overhead costs, which might apply to a variety of outputs. Not only could the level of employment and output be varied, the composition – the proportion of different products or services and thus of different kinds of labor – could also vary. Clark considered this a new development, dating from the end of the nineteenth century, which could not be treated adequately with the tools of the so-called “orthodox” economic theory. Yet, the relevance of Clark’s Magnus Opus should not be limited just within the narrow limits of the institutionalist camp. Clark’s monograph was in fact one of the most influential works produced by an American economist during the interwar years. In 1922, for example, anticipating some of the main themes of the book in the paper “Some Social Aspects of Overhead Costs” (Clark,

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Research in the History of Economic Thought and Methodology, Volume 21-A, pages 49–64. Copyright © 2003 by Elsevier Science Ltd. All rights of reproduction in any form reserved. ISBN: 0-7623-0996-2

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1923b), Clark received a standing ovation at the annual meeting of the American Economic Association at which the paper was presented (Shute, 1994; see also Shute, 1997). After its publication, favorable reviews of the volume appeared both in the Political Science Quarterly (Copeland, 1925) and in the American Economic Review (Hugh Jackson, 1925), while across the Atlantic, Francis Y. Edgeworth, who reviewed the book for the Economic Journal, found it to be like “an atlas which together with the general map of a kingdom contains maps of counties and districts on a smaller scale” (Edgeworth, 1925, p. 245). In one case, however, the book triggered a brief but significant controversy with one of the rising stars of American economics, Frank Knight.1 In his critique, Knight focused in particular on the last chapter of the book, the one dealing with the impact of overhead costs on the law of distribution. In a note which appeared in the Journal of Political Economy, he informed the reader that: “[i]n his brilliant and valuable book on the Economics of Overhead Costs, Professor J. M. Clark gives an arithmetical example to illustrate the theory of distribution by marginal productivity which seems to the writer involving a slip worth pointing out” (Knight, 1925a, p. 550). In order to better understand Knight’s contention, it is necessary to briefly review Clark’s proof that if all productive agents are rewarded in accord with their marginal products, then the total product will be exactly exhausted. We can summarize his arithmetical example as follows. Let 100 acres of land and 1,000 days of labor yield 2,000 bushels of wheat. Suppose that by adding 50 days of labor the product is increased to 2,060 bushels, diminishing returns entering the scene. Now, if we add five acres of land, the proportion of the productive factors will be the same as in the original combination, and if the product is increased in the same ratio as both factors, the new output will be 2,100 bushels. Then the marginal contribution of the 50 days of labor is 60 bushels – or 1.20 bushels per unit – while the marginal contribution of the five acres of land is 40 bushels – or eight bushels per unit of land. Multiplying the marginal productivity of a single unit of labor by the 1,000 units of labor used in the original combination gives 1,200 bushels for the total share of the labor, and performing the same operation for the land gives 800 bushels for its total share, which together make 2,000 bushels, exactly exhausting the total product. In Clark’s words:

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this is a law and not a coincidence the reader may note for himself, using any figures he likes so long as they abide by the crucial assumption of the problem (Clark, 1923b, emphasis added).

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To Clark, this mathematical example was instrumental to show his main point, namely, that when there is a group of factors which, if increased by a certain

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percentage, will increase the product by the same percentage2 (and in his opinion materials and direct labor in a plant with spare capacity roughly meet this condition), then the differential worth of these factors as a group, without any attempt to divide the product between them, would absorb the whole product and leave nothing for the overhead costs. In his note, Knight declared his appreciation of Clark’s effort to present the marginal productivity theory without the use of higher mathematics – “a thing evidently to be desired for purposes of exposition” (Knight, 1925a, p. 552) – but he nevertheless found his illustration to be a much more general relation than that of Euler’s theorem. We can follow Knight’s reasoning by use of simple mathematics. Let:

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x units of land, with y units of labor give P1 units of product; x units of land, with ay units of labor give P2 units of product; ax units of land, with ay units of labor give aP1 units of product.

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Then stating the same operations indicated by Clark in his example we have: P2 – P1 aP – P1 x = P1 y+ 2 ay – y ax – x Canceling out the x and y and rearranging we obtain: P2 – P1 + aP1 – P2 = aP1 – P1 Which, as Knight put it, is “an obvious identity,” in the sense that “the reasoning does hold for any figures not violating the restrictions as to proportions.” But the interesting thing is that the P2’s of the original equation disappear entirely. That is, “any assumption whatever may be made as to the product of the second or intermediate combination, without invalidating the result. The reader may work it out with the product of the second combination set equal to zero, or a negative quantity, or a magnitude greater than the product of the third combination or any negative or positive quantity whatever” (Knight, 1925a, p. 553). In other words, Knight pointed out that Clark’s proof would work no matter what apparently absurd figures one might choose for the illustration. Increasing one of the productive factors might reduce the former product or wipe it out entirely, and still this (negative) marginal product, added to the corresponding marginal product of the other factor, would exhaust the total amount produced. This Knight considered: an arithmetical puzzle which has no relation to the productivity of the factors in a technological combination – if it has any real interpretation of any sort (Knight, 1925a, p. 553).

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Knight’s note was followed in turn by a “Reply” by Clark (1925a), a further “Rejoinder” by Knight (1925b), and a final “Concluding Note” by Clark (1925b). In his reply Clark admitted the validity of Knight’s criticisms, but defended his proof of the marginal productivity theory on the ground that even if it would work with absurd figures, “it is not the formula which is responsible for the absurdity.” According to Clark: Ordinarily, a factor which costs something will not be used unless it promises to yield a differential product equal to its cost. But where all the factors yield a differential product, all must be in the stage of ‘diminishing return,’ thus ruling out the extreme and meaningless cases mentioned by Professor Knight (Clark, 1925a, p. 557: emphasis in original).

Apart from such an invitation to the use of plausible figures, in none of his two replies did Clark succeed in confuting the validity of Knight’s penetrating criticisms. From our archival researches it emerges that the controversy hosted in the pages of the Journal of Political Economy was anticipated by an epistolary exchange between the two leading economists (the letters are reproduced in the appendix). What is relevant about the correspondence is that it contains a diagrammatic version of the illustration Clark provided in his 1923 volume. Interestingly, from Joseph Dorfman (1964, p. 294) we learn that Clark had informed Wicksteed as early as in 1915 that he had worked out a “diagrammatic geometric proof” of the equality of the sum of marginal products and total products.3 Clark also mentioned his “independent” discovery of the “exhaustion” problem in a letter he wrote to Paul Samuelson who had asked him about the “psychological genesis” of the accelerator principle: Your question reminds me of a couple of other instances: the proposition about the sum of the marginally-imputed products absorbing the total product, and the conditions necessary to this, and the working out of a rough form of the R. F. Kahn-type multiplier. I remember where I got the answer to the first: namely in a hotel room where my father and I had gone to meet David Kinley. I had been wrestling with the problem, and figured out a geometrical solution. Later, I talked it over with my friend, Charley Cobb, and he converted it into a case of Euler’s theorem. Before trying to publish it, I did some investigating, and discovered Wicksteed’s monograph, and Flux’s review, which converted Wicksteed’s demonstration into a case of Euler’s theorem. So that had clearly been anticipated.4

Clark’s diagrammatic exposition does not need any particular comment. Following the approach introduced by his father in The Distribution of Wealth (Clark J. B., 1899), Clark assumed only two factors, in this case land and labor, each of which is homogeneous, i.e. all units of the factor being equally efficient. This implies that the marginal productivity of labor (the variable factor in the example) falls as more labor is added to a given amount of land because land per unit of labor is falling. By the same token, Clark considered the greater

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marginal productivity of fewer workers solely as a consequence of the fact that they have more land to work with – the greater productivity of fewer workers may just as well be attributed to the productivity of land (see the discussion in Clark to Knight April 14, 1924). In other words, as Clark put it explicitly in his correspondence, there is no such a thing as a specific marginal product of a factor considered in isolation; the factors of production are essentially complements and the marginal product of one factor is a consequence of the marginal factor of the other factor: The example in the book is an identity because, under the assumptions of our problem (homogenous functions) increments of capital and labor are not separate facts: a positive increment of capital (changing the proportions so that there is more capital per unit of labor than before) is in itself a negative increment of labor (in terms of the amount per unit of capital). There are no two things happening: one change has both aspects (Clark to Knight April 14, 1924; emphasis added).5

There are two further aspects which deserve to be emphasized. Firstly, as showed by Knight in his letter of April 24, Clark’s graphical proof is subject to the same sort of criticisms of his simple mathematical example. Following Clark’s procedure, in fact, Knight ably demonstrated that his diagrammatic proof would “check” also with negative marginal products of the eleventh unit of the variable element (see Knight to Clark April 24, 1924 and related graph). As Knight put it in his letter, the graphical explanation presented by Clark was “enormously clever,” but he nevertheless thought it to be “a much more general relation than that of Euler’s theorem or the actual economic situation.” Secondly, it should be noted that Sydney Chapman as early as in 1906 had already provided an elegant diagrammatic proof that the residual share is equal to the marginal product of the factor receiving the residual. Differently from Clark’s, Chapman’s demonstration works exclusively under the assumption of diminishing returns and introduced explicitly the problem of external economies (see Stigler, 1941). It should be also noted that in his published rejoinder Knight touched also upon the larger issues dealt with in Clark’s monograph. According to Knight the emergence of overhead costs and the subsequent problems of maladjustment in distribution are, in general, strictly connected with conditions involving more or less the element of monopoly: “A more careful application of the theory of monopoly in substantially its conventional form – he stated – will [. . .] go far toward reducing most of these problems both to intelligibility and manageability – farther in fact than will new and especially invented categories” (Knight, 1925b, p. 560). In the same passage, Knight also contested Clark’s recurrent insistence on the novelty of his contribution. Such a novelty, he wrote, produces “the impression that he is 53

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departing farther from established principles and methods than it is in fact the case” (Knight, 1925b, p. 560). In this connection, a final word should be said about the more general issue of the relationship between Frank Knight and the institutionalists. During his whole career, and especially in the 1920s and early 1930s, Knight never hesitated to express his dissent towards the “newer economics” of Clark, Hamilton, Mitchell and their fellow travelers. Still in 1924, to cite a significant example, Knight revealed to Mitchell his intention of contributing an essay to the Tugwell’s projected volume on The Trend of Economics (Tugwell, 1924). Such an essay, he wrote, “will be a ‘hauptsächlich,’ a presentation of the claims of old-fashioned theory as against institutional economics,” Then, in his typical style, he added: Of course I am the farthest in the world from having anything against the study of economic institutions. But I will say that I am very skeptical about the development of any science in that field (other than history and empirical description – isn’t it the old siren-song of a philosophy of science of history?), and secondly that it seems to me that such a science in whatever sense and to whatever extent it can be developed is surely not identical with economics, though I would not attempt to state in a sentence exactly what I should consider the relation between the two to be.6

Many commentators have observed that, despite their substantial differences in approach, there are nevertheless important points of convergence between Knight and the institutionalists. Interestingly, as Geoff Hodgson has recently pointed out, these convergences are rooted in their common criticisms of neoclassical economics and its methodological apparatus. Knight was in fact critical of the neoclassical assumptions that treated man as an isolated rational economic actor equipped with given preferences, although he believed they had a considerable heuristic and ethical value (Hodgson, 2001). He was also critical of psychological utilitarianism and ethical utilitarianism, the first because it was essentially tautological, the second because it confused the “good” with the “pleasurable” (Tilman, 1992, p. 58). Both Knight and the institutionalists were concerned about the dynamics of a rapidly changing economy and were likewise attempting to answer the same question, namely, how to supplement and integrate traditional economic theory. Of course, they provided different answers, differing in the main, on the role to be assigned to marginal utility theory.7 What is relevant here, however, is that once we scratch the surface of his most polemical writings, we actually find Knight marching on the same side of the institutionalists. Such a convergence becomes more apparent, for instance if we compare what Knight wrote in his rejoinder to Clark with Mitchell’s reply to Knight’s polemical letter quoted above concerning his skepticism about the development of a “scientific” institutionalism:

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Professor Clark has done a piece of work whose high value I hope I am second to none in recognizing, in his keen portrayal of the anomalies in the working of competitive forces in this situation. The only disagreement would be in regard to the relation between his work and economic theory of what we may call the old fashioned variety. The vague set of conditions loosely referred to as “free competition,” but never carefully defined and stated, are not very closely approximated in the facts of business life. Professor Clark, I know, does not mean to imply that this fact either invalidates or renders unimportant a correct theory of free competition, as long as business life contains an important element of that character or shows a considerable tendency in that direction. It is all a question of where and how to supplement competitive theory so as to make it more accurate and applicable (Knight, 1925b, pp. 559–560, emphasis added).

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I am glad you are going to sum up the case of old-fashioned theory. Of course I think this line of attack on economic problems has more than an historical justification. Its constructive value, as I see things, is that it contributes to our understanding of pecuniary institutions which are, as I have argued repeatedly, a factor of the very first moment in the situation which it is important for us to understand. The scientific value of that contribution is really enhanced by taking the institutional viewpoint.8

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NOTES 1. On the relationship between Knight and the institutionalists see Tillman (1992) and Hodgson (2001). 2. This is equivalent to saying that the product of industry is a homogeneous function of the first degree of the factors of production. 3. Wicksteed’s response to Clark, dated 14 February 1916, indicated that the English economist no longer considered the marginal productivity a sufficient explanation of distribution. See Dorfman (1964). 4. John M. Clark to Paul A. Samuelson: April 21, 1953. John M. Clark Papers, Rare Book and Manuscript Library, Columbia University. Samuelson’s letter and Clark’s reply are reproduced in Fiorito (2001). 5. A similar objection to marginal productivity theory had already been advanced by John Hobson in his The Industrial System (1909). 6. F. H. Knight to W. C. Mitchell: Iowa City, Iowa, May 18, 1923. W. C. Mitchell Papers, Rare Book and Manuscript Library, Columbia University. The Knight-Mitchell correspondence is reproduced in Fiorito (2000). 7. Regarding Knight’s treatment of “economic man” see Emmett (1994). 8. W. C. Mitchell to F. H. Knight: New York, May 22, 1923. W. C. Mitchell Papers, Rare Book and Manuscript Library, Columbia University. 9. Knight (1925a). 10. Commons J. R. (1924). The Legal Foundations of Capitalism, Madison: University of Madison Press.

ACKNOWLEDGMENTS

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I am indebted to Warren J. Samuels and Malcolm Rutherford for encouraging publication and to Debra Levine, the assistant librarian, for much friendly cooperation during my research. 55

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The Clark-Knight correspondence is published below with the permission of the University of Chicago Archives. The relevant material was found among Knight Papers, Folder C.

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REFERENCES

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Chapman, S. J. (1906). The Remuneration of Employers. Economic Journal, XVI, 523–528. Clark, J. B. (1899). The Distribution of Wealth. New York: Macmillan. Clark, J. M. (1923a). Studies in the Economics of Overhead Costs. Chicago: The University of Chicago Press. Clark, J. M. (1923b). Some Social Aspects of Overhead Costs: An Application of Overhead Costs to Social Accounting, with special reference to the Business Cycle. American Economic Review, 13 (Supplement), 50–59. Clark, J. M. (1925a). Reply to Professor Knight’s Remarks. Journal of Political Economy, 33, 555–557. Clark, J. M. (1925b). Concluding Note. Journal of Political Economy, 33, 561–562. Copeland, M. (1924). Review of Studies in the Economics of Overhead Costs. Political Science Quarterly, 40, 296–299. Dorfman, J. (1964). Wicksteed’s Recantation of the Marginal Productivity Theory. Economica (New Series), 31, 294–295. Emmett, R. (1994). Maximizers vs. Good Sports: Frank Knight’s Curious Understanding of Exchange Behaviour. In: N. De Marchi & M. S. Morgan (Eds), Higgling: Transactors and their Markets in the History of Economics (Annual supplement to History of Political Economy, Vol. 26, pp. 276–292). Edgeworth, F. Y. (1925). Studies in the Economics of Overhead Costs by John Maurice Clark. Economic Journal, 35, 245–251. Fiorito, L. (2000). The Years of High Pluralism. Research in the History of Economic Thought and Methodology (Archival Supplement), 18C, 267–335. Fiorito, L. (2001). John Maurice Clark’s Contribution to the Genesis of the Multiplier Analysis. Quaderni del Dipartimento di Economia Politica, 322. Siena: Università degli Studi di Siena. Hobson, J. (1909). The Industrial System. London: Macmillan. Hodgson, G. (2001). Frank Knight as an Institutionalist. In: J. E. Biddle, J. B. Davis & S. G. Medema (Eds), Economics Broadly Considered: Essays in Honour of Warren J. Samuels. New York: Routledge. Hugh Jackson, J. (1925). The Economics of Overhead Costs by John Maurice Clark. American Economic Review, 15, 82–84. Knight, F. H. (1924). The Limitations of Scientific Method in Economics. In: R. G. Tugwell (Ed.), The Trend of Economics (pp. 229–267). New York: Alfred Knopf. Reprinted in: F. H. Knight (Ed.) (1935), The Ethics of Competition and Other Essays. New York: Harper. Knight, F. H. (1925a). A Note on Professor Clark’s illustration of Marginal Productivity. Journal of Political Economy, 33, 550–553. Knight, F. H. (1925b). Rejoinder. Journal of Political Economy, 33, 557–561. Knight, F. H. (1935). The Ethics of Competition and Other Essays, New York: Harper. Rutherford, M. (2000a). Understanding Institutional Economics: 1918–1929. Journal of the History of Economic Thought, 22, 277–308.

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Rutherford, M. (2000b). Institutionalism Between the Wars. Journal of Economic Issues, 34, 291–303. Shute, L. (1994). John Maurice Clark: 1884–1963. In: G. M. Hodgson, W. J. Samuels & M. Tool (Eds), The Elgar Companion to Institutional and Evolutionary Economics (2 Vols, pp. 50–54). London: Elgar. Shute, L. (1997). John Maurice Clark: A Social Economics for the Twenty-First Century. New York: St. Martin’s Press. Stigler, G. J. (1941). Production and Distribution Theories. New York: Macmillan. Tilman, R. (1992). Thorstein Veblen and His Critics, 1891–1963. Princeton: Princeton University Press. Tugwell, R. G. (Ed.) (1924). The Trend of Economics. New York: Alfred Knopf.

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THE CORRESPONDENCE

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Frank H. Knight to John M. Clark: Chicago, April 10, 1924 Dear Clark:

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I am wondering what you would say if I were to submit to you something of the nature of the enclosed paragraphs, in your capacity as an editor of the J.P.E. Anyway I hope you’ll let me know your reaction to the criticisms.9 An additional point is considered important by a colleague here, Henry Simons, who I believe was in your class last summer. It is that in figuring the product of the marginal unit of labor by adding labor and that of land by subtracting land, you automatically give the labor too much and the land too little as compared with what you would get by integrating between the same limits the productivity of infinitesimal increments. If you did not do this you would not of course have enough to pay the land and the labor, using finite increments as units and any productive function giving rise to diminishing returns. It seems to me that my point annuls this in a way, as I show that the actual marginal products may be opposite in sign without destroying the balance of your illustration. Cordially

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Frank H. Knight

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John M. Clark to Frank H. Knight: Chicago, April 14, 1924

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Dear Knight: You are quite right in saying that my proposition, as I have put it in the arithmetical illustration you are discussing, is an identity. I am not sure about Mr. Simons’ point: he seems to be proposing to convert the problem from one of finite increments to one of infinitesimals, in which case I think that Euler’s theorem would apply and the whole product would be divided without shortage or surplus. Of course, I was using the illustration for the purpose of showing one large discrepancy between the whole product and the sum of the shares of separate contributors, due to the existence of constant factors with unused capacity. I was not concerned with minor discrepancies due to the presence of the variable factors in finite increments, and the nature of my book did not justify taking the space necessary to a full discussion of the logic of the thing in all its

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relations, such as would be necessary in a treatise on distribution for economists only. I was not even concerned to prove that the product is equal to the sum of the shares, but rather to show that the argument which says it does so, requires that the function be homogenous in the first degree. However, it is an essential part of my case to show a tendency for factors which are “homogenous” in their behavior to absorb approximately the whole product if they get their full marginal worth, so that there would be little or nothing left for “constant” factors. If I were stating the proposition with reference to the grade of criticism which you are applying to it, I would add some things (which I do add in class-room discussion) about as follows. The example in the book is an identity because, under the assumptions of our problem (homogenous functions) increments of capital and labor are not separate facts: a positive increment of capital (changing the proportions so that there is more capital per unit of labor than before) is in itself a negative increment of labor (in terms of the amount per unit of capital). There are no two things happening: one change has both aspects. The question of distribution, however, cannot be answered by one such experiment. It starts with a given proportion and the share either factor can actually get depends in practice on a possible finite change in either direction, addition or subtraction, according to conditions of supply or bargaining situations. These make it possible for the sum of the shares to be either greater or less than the whole product, for any given producer. And even a marginal or “bunk-line” producer (as I understand the Tariff Commission people call him) might pay one factor on the more favorable basis, and another on the less favorable. Now the case is no longer an identity. It is in this form that I have put it in my classes. Discrepancies are limited by the smallness of the increments and the continuity of the curve of diminishing return, but some discrepancies are possible. This point did not seem to me important enough in connection with my overhead cost theme to justify taking up the reader’s attention, but it might be worth making in an economic journal, for economists who might want to follow the argument further than my book does. Moreover, the chief force acting to bring this is the semi-natural selection which weeds out the worst discrepancies because they tend to raise the cost of production. Hence, more room for discrepancies! So my arithmetical illustration unduly limits the choice of increments, but the essential point seems to me to be that the result, with its absolute equality, could be gotten by the device of infinitesimals, that any reader knows that bargaining power and other things introduce discrepancies (hence I did not feel responsible for taking up space to show just what discrepancies were involved 59

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in the abstract logic of my figures); and that my device for simplifying Euler’s theorem expresses the same central truth that Euler’s theorem does, without concealing the essential assumption involved. I knew what I was doing, and it seemed to me legitimate. I’m ready and anxious to state it more fully, now or later. As for the fact that productivity may be zero or a minus quantity, that is to be taken in connection with the points noted in the footnote to page 86. Constant return to factor A implies zero return to factor B, and increasing return to factor A implies less than zero return to factor B. It is a stock proposition that when added labor on a given land area would yield “increasing return”, you’re cultivating too much land and would get more crop by letting some of your land lie idle. In other words, land has a marginal product of less than zero and unless you paid less than nothing for it, it wouldn’t pay you to use it to that extent. In other words, unless someone paid you to use that much land, as Uncle Sam did by offering settlers title to it with a speculative future value attached. And the marginal product of labor is more than the whole crop, for it includes the speculative value of proving the claim. Such cases are illuminating as limiting cases, not economical on economic principles. I don’t see that the fact that Euler’s theorem applies to them also proves its unreality. When it applies to them, it makes sense and not nonsense, even though the cases are “rare and peculiar”. And constant return to A and zero return to B is by no means rare and peculiar: it constitutes the very paradox I am discussing in that twentythird chapter, Sections 4 to 8. A’s share absorbs the whole product, and B either gets nothing or takes part of A’s share. This is my reaction as writer and not as an editor. As an editor, whatever you care to say goes into print, and also I’d want to make some such explanation as I have made to you here, indicating something of what the larger story is, of which that arithmetical illustration is a part. Then I wonder if we can’t somehow telescope these first two moves and go on to your reaction to this statement. I suppose what we could do about that would depend on whether this is a separate note or part of a review. If it is a separate note we can do about what we please. I am not particular about having the last word, but I’d rather make this a cooperative putting forth of some considerations on a neglected point in the marginal-productivity theory, rather than a controversy of the usual sort. You have certainly dug into the logic of the argument! However, I don’t think that the thing loses its meaning by being an identity. And if it does, I can simply take two increments, each yielding the same marginal product (a finite substitute for what infinitesimals would give you) start at the mid-point, after the first increment and before the second, and then go ahead with any

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possible combination of the four resulting marginal products. Then you’d get an equality that wouldn’t be an identity. It would be as valid as the infinitesimal assumption is: no more so. But isn’t all pure deduction an identity if you chase it enough? The conclusion is contained in the premises, but it may be worthwhile to find out what was in that premise by way of implications that weren’t obvious on the surface. As to how I hit on the relation, it was in graphic form, long before I ever came to Chicago. I’d never read the Wieser-Menger controversy nor heard of Euler’s theorem. I was trying to prove that the sum of the marginal shares had to equal the whole product, and I hit on this relation. Let OABC be the product with OC units of the variable factor yielding OA product per unit. Let ODFH be the product with, say, a ten percent increase of the variable factor, subject to diminishing return, so that yield per unit is less than before but total yield is more. Let CJGH be equal to this increase of total product. The easiest way to construct it is to construct EFGJ equal to ABED. Then CJGH is the marginal product of the variable factor (say labor). But at the same time, ABED is the marginal loss of product suffered by the labor already there, through having less capital to work with, owing to having to give the new unit of labor its share. (You remember my father talks in those terms: I think in one place he explains diminishing return by this reduction of the per-unit share of the constant factor). Then ABED (or JEFG by construction) are equal to the marginal decrement due to the loss of one eleventh of the original supply of capital. Eleven times JEFG is equal to IDFG. This is the marginal share of capital, and OIGH is the marginal share of labor. Check. Here you have the same identity you have pointed out, though it took me some time to see that it was an identity. You saw that fact quicker than I did.

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Applying the same method to the original product you check again. That was the original form of the thing, I showed it to Charley Cobb, of the math. dept. of Amherst and he worked out the Euler’s theorem part. Later I found it had been done before, so I didn’t try to publish it. (I don’t mean that the graphic form of the thing was not new: I have never seen that in print). Well, that’s that! Let me know what you are doing on it and I’ll govern my actions according [sic]. Incidentally, I’ve wanted to congratulate you on that article of yours on the ethics of competition. It’s one of the best things you have done. I hope things are going all right with you and your wife and family – is there one? Sincerely yours;

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John M. Clark

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Frank H. Knight to John M. Clark: Chicago, April 24, 1924

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Dear Professor Clark: Some other matters kept me from getting at once at the interesting task of studying out just what was involved and where it connects up with my algebra. I think I see it now, and have written up a few paragraphs such as I might write if we should get out something of the nature of a colloquy and you should make a “Reply” along the lines of your letter.

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Referring to this copy of your graph, you will see that the point F representing the product per unit of labor will not descend very far toward the base line until the area ADBE will become equal to and then exceed the whole area EFCH. After this point (supposing the point F to be chosen at successively lower levels) the marginal product of your eleventh element becomes negative. When this happens it becomes necessary to build an area CHCIHI below the X axis, as indicated. Your addition will still check, however, just as my algebra does, if you complete the rectangles and regard the negative sign of areas below the line. On the other hand the point F may be placed above the line AB, showing increasing returns. You will still get a check by building up the marginal strip to EIFI, completing the rectangle and adding the area algebraically. It would be entirely up to your editorial discretion whether such stuff as this is worth the pages. The fun of it has paid me for the trouble, in any case. You will see that I feel rather unscathed in my critical position by the considerations brot [sic] forward in your letter. Maybe you can still produce something that will disintegrate this complacent attitude. Or, it may be as such things so often are, a question of ultimate difference of opinion at some point. Anyway, I shall be glad to hear from you, and appreciate the attention you give to my animadversions. (It has been my “guess” that even if you publish the notes you probably would not care to give up the space and expense of engraving my discussion of the graph; hence the separation of it from the “paragraphs.”) A reasonably clear exposition of the various “cases” would be rather long and for most readers “tedious,” as I state. It would go without saying that your graph and explanation should be given the light. I think in fact that it is enormously clever, and that I shall use the whole thing, as I suggest. I am sure, however, to date, that it is really a much more general relation than that of Euler’s theorem or the actual economic situation. Very sincerely,

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Frank H. Knight

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Frank H. Knight to John Maurice Clark: Chicago, January 12, 1925

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Dear Professor Clark: I have finally gotten around to the notes we exchanged last year and put in most of yesterday working over my thunder. You will see that I have re-written my first contribution with only verbal changes, except that I speak of share in 63

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distribution and factors instead of product and factors, in the last paragraph. I am still sure that the resemblance between your figures and the relation shown by the homogeneous functions of variables is the purest coincidence, but do not see anyway to make that point very conclusive. Your reply carries the argument into the use of the illustration in your book. I have written a few pages showing what I would feel like saying on that point. I am disappointed with the result as to length and in every other way, though I think my contents are sound. It seems clear to me that our conventional categories of competition and monopoly need only to be reasonably applied to cover most of the argument brought forward in your book and also in that of Professor Commons to which I refer.11 However, I would not want to raise questions as to the general argument of your book, at least that was not my intention at first. Of course I believe in what I am saying and shall be glad enough to say it in print if the editors of the Journal think it worth the space and not too far from the canons of good taste. I should in any case be very glad, if the stuff goes into print, if it can be reorganized so as to put my two pieces into one and give you the last word. I am more interested in understanding the issues myself than I am in any debating or publicity aspects of the case and should be very glad to have any expression of opinion you may care to make. Cordially Yours,

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F. H. Knight

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WAGING WAR AGAINST MECHANICAL MAN: THE KNIGHT-COPELAND CONTROVERSY OVER BEHAVIORISM IN ECONOMICS

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Pier Francesco Asso and Luca Fiorito

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His (Copeland’s) theory makes a neat machine out of personality, does it not? (Knight undated). And mind, as a behavior trait of the human body, is presumably understandable by analyzing it into the behavior-traits of the structural parts of the body (Copeland, 1930, p. 16).

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1. INTRODUCTION

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Shira B. Lewin (1996) has recently published a detailed reconstruction of the early twentieth century debate over the psychological foundations of economic theory. From her well documented research, we learn that, since the 1920s, behaviorism as a school of thought had begun to acquire a prominent position in psychology, entering, in the meantime, the domain of other social sciences. As far as economic methodology was concerned, behaviorism promptly gained the attention and support of many leading American institutionalists. With its emphasis on demarcating science (observed behavior) from metaphysics (mental states) and on the empirical testing of behavioral laws, the new approach seemed

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to provide a powerful analytical and rhetorical weapon against the perceived narrowness of “orthodox” economic theory. With its bias towards the practical applicability of scientific knowledge to the prediction and social control of human conduct, behaviorism was viewed as a promising philosophy for those who were looking for suitable models of inquiry and intervention for the postwar world (Lewin, 1996, p. 1294; pp. 1304–1307). Among institutionalists, Morris Copeland was the strongest supporter of the new approach. American economists did not unanimously accept this methodological turn, and behaviorism soon found its fierce detractors. First, the behaviorist doctrine was attacked by those who saw something distinctive in the study of human behavior. Many found that, if applied to economics, behaviorist explanations were bound to degenerate into a new, and more dangerous, brand of determinism. Critics also disliked the idea that intentional human action – whose origins are presumably subjective – could be reduced to testable theories based on observable behavior. It was also remarked that observation was hardly an objective activity, but theory-laden; and that sociological factors rather than empirical verification, often determined whether a theory actually comes to be accepted or rejected. Such a wave of criticism was formulated, among others, by Frank H. Knight. In a series of contributions appearing in the 1920s and early 1930s, Knight vigorously attacked the adoption of behavioristic psychology in economics. The major theme of this essay is to explore the rationale of Knight’s campaign against behaviorism and the psychological foundations of human conduct. We also attempt to qualify whether Knight’s methodological criticism may somewhat undermine his recently acquired credentials as an institutionalist economist (Hodgson, 2001). In so doing we shall focus our attention in particular, although not exclusively, on his debate with the institutionalist, Morris A. Copeland. In the first section we try to explain why behaviorism gained consensus among institutional economists, and we also provide a brief overview of the main behavioristic themes as they were presented in contemporary economic literature. The second section is devoted to Knight’s reactions against behaviorism. Our main point here is that Knight’s insistence upon the peculiarities of the human subject matter of economics is still worth careful consideration by all those interested in economic methodology. The final section presents a conclusion.

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2.1. THE 1920S: BEHAVIORISM ENCOUNTERS ECONOMICS

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In December 1918, one of the young dissenters of American economics, Walton H. Hamilton, proposed a reformulation of the discipline along “institutionalist”

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lines. In a paper delivered at the annual meeting of the American Economic Association – which later became known as the “institutionalist manifesto” (Dorfman, 1974; Rutherford, 2000a, b; Hodgson, 2001) – Hamilton preached for a new economic theory whose relevance should be extended to the social problem of control and whose foundations should be based upon an acceptable theory of human behavior. In this connection, Hamilton believed that subjective utility was a misleading concept in order to explain economic behavior and the way it changed in an evolutionary perspective. He resolutely condemned “[t]he extreme individualism, rationality, and utilitarism which animated eighteenth century thought” and which, in his opinion, still found expression in contemporary neoclassical economics. In its stead – he argued – the social scientist ought to formulate a new theory of economic motivations which could find useful inspiration in the most recent achievements of modern social psychology. As Hamilton put it: Where it [neoclassical economics] fails, institutional economics must strive for success. It must find the roots of activity in instinct, impulse, and other qualities of human nature; it must recognize that economy forbids the satisfaction of all instincts and yields a dignified place to reason; it must discern in the variety of institutional situations impinging upon individuals the chief sources of difference in the content of their behavior; and it must take account of the limitations imposed by past activity upon the flexibility with which one can act in future (Hamilton, 1919).

Hamilton’s argument for an economics based on modern psychological foundations requires some comment. As noted by Hodgson (2001), when the premises of institutionalism were laid down in the 1890s “modern psychology” perfectly coincided with the instinct psychology of W. James, W. McDougall and others. Indeed, this doctrine had exerted a strong influence on early institutionalist thinkers like T. Veblen, R. F. Hoxie, and Carleton Parker, as well as, although to a lesser degree, on some more orthodox figures like F. Taussig, I. Fisher and H. J. Davenport. Instinct psychology, however, shortly began to decline. Even before 1918 it had come under severe attack both from psychologists and economists alike, the latter denying its usefulness for the study of economic agents and the nature of complex economic activity. Quite interestingly, early critical comments of instinct psychology were raised from the institutionalist camp. In 1914, for instance, W. C. Mitchell pointed out some ambiguities in Veblen’s definition of the term instinct (Mitchell, 1914); in his 1915 lecture notes Mitchell observed that economic behavior was probably “the most suggestive name of the type of economic theory that we should cultivate,” emphasizing the need for the economist to acquaint “the knowledge of human nature which psychology, ethics, history and biology has afforded since Ricardo’s time [together with] 67

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all the materials put at our disposal by statistics, and all our own wits to understand economic behavior” (Mitchell, 1915, 1969).1 Two years later, in 1917, in his posthumously published Trade Unionism in the United States, Hoxie had strongly criticized Veblen’s deterministic conception of human nature (Hoxie, 1916); while in 1921, Clarence Ayres attacked the instinct theorists on the grounds that no adequate consideration was given to the cultural and environmental factors as a contributory cause of human activity and motivations. Ayres’ contention can be succinctly summed up by quoting the closing sentence of his 1921 article on instincts and capacity: wondering what the driving force that ultimately formed individuals might be, Ayres stated that “the social scientist has no need of instincts; he has institutions” (Ayres, 1921, p. 565). Within economics, however, the most devastating attack on instinct psychology is to be found in Knight’s 1922 essay on “Ethics and the Economic Interpretation.” Speaking of the relevance of instincts the Iowa economist noted that:

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If instincts are to be scientifically useful, it must be surely possible to get some idea of their number and identity. But there has always been substantially unanimous disagreement on this point. Logically the choice seems to lie between a meaningless single instinct to do things-in-general and the equally meaningless hypothesis of a separate instinct for every possible act (Knight, 1922, 1935c).

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Knight thus strongly rejected the usefulness to economics of any working definition of instincts, pointing out that it would always be possible to find ad hoc justifications for any kind of human behavior simply by adding one new instinct to the existing set. “It is not enlightening” – this was Knight’s conclusion – “to be told that conduct consists in choosing between possible alternatives.” (Knight (1922), 1935c, pp. 29–30; see also Copeland, 1924).2 The following year, Knight again turned his attention to instinct psychology in his review of Lionel D. Edie’s Principles of New Economics (Edie, 1922). Echoing Ayres’ criticism, Knight affirmed that he was under the impression that “the tendency of the more careful students in this domain [social psychology] is already strongly away from the use of ‘instincts’ to explain everything in the field of human contact” and observed that “the movement is toward a real ‘psychology,’ viewing behavior as the expression of conscious attitudes toward values whose content is largely an institutional product” (Knight, 1923, p. 155). Thus, at the time that Hamilton raised his plea for a closer “cross-fertilization” between modern psychology and economic theory, several economists, more or less sympathetic with the institutionalist perspective, had already expressed, or were about to express, skeptical observations about the possibility of building a theory of human agency based on the notion of instinct.3 It is not surprising

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that at the beginning of the 1920s, many of them turned their attention to a new approach in psychology, namely behaviorism, which was thought to undermine the validity of the instinct doctrine. Launched in 1913 by John B. Watson’s much celebrated series of lectures at Columbia University on “Psychology as the Behaviorist Views it” (Watson, 1913), the new approach soon began to gain momentum throughout American psychology. During the 1920s, the work of a growing number of psychologists led to the emergence of a reasonably coherent set of intellectual commitments to which the name behaviorism gradually became attached (Wozniak, 1994). Its main tenets were the removal of introspection in psychological theory, a dedication to the use of objective methodology in research, and a strong concern for the practical application of psychological knowledge to the prediction and control of behavior. As a consequence, behaviorism soon displaced instinct theory as the “scientific,” methodological basis for the construction of an alternative theory of human agency in economics. This circumstance is also confirmed by the large number of references to behaviorism that are to be found during the 1920s in “heterodox” economic literature.4 Among the leading institutionalists, Rexford G. Tugwell was perhaps the first to express his approval of the new psychological approach. According to Tugwell, the increasing demand for data collection and empirical manipulation of statistical series required a drastic “philosophical” change in the conduct of quantitative methods. Empiricists in the social sciences could not derive their practices from the delicate physical manipulations employed by physical scientists. Instead, they had to content themselves with relatively coarse manipulations having discernable effects on aggregate behavior. In this connection Tugwell wrote that “the devices of the behaviorists have been useful in the sense that we now have the facts which provide a significant nucleus for others and which will grow into a later, more complete, body of truth” (Tugwell, 1922, p. 332). Moreover, he added, behaviorism was quite instrumental to a new scientific rationale of government intervention, which the new breed of economists “in the public service” was eager to promote in the postwar world. In fact behaviorism was very disturbing “to laissez faire believers precisely because it calls in question what is meant by saying that man pursues his own gain and how it is that he accomplishes in this way the social good he is credited with” (Tugwell, 1922, p. 339). Three years later, in his famous presidential address on “Quantitative Analysis in Economic Theory,” W. C. Mitchell followed Tugwell’s suggestions and embraced enthusiastically behavioristic psychology. While discussing the pros and cons of experimentalism, Mitchell dwelt upon the difficulty of carrying out neutral experiments in the social sciences. Such difficulty seemed to him almost 69

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insuperable, as long as economists and social scientists were stuck to the old, unchangeable conceptions of human nature and motivations. Quite to the contrary, he wrote, “the behavioristic concept promises to diminish this handicap under which economics and its sister sciences have labored. For we can try experiments upon group behavior. Indeed we are already trying such experiments” (Mitchell, 1925, p. 8). Among institutional economists, however, the most outspoken and resolute endorser of behaviorism was undoubtedly Morris A. Copeland. In a series of papers which were published between 1925 and 1931, Copeland attempted to establish strong scientific connections between behaviorism and institutionalism.5 Such a fruitful alliance, he wrote, was to be grounded on the common concern (common to the institutionalist and the behaviorist) that their formulations shall conform to two important canons: “(1) that they shall be consistent with hypotheses in other fields, especially with the natural-evolutionary hypotheses in geology and general biology; (2) that they shall leave the door open to the solution of all psychological problems by methods of scientific observation and scientific reasoning” (Copeland, 1930, p. 13).6 However, within the economics profession, the institutionalists’ enthusiasm for the application of the latest achievements of psychological research in economics did not receive unanimous support. T. N. Carver, for instance, as early as 1919, warned the readers of the Quarterly Journal of Economics against the emergence of a new kind of economic man – the “behavioristic man” – who was the by-product of a related school of thought, the so-called “behavioristic school of economists.” Such a characterization, he argued in a strongly critical vein, seemed to have no historical specificity, sharing an odd destiny with its neoclassical counterpart. It was simply “the result of an overemphasis upon the non-pecuniary and the neglect or under-emphasis upon the pecuniary motives, as the old economic man was the result of the opposite tendencies”7 (Carver, 1919, p. 195). In the same fashion, in 1924, R. T. Bye commenting on “Some Recent Development in Economic Theory,” continued to express his faith in the survival of neoclassical price theory. Quite ironically, Bye remarked that some contemporary critics of traditional economic theory “have become so sanguine over the possibilities of behavioristic psychology that they believe the whole of current value theory must be thrown upon the scrap heap and a new one constructed upon the study of human behavior. But this would be too much useful work of the past, and is quite unnecessary” (Bye, 1924, p. 277). If these economists merely limited themselves to passing references to behaviorism, Frank H. Knight, both in his published works and in his private correspondence, embarked on a personal campaign against the adoption of

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behaviorist psychology in economics. The next paragraph briefly reviews the main reasons why some institutional economists adopted a behavioristic perspective with a particular, although not exclusive, focus on M. A. Copeland; in the subsequent section we analyze Knight’s reaction to behaviorism.

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2.2. BEHAVIORISM IN ECONOMICS: THREE MAJOR THEMES

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Even among the psychologists who identified themselves as behaviorists, agreement as to its meaning and scientific usefulness was by no means unanimous (Buckley, 1989; Mills, 1998; O’Donnell, 1985; Wozniak (Ed.), 1994). In what follows, we make an attempt to define the behaviorist programme or, rather, the main common themes as they were presented by those institutional economists who adopted a behavioristic approach to economics. As already remarked, Morris A. Copeland was the economist who, more than anybody else, attempted a systematic treatment of behavioristic psychology.8 Therefore, his works will be our main source of reference.9 Interpreting Copeland, the key propositions of behaviorism could be formulated in the three following points:

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(1) Introspection – internal observation of one’s own consciousness – must be rejected because consciousness is not an objective fact to be observed. Following Watson, some economists protested against all attempts to explain human action by exclusive reference to introspection on the grounds that mental states fall outside the range of physical measurement. Conversely, human behavior was viewed as belonging to the same realm as physics – in its strictly mechanical interpretation – and defined in terms of the organism’s “organized” reaction to an antecedent stimulation. In a typical institutionalist fashion, it was argued that economic agents developed new chains of habits from past experiences, which strongly influenced the prospective evolution of economic actions and reactions. Such an argument was best put forward in L. Frank’s words. In his 1924 article on “The Emancipation of Economics,” which appeared in the American Economic Review, Frank wrote: This does not mean that a stimulus (event, person, or thing) ‘causes’ man’s behavior, but rather that each person, from birth onward, develops a set of habits or patterns of behavior by responding to the stimuli of the environment he meets; these habits are ‘touched off’ whenever the appropriate stimuli appear.

For Frank, behaviorist psychology was a rather mechanistic version of associationist psychology which was organized around experiments using comparisons and conditioned responses: 71

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PIER FRANCESCO ASSO AND LUCA FIORITO Man’s behavior then, like all other phenomena, is a consequent response which follows a specific, antecedent stimulus; but the particular form or manner of the response is a stage in the process of development or evolution of habits, as formed by prior stimuli, or what we call experience. In simplest terms, then, behavior is an event, the occurrence of which is a consequent to an antecedent stimulus; but the character, quality, form, pattern, and so on of that behavior event is a product of past experience or habits (Frank, 1924, p. 25).

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In other words, the social scientist who set himself the task of analyzing the causation of human behavior must be concerned with the only data objectively available, namely the past record of stimuli to the organism and the organism’s actual response to the external stimulus. In so doing, the economist may be able to specify the response as a function of the history of stimuli. As to the rejection of consciousness, it must be noted that Copeland took a somewhat less radical position. If in the analysis of human behavior – thus his argument ran – consciousness was to be attributed any role, mental states merely needed to be reconceptualized in terms of physical processes or to be reconstructed as an epiphenomenal – albeit psychical – byproduct of physical process. Even in these cases, however, consciousness had to be considered as a datum rather than as an explanation or an analytical tool: “Mental states, if not physical, must be mere parallels or duplicates of physical conditions and events” (Copeland, 1926, p. 246).

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(2) Intentional, purposive descriptions are highly interpretative, and therefore do not allow intersubjective consensus. Purposive action should always be explained in terms of more basic properties of behavior. If behavior is to be accounted for only in terms of a more or less mediate stimulus-response patterns, explanations of human conduct based on “teleological” terms like motive, intent, purpose, aim, desire, urge and so on, should always be carefully avoided in scientific analysis. Or else they should be reconstructed and reconsidered along the behaviorist perspective. Frank was especially forceful in making this point: It is not difficult to see how the notions of volition and of motives arise and persist, for, if we do not know a person’s habits or prior experience, his behavior in any situation can be accounted for only as something willed, the product of a specific motive. It may not be unwarranted to suggest that a motive is a name we give to an undisclosed habit or to the susceptibility to stimuli which has been acquired in past experience. We may give up the conception of autonomy and the problem of motivation without embarrassment to social science, if we approach the problem of human behavior as a sequence of antecedent stimulus, prior experience, or habits and consequent response (Frank, 1924, p. 25, emphasis added; see also Snow, 1924).

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Even the concept of instinct ought to be discarded in so far as it was conceived in teleological terms, i.e. as an “innate disposition” to attain some natural objectives or as a form of evolutionary association. “Such a metaphysical interpretation of organic predispositions” – wrote Adolf Snow10 – “is unintelligible” (Snow, 1924, p. 492: emphasis added; see also Frank, 1924, Copeland, 1925, 1926).11 Copeland’s analysis of intentional behavior in a behavioristic perspective deserves special mention. As a behaviorist, Copeland coherently rejected teleological explanations, although he did not deny that behavior shows purposive characteristics – namely, persistence and flexibility. However, such characteristics, he maintained, were also to be accounted for in nonteleological terms. In order to clarify the issue, Copeland first introduced a semantic distinction between “teleological” and “telic” behavior. The word “telic” was applied to those instances in which “antecedent responses appear to be determined by the consequent end”; while the word “teleological” was confined to terms or statements which implied that “consequent determines antecedent in telic behavior” (Copeland, 1926, p. 255, both italics are ours). Now, according to Copeland, telic behavior can be explained nonteleologically as stimuli that are maintained until they are eliminated by a goal-response. Therefore, behavior shows persistence because different goal-responses will continue to be emitted until the inducing stimulus disappears or is substituted by a new one: “[t]he end is the elimination of the inducing stimulus, or perhaps the presentation of a new stimulus which directs attention or awareness along other lines by inhibiting a new set of reaction-patterns and calling out a different set of responses” (Copeland, 1925, p. 256). Similarly, behavior shows a certain degree of flexibility whenever new goal-responses succeed in eliminating the inducing stimulus: “[t]he evolution of drives is partly a process of adding new reaction patterns to a given drive [. . .], and partly a process of developing inhibitions to one of two mutually conflicting responses when both are called out together [. . .]” (Copeland, 1926, p. 256). It was on these grounds that Copeland dismissed the idea of rationality and given preferences implied by the neoclassical homo oeconomicus: contrary to what is assumed by marginal utility theory, choice does not take place between competing desires, since what is desired may be changing during the choice-process. Choice, as he put it, is rather “a conflict between two reaction-patterns and a process of survival of one of them in the complex” (Copeland, 1926, p. 263).

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(3) Behavioral research leads to the discovery of behavioral “laws,” and these laws can be tested experimentally. A theory that is confirmed by repeated 73

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tests allows prediction and control. Many commentators (O’Donnell, 1985; Smith, 1986) have remarked that the behaviorists’ emphasis on objective and measurable variables was consistent with the emerging positivist approach. Undoubtedly, with the logical positivists the behaviorists shared the empiricist insistence that claims must be assessed on the basis of observational evidence. Sensory experience – the results of observations and experiments – constituted the ultimate evidence on which to base (or reject) consistent theoretical claims. In this connection, M. A. Copeland made it crystal clear that the social scientist should draw a sharp distinction between appraisals (subjective) and descriptions (objective) of human behavior: “[a]ppraisal of the behavior of an organ as appropriate to the performance of the organ function is not part of the description that makes possible prediction, specification, or control of behavior” (Copeland, 1926, p. 250). Similarly, L. Frank insisted on the denial of consciousness in order for economics to attain a scientific status: “So long as man’s behavior is conceived to be volitional and purposive, it must escape experimental and scientific study, for it is a non-repetitive occurrence and has no antecedent which can be objectively studied” (Frank, 1924, p. 37n). The idea of an objective, scientific approach to the study of human behavior, which was able to draw upon the methods of the natural sciences, turned out to be extremely appealing especially to the “quantitative” wing of the institutionalist movement. Terms like experiment, experimental, quantitative techniques and the like became very common in the methodological debates of the 1920s. Again, Mitchell’s belligerent 1925 article provides one of the most relevant examples. According to the Columbia economist, realistic studies should not be viewed as subordinate to theoretical work, nor even as complementary. Instead, [i]n collecting and analyzing such experimental data as they can obtain, the quantitative workers will find their finest, but most exacting opportunities for developing statistical techniques – opportunities even finer than are offered by the recurrent phenomena of business cycles. It is conceivable that the tentative experimenting of the present may develop into the most absorbing activity of economists in the future. If that does happen, the reflex influence upon economic theory will be more radical than any we can expect from the quantitative analysis of ordinary behavior records (Mitchell, 1925, p. 9).

Similar claims about the need of a quantitative-experimental economics were made by Copeland (1924), Mills (1924), Snow (1924), and Tugwell (1924b). Nevertheless, the nature and definition of what the Columbia economist and his fellows meant by “experimental method” often remained unclear, raising heated debates and controversies over Mitchell’s line of thought (Schultz (1937), 2000; Seckler, 1975; Fiorito – Samuels, 2000).

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Finally, as to the issue of social control, it should be noted that in the institutionalist manifesto, W. H. Hamilton had listed the pragmatic nature of the “new economics” among its most distinguished features as well as one of the highest research-priorities on the agenda of postwar economic thinking: A shift in problems and a general demand for control has made institutional economics relevant. This shift has been due partly to a discovery that institutions are social arrangements capable of change rather than obstinate natural phenomena, partly to a consciousness that activity, once apparently voluntary, is controlled by subtle conventions and habits of thought, and partly to the bad taste which laissez faire has left with us (Hamilton, 1919).

There seems to be a strong similarity between Hamilton’s pragmatic view of institutionalism and the behaviorists’ claim that the goal of psychology was to lay down the groundwork for a “behavior technology.” In contemporary textbooks on the history of economic doctrines, this new strand of American economic thought began to be classified as the “behaviorist institutionalists.”12

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3.1. KNIGHT’S CRITIQUE OF BEHAVIORISM

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In order to present a coherent analysis of Knight’s critique of behaviorism, we must first make an effort to reconstruct his line of thought from the several contributions he made from the early 1920s to the mid-1930s, which mainly dealt with economic methodology, psychology, and ethics. On these issues Knight entertained intense exchanges with Morris A. Copeland and we shall also quote extensively from their unpublished correspondence. The most interesting among these letters – the two Knight wrote to Copeland in reaction to the latter’s defense of behaviorism which appeared in the Quarterly Journal of Economics – are reproduced in the Appendix. As other authors have shown, immediately after the War, the two economists entertained regular intellectual exchanges which culminated in the organization of a working group.13 It is, therefore, quite disappointing that in his critique of behaviorism Knight never explicitly discussed Copeland’s writings. For the sake of simplicity, we have grouped Knight’s critique under the same headings which we previously adopted to define the three major themes of behaviorism.

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(1) Consciousness. Knight’s defense of the role of introspection in the analysis of human behavior is inspired by his intellectual debt to such figures as Henry Bergson and Max Weber (Knight, 1925a).14 From the German 75

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thinker in particular, Knight took the idea of Verstehen – the intuitive understanding of human motivation – which in Weber’s opinion is what fundamentally distinguishes the human sciences from the natural sciences (Weber, 1922; Lewin, 1996, pp. 1298–1299). Knight started his discussion by affirming that the economist who adopts the scientific – i.e. behavioristic – point of view, reduces the problem of economic behavior to a “parallel” of that of celestial motions. The “desire” which prompts the act of purchasing is thus analogous to the “attractive force” among planets. In this perspective, the idea of consciousness plays no active role, for “[w]hat we really observe in the economic situation is the fact that a good is purchased, just as what we observe in the other case is the fact of movement” (Knight (1925a), 1935c, p. 83). However, the adoption of the physical – or, more precisely, mechanical – metaphor in the study of economic behavior implied what Knight called the “fundamental difficulty in economic psychology”.15 On the one hand, in fact, mechanics involves a strictly deterministic causality according to which there can be no discrepancy between the driving forces and their effect, since the only source of information available to the observer are the effects themselves. On the other hand, in dealing with human behavior we find two distinct sources of information about desire, and both sources tend to show that such a strict causality does not necessarily hold (Knight (1925a), 1935c, p. 84; 1925b). The first source is introspection, i.e. the human ability to contemplate one’s own desires, a quality which does not find expression in any observable behavior. Through introspection, Knight argued, the individual “has immediate knowledge to the effect that the acts most directly prompted by desire do not exactly express the desires as felt and often diverge grotesquely from them” (Knight (1925a), 1935c, p. 84; 1925b). The second source of information about desires is communication with other human beings: “The knowledge of human desires we get through social intercourse reveals them as divergent in a very considerable degree from the desires which are necessary to explain in the scientific sense the behavior we observe” (Knight (1925a), 1935c, p. 84; 1925b). For Knight, the fact that psychologists did not know precisely what consciousness was, did not prove its non-existence, since even physicists did not know the real nature of force.16 Therefore, he insisted, the behaviorist was on rather shaky ground when he identified consciousness with physical processes, or whenever he acknowledged differences between them, but tended to exclude the former from the realm of science. Most importantly, assumptions (or exclusions) of this kind were untenable, as a simple consideration of intra and interpersonal communication showed.

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Both forms of communication represented forms of consciousness, not just physical events, and they cast serious doubts on whether human behavior was always mechanically activated by motives as analogues to force. It must also be noted that Knight attached paramount importance to the role of communication in another connection which is quite different from the behaviorists’ attitudes towards the logic of language. While Watson and his followers proposed and attempted to incorporate the major aspects of linguistic behavior within a behavioristic framework, Knight held that our ability to relate to one another through language – but also through shared meanings, traditions, norms – cannot be reduced to the logic of mechanical action patterns. In his view, communication among individuals was essentially communication among different states of consciousness: “Peoples are personalities, characters; the biggest part of social relations consists of conversation, the interest residing in feeling and thought communicated and not in behavior and its physical results” (Knight, 1925b, p. 260). The very logic of language thus becomes purposive and eludes any behavioristic attempt to reduce it to a stimulus-response pattern. Quite interestingly, in his attempt to rebut the idea of a language habit, Knight anticipates many of the anti-behavioristic themes around which Noam Chomsky would base his 1959 critique of Skinner’s Verbal Behavior. As Knight put it in a long passage from which we quote at length: Speech in particular cannot without absurdity be treated as mere physical behavior, and the behavioristic term ‘language habit’ does grave injustice to the richness and variety of life. The notion of habit is of possible applicability to the utterance of words used in a purely literal sense – if any language outside of mathematical symbols ever is strictly literal, an assertion open to doubt. It will not fit at all the other type of language, which is more important and more common in cultural intercourse, the figurative, suggestive use. Language as an artistic medium must not be confused either with the mere tool of factual communication or with mechanical incitement to action. Actual speech almost always contains a considerable admixture of the first element. No two people talk identically the same language. The great majority of sentences spoken or written express and convey to the hearer or reader ideas to some extent original and unique. How we ever learn to communicate thought and feeling seems profoundly mysterious. Induction by association appears wholly inadequate to explain the result, certainly in a creative genius and his readers. The writer is impelled to believe to some extent in an intuitive ‘faculty’ of communication and interpretation. Yet our communication is admittedly very imperfect. Two critics get very different impressions from a book or poem; and in social science and philosophy, discussions of fact have a way of transforming themselves into arguments about what somebody really said. Yet communications of new ideas and emotions is a fact, and one which resists mechanistic explanation (Knight (1925a), 1935c, 90n).

The role of language and social intercourse thus occupies a central place in Knight’s defense of Verstehen. It is through communication and social 77

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intercourse that people infer other people’s (and their own) consciousness and recognize it as real. This, in turn, begs the question of what Knight meant by real. This point will be taken up below.

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(2) Analysis of behavior. Once the role of consciousness is recognized and once the possibility of discrepancy between stimulus and response is allowed for, the idea of a mechanistic interpretation of human behavior breaks down. Stepping from the Pars Destruens to the Pars Construens, Knight advanced three distinct interpretative “principles” or “levels” for the study of human behavior.17 As Knight would put it most explicitly in his subsequent writings – where he would develop six different categories of human behavior18 – each of these three “levels” of explanation is necessary when the social scientist approaches the study of human behavior. First, human action is in part explained by “natural causality” and can accordingly be reduced as far as possible to principles of regularity by statistical inference and other methods: “Within limits,” Knight conceded, “it is possible to discover laws of behavior as such, in the objective sense” (Knight (1924), 1935c, p. 121). Yet, even in this case, Knight maintained a strong skepticism toward the rhetoric used by those who followed behaviorism. As he wrote in a letter to Copeland: Of course I recognize that behavior is largely mechanical, and that it is vitally important to push the study of it along mechanical lines as far as possible. In this connection, however, I am still skeptical about the ‘relevance’ of such notions as those of drives, complexes etc. They do not mean the same thing as action-pattern, and even in this latter, the word ‘pattern’ is ambiguous and dangerous, and ought to give place to the old-fashioned word ‘law,’ or some new term which would get rid of the flavor of imperativeness which that word unfortunately has. The use of such language is to me a sign of the weakness of the position it is used to defend.19

Second, human action may be accounted for by an intention or desire which is to be considered as an absolute “datum,” and thus as a “fact” (Knight (1935a), 1935c). It is this second level of interpretation which ultimately represents, according to Knight, the proper realm of scientific economics. Economics as a science deals with ideal and not actual behavior – ideal in the sense of “being an objective which the individual does in fact strive to realize” (Knight (1935a), 1935c, p. 279). And this idealized form of behavior is ruled by universal laws, which are non-institutional in character: [T]here is a science of economics, a true and even exact science, which reaches laws as universal as those of mathematics and mechanics. The greatest need for the development of economics as a growing body of thought and practice is an adequate appreciation of the meaning, and the limitations, of this body of accurate premises and rigorously established conclusions (Knight (1924), 1935c, p. 135).

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D. Wade Hands has correctly observed that Knight adopted a rather narrow “means-end” definition of economics: “[i]n contemporary terminology, Knight characterized economics as the science of instrumental rationality: finding the most efficient way of achieving (often maximizing or minimizing) a given objective (or objective function).” However, Wade Hands also affirms that Knight’s use of the term “economic science” for this kind of theorizing should be interpreted carefully: “it is a type of science, but not a positivistic science [. . .]” (Hands, 1996, p. 201). In fact, and this is Knight’s main point, in spite of the universal nature of the laws which govern human choice, the ordinary conditions of economic behavior should be kept sharply separate from the theoretically ideal conditions of mechanics. On closer examination, any supposed analogy between utility maximizing economic agents and Newtonian principles does not rest upon solid foundations: In mechanics, if the forces are not directly accessible, at least the conditions under which they act and the effects are measurable and do repeat themselves accurately from one case to another. In economic behavior the opposite is the case. Under no real circumstances can the behaving subject himself, not to mention any outside observer, ever know even afterwards whether or not he actually performed in such a way as to realize maximum possible total satisfaction; and it is even less possible to repeat the choice experimentally with controlled variations (Knight (1931a), 1935c, p. 160).

On several occasions Knight insisted on the pervasiveness of intentional human behavior. What the economist can assume as an ideal condition is merely that individuals strive and endeavor to act rationally – a tendency which approximates the results of rational action. Once, however, uncertainty and the subjective probability of error are allowed to creep into the formal model, human action is placed on a peculiar epistemological basis, which is categorically different from cause and effect in natural sciences. For Knight the existence of uncertainty and error is the mark of human consciousness (McKinney, 1977, p. 1143). Third, human actions can be explained by an urge to achieve different kinds of values which cannot be reduced entirely to factual desires, because “this urge has no literally describable object” (Knight (1935a), 1935c, p. 244). Again, in matters of value judgments, value formation and subjective “rightness,” any resort to a mechanical man was of little help for the social scientist. Knight’s correspondence with Copeland is particularly illuminating on this specific weakness of behaviorism: I submit that no man, however well-educated or critical, or scientifically biased, can carry on five minutes of ordinary conversation about any topic of human interest connected with human relations, without repeatedly and distinctly recognizing: (a) that

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PIER FRANCESCO ASSO AND LUCA FIORITO human actions are largely caused and inevitably interpreted in terms of wishes or desires, in a sense categorically different from mechanical estimation; and (b) furthermore, that they are similarly caused by and inevitably interpreted in terms of (to a lesser but important degree) value judgment in a sense categorically different from wishes or desires.20

Knight made this point in a more explicit fashion in a later contribution: The role of value judgment in individual motivation constitutes a more serious limitation on the economic view of motivation. One commonly wants to do the ‘right’ thing, without knowing what it is, in contrast with wanting to do any given thing. In this case the problem in action is to decide upon an end, upon what to want, as well as to achieve one’s desire. And ‘rightness’ has a variety of meanings; we want to be right in a mere conventional meaning and also in several ‘real’ senses – aesthetically, intellectually, and morally (Knight, 1940, p. 25; 1925a, b).

Here, Knight made an important step forward in his critique of the mechanical interpretation of human nature. Not only is it impossible to account for intentional behavior without making reference to internal mental states, but it is also impossible to “explore” these mental states without making reference to the set of the individual’s values according to which he decides what is right, what is good, and what he wants. To put it differently, for Knight, while the selection of a means to a given end can be assessed in terms of its instrumental rationality, since it is possible to discriminate scientifically between adequate and inadequate means, such a notion of rationality does not apply to “value-seeking” or “value defining” behavior. It seems to us, that Knight is here referring to the kind of behavior that Weber has defined as “value rational” (Wertrational), i.e. an action which is “determined by a conscious belief in the value for its own sake of some ethical, aesthetic, religious, or other form of behavior, independently of its prospects for success [. . .].” According to Weber, examples of pure valuerational actions would be “the actions of persons who, regardless of possible costs to themselves, act to put into practice their convictions of what seems to them to be required by duty, honor, the pursuit of beauty, a religious call, personal loyalty, or the importance of some ‘cause’ no matter in what it consists.” In Weber’s terminology, a value-rational bias “always involves ‘commands’ or ‘demands’ which, in the actor’s opinion, are binding” (Weber, 1968, p. 25). Value rational action, therefore, is characterized by the striving for some substantive goal, which in itself may not be rational, but which is nonetheless pursued with rational means. Also in his entry “Value and Price” for the Encyclopaedia of the Social Sciences, Knight devoted a few passages to emphasizing the role of values in economic behavior. Values, he argued, enter the realm of economic behavior in two different ways. First, he insisted on the fact that “what is chosen in an

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economic transaction is generally wanted as a means to something else” – a point reminiscent of Dewey’s denial of the means-end dichotomy (Hodgson, 2001) – and this in turn implies “a judgment that is a means to the result in question.” Second, he warned, “what is ultimately wanted for its own sake can rarely, if ever, finally be described in terms of physical configuration, but must be defined in relation to a universe of meanings and values” (Knight (1935a), 1935c, pp. 246–247).21 From this perspective, the main deliberative problem implied by human action was the evaluation of the “ends” that scientific economics must necessarily take as granted. Values, as we would say in modern jargon, provide a metapreference ranking according to which the individual can evaluate, and give meaning to, “factual desires.”

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(3) Verification, Prediction and Control. As we have previously remarked, under the influence of logical positivism, behaviorists held that scientific theorizing had a twofold purpose: (i) to develop through objective observation a reasonably real picture of the world, amenable to empirical testing; and (ii) to gain some measure of control over the course of events which occur in the real world. Knight harshly criticized such a position. First he rejected the possibility of separating observation from inference. Every observation – even the most objective observation – is filtered and shaped by the individual’s consciousness, for “we cannot perceive the objects themselves as real [. . .] without reading our own experience into them” (Knight (1925a), 1935c, p. 93). Accordingly, as Knight put it, not only are observations theory laden, but they are also laden with what the behaviorists have dismissed as metaphysics. Every scientific observer has his own way of seeing the world, which is in part based on his background interests and purposes, and in part influenced by his social intercourse with other individuals. Moreover, like every other individual, the social scientist at work is equipped with a very unstable set of preferences, and the behaviorists provided no exception to this rule. Observation thus becomes an act characterized by deeprooted historical and human specificity: Thus, observation itself, understood in anything approaching its scientific meaning, is a power socially developed and trained in the individual, and produced in the course of history by the accumulation of communicated and compared experience. Only in this way do we learn even to see with anything like accuracy. And always we see largely what we expect to see, what fits into our organized knowledge of the world. And the structure of our thinking is notoriously that of our language, our medium of communication (Knight (1925a), 1935c, p. 96; 1925b).22

This, in turn, led to a more fundamental implication. If every observation involved a certain degree of inference, there was no such thing as an 81

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external physical reality – itself independent of men’s consciousness – but a never-ending construction (and reconstruction) of “reality” through social interchange. Accordingly, Knight defined “reality” as the sum of the factors which condition purposive activity, including purposive thought, which must not be conceived of as always standing in an incidental relation to behavior. The freeing of thought from emotion and metaphysical entities would mean its annihilation. It is impossible to perceive or imagine the real world without recognizing the equally real character both of purposes and of intellectual concepts. Thought is impossible without these non-factual data (Knight (1925a), 1935c, p. 95).

Thus, the behaviorist assertions that only the external world is real, that the world consists exclusively of material entities and their interactions, and that experience can be reduced to mere sense perception, were all rejected by Knight as meaningless, once consciousness was allowed to enter the scene. The next step for Knight was to advance what may be called a “consensus” theory of verification. Verification was not a matter of analysis of objective data and experimental testing. “True” knowledge was developed by means of critical comparisons and mutual communication; it became accepted on the basis of agreement among the members of the community of inquirers:

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[T]he test for distinguishing ‘real’ observation from imaginary is the possibility of verification, which means comparison with the communicated observations of other persons. Observation in the scientific sense is therefore restricted to the limits of possible communication; and nothing very far from the common experience of the race, accumulated and organized into concepts and symbolized by speech forms, could be observed even if it existed. There is no such a thing as either immediate or positive knowledge, it is all a matter of the relative cogency of reasons, or usefulness of believing one thing as compared with another. Scientific truth is a critical rather than a logical category (Knight (1925a), 1935c, p. 97).

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Whenever one wondered how the ultimate test of truth could be established, Knight admitted that no abstract principle, however convenient it was, could be fruitfully applied. Again in this instance, the soundest criterion was found to rest upon “simply the requirements of intelligent discussion and final agreement” (Knight, 1925b, p. 251). Thus, while it certainly remained true that the possibility of securing agreement was an absolutely essential feature of the scientific criterion of truth, Knight believed that truth is not merely what is the same for all, but is what is known and recognized as the same. Exponents of the scientific logic commonly take this process of demonstration or verification for granted in an unpardonably uncritical fashion (Knight, 1925b, p. 253).

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Finally, when dealing with “control,” Knight once again rejected the mechanistic interpretation of human nature. While the behaviorists stressed the relevance of behavioral mechanisms as an instrument for social control, Knight emphasized the role of persuasion through communication. To Knight, control appeared to be more a matter of “art” than of mechanical technique: “Art, after all, is ‘expression’ – of ideas and emotions; and the potency in human relations of sympathy, anger, personal force, and feeling attitudes generally, is not to be gainsaid” (Knight (1925a), 1935c, pp. 90–91). Thus, Knight concluded that any attempt to influence or manipulate society through the laws of response to stimuli, although correct from a “scientific” point of view, was doomed to be ineffective: The man who expects to influence others must work more through their feelings and his own than through explicit physical stimulus and response. The interpretation of human conduct in terms of ‘behavior patterns,’ inherited or acquired, in relation to ‘situations’ may be metaphysically correct, but it will not work (Knight (1925a), 1935c, p. 90).

Thus, his main critical point was that when dealing with human beings, as opposed to inanimate physical objects, the social scientist cannot adopt the categories of positivism. If there is to be any “objective” social science, it must be built upon the kind of objectivity which human behavior and procedures of action actually possess. Such an objectivity, Knight argued, is fundamentally different from the one that belongs to the world of physical phenomena. As he wrote in a caustic review-article of Slichter’s Modern Economic Society, the notion of uniformity of sequence is antithetical to that of control “by the behaving material himself.” Although Knight admitted that in social and economic phenomena there is “considerable uniformity of sequence”, such a uniformity “runs in terms of meanings and values rather than physically described events” (Knight, 1932, p. 440).

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3.3. EPILOGUE

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Knight’s criticism of behaviorism triggered the reaction of Morris A. Copeland, although, it should be remarked, in his articles Knight had never referred to the latter’s contributions. Copeland contested Knight’s characterization of behaviorism as an attempt to apply the methods of mechanics to the study of human behavior. The behaviorist and the institutionalist looked at biology, he wrote, rather than at mechanics, as a model for scientific inquiry, and they accordingly “employ concepts and (statistical) methods appropriate to classes of which the individual members differ from one another, to species that originate and evolve” (Copeland, 1925, p. 147). 83

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As to the problem of the psychological foundations of economics, Copeland insisted that under the pressure of the new developments in psychology, economic theory needed to be transformed, so that it could deal directly with objective behavior rather than making deductive inferences from the needs and feelings of fictional individuals. Instead of accepting Knight’s “mystical attitude” toward human desires and purposes – this was Copeland’s conclusion – “perhaps we may still proceed on the assumption that psychology and social science will be able by improvement of statistical and laboratory technique, by a more exhaustive collection of data, by better definition of terms and formulation of problems, and by accurate reasoning, to render a scientific account of purposes and values” (Copeland, 1925, p. 151: emphasis added). In spite of his well known predilection for academic debates, Knight did not publish any rejoinder and limited his reaction to a series of letters to Copeland, two of which, as already mentioned, are reproduced in the Appendix to this article. In his correspondence Knight took issue on the alleged parallelism between force in mechanics and desire in economics, maintaining, rather provocatively, that even in botany the idea of intentional behavior seemed somewhat inescapable: “I do not believe we can finally ‘talk sense’ about even plant life without recognizing some degree and kind of purposiveness in it. The term ‘struggle’ for existence points that way.” Even more significant to Knight was the point that behaviorism, in limiting psychology to observations of individuals other than the observing scientist himself, excluded any introspection of the scientist’s own internal activities. In his letter to Copeland of November 9, 1926, he argued that behaviorists were unable, in terms of their own theory, to account for their own activity as researchers. For instance, any attempt to explain why an author was actually writing a scientific article, would lead to an infinite logical regress: My point, which I tried to make in two articles which you took as a test for the reply, whether you thought them of it or not, is simply that whether anything else in human activity and experience is purposive or automatic, we cannot escape the fact that arguing about the question itself is purposive! If you try to work out a drive or action-pattern which will “explain” your writing the article at all, and writing one leading to this particular conclusion instead of some other, you will only set yourself (if you succeed) the new question of working out an action-pattern to explain why you did that, and so on without end. In the intellectual life itself (if not elsewhere) you cannot get away from real interests, which look forward and not backward for their explanation. This tendency to place the investigation, inquiry or argument itself outside the universe of discourse, is very interesting to me. But the fact remains that inquiry and argument are also behavior, and their characteristics have to be taken account of in any discussion of behavior which pretends to completeness. The next step, of course, is that you cannot finally maintain that intellectual inquiry is categorically discontinuous with other human interests and behavior – but I don’t want to get off on that phase of it now.23

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Interestingly, Knight turned again his critical attention to behaviorism in two important essays which were published at the beginning of the 1940s. This time, however, he did so in quite a different context. In the first contribution (Knight, 1940) – a caustic review of T. W. Hutchison’s The Significance and Basic Postulates of Economic Theory – Knight reacted against the explicit introduction of Popper’s methodological criterion of falsification into economics. Knight’s argument is familiar to modern readers. Falsification was a procedure used in science to test the validity of a hypothesis or a theory. Being unrestricted, scientific theories cannot be verified by any possible accumulation of observational evidence. Thus, a scientific test must consist in a persevering search for negative, falsifying instances. If a hypothesis stands up to continuous and serious attempts to falsify it, then it has “proved its mettle,” it can be provisionally accepted, even though it can never be established conclusively. In this review Knight reiterated all his main criticisms to behaviorist psychology. First he ridiculed the positivist idea that proper knowledge of people’s mental states could be inferred from the observation of their behavior. His defense of introspection was still based upon “the social-mental, intercommunicative character” of all human thinking (Knight, 1940, p. 15). On the empirical side, Knight insisted on the impossibility of distinguishing observation from inference, and reaffirmed that “testing observations is chiefly, and always ultimately, a social activity or phenomenon” (Knight, 1940, p. 7). Again, in another passage in the same review-article, Knight insisted on his conception of science as a linguistic community and explicitly introduced competence and authority as social requisites to attaining a high status among scientists: Moreover, a consensus regarding truth is itself by no means a ‘mere’ (undisputed) fact. It rests upon value judgment as to both the competence and the moral reliability of observers and reporters. (It is not a matter of majority vote!) Without a sense of honor (as well as special competence) among scientists – if, say, they were all charlatans – there could be no science (Knight, 1940, pp. 7–8).

Knight’s second contribution was a critique of the “Slutsky school” in demand theory (Knight, 1944). Quite ironically, with regard to behaviorism, Knight pointed out that what in the 1920s seemed to be a powerful weapon in the hands of institutionalists, after only two decades had become a sound and appealing psychological doctrine, even for “orthodox” economists. In fact, as has been noted by S. Lewin, from the mid-1930s onwards, a behaviorist mainstream economics began to emerge, based on the contributions of Eugene Slutsky (1915), John Hicks and Roy Allen (1934), and Paul Samuelson (1938). Leaving out of this paper any detailed discussion of the so called “ordinalist” turn and disregarding all substantial differences among the authors who were responsible for it, we can follow F. Knight in saying that the new approach to 85

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demand theory presented two distinct features. The first was the substitution of the traditional conception of diminishing marginal utility of a single commodity, for a diminishing “coefficient of substitution” of one commodity for another. Such a coefficient was intended to be a “purely behavioristic principle, or at least purely relative” (Knight, 1944, p. 289; emphasis added). The second meant the adoption of an “ordinalist” conception of utility, according to which the individual is still considered as a maximizing agent but “this something maximized need not, and therefore should not, be treated as a quantity in the ordinary ‘cardinal’ meaning, but as only ‘ordinal,’ that is, utilities are subject to ranking but not to real quantification [. . .]” (Knight, 1944, p. 290). This is not the proper place to dwell upon the more analytical aspects of Knight’s critique of the Slutsky school.24 However, what is relevant to our discussion is the fact that Knight’s attack on the ordinalist’s self-denial of psychological commitments echoed his critique of the institutionalists’ endorsement of behaviorism. Significantly, Knight again turned his attention to the adoption of the physical metaphor in economic theory, warning that the realism of such theorizing would be “severely limited because the heart of the phenomena in the human case is uncertainty, error, and speculation (with some analogy to mental inertia!) in the thinking by which economic behavior is controlled, and these are not considered to be present in mechanical processes” (Knight, 1944, p. 310). With the advent of the 1940s and 1950s Knight’s campaign against behaviorism faded away, but not his opposition to the rising positivist tide in economics. Nevertheless, even in his later writings, it is not difficult to find Knight reminding his readers that “much that is currently published in psychology and sociology advocates or rests upon the absurdity of behaviorism.” (Knight, 1956, p. 396).

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Philip Mirowski and D. Wade Hands (1998, p. 270) have observed that Frank Knight “rarely made any argument elegantly or systematically,”25 and, we add, this may in part explain why we find many different interpretations of his thought. Among these, two in particular are relevant, in connection with what we have been discussing so far. The first is provided by Jack Amariglio (1990) in his attempt to trace the historical roots of modernism in economics. Relying exclusively on Knight’s Risk, Uncertainty and Profit (1921) and focusing on his treatment of uncertainty, Amariglio ranks Knight among the forerunners of modernism. This point is made rather categorically:

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That Knight was a modernist should not be doubted. The first chapter of his text [Risk, Uncertainty and Profit] contains one of the more careful discussions before Robbins of ‘scientific’ epistemological and methodological procedures. Although Knight’s arguments about the unreality of assumptions and separate of concrete prediction and abstract theorizing might give pause to positivists, Knight clearly enunciated his belief that the method of economics ‘is the scientific method’ [. . .] Knight’s constant comparison and recourse to physics throughout his text suggests his fascination – with reservations – with modernist conception of knowledge (Amariglio, 1990, p. 28: emphasis added).

A quite different reading has been recently offered by Geoff Hodgson who has presented a reconsideration of Knight’s economic thought along “institutionalist” perspectives. Hodgson observes that, despite substantial differences in approach, there are important points of convergence between Knight and the institutionalists. These are mostly deeprooted in their common criticisms of neoclassical economics and its methodological apparatus. Knight was in fact critical of the neoclassical assumptions that treated man as an isolated rational economic actor equipped with given preferences, although he believed they had a considerable heuristic and ethical value. In Hodgson’s own words:

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Not only was Knight an institutionalist, he was one of the greatest of all institutional economists after Veblen. He differed from mainstream American institutionalism on key points, but he brought to that tradition great insight and rigour. Without reaching a complete solution to the most fundamental and pressing methodological and theoretical problems, he developed an innovative type of economics which, today at least, is far from the mainstream. He grappled with central problems such as the problem of agency and structure. Inspired by Veblen, Weber, and the German historical school, he engaged likewise with the problem of historical specificity in economic theory. He thus addressed two of the most pressing theoretical problems for a revised institutional economics today (Hodgson, 2001).

We believe that our reconstruction of Knight’s critique of behavioristic psychology qualifies both Amariglio’s and Hodgson’s interpretations of Knight’s economic methodology. As to the former, the above discussion may lead to a reconsideration of Amariglio’s claim about Knight being a precursor of modernism in economics. In fact, central to Knight’s critique of behaviorism was the recognition that human conduct involves communication among individuals and that we cannot conceive of communication without recognizing that human beings are purposeful actors. In particular, Knight saw language as a social artifact involving deliberative effort on the part of individuals, and therefore not explainable simply in terms of mere stimulus-response patterns. As to the more specific problem related to the conduct of economic analysis, Knight maintained, although with some qualification, that economics (and social science in general) is a sociological as well as an epistemological phenomenon. Economics gains scientific status in so far as it studies ideal behavior, ideal in the sense that agents are supposed to make an effort to behave rationally 87

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(Emmett, 1992a). But economics is also a “language community.” Scientists influence each other and build their own reputation through persuasion and intelligent communication, and it is “consensus” among scientists, rather than the search for empirical verification or falsification, which constitutes the proper test for judging scientific statements. Knight’s critique of Hutchison’s attempt to introduce falsificationism into economics, along with his rejection of the behaviorist distinction between observation and inference, set a clear distance between himself and the modernist tradition. On the same ground, Knight contested the modernist claim that, as a natural science, economics was committed to increasing scientific understanding of behavioral mechanisms for the purpose of prediction and control. In Knight’s typical style: “Surely the man who would undertake to treat human society merely as material for scientific manipulation, to control it by finding the laws of its response to stimuli and devising stimuli to provoke the responses he might desire, would have to be classed as a monster or as an imbecile” (Knight, 1925, p. 89). For Knight control was a matter of “art” and persuasion rather than “technique.” As he put it in his correspondence with Copeland:

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I say it is a ‘fact’ that the physical world (inanimate) is ‘in-exorable,’ not open to persuasion or entreaty, and a ‘fact’ that with human beings the opposite is conspicuously true. (The animals closest to man seem to be in a somewhat intermediate position – I confine the discussion to homo). I say that human beings influence one another’s behavior mainly by complicated psychological procedures in which the states of consciousness of both parties play an essential, and in fact the central role (that in fact they are far more interested in these states of consciousness than in the spatial paths described by the bodily members of other persons, but even that is carrying the discussion away from the particular issue, into the field of what we mean by the good life, or objective of one’s own action however formulated).

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In this connection, the similarities between Knight’s approach and the arguments advanced by D. McCloskey and her fellow opponents of modernism are quite impressive. Following Knight’s line of reasoning, McCloskey is drawn to emphasize the role of rhetoric, introspection and persuasion and to suggest, as a general rule, that “good science is good conversation” (McCloskey, 1985, p. 27 quoted on Hoksbergen, 1994, p. 686).26 As for Hodgson’s interpretation, our reconstruction of Knight’s disagreement with the followers of the behaviorist approach provides some qualification regarding the relationship between Knight and the institutionalists. On the one hand, it is certainly true that Knight shared with the institutionalists some awareness of the intrinsic limitations of marginal utility economics (Emmett, 1994). As he recollected in a letter of personal reminiscences, he regretted that many of the institutionalist research projects had lost their popularity, particularly among the younger generation of American economists:

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Above everything else I’d be interested in the history of economic institutions, particularly the early history (“origins”) or turning points, and I imagine that in the concrete this is a matter of legal history, or business practice amounting to unwritten laws. And among institutions, I suppose “property” and the “corporation” (American sense) are of most general interest and importance. Of course the two branches overlap. Now, who is there, particularly among the younger men, but not at all excluding any because of age, who is, or are, carrying on the ideas of Commons (in particular, in this immediate connection) and/or the Germans (Weber, Sombart et al.).27

On the other hand, Knight broke away from the institutionalist line whenever he perceived institutionalism as an attempt to substitute the traditional homo oeconomicus with too weak an ontology of the social being as a subject deprived of all autonomy of decision and purposeful action. Like the institutionalists, Knight recognized the tension between the purposeful and constructing role of individual agents and the conditioning influence of the structure of society; however, unlike the institutionalists (such as Copeland) or the neoclassicists, Knight rejected the mechanistic view of human nature which the behaviorists advanced as a proper remedy for such tension. Whether or not, and to what extent, Knight succeeded in finding a solution to the problem of agency and structure is a matter that goes well beyond the scope of this essay. However, his critique of behaviorism shows how much he was aware that any attempt to escape the reductionism of individual methodology and rationality must likewise elude the behavioristic determinism of mechanical man, according to which the individual is merely an automaton governed by his outer environment. At the same time, it should be added, Knight’s firm anti-behaviorism faces at least one fundamental problem. Insisting on the idea that behavior arises from human intention alone and is not determined by antecedent conditions, Knight advanced the view of human action as an “uncaused cause.” As incidentally noted by Copeland in his polemical exchange – and recently reaffirmed by Hodgson in a more explicit and systematic fashion – the concept of an uncaused cause severely limits the possibility of the construction of an authentic institutional economics. In this manner, in fact, institutions are seen exclusively as a constraint to – or as a result of – intentional human action, while the impact of institutions on shaping and influencing human motivations is deliberately left out of the picture (Hodgson, 1999, 2001).

NOTES 1. In this connection, in 1924 A. B. Wolfe pointed out that “[M]itchell had as early as in 1914 looked to behavioristic psychology as a promising basis for economics as a science of behavior” (Wolfe, 1924, p. 472). Mitchell’s 1915 outline confirms this impression. 89

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2. On the relationship between Knight and Ayres, see Samuels (1977). 3. In the early 1920s, among social psychologists, issues related to instinct theory were frequently debated. See, for instance, McDougall (1924) and especially Kantor (1922, 1924). This latter work had quite an impact on the institutionalist community and particularly on Clarence Ayres. As Rutherford observed, “Kantor’s work helps in understanding the nature of the behaviorism adopted by many institutionalists as instinct theory fell out of favor” [Rutherford, forthcoming]. However, to our knowledge, in Copeland’s several contributions to economic psychology there is only a passing reference to Kantor and, at least in his case, Watson’s works influenced his “conversion” to behaviorism. 4. The victory of behaviorism over alternative psychological methods in the interwar years was recognized by Schumpeter (1954, pp. 797–798) who wrote that “American economists have shown more interest in the programmatic pronouncements of behaviorists than they have in any other of the developments in psychology.” 5. As noted by Rutherford (forthcoming), Copeland’s interest in the connections between economics and psychology was already manifest in his Ph.D. dissertation “Some Phases in Institutional Value Theory” (Copeland, 1921). The thesis included two long appendices, one entitled “Psychological Implications of Institutionalism” and the other “Philosophical Presuppositions of Institutionalist Value Theory,” which served as basis for Copeland’s later contributions in the field of economic methodology (see especially Copeland, 1924, 1927). 6. Six years later, in a similar fashion, Clarence Ayres commented: “In short, institutions means to the institutionalists precisely what behavior means to the behaviorists, and the reason for this is not that the institutional economists have made use of any specific of the psychological behaviorists but, rather, that the two movements are parallel and coincident, as the two sciences have always been” (Ayres, 1936, p. 235). 7. It should be noted, however, that Carver did not mention the name of Watson. 8. Quite interestingly Copeland’s major contributions (Copeland, 1926, 1930) were hosted by one of the most prominent journals in the field of psychology. On Copeland’s work and academic career, see Dorfman (1959, V) and Rutherford (forthcoming). 9. Other references will be made to the works of Lawrence Kelso Frank, a leading exponent of the “new American psychology” and a student of industrial organization. For a brief evaluation of his contributions see Dorfman (1959, V, pp. 497–502). 10. Adolf J. Snow, psychologist, wrote extensively on the applications of psychology to economics and business. See for example, his Psychology in Business Relations (1925) and Psychology in Personal Selling (1926). 11. It is interesting to note that Watson’s attitude toward instincts is somewhat ambiguous. While remarking in a critical vein that “no one has as yet succeeded in making even a helpful classification (of instincts),” he nevertheless admits that man at birth and at various periods thereafter is supplied with a series of protective and attack and defense mechanisms (Watson, 1918, p. 45). 12. See, for example, Suranyi Unger (1931), Haney (1936). 13. “During this time [presumably between the years 1917–1919, when both Knight and Copeland were at the University of Chicago] Knight also participated in a small group of philosophers and social scientists (including J. W. Angell, Morris Copeland, W. B. Smith, Carter Goodrich, and H. A. Innis), who met informally to discuss the importance of Thorstein Veblen’s work. Out of his participation in this group emerged

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Knight’s review of The Place of Science in Modern Civilization by T. Veblen.” (Emmett, 1992b, p. 245; see also Neill, 1972, p. 12). 14. See Schweitzer (1975) on the influence of Weber on Knight’s work. 15. Quite interestingly, this point was also raised by Gunnar Myrdal in his 1929 book on the political element in the development of economic theory (Myrdal, 1953). 16. See Knight’s considerations about the nature of force in physics in his correspondence with Copeland. 17. To our knowledge, Knight’s first exposition of his three levels analysis of human behavior is to be found in Knight (1935a, c). Other implications can be found in several passages of his earlier contributions (1924, 1925a, b) as well as in his correspondence with Copeland (see the Appendix). 18. See Hands (1996) for a discussion of Knight’s six category taxonomy of human behavior. 19. Frank H. Knight to Morris A. Copeland: November 9, 1926. Knight Papers, Department of Special Collections, University of Chicago. The whole document is reproduced in the Appendix. 20. Frank H. Knight to Morris A. Copeland: January 25, 1927, emphasis added. Knight Papers, Department of Special Collections, University of Chicago. The letter is reproduced in the Appendix. 21. The two following passages demonstrate that, in his previous writings, Knight had already considered the role of values in economic behavior: “Wants are culture products, to be judged by culture canons and understood and controlled through culture categories. Even our food and clothing, in all their concrete content, and by far the larger part of their money cost, represent social and aesthetic and not biological values” (Knight (1925a), 1935c, p. 98). “Conscious states do have in most cases an aspect which is more than factual; they are not merely causes of action in the scientific sense of a uniform antecedent and means of control, but are in addition ends, values, to be recognized; they are not only ‘real’ but ‘important’ in greater or less degree. [. . .] Neither economics nor any other serious attempt at applied psychology can in practice ignore this ‘fact’ than value is more than desire, as desire is more than behavior” (Knight, 1925b, p. 263: emphasis in original). 22. “The common identification of ‘observed fact’ with ‘sense data’ is manifestly a confusion. The perception of an object rests upon ages of mental sophistication. Moreover, as we have previously remarked, no observation in the true sense is quite compulsory and unavoidable; no objectification will stand up under hard skeptical scrutiny; even perception of reality is more or less a voluntary act. Thought is saturated with purpose and concepts, emotion and metaphysical entities” (Knight (1924), 1935c, pp. 96–97n). 23. Frank H. Knight to Morris A. Copeland: November 9, 1926. Knight Papers, Department of Special Collections, University of Chicago. The letter is reproduced in the Appendix. 24. At a more analytical level, Knight’s proposal was to redefine the demand curve so that it would depict the quantities of a commodity purchased, not with income and all other prices being constant – as held by the Slutsky’s school – but with adjustments in other prices that would restore the original level of total utility. According to Knight, this was designed to exhibit the “substitution effect” exclusively, with the “income effect” removed. Whereas the followers of the Slutsky’s school isolated the income effect consequent upon a price change by an adjustment of money income, Knight thought the task of adjustment to be assigned to the prices of all other goods. As noted by Mirowski 91

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and Hands, Knight believed “that the idea that one could analytically decompose movements along a microeconomic demand curve into income and substitution effects would lead to the conviction that one could actually factor out variations in macroeconomic incomes from price-theoretic considerations and thus open the door to (insidious) Keynesianism” (Mirowski-Wade Hands, 1998, p. 270). On Knight’s criticism of Keynes, see Asso (1990). 25. Similarly, Hammond observes: “(Knight) was not always a model of consistency, straightforwardness, and clarity, especially so since his style was something of a freeform response to other people’s texts” (Hammond, 1991, p. 361). 26. See (Hammond, 1991; Hands, 1996) for similar assessments of Knight’s thought. However, J. D. Hammond (1991, p. 378) observes that it would be mistaken to affirm that Knight was promoting a view fully consonant with McCloskey’s rhetorical one. There are differences, the most fundamental of which is that while Knight thought philosophy, epistemology especially, to be an essential ingredient of good economics, McCloskey sees philosophy as at best without effect and at worst a source of damage to economic “conversation.” 27. F. H. Knight to I. L. Sharfman and J. M. Clark: Chicago, October 27, 1949. J. M. Clark Papers, Rare Book and Manuscript Library, Columbia University.

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ACKNOWLEDGMENTS We wish to express our gratitude for their comments to Nicolò Bellanca, Nicola Giocoli, Fabio Lo Verde, Malcom Rutherford, Warren J. Samuels and two anonymous referees. The usual disclaimers apply.

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Copeland, M. A. (1924). Communities of Economic Interest and the Price System. In: R. G. Tugwell (Ed.), The Trend of Economics (pp. 104–152). New York: Alfred Knopf. Copeland, M. A. (1925). Professor Knight on Psychology. Quarterly Journal of Economics, 40 (November), 134–151. Copeland, M. A. (1926). Desire, Choice, and Purpose from a Natural-Evolutionary Standpoint. Psychological Review, 33 (July), 245–267. Copeland, M. A. (1927). An Instrumental View of the Part-Whole Relation. Journal of Philosophy, 24 (February 17), 96–104. Copeland, M. A. (1930). Psychology and the Natural Science Point of View. Psychological Review (November), 461–487. Reprinted (1973) in: M. A. Copeland (Ed.), Fact and Theory in Economics (pp. 11–36). Westport Conn.: Greenwood Press. Copeland, M. A. (1931). Economic Theory and the Natural Science Point of View. American Economic Review, 21 (March), 67–79. Dorfman, J. (1959). The Economic Mind in American Civilization, 4, 5. New York: The Viking Press. Dorfman, J. (1974). Walton Hale Hamilton and Industrial Policy. Introduction to: W. H. Hamilton, Industrial Policy and Institutionalism: Selected Essays (pp. 5–28). Clifton: Augustus M. Kelley. Edie, L. D. (1922). Principles of the New Economics. New York: Thomas Y. Cromwell Co. Emmett, R. (1992a). The Economist as Philosopher: Frank Knight and American Social Science During the Twenties and Early Thirties. Ph.D. Dissertation, St. John’s College, University of Manitoba. Emmett, R. (1992b). Frank H. Knight on the Conflict of Values in Economic Life. Research in the History of Economic Thought and Methodology, 9, 87–103. Emmett, R. (1994). Maximizers vs. Good Sports: Frank Knight’s Curious Understanding of Exchange Behaviour. In: N. De Marchi & M. S. Morgan (Eds), Higgling: Transactors and their Markets in the History of Economics, annual supplement to History of Political Economy (Vol. 26, pp. 276–292). Durham, N.C.: Duke University. Fiorito, L., & Samuels, W. J. (2000). The Quantitative Method in Economics: Its Promise, Strength and Limits. Research in the History of Economic Thought and Methodology, 18C, 263–266. Frank, L. K. (1924). The Emancipation of Economics. American Economic Review, 14 (March), 17–38. Hamilton, W. H. (1919). The Institutional Approach to Economic Theory. American Economic Review, 9 (March), 309–318. Hammond, J. D. (1991). Frank Knight Antipositivism. History of Political Economy, 23(3), 359–381. Hands, D. W. (1996). Frank Knight’s Pluralism. In: A. Salanti & E. Screpanti (Eds), Pluralism in Economics. Aldershot, England: Edward Elgar. Haney, L. H. (1936). History of Economic Thought. New York: Macmillan. Hodgson, G. (1999). Evolution and Institutions. Cheltenham, U.K.: Elgar. Hodgson, G. (2001). Frank Knight as an Institutionalist. In: J. E. Biddle, J. B. Davis & S. G. Medema (Eds), Economics Broadly Considered: Essays in Honour of Warren J. Samuels. New York: Routledge. Hoksbergen, R. (1994). Postmodernism and Institutionalism: Toward a Resolution of the debate on Relativism. Journal of Economic Issues, 28 (September), 679–713. Hoxie, R. F. (1917). Trade Unionism in the United States. New York: D. Appleton. Kantor, J. R. (1922). An Essay Toward an Institutional Conception of Social Psychology. American Journal of Sociology, 27 (March), 611–627; (May), 758–779. Kantor, J. R. (1924). The Institutional Foundation of a Scientific Social Psychology. American Journal of Sociology, 29 (May), 674–687.

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Kasper, S. D. (1993). Frank Knight’s Case for Laissez Faire: The Patrimony of the Social Philosophy of the Chicago School. History of Political Economy, 25(3), 413–433. Knight, F. H. (1921). Risk, Uncertainty, and Profit. Boston: Houghton Mifflin. Knight, F. (1922). Ethics and the Economic Interpretation. Quarterly Journal of Economics, 36, 454–481. Knight, F. (1923). Some Books on Fundamentals. Journal of Political Economy, 31, 542–559. Knight, F. (1924). The Limitations of Scientific Method in Economics. In: R. G. Tugwell (Ed.), The Trend of Economics (pp. 229–267). New York: Alfred Knopf. Reprinted in: The Ethics of Competition and Other Essays (pp. 104–147). New York: Harper & Bros. Knight, F. (1925a). Economic Psychology and the Value Problem. Quarterly Journal of Economics, 39, 372–409. Reprinted in: The Ethics of Competition and Other Essays (pp. 76–104). New York: Harper & Bros. Knight, F. (1925b). Fact and Metaphysics in Economic Psychology. American Economic Review, 15, 247–266. Knight, F. (1931a). Marginal Utility Economics. Encyclopaedia of the Social Sciences, New York: Macmillan. Reprinted in: The Ethics of Competition and Other Essays (pp. 148–160). New York: Harper & Bros. Knight, F. (1931b). Relation of Utility Theory in the Work of William Stanley Jevons and Others. In: S. A. Rice (Ed.), Methods in Social Science (pp. 59–69). Chicago: University of Chicago Press. Knight, F. (1935a). Value and Price. Encyclopaedia of the Social Sciences. New York: Macmillan. Reprinted in: The Ethics of Competition and Other Essays (pp. 237–250). New York: Harper & Bros. Knight, F. (1935b). Economic Theory and Nationalism. In: The Ethics of Competition and Other Essays (pp. 277–360). New York: Harper & Bros. Knight, F. H. (1935c). The Ethics of Competition and Other Essays. New York: Harper & Bros. Knight, F. (1944). Realism and Relevance in the Theory of Demand. Journal of Political Economy, 52, 289–318. Knight, F. H. (1956). Science, Society, and the Modes of Law. In: L. D. White (Ed.), The States of the Social Sciences (pp. 9–28). Chicago: University of Chicago Press. Knight, F. H. (1960). Intelligence and Democratic Action. Cambridge: Harvard University Press. Knight, F. H. (Undated). Some Notes on Copeland. Frank H. Knight Papers, Joseph Regenstein Library, Department of Special Collection, University of Chicago. Lewin, S. B. (1996). Economics and Psychology: Lessons For Our Own Day From the Early Twentieth Century. Journal of Economic Literature, 34 (September), 1293–1323. McCloskey, D. (1983). The Rhetoric of Economics. Journal of Economic Literature, 21 (June), 481–517. McCloskey, D. N. (1985). The Rhetoric of Economics. Madison: University of Wisconsin Press. McDougall, W. (1924). Can Sociology and Social Psychology Dispense with Instincts? American Journal of Sociology, 29 (May), 657–673. McKinney, J. (1977). Frank Knight on Uncertainty and Rational Action. Southern Economic Journal, 43 (April), 1438–1452. Mills, F. C. (1924). On Measurement in Economics. In: R. G. Tugwell (Ed.), The Trend of Economics (pp. 37–72). New York: Alfred Knopf. Mills, J. A. (1998). Control: A History of Behavioral Psychology. New York: New York University Press. Mirowski, P., & Wade Hands, D. (1998). A Paradox of Budgets: The Postwar Stabilization of American Neoclassical Demand Theory. In: M. S. Morgan & M. Rutherford (Eds), From Interwar Pluralism to Postwar Neoclassicism. Durham, Duke University Press.

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Mitchell, W. C. (1914). Human Behavior and Economics: A Survey of Recent Literature. Quarterly Journal of Economics, 29 (November), 1–47. Mitchell, W. C. ([1915]1969). Types of Economic Theory: From Mercantilism to Institutionalism (2 Vols). New York: Augustus M. Kelley. Mitchell, W. C. (1925). Quantitative Analysis in Economic Theory. American Economic Review, 15 (March), 1–12. Myrdal, G. ([1929]1953). The Political Element in the Development of Economic Theory. London: Routledge & Kegan. Neill, R. (1972). A New Theory of Value: The Canadian Economics of H. A. Innis. Toronto: University of Toronto Press. O’Donnell, J. M. (1985). The Origins of Behaviorism: American Psychology, 1870–1920. New York: New York University Press. Rutherford, M. (1999). Institutionalism as ‘Scientific’ Economics. In: R. Backhouse & J. Creedy (Eds), From Classical Economics to the Theory of the Firm: Essays in Honour of D. P. O’Brien (pp. 223–308). Cheltenham: Edward Elgar. Rutherford, M. (2000a). Understanding Institutional Economics: 1918–1929. Journal of the History of Economic Thought, 22, 277–308. Rutherford, M. (2000b). Institutionalism Between the Wars. Journal of Economic Issues, 34, 291–303. Rutherford, M. (forthcoming). Morris A. Copeland: A Case Study in the History of Institutional Economics. Journal of the History of Economic Thought. Samuels, W. J. (1977). The Knight-Ayres Correspondence: The Grounds of Knowledge and Social Action. Journal of Economic Issues, 11 (September), 485–425. Samuelson, P. (1938). A Note on the Pure Theory of Consumer Behavior. Economica (5), 61–71. Schultz, H. [2000] (1937). The Quantitative Method with Special Reference to Economic Theory: A Public Lecture Given Before The Division of the Social Sciences. University of Chicago. Research in the History of Economic Thought and Methodology, 18C, 343–355. Schumpeter, J. A. (1954). A History of Economic Analysis. Oxford University Press. Schweitzer, A. (1975). Frank Knight’s Social Economics. History of Political Economy, 7(3), 279–292. Seckler, D. (1975). Thorstein Veblen and the Institutionalists: A Study in the Social Philosophy of Economics. Col.: Colorado Associated University Press. Slutsky, E. (1915). Sulla teoria del Bilancio del Consumatore. Giornale degli Economisti, 51, 1–26. Smith, L. D. (1986). Behaviorism and Logical Positivism: a Reassessment of the Alliance. Stanford, Calif.: Stanford University Press. Snow, A. (1924). Psychology in Economic Theory. Journal of Political Economy (August). Snow, A. (1925). Psychology in Business Relations. Chicago: A. W Shaw Company. Snow, A. (1926). Psychology in Personal Selling. Chicago: A. W Shaw Company. Suranyi-Unger, T. (1931). Economics in the Twentieth Century. The History of its International Development. New York: Norton. Tilman, R. (1992). Thorstein Veblen and His Critics, 1891–1963. Princeton: Princeton University Press. Tugwell, R. G. (1922). Human Nature in Economic Theory. Journal of Political Economy, 30 (June), 317–345. Tugwell, R. G. (Ed.) (1924a). The Trend of Economics. New York: Alfred Knopf. Tugwell, R. G. (1924b). Experimental Economics. In: R. G. Tugwell (Ed.) The Trend of Economics (pp. 370–422). New York: Alfred Knopf.

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Viner, J. (1925). The Utility Concept in Value Theory and Its Critics I. Journal of Political Economy, 33 (August), 369–387. Watson, J. B. (1913). Psychology as the Behaviorist Views It. Psychological Review, 20, 158–177. Watson, J. B. (1918). Psychology from the Standpoint of a Behaviorist. Philadelphia: Lippincott. Weber, M. (1968). Economy and Society: An Outline of Interpretive Sociology. New York: Bedminster Press. Wolfe, A. B. (1924). Functional Economics. In: R. G. Tugwell (Ed.), The Trend of Economics (pp. 443–482). New York: Alfred Knopf. Wozniak, R. H. (Ed.) (1994). Reflex, Habit and Implicit Response: The Early Elaboration of Theoretical and Methodological Behaviorism 1915–1928. London: Routledge/Thoemmes.

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A celebrated scholar – namely, Veblen – has been described as both an economist and an artist, and maybe more of an artist than an economist (see Young, 1925, quoted in Backhouse, 1985, p. 240; Dorfman, 1934/1972, p. 547). Whether or not this characterization does justice to the pioneer of institutionalism, it does apply to Sergius Bulgakov (1871–1944), a Russian economist and historian of economic thought, an outstanding representative of the so-called “Silver Age” in Russian culture. Had Bulgakov himself been asked, he would have probably enjoyed the description – with the qualification, though, that he is not classed with impressionists! Bulgakov’s conception of economics and of the ways of its development is somewhat short of scientific precision; but he had a vision, largely original, coherent and captivating. Imaginative and picturesque, this vision was also strongly framed by metaphysical and religious considerations. Bulgakov was a Christian political economist, corresponding to A. M. C. Waterman’s definition, that is, simultaneously an economist and theologian, engaged in an exploration of the boundaries between Christian belief and theology on the one hand and political economy on the other, and attempting a reconciliation (Webb, 2000, p. 14). Sergius (Sergei) Nikolaevich Bulgakov was born in Livny, in the province of Orel, into the family of an Orthodox priest in 1871. Sergius was trained at

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the seminary but early became an agnostic and a materialist. Bulgakov studied political economy at Moscow University. On graduation, he spent two years in Germany, entering the Social Democratic circle. In 1900, Bulgakov began his teaching career as professor of political economy, initially in Kiev, and later in Moscow. His two-volume Capitalism and Agriculture (1900), contesting the validity, for agriculture, of the Marxian law of concentration, made him a foremost figure among Russian economists. Around the same time he began to regain his faith. (Bulgakov singles out his “unexpected, marvelous encounter” with the Sistine Madonna, in Dresden, in 1898, as an important experience on his return to Christianity. He also names Vladimir Solovyov as his philosophical “guide to Christ”.) He underwent a gradual conversion from Marxism and materialism to religious idealism. Inspired by English Christian Socialism, he projected a Union for Christian Policy, with little practical result. Bulgakov nevertheless had reasonable success as a journalist and editor, collaborating with other leading representatives of what is now known as the Russian religious-philosophical renaissance. His contribution to Signposts (1909), a celebrated collection of papers by a group of prominent philosophers, criticized the arrogance of rationalism and called on the intelligentsia to accept a position of “humility”. Despite these various undertakings, Bulgakov proceeded with his teaching career as an economist. He now embarked on, as researcher and educator, a project aimed at a reconsideration of economics from the standpoint of ethics and metaphysics. Of the literary outcome of the project, especially important are From Marxism to Idealism (1903), Two Cities (1911) and Philosophy of Economy (1912). The Unfading Light (1917) was a bridge to Bulgakov’s later work in theology. In 1918, Bulgakov was ordained as an Orthodox priest. He was at that moment actively involved with the reform of the Church. After 1920, during his residence in the Crimea, Bulgakov made an excursion into semiology, which resulted in Philosophy of the Name (published in full only posthumously in 1953). In 1922 he was exiled from the Soviet Russia together with a large group of non-Marxist intellectuals, and eventually settled in France. In emigration, Bulgakov taught theology and produced a number of theological writings (including the trilogy, On Divine-Humanity, 1933–1945). He also wrote on religion and art (Icons and their Veneration, 1931).1 Bulgakov was active in the ecumenical movement, particularly in the Orthodox-Anglican intercommunion. He died in 1944, and was buried at the Russian cemetery near Paris. Bulgakov’s economics became an object of study much later than his philosophy and theology. Of particular notice is Natalia Makasheva’s research (Makasheva, 1993). Warren Samuels’s paper on Bulgakov’s Christian political economy (Samuels, 1995) is a pioneering inquiry into the subject by an

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American economist. What remains virtually obscure is Bulgakov’s work on the history of economic thought, although doctrinal history was a major concern for Bulgakov as a teacher and researcher. For more than a decade, beginning in 1907, Professor Bulgakov taught history of economics at the Moscow Commercial Institute. Starting with courses named “History of Political Economy” and “Agrarian Question”, he continued with “History of Economic Doctrines”. The latter course, printed in lithograph from a typewritten manuscript, went through eight editions between 1910 and 1919. The first part was carefully reworked by the author and re-emerged as a fullfledged textbook, Sketches of the History of Economic Doctrines: Volume I (1913; second printing, 1918). Bulgakov’s survey begins with ancient Israel and runs through Plato, Aristotle, the Stoics, the Church Fathers and the scholastics to the Renaissance and the Reformation. The second part deals mainly with the mercantilists, the classical school and the socialists. The most copious and insightful section here is that on Malthus, who is assessed as a Christian economist and is said to have accomplished a feat of “scientific courage and selflessness”. The book ends with a mentioning of “the increasing chances of the Austrian school” in its debate with the Marxists following the publication of Marx’s Volume III. Along with history of economics, Bulgakov taught “History of 19th Century Social Doctrines”. A 1913 lithograph edition of the lectures contains a number of interesting pages dedicated to economics, for example, a section on the political economy of the Quakers. Close to Bulgakov’s lecture courses is his elegant little monograph Primary Motives of Philosophy of Economy in Platonism and Early Christianity (1916). Apart from systematically dealing with the history of economic doctrines as an academic discipline, Bulgakov discussed aspects of economics and its evolution in his works written from the positions of a political reformer, social critic, moralist, metaphysician or theologian. In this respect, “Apocalyptic and Socialism,” from the collection Two Cities, “The Tasks of Political Economy” included in From Marxism to Idealism, and “Humanity vs. Man-Worship: A Historical Apology for AngloRussian Union” written in 1917, as well as Bulgakov’s treatise on the philosophy of economy, are all important counterparts to his lectures. An examination of Bulgakov’s work on doctrinal history, apart from filling a gap in Bulgakov scholarship, which should capture the attention of a limited circle of researchers, might also prove interesting to a wider audience of historians of economics. Bulgakov’s treatment of the history of economic and social doctrines is important as an early example of the approach taken by an “eiconist”. Kenneth Boulding suggested the name “eiconics” for “a new science” that seeks to explain human behavior as depending on the image (Gr. eikon). As different from some objective “truth”, the image is what one believes to be 107

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true, one’s subjective knowledge (Boulding, 1956, p. 6). “The tradition of economics”, says Boulding, “is pretty sharply anti-eiconical and mechanistic – from Adam Smith to Pareto it has been celestial mechanics applied to earthly things . . . I am familiar with only two – completely unrelated – pieces of work in economics that make any serious attempt to contribute to this problem. The first is an essay by F. A. Hayek, the second is the work of the economic psychologist, George Katona. To these men I offer – whether they accept it or not – the honor of being the first eiconists in their field” (pp. 149–150). Bulgakov might be claimed to have made an early contribution to the same research program. Indeed, the Russian scholar describes man as: (1) zoon eikonikon, an image-seeing animal; and (2) zoon poietikon, a creator of images or “wordly icons”, an active participator in the iconization of the environment (1931/1999, p. 268). According to Bulgakov, man experiences the world, forming subjective images of it, rather than passively reflecting it. As a straightforward example of the imaginative nature of human experience, the saint’s relics, totally irrespective of their physico-chemical properties, are perceived as fragrant by the faithful venerators (1918b/1997a, p. 521). It is tempting to describe Bulgakov’s standpoint as akin to that of another eiconist, Hayek. In the latter’s famous pronouncement, the facts of the social sciences “refer not to some objective properties possessed by the things or which the observer can find about them, but to views which some other person holds about these things . . . That this is not more obvious is due to the historical accident that in the world in which we live the knowledge of most people is approximately similar to our own. It stands out more strongly when we think of men with a knowledge different from our own, for example, people who believe in magic” (Hayek, 1948/1980, pp. 59–60). Bulgakov’s eiconics encompasses a group of core concepts, which, in addition to obraz (image) and ikona (icon), includes pervoobraz (prototype) and a number of related notions. When Bulgakov comes to discuss economy and society, he introduces additional eiconical concepts such as “mood”, “worldview” and “philosophy of economy”. As defined by Boulding, the image, even if shared through communication and made public, always remains the property of individual persons. Similarly, Bulgakov makes it clear that the “moods” which come to dominate certain historical epochs and strongly influence the character of society’s economic activity, originate and dwell in individual souls. A mood is essentially a subjective intuition. One particular mood is “otherwordliness”, or “abstinence”. It causes a contemplative or pessimistic, but always passive, attitude toward life. A radically different mood is one of acceptance of this world. The attitude it shapes is optimistic and practical. A mood, more or less developed into a

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system, is a “philosophy of economy” or “economic worldview”.2 Bulgakov explicitly allows for a plurality of philosophies of economy. “A Buddhist, [a modern “Epicurean” economist such as] Sombart, and Ecclesiastes, placed in the same situation, would fail to agree . . .” (1910, p. 19). Every particular philosophy of economy is based on its own set of axioms, that is, on a certain subjective intuition. Different axioms necessarily lead to different deductions. Euclidian and non-Euclidian geometry are each internally consistent, and the same is true of different philosophies of economy (1912/1990, pp. 260–261). Bulgakov treats history of economic thought precisely as “history of philosophies of economy” or “history of economic worldviews” (1913a, p. 10). Technical aspects of economic doctrines are dealt with, but they fail to gain priority in his discussion. Bulgakov, as a historian of philosophies of economy, is probably at his best in the examination of Plato, whose philosophy of economy involves conflicting moods. Bulgakov perceptively discriminates between the “ascetic” and the “social reformist” aspects of Plato’s thought, connecting these with Plato’s theory of two worlds. In Bulgakov’s interpretation, Plato’s eros, being a bridge between the world of ideas and its imperfect image formed by the dwellers of the “cave”, also serves as a coordinating vehicle between the otherwise incompatible attitudes toward life. A peculiar economic worldview results from this coordination, and makes Plato an implacable foe of the market economy, a preacher for economic primitivism. “Plato strives to fence his city with a high wall from the sinful capitalist world and to preserve this economic monastery in natural-economic simplicity” (p. 72). Bulgakov notes Plato’s desire to control the economy by government-made laws designed to resist the market and freeze economic development. “One and the same vision, that of the absolute state, dims the view of the author of both Politeia and Laws” (p. 73).3 In the course of the same discussion, Bulgakov recalls Pope Gregory VII, with his theocratic project, in order to achieve a clearer conception of Plato’s “economic monastery”. This juxtaposition is an example of Bulgakov’s favorite “method”: searching for prototypes or models in the history of thought that are replicated in sequences of “copies”. To understand a “copy”, says Bulgakov, an intellectual historian must get to the “original”. The “originals” need not precede the “copies” in historical time. What Bulgakov means, in this context, by prototype is an exemplary specimen of a given class of mental structures (systems of worldview), exemplary in the sense of being an adequate manifestation of that class as a universal. This understanding matches Bulgakov’s image theory in general, as well as his aesthetic. In iconization, he argues, we identify three, not two, entities: the original, its representation and also the ideal entity, of which the “original” is 109

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but an icon (1931/1999, p. 272). Bulgakov’s conception, certainly partaking of Platonism, also bears likeness to the approach of structuralists like Vladimir Propp and Claude Lévi-Strauss. It seems possible to interpret Bulgakov’s prototypes as a heuristic device used to identify certain invariances reappearing in a range of transformations in the history of economic thought. Bulgakov’s approach might therefore be labeled “structuralist-eiconical”. At the same time, Bulgakov warrants being called an “evolutionary eiconist”. Far from keeping his study confined to synchronic aspects of economic thought, he keenly investigates its diachronic aspects. His account of economic worldviews is a story of an ongoing change that has particular direction and logic. Bulgakov is especially intrigued by threshold phenomena in the development of social thought, when changes in individual images are suddenly amplified to produce a dramatic effect in the public image. In his own strongly metaphorical account: “Deep rivers sometimes originate from a barely visible spring. Mountain gorges, mighty watersheds, borders of the countries happen to be almost imperceptible to the eye. The most powerful and effective word is spoken in whispers, by an almost numb movement of lips, and great decisions in the life of the spirit ripen for the world unseen, in silence of solitude” (1917/1997a, p. 236). “Thus . . . a mystical seer, most humbly obedient to the power of the Church and never leaving his monastic cell, appears to have originated a revolutionary social movement, based on ideals quite alien to him” (1913a, p. 164). Bulgakov persistently returns in his lectures and other writings to a major evolutionary development, a “mysterious spiritual shift” that occurred around the year 1500, when “man rediscovered anew his human power and was blinded, astonished by this discovery, fell in love with himself, as Narcissus . . . [E]verything that Europe is proud of, – [modern] arts, sciences, philosophy, government, [national] economy, – originates there, in that mysterious epoch, and has, in it, its spiritual source” (1917/1997a, pp. 236–237). However, the 16th-century shift in the image created not one but two spiritual paths: that of humanistic-naturalistic individualism and that of religious individualism. The former was manifested in the Enlightenment; the latter, in the Reformation, most importantly the English Reformation, which created the strong enterprising personality – the spiritual center of English capitalism and of England’s triumph on the world market (p. 238; 1913b, p. 27).4 Bulgakov sees the logic of the two paths as fundamental to the development of economic and social doctrines up to his time. In the 19th century, Humanism evolves into Benthamism, and the latter leads to socialism. The vision underlying all brands of humanistic economics is that of man as a clockwork that “only requires to be placed in the appropriate environment, to be wound up correctly to start functioning perfectly . . . The problem of evil in general, in

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particular that of social evil, is thus being turned into the problem of the appropriate construction of social mechanism” (1916/1997a, p, 234). An alternative to this sort of “economic immoralism” would require a re-establishment of the link between economics and ethics, essentially in the religious-idealistic tradition. Bulgakov credits Carlyle, together with Tolstoy, Dostoevsky and Solovyov in Russia, with the formulation of this alternative; though remaining unsympathetic with Carlyle’s medievalism, as well as with Tolstoy’s economic primitivism. Bulgakov looks forward to a synthesis of social moralism and a scientific (empirical) study of economy. To achieve a better understanding of the two alternative wordviews, Bulgakov employs his structuralist technique. For him, “the great and unrivaled prototypes” of modern social moralists are the prophets of Israel (1913a, p. 26). An adequate model for the humanistic, clockwork image of man, society and economy is ancient apocalypticism. In drawing these parallels, Bulgakov sometimes changes his reference point, so that a “model” now appears to be “explained” from a “copy”. Since the use of prototypes is but a heuristic device, serving to identify certain invariances reappearing in both “models” and “copies”, Bulgakov presumably avoids an error of cross-reductionism. The “mood” of the prophets, in Bulgakov’s interpretation, is marked by “bold activism, [by] the intuition of God in history”; it is a subjective, creative, pragmatic attitude. “No wonder the prophets are also major public leaders, sometimes statesmen, and patriots; they combine the greatest rise of religious feeling with sober realism, I should say, practicality (only remember Isaiah’s political activity); their view remains clear before the opening world-historical and eschatological panorama; they retain both a harmony of spiritual forces and spiritual vigor. Thus, they would not instigate their people to desperate actions, would not inspire them to revolutionary outbreaks characteristic of the age of the apocalyptics . . .” (1911/1997b, p. 215). Bulgakov conceives of apocalypticism to be a persistent historical phenomenon. An account of sectarians and millennialists of the Middle Ages and early Modernity, including such spectacular episodes as the reign of John of Leyden as “King David” in Münster, occupies much of Bulgakov’s courses. The theme is developed further in his articles on the nature of Russian intelligentsia, with its peculiar millennialist mood. The apocalyptic image, as structured in Bulgakov’s analysis, involves two perspectives, the chiliastic and the eschatological. The former shapes a practical mood, setting objectives attainable in the course of human history. (Chiliasm is the millennial kingdom, where the good comes to reign on earth.) The latter, as concerned with trans-historical objectives, shapes a quietistic mood. Activism and quietism may enter, as elements, in the same worldview, without destroying 111

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its relative orderliness, and Bulgakov explores this type of correlation in Plato. However, in apocalypticism, the two perspectives are “in a state of hopeless, chaotic confusion, and this sort of confusion leads to a number of substitutions and misconceptions . . . In the icon-like apocalyptic vision, the historical, or chiliastic, and the eschatological planes merge in one, producing fantastic imagery, sometimes nightmarish, sometimes charming” (p. 222). Apocalyptic, vis-à-vis prophecies showing the ways attainable, in principle, by humans, “carries a revelation about those changes in the fate of the people of Judea, that are independent of the people’s will, being superior to all natural forces. It aims at a quasi-scientific study and perception of the logic of historical development, which of necessity (though of religious rather than scientific necessity) brings about the messianic kingdom . . . If the prophets perceived history as a connected whole, in the sense that it is a realization of the single divine plan, though carried out through people’s actions,5 the apocalyptics perceive it as something fatally predetermined, as a world of ruthless necessity, inconsiderate in its iron march . . . And almost all apocalypses, with equal strength, put forward the idea of the earthly City of God, or of the ‘future society’, the same idea that forms the essence of modern socialism. Therefore the apocalypses contain the complete prototype of the modern socialist ideal of the city of the future, arising with irresistible sociological necessity” (1913a, pp. 29–30). This generally passive and deterministic bent of apocalyptic thought is matched by a host of other features . . . These include a certain anonymity of apocalypses, a symbolism of numbers and beasts, and a manner of describing the past and present events in the future tense, as if predicted before they actually happened, i.e. succumbing to vaticinium post eventum; together, all this characterizes the logical nature of apocalyptic thought, bringing it close to modern ‘sociology’ [i.e. positivistic social science] with its abstract schemata (1911/1997b, p. 215).

(1) Anonymity. “The prophets”, notes Bulgakov, “spoke in the first person . . . Contrariwise, the use of pseudonyms is a general and inevitable feature of apocalyptic with its passively contemplative mood. What is also characteristic (and seems to be insufficiently studied by the science) is that the majority of pseudonyms are chosen purely arbitrarily, with little concern for their verisimilitude, and sometimes even with the desire to make their falsity and arbitrariness apparent and outright. Enoch, Baruch, Ezdra, the patriarchs, Adam and Eve, the sibyls are, strictly, not pseudonyms but rather titles, outright conventions . . . These names should be interpreted as signifying a certain school, a tradition in the spirit of which a given work was written (akin to various present-day ‘isms’) . . . The use of pseudonyms matched the impersonal or transpersonal character of the content of apocalyptic texts.

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Again, this property might be better understood through a comparison with modern science, the role of which, in its own way and in accordance with its own time, apocalyptic sought to play. Science is impersonal or transpersonal; a pronouncement of a certain scientific truth by a certain scientist is only a biographical and historical fact, totally irrelevant for the truth as such; once proclaimed and accepted, it becomes quite independent of and alien to its spiritual parent.6 The same refers to the truths of apocalyptic, revealed through visions and symbols” (pp. 215–216). (2) Vaticinium post eventum. Unlike the prophecies, “apocalyptic consciously avoids being specific about place and time, it longs for abstract objectivity, so that the ideas brought out in the 1st century B.C. come to be attributed to Enoch, which should point to their trans-historical significance” (p. 216). The use of future tense while referring to the past and present events, typical of apocalyptic, becomes also a feature of positivism, with its claims to rationalistic explanations of the past and predictions of the future. “Comte and Marx, and the ancient anonymous apocalyptics all meet at this juncture” (p. 217). (3) Numerological and zoological symbolism. “The same nature of apocalyptic, as abstract sociology”, Bulgakov goes on to say, “is further exposed by its obsession with the traditional symbolism of numbers and animals . . . [R]egarding the origins of particular symbols and numbers, there can be and actually is a vast amount of historical research and exegetic argument. However, left to themselves, they [i.e. symbols and numbers] cannot fail to astonish with their highly abstract schematicism in the treatment of historical events. To describe the whole of world history as a succession and struggle of several apocalyptic beasts, requires, in my opinion, the same boldness of logical abstraction and symbolism that we have in modern sociological concepts such as ‘the mode of production’, ‘the development of the forces of production’, feudalism, natural economy, capitalism, etc. A logical simile of the apocalyptic image of the history of kingdoms, as a succession of rams, goats, plants, clouds, waters, etc., can be found, in modern social science literature, e.g. in Marx’s celebrated introduction to Zur Kritik der politischen Oekonomie, where all history is first divided into two departments, Vorgeschichte and Geschichte, and the first department is next subdivided into several symbolically designated epochs: slavery, feudalism, capitalism, – new signs for old apocalyptic symbols. We have got so much used to these historical symbols that we completely fail to notice their abstract and conventional character, while, as regards their logical structure, they are but the same apocalyptic beasts which may seem bizarre and strange due to their horns and hair, but not because of their logical nature. Many of the schemata 113

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of the social science could be easily translated [back] into the language of apocalyptic symbolism” (pp. 216–217).7

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Sociological predictions, however, “fall short of the creative and monumental imagery of apocalyptic, and only involve cold, non-figurative, near-mathematical symbols” (pp. 217–218). The apocalyptic bent, the tendency toward the abstract, characteristic of social science in general, is also seen in the development of economics. Like Veblen (1898), Bulgakov regards modern economics as a taxonomic science. Economics, he contends, has become engaged in posing questions of the type: “What kind of connection is there, in the abstract, between certain facts (the particular phenomena of prices, profit, capital, rent) beside their empirical connection?” (1903/1997a, p. 295). However, there are certain variations in Bulgakov’s attitude. What he says in 1903 amounts to a wholesale dismissal of much of classical and neoclassical theory as “a philosophically undisciplined mind’s game”. Mathematical economics is assessed as the final achievement and also the reductio ad absurdum of the tendency toward the abstract (p. 298). Re-examining the theme in 1912, Bulgakov unexpectedly offers a qualified defense of the abstract-deductive method and even of mathematical formalism in economics. He comes to see factor analysis as the economist’s legitimate and even indispensable technique. Homo oeconomicus, too, is said to be a fiction of certain scientific relevance. However, Bulgakov warns about the necessity, in economics, of keeping the abstract within limits determined by the scientists’ methodological intuition and taste (1912/1990, pp. 200–201; compare 2000, pp. 232–233). Bulgakov’s unease about formal theory is motivated, first, by his desire to secure an independent role for philosophy and metaphysics in the evaluation of the nature and tasks of economic science. In his view, only metaphysics, but not economics, is capable of addressing fundamental questions like “How is economy possible?”.8 Only metaphysics can conceive of “the transcendental subject of economy”, that is, the historical humanity in its totality.9 Hence Bulgakov’s concern about a meta-empirical discipline, bearing a superficial resemblance to metaphysics, attempting to usurp the latter’s special role.10 Second, the advent of pure theory, in Bulgakov’s eyes, dramatically aggravates the split between economics and ethics. He believes that the more theoretical economics becomes, the less emotional and the less humane it also becomes. It is Bulgakov’s conviction that “social science in general, and political economy in particular, is unable to comprehend without crying and laughing, and it is not only its right, but also its responsibility. Therefore, someone for whom human affairs are indeed geometrical constructions, cannot be a social scientist,

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just as a blind cannot be a painter, and a dumb, a musician” (1903/1997a, p. 288).11 Arguably, Bulgakov’s story of the fading of imagery and triumph of the abstract retains its message even outside of Bulgakov’s particular metaphysical, ethical or theological concerns. Essentially, it is the story of social and economic thought striving to grasp what is not directly “given” to the observer: the whole of history, the whole of economy, the general and abstract logic of economic behavior. Like cartographers of the Middle Ages, who located Amazons, cynocefali, unipeds and other bizarre creatures in the remote and unexplored parts of the Earth, as symbols of the unknown, precursors of modern social scientists, too, used vivid imagery to convey their notions of the unobservable. As economic science emerged and matured, this sort of imagery began to fade, being progressively replaced by more formal and scientistic concepts. If, initially, the link of these concepts with their exotic prototypes had been acknowledged by the use of old apocalyptic names (such as Leviathan), it later became obscure. In offering this kind of picture, Bulgakov certainly had predecessors. Thus, the Russian researcher of folklore and mythology A. N. Afanasiev wrote in 1865: “The family, civil and social relations, as they initially emerged in the community of people, found expression in the imaginative, plastic words that the nation’s poetic genius created in the period of the nation’s infancy. Those words could capture the most characteristic attributes of things and actions and vividly portray those; with the passing of time, the names lost their original meanings and acquired new ones; they became technical, unintelligible as regards their origins . . .” (Afanasiev, 1865/1996, p. 328). This especially happened to words describing general and thus abstract rules, for example, principles of law, rather than concrete situations. One example is the word right, in various languages, coming to denote anything that is good and just without, however, retaining the rich mythological and poetic content of the notion (pp. 331–332). There is a whole tradition of “poetic reading” of spontaneous orders like law, language and economy, that goes back at least to Jacob Grimm’s Von der Poesie im Recht (1815), and Bulgakov’s work on the history of economics partakes of this tradition. It is no surprise that economic worldviews are referred to, in his lectures, as “the poetry of political economy” (1918a, p. 3). A student of social imagery, Bulgakov was himself a visionary, a traveller in dreamland. In Unfading Light, he gives an account of his mystical experience. Bulgakov’s economic vision, as it evolves to encompass planes “more refin’d, more spirituos and pure” (Milton) than the empirical, gains in artistic vividness, as well as in complexity. At the mystical level, the transcendental subject of 115

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economy, who is also the transcendental knowing subject, is equated with Sophia, the Wisdom of God. For Bulgakov, economy as well as the science of economy, and science generally, are fundamentally “sophianic”, partaking of divine light. Sophia embodies the preconscious unity of reality and reason. It is from this identity that new scientific ideas are born, dawning on their creators analogously to the way in which inspiration dawns on the artist. Science is a creative anamnesis rather than an accounting activity; the mirror theory of knowledge, that positivism offers, is false (2000, p. 194; compare 1912/1990, p. 164). Sophia is a mysterious and elusive image, as Bulgakov himself points out (1937/1993, p. 2). Sophia’s femininity is particularly difficult to account for. Bulgakov traces the source of the image, in its modern form, to the writings of Jacob Boehme on Jungfrau Sophia (though Plato and Plotinus are said to have already had intuitions of Sophia). “Together with Eckhart, he [Boehme] represents the secret dynamic of the philosophy of Hegel and Schelling, of F. Baader and the romanticists” (p. 6). “The time has come to us”, writes Bulgakov, “to sweep away the dust of ages and to decipher the secret script . . .” (p. 5). One can only regret that Bulgakov never undertook to systematically explore glimpses of the theme of Sophia in economic thought, and, thus, to identify his own predecessors, in his favorite manner of searching for prototypes.12 It would have been a fascinating story!

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1. Bulgakov’s theological aestheticism has proved appealing even outside Orthodoxy. Pope John Paul II recently cited his description of God as the “artist of the world” (John Paul II, 1998). 2. A related notion, in Bulgakov, is that of “ideals”, said to be “supra-empirical”, and, as such, independent of scientific arguments. Thus, Bulgakov argues that Marx’s economics is uncalled for as a basis for socialism, and that the labor theory of value is but “quasi-socialist” (1903/1997a, p. 295; compare 2000, p. 325, note 4). Bulgakov’s judgment is reiterated by Schumpeter: . . . there is nothing specifically socialist in the labor theory of value . . . Socialist or revolutionary conclusions can be impressed on any scientific theory; no scientific theory necessarily implies them (Schumpeter, 1951/1969, p. 73f).

3. Throughout his life, Bulgakov remained opposed to the all-powerful State that strives to deprive all forms of social life of autonomous existence. In 1906 he noted the bureaucratic lust for power of the Tsar’s government and the tendency toward bureaucratic capitalism (1906, pp. 149–150). In 1937, Bulgakov, apparently referring to Stalin’s Russia, Hitler’s Germany and Mussolini’s Italy, but also meaning a more general phenomenon, wrote of the State as aspiring “to become ‘totalitarian’, and to effect the complete and unlimited triumph of its bestiality”; the State bears, for him, “the likeness

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of ‘the beast that ascendeth out of the bottomless pit’” (1937/1993, p. 144). It is possible to describe Bulgakov’s position as liberal, but it must be remembered that this peculiar variety of liberalism is deeply rooted, to use Bulgakov’s expression, “in truths metaphysical and religious”. 4. Bulgakov clearly follows Max Weber here, whose Protestant Ethic and the Spirit of Capitalism he admired. It may be argued, however, that he also anticipates Hayek on “true” and “false” individualism (see Hayek, 1948/1980, p. 8). 5. Bulgakov thus locates, with the prophets of Israel, the origin of the idea of societal evolution as the result of human action but not of human design. 6. In Popperian terms, Bulgakov distinguishes World 3 (the world of objective knowledge) from World 2 (the world of subjective images). 7. Bulgakov actually undertakes the exercise in the following passage: “Socialism is a rationalistic adaptation of Jewish chiliasm, translated from the language of theology and cosmology into that of political economy, and all its dramatis personae are therefore interpreted in terms of economics. The chosen people – the bearer of the messianic idea – or, as later in the Christian sects, the saints or the elect, are replaced by the proletariat that has a special proletarian soul and a special revolutionary mission. The part of Satan and Belial naturally fell to the lot of capitalists, promoted to the rank of representatives of metaphysical evil. To the last sorrows and messianic agonies there corresponds the inevitable and ever-increasing impoverishment of the workers and the increasing antagonism between the classes . . .” (as translated in Lossky, 1951, pp. 198–199; compare 1911/1997b, pp. 241–242). 8. To cite an early German translation of Bulgakov, “Wie ist Wirtschaft möglich?” (Bulgakoff, 1913, S. 360). Bulgakov’s question, a paraphrase of one posed by Kant (“Wie ist Natur selbst möglich?”), is an expression of the Russian thinker’s “philosophical amazement” at the fact that “[a]ny individual entering economy occupies his own place in it, as if it were deliberately prepared for him” (1912/1990, p. 92; compare 2000, p. 125). A certain parallel exists between Bulgakov’s formulation and that of Hayek – of what the latter believes to be the central problem of the social science. “The problem . . . is how the spontaneous interaction of a number of people, each possessing only bits of knowledge, brings about a state of affairs. . . which could be brought about by deliberate direction only by somebody who possessed the combined knowledge of all those individuals” (Hayek, 1948/1980, pp. 50–51). 9. At this point Bulgakov and Hayek diverge. Bulgakov’s “subject of economy” is both transcendental and transcendent; Hayek’s “spontaneous order” is likewise “not given” to the observer (Hayek actually uses the term “transcendent” in The Fatal Conceit as “the word that precisely characterises an extended order”; see Hayek, 1988, p. 72). But, whereas Bulgakov turns to metaphysics to grasp the transcendent, Hayek remains dedicated to economic, or catallactic, analysis. 10. Bulgakov’s categorization of modern economics as neither metaphysical nor empirical almost literally coincides with Veblen’s. Affinities in the thinking of Bulgakov and Veblen might be a promising direction of research. There is a correspondence between the former’s “moods” and the latter’s “habits of thought”. Bulgakov’s apocalyptical exegesis is paralleled by Veblen’s translation and interpretation of The Laxdæla Saga. 11. Bulgakov’s standpoint matches that of Alfred Marshall, who wrote that “economic studies call for and develop the faculty of sympathy . . . The fact is that nearly all the founders of modern economics were men of gentle and sympathetic temper, touched with the enthusiasm of humanity” (Marshall, 1920, p. 39). 117

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12 One possible predecessor of Bulgakov was Nikolai Polevoi (1796–1846), journalist, writer, historian and economist. Polevoi’s paper on non-material capital (1828) sketches a knowledge (rather than labor) theory of value and presents a mystical vision of humanity as the knowing subject, akin to Bulgakov’s. The Russian early 19th century thought was strongly influenced by mysticism, which, in fact, became a social movement and for a time enjoyed governmental support (see Chapter V of Florovsky, 1979).

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ACKNOWLEDGMENTS I feel obliged to recognize the initiating role in this project of Warren J. Samuels, whose idea it was that an examination of Sergius Bulgakov’s views on the development of economic thought might be of interest to an international community of historians of economics. This is not to say, of course, that Professor Samuels, or anyone else, shares with me any errors that this paper may happen to contain. I am also grateful to William O. Coleman for valuable remarks on an earlier draft and to three anonymous referees whose insightful comments have helped to substantially improve on the previous versions.

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REFERENCES

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Afanasiev, A. N. (1865/1996). Iuridicheskie obychai [Law traditions]. In: Proiskhozhdenie mifa. Moscow: Izd-vo Indrik. Backhouse, R. E. (1985). A History of Modern Economic Analysis. Oxford: Basil Blackwell. Boulding, K. E. (1956). The Image. Ann Arbor: The University of Michigan Press. Bulgakov, S. N. (1903/1997a). Ot marksizma k idealizmu [From Marxism to Idealism]. Reprinted as volume I of Trudy po sotsiologii i teologii. Moscow: Nauka. Bulgakov, S. N. (1906). Kratkii ocherk politicheskoi ekonomii [A Short Outline of Political Economy]. Moscow. Bulgakov, S. N. (1910). Istoriia ekonomicheskikh uchenii [History of Economic Doctrines]. Moscow: Moscow Commercial Institute. Bulgakov, S. N. (1911/1997b). Dva grada [Two Cities]. St. Petersburg: Izd-vo RHGI. Bulgakov, S. N. (1912/1990). Filosofiia khoziaistva [Philosophy of Economy]. Moscow: Nauka. Bulgakov, S. N. (1913a). Ocherki istorii ekonomicheskikh uchenii: Vypusk I [Sketches of the History of Economic Doctrines: Volume I]. Author’s edition, Moscow. Bulgakov, S. N. (1913b). Istoriia sotsialnykh uchenii v XIX veke [History of 19th Century Social Doctrines] (2nd ed.). Moscow: Moscow Commercial Institute. Bulgakov, S. N. (1916/1997a). Osnovnye motivy filosofii khoziaistva v platonizme i rannem khristianstve [Primary motives of philosophy of economy in Platonism and early Christianity]. In: Trudy po sotsiologii i teologii (Vol. II, pp. 191–235). Moscow: Nauka. Bulgakov, S. N. (1917/1997a). Chelovechnost’ protiv chelovekobozhiia: Istoricheskoe opravdanie anglo-russkogo sblizheniia [Humanity vs. man-worship: A historical apology for AngloRussian union]. In: Trudy po sotsiologii i teologii (Vol. II, pp. 236–263). Moscow: Nauka. Bulgakov, S. N. (1918a). Istoriia ekonomicheskikh uchenii [History of Economic Doctrines] (Part II, 7th ed.). Moscow: Izd-vo Vysshaia Shkola (Moscow Commercial Institute).

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Bulgakov, S. N. (1918b/1997a). O sviatykh moshchakh [On the saint’s relics]. In: Trudy po sotsiologii i teologii (Vol. II, pp. 501–527). Moscow: Nauka. Bulgakov, S. N. (1931/1999). Ikona i ikonopochitanie [Icons and their veneration]. In: Pervoobraz i obraz (Vol. 2, pp. 241–309). Moscow: Iskusstvo. Bulgakov, S. (1937/1993). Sophia, the Wisdom of God: An Outline of Sophiology. Hudson, N. Y.: Lindisfarne Press. Bulgakov, S. (2000). Philosophy of Economy. C. Evtuhov (Trans.). New Haven: Yale University Press. Bulgakoff, S. (1913). Die naturphilosophischen Grundlagen der Wirtschaftstheorie. Archiv für Sozialwissenschaft und Sozialpolitik, XXXVI.2, 359–393. Dorfman, J. (1934/1972). Thorstein Veblen and his America. Clifton, N. J.: Augustus M. Kelley Publishers. Florovsky, G. (1979). Ways of Russian Theology. General editing by R. S. Haugh. R. L. Nichols (Trans.). (Collected works of Georges Florovsky, Vol. 5.) Belmont, Mass: Nordland Pub. Co. John Paul II (1998). Spirit is active wherever the truth is sought. L’Osservatore Romano (September 23). Hayek, F. A. (1948/1980). Individualism and Economic Order. Chicago, Midway Reprint: The University of Chicago Press. Hayek, F. A. (1988). The Fatal Conceit: The Errors of Socialism. W. W. Bartley, III (Ed.). (The Collected Works of Friedrich August Hayek, Vol. I). London: Routledge. Lossky, N. O. (1951). History of Russian Philosophy. International Universities Press, New York. Makasheva, N. (1993). Eticheskie osnovy ekonomicheskoi teorii: Ocherki istorii [Ethical Foundations of Economic Theory: A Historical Sketch]. Moscow: INION. Marshall, A. (1920). Principles of Economics (8th ed.). London: Macmillan. Polevoi, N. (1828). Rech’ o neveshchestvennom kapitale (capital immatériel) . . . [A Colloquy on Non-Material Capital]. Moscow: Auguste Semen. Naumov, K. (1984). Bibliographie des œvres de Serge Boulgakov. (Bibliothèque russe de l’Institut d’études slaves. Tome LXVIII/1. Série: Écrivains russes en France) Paris: Institut d’études slaves. Samuels, W. J. (1995). Some reflections on the work of Sergius Bulgakov by an historian of economic thought. In: J. Diskin & N. Makasheva (Eds), S. N. Bulgakov (1871–1944): Economics and Culture (pp. 155–181). Moscow: Russian Academy of Sciences, Institute for Social and Economic Problems of Population. Schumpeter, J. A. (1951/1969). Ten Great Economists: From Marx to Keynes. New York: Oxford University Press. Veblen, T. B. (1898). Why is economics not an evolutionary science? Quarterly Journal of Economics (July), 373–397. Webb, B. G. (2000). A conversation with Anthony Waterman. Faith and Economics, 36, 10–18. Young, A. A. (1925). The trend of economics, as seen by some younger American economists. Quarterly Journal of Economics, 39 (February), 155–183.

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According to Francis X. Diebold (in Adams, 1992, p. 31), “A striking and easily forgotten fact is that, before Keynes and Klein, there really was no macroeconomics” (Diebold’s emphasis). Diebold concedes that “Certainly Smith, Ricardo, Mill, Marshall and others addressed some macroeconomic concerns” but “Classical economics is essentially microeconomics.” While many practising economists may believe themselves to know this striking “fact”, historians of economic thought have studied the rich and varied traditions of monetary and business cycle theory that formed the context for Keynes’s General Theory, streams of literature amounting to much more than the passing asides of classical and neoclassical value theorists. Although the terms macroeconomics and microeconomics were not used until Ragnar Frisch coined “macrodynamics” in 1933, economists analysed the subject matter of macroeconomics (the price level, real and nominal interest rates, fluctuations in output and employment) long before John Maynard Keynes’s General Theory of Employment, Interest and Money (1936) transformed the nature and language of their controversies, bringing the two bodies of literature focused on cyclical fluctuations and on the

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price level into a discourse centred on determination of the level of employment and national income. The quarter-century of monetary and business-cycle theory which preceded the General Theory and provided the context and many elements for the emergence of modern macroeconomics itself emerged from earlier developments, which must be briefly sketched as background. The quantity theory of money, holding that a change in the money supply will, for a given demand for real money balances, eventually change the price level in the same proportion, is “the oldest surviving theory in economics” (Blaug, 1995) even though “the quantity theory is always and everywhere controversial” (Laidler, 1991a). Laidler attributes the continuing controversies to the technical difficulty of establishing direction of causality between money and prices, and to ideological issues about the functioning of markets that obstruct scientific research, while Blaug (1995, p. 27) stresses that the difference between the short-run and long-run predictions of the theory (with no clear guide for translating the logical-time distinction between short and long runs into historical time) “opens the door to endless equivocation of what observations are to count as confirmations or refutations of the theory.” The quantity theory antedates the classical political economy of Adam Smith by at least two centuries. Marjorie Grice-Hutchinson (1952), René Gonnard (1936), and Denis O’Brien (2000) show how the Salamanca school and Jean Bodin used the quantity theory of money to explain the “Price Revolution” of the Sixteenth Century, the inflation following the inflow of silver from the New World. Douglas Vickers (1959) and Thomas Guggenheim (1989) reveal the contributions of John Locke, Richard Cantillon, and Isaac Gervaise to the understanding of velocity of circulation and international adjustment, and of John Law to banking. David Hume’s 1752 specie-flow analysis of international monetary adjustment through changes in national price levels, with short-run changes in real output, was the high-point of pre-classical monetary economics (see Humphrey, 1986, pp. 128–133). While Hume linked the price level in each country to the quantity of money in the country and stressed relative price effects on the balance of trade, Adam Smith (as interpreted by Thomas Humphrey, 1986, pp. 180–187) anticipated the monetary approach to the balance of payments by assuming purchasing power parity (with the world price level determined by the world gold supply and world demand for real money balances) and stressing the direct effect on spending (and hence on the balance of payments and thus the money supply) of an excess demand or supply of money in a country. Keynes (1936) drew attention to the arguments between David Ricardo and Thomas Robert Malthus over the possibility of a general glut of commodities at the end of the Napoleonic Wars, regretting that Ricardo’s sharper analysis

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and invocation of Say’s (or James Mill’s) Law of Markets won out over what Keynes considered Malthus’s deeper insight that insufficient effective demand could cause an excess supply of labour without there being an excess demand for any good. Steven Kates (1994) argues that Keynes’s re-reading of his early lecture on Malthus and his reading of the Ricardo-Malthus correspondence being edited by Piero Sraffa inspired Keynes to write The General Theory in terms of effective demand and the rejection of Say’s Law (which Keynes summarized as “supply creates its own demand”). Thomas Sowell (1972) shows that statements of the Law of Markets by classical economists were more varied and complex, often subtler, and sometimes confused and contradictory, than Keynes recognized. John Stuart Mill, among others, searched for a formulation that would be stronger than the truism now known as Say’s Equality (if each market is in equilibrium, then the sum of excess demand over all commodity markets necessarily adds to zero) but weaker than Say’s Identity, that excess demand for all commodity markets (that is, all markets except that for money) always sums to zero for any set of prices (which implies that the money market always clears for any prices, leaving the absolute price level indeterminate). As Hutchison (1980, p. 3n) notes, Jean-Baptiste Say himself endorsed public works as a response to unemployment and criticised Ricardo for neglected the possibility that savings might be hoarded instead of invested if investment opportunities were lacking. Ricardo preferred restoration of gold convertibility of sterling at the depreciated parity rather than deflation to restore the prewar parity. Doctoral dissertations by Robert Link (1959) and Bernard Corry (1962) surveyed the macroeconomics of English classical political economists and their critics in the first half of the Nineteenth Century, while more strictly monetary controversies were elucidated by Frank W. Fetter (1965) and in Anna J. Schwartz’s New Palgrave article “Banking school, currency school, free banking school.” Among the early Nineteenth Century English economists who concentrated on topics now considered macroeconomic, Thomas Joplin is the subject of a noteworthy monograph by Denis O’Brien (1993), while Henry Thornton (1802) attracts attention for his analysis of central banking and his influence on the Bullion Report (with a bicentenary conference on the lender of last resort in Paris in 2002). Arie Arnon (1990) studies the price historian Thomas Tooke, opponent of the quantity theory. In the third quarter of the Eighteenth Century, François Quesnay’s Tableau Economique provided a basis for Physiocratic analyses of the circular flow of income and spending and of the impact of investment in agriculture on economic growth or decline (Eltis, 1984, Chapters 1 and 2). Despite Adam Smith’s respect for Quesnay and Turgot, the Physiocratic doctrine of the exclusive net productivity of agriculture proved a barrier to the absorption of Quesnay’s 123

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analysis into the mainstream of classical political economy. Further outside the mainstream of classical political economy (which he had studied carefully), Karl Marx reflected on the Tableau Economique and composed schemes of simple and expanded reproduction, precursors of representations of circular flow and of multi-sector growth models (Tsuru, 1942; Eltis, 1984, Chapters 7 and 8). He rejected Say’s Law to consider realization crises, even while implicitly assuming it in other parts of Capital, and inspired generations of underconsumption and disproportionality crisis theorists (Howard & King, 1989–1992). Also in the 1860s, William Stanley Jevons and Clément Juglar gave great impetus to statistical and theoretical study of the trade cycle, a literature extensively sampled in multi-volume collections edited by O’Brien (1997) and Hagemann (2001). Jevons’s papers on cycles (collected posthumously in Jevons, 1884) did more than his marginal utility analysis of relative prices to persuade the British Association for the Advancement of Science that economics was sufficiently scientific for Section F to be allowed to remain in the association. Wesley Mitchell (1927, p. 384) remarked that “Jevons had an admirably candid mind; yet in 1875, when the sun-spot cycle was supposed to last 11.1 years, he was able to get from Thorold Rogers’ History of Agriculture and Prices in England a period of 11 years in price fluctuations, and when the sun-spot cycle was revised to 10.45 years he was able to make the average interval between English crises 10.466 years.” Jevons’s view of cycles in solar radiation as the driving force behind the trade cycle has been the target of derision, to the neglect of his lasting contributions on seasonality and in the use of index numbers to trade the effects of the Australian and California gold discoveries. However, Sandra Peart (1996) shows convincingly that Jevons’s procedure was reasonable for a largely agricultural economy, given that meteorologists then believed that sunspots produced cycles in weather, which would affect harvests, and that an economist might accept the conclusions of meteorologists about meteorology. As Wesley Mitchell (1927, p. 7) observed, “Before the end of the nineteenth century there had accumulated a body of observations and speculations sufficient to justify the writing of histories of the theories of crises.” Terence Hutchison (1953, p. 437) cites Eugen von Bergmann’s Die Wirtschaftskrisen: Geschichte der nationalökonomischen Krisentheorien (Stuttgart, 1895) as “still an outstandingly valuable work covering the nineteenth century and going well back into the eighteenth” and Edward D. Jones’s Economic Crises (New York, 1900) as “a short survey of the main theories with a useful bibliography.” In 1909, at the time of Beatrice Webb’s Minority Report of the Poor Law Commission and of the first edition of Beveridge’s Unemployment, the London School of Economics published a seventy-one page bibliography of unemployment and

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the unemployed by F. Isabel Taylor. One might recall in this context that the editors of the New Cambridge Modern History reported that the proper dividing line between ancient and modern history was a subject of debate in Rome in what is now considered the first century C.E.

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WHO WERE THE LEADING INTERWAR MONETARY AND BUSINESS CYCLE THEORISTS?

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Photographs of three economists grace the cover of David Laidler’s The Golden Age of the Quantity Theory (1991b): Alfred Marshall, Knut Wicksell, and Irving Fisher. In the years before 1914, these three laid the foundations for interwar developments in monetary theory, just as Jevons and Juglar laid the foundations for interwar business cycle analysis. Marshall’s Money, Credit and Commerce was not published until 1923, but it incorporated manuscripts dating back to the 1870s, while other contributions, collected in his Official Papers (1926), were made presented to government inquiries before the turn of the century. The Cambridge cash balance approach to the quantity theory (M = kPY in modern notation, relating desired cash balances to nominal income) and the Cambridge analysis of saving and investment followed from Marshall’s work (Eshag, 1963; Bridel, 1987). Wicksell’s distinction between the market rate of interest and the natural rate (which would equate desired saving to investment) and his analysis of cumulative inflation or deflation in a credit economy led to the economic dynamics of the Stockholm School (Wicksell, 1898, 1915; Jonung, 1991, 1993). The Fisher relation, expected inflation as the difference between real and money interest rates (Fisher, 1896), and the Fisher diagram, showing optimal consumption over two periods with present discounted value of expected lifetime income as the budget constraint (Fisher, 1907), have proved fundamental for later macroeconomics (Loef & Monissen, 1999). Patrick Deutscher (1990, p. 193) count citations in all economic journal articles in published in English from 1920 to 1939 listed in the American Economic Association’s Index of Economic Journals under “Aggregative and Monetary Theory and Cycles” and the non-historical categories of “Money, Credit and Banking,” while Jeff Biddle (1996) counts citations of sixteen leading economists in all English-language economic journals in seventeen target years from 1904 to 1950 (excluding self-citations and obituaries). Citation counts of German, French, or Italian journals would yield different results (such as more attention to Böhm-Bawerk, Walras, Pareto and Aftalion). Keynes, cited in 200 articles 1920–1939, leads Deutscher’s list (and leads already in the 1931–1935 sub-period, before the General Theory), followed by his Cambridge colleague Dennis H. Robertson (cited in 104 articles), the Yale quantity theorist Irving 125

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Fisher (73 citations), A. C. Pigou of Cambridge (72), R. G. Hawtrey of the British Treasury (66), and Friedrich A. von Hayek, first directing the Austrian Institute for Business Cycle Research and then from 1931 at the London School of Economics (58 citations, and third behind Keynes and Robertson for 1931–1935). Alfred Marshall (cited in 43 articles), Wesley Clair Mitchell of Columbia and the National Bureau of Economic Research (42), and Sweden’s Gustav Cassel (40, mainly for his purchasing power parity theory of exchange rates and 22 of them in 1931–1935) had at least as a fifth as many references as Keynes. Marshall dominated the wider economics literature in English, as the most-cited economist in seven of Biddle’s twelve sample years from 1904 to 1932 (and still second most-cited in 1950). Citations of the Stockholm School were spread across Knut Wicksell (fourteenth with 31 citations 1920–1939), Bertil Ohlin (18) and Gunnar Myrdal (17, all after 1930), with 18 articles citing the Norwegian econometrician Ragnar Frisch (all after 1930). Monetary heretics outside the academic discipline of economics received some attention (18 articles citing Foster and Catchings from 1920–1939), and the emigré Polish Marxist Michal Kalecki attracted notice a little later (18 citations 1940–1944, tied with Joseph Schumpeter for sixth place). For 1920–1930, Deutscher (1990, p. 189) found the most-cited economist in macroeconomic articles in English was Irving Fisher (Biddle’s mostcited economist for 1914), followed by Wesley Mitchell (Biddle’s most-cited economist for 1916), Pigou (Biddle’s most-cited economist for 1936), Marshall, Jevons, Hawtrey, Robertson (tied with Hawtrey for sixth place), Henry Ludwell Moore of Columbia (third behind Marshall and Pigou in Biddle’s count for 1930), Carl Snyder of the Federal Reserve Bank of New York (tied with Moore), and, tenth, Maynard Keynes (of A Tract on Monetary Reform). Publication of Keynes’s Treatise on Money (1930) and Hayek’s Prices and Production (1931) transformed the rankings: Fisher dropped in Deutscher’s count from first in 1920–1930 to tied with Hawtrey for fourth in 1931–1935, a four-way tie for sixteenth in 1936–1939, and no citations in 1940–1944. Five of the seven most-cited macroeconomists in 1920–1939, by Deutscher’s calculation, were Cambridge-trained (including Hawtrey at H. M. Treasury). This focus is confirmed by Raymond Saulnier’s Columbia PhD dissertation and book, Contemporary Monetary Theory (1938), which examined only four economists, Keynes, Hawtrey, Robertson and Hayek: three members of the Cambridge Apostles plus an LSE professor who was the cousin and intended biographer of the Cambridge Apostle and philosopher Wittgenstein. Alec Macfie’s Theories of the Trade Cycle (1934) studied the same four economists plus Pigou, with a few additional references to Mitchell, John Maurice Clark, and the British underconsumptionist John Hobson. In contrast to this Cambridge

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focus, the American Economic Association Readings in Monetary Theory (Lutz and Mints 1951) reprinted (in addition to papers by Hawtrey, Pigou, and Robertson) Henry Simons on rules vs. discretion in monetary policy, Clark Warburton calling for a return to a monetary emphasis in business fluctuation theory, and a postwar article by Milton Friedman. Although Chicago School monetarists were to take Fisher’s and Hawtrey’s place as upholders of the quantity theory of money, no economist from the University of Chicago appears on Deutscher’s list of twenty-five most-cited macroeconomists for 1920–1939 or on his lists for 1920–1930, 1931–1935, 1936–1939, or 1940–1944. The distinctive Chicago oral tradition of monetary theory, whose existence was claimed by Milton Friedman but disputed by Don Patinkin (1981), had only a local impact.

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CAMBRIDGE

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For Keynes (1936), the classical era of political economy did not close with John Stuart Mill. In Keynes’s usage, the “classical” economists were all those to whom he attributed explicit or implicit acceptance of Say’s Law (the impossibility of insufficient aggregate demand), including Alfred Marshall and A. C. Pigou, who held the chair of economics at Cambridge from 1885–1908 and 1908–1943, respectively. Keynes (1936, appendix to Chapter 19) took Pigou’s Theory of Unemployment (1933) as his target, summarizing its argument in two classical postulates. Keynes (1936, Chapter 2) accepted the first classical postulate, that the real wage equals the marginal product of labour (the economy is on the labour demand curve), but rejected the second, that the utility of the real wage equals the marginal disutility of labour (the economy is on the labour supply curve). Rather than being a typical representative of pre-Keynesian economics, Pigou was unusual in the extent to which he treated the supply and demand for labour in real terms, introducing monetary factors late in his book. Even Mark Casson (1983, pp. 16–17, 157), who sees Pigou as the foremost pioneer of a “Pre-Keynesian” theory of structural unemployment, allows that Pigou’s writing “degenerated into little more than analytical taxonomy in the 1930s . . . There is no standard work epitomizing Pre-Keynesian theory. Pigou was the person best equipped to write such a book, but instead he wrote The Theory of Unemployment (1933) – a taxonomy of the subject which makes the reader wonder how anyone could write anything so tedious and abstract in the middle of an economic crisis.” However, Michael Brady (1995) has shown that, in keeping with his acceptance of the first classical postulate, Keynes’s exposition of the employment function (the inverse of the aggregate supply function) in Chapters 127

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20 and 21 of The General Theory was shaped by the Marshallian elasticity approach of Pigou (1933, Part II, Chapters 8–10). Brady argues for those chapters as evidence both for the value of Pigou’s contribution and for Keynes’s proficiency as a mathematician and microeconomic theorist. Nahid Aslanbeigui (1992) dissents from Keynes’s critique of Pigou (1933), and presents textual evidence, notably a letter from Pigou to Keynes in May 1937 (Keynes, 1971–1989, pp. XIV, 54) that Pigou intended a reverse L-shaped macro labour supply schedule, not the upward-sloping one attributed to Pigou (1933) by Keynes (1936). As Hawtrey remarked at the time, “And how is any reader of the Theory of Unemployment to guess what Pigou has in mind, seeing that there is not a word about it from the beginning of the book to the end?” (Keynes, 1971–1989, pp. XIV, 55). Keynes himself, in his younger days, was an orthodox Marshallian contributor to the Cambridge cash-balance approach. A Tract on Monetary Reform (Keynes, 1923) and the articles leading to it in the Manchester Guardian Commercial’s supplements on “Reconstruction in Europe” contributed the analysis of inflation as a tax on the holding of money and government bonds, the resulting reduction of demand for real money balances (by 92% during the German hyperinflation) as a social cost of inflation, the consequent decline in inflation tax revenue beyond a revenue-maximizing inflation rate, and the nominal interest differential between two countries as the forward premium or discount in the foreign exchange market (see Humphrey, 1986, pp. 38–48; Dimand, 1988, pp. 4–20; Flanders, 1989, pp. 160–169). These standards of later monetarist analysis do not appear in Pigou’s articles on the value of money and on the foreign exchanges. Milton Friedman and Thomas Sargent, who have deep reservations about The General Theory, both admire Keynes’s Tract. While Keynes developed covered interest parity, Fisher (1896) had introduced uncovered interest parity (the difference between interest rates in two standards is the expected rate of appreciation or depreciation of one standard against the other). Patinkin (1982) concluded that Keynes’s 1924 memorial article on Marshall and 1911 review of Fisher’s Purchasing Power of Money, like Pigou’s 1917 article on the value of money (in Lutz & Mints, 1951), greatly overstated the extent to which the cash-balance approach of Cambridge oral tradition (drawn from Marshall’s lectures and evidence to official inquiries) was more choicetheoretic and less mechanical than Fisher’s MV = PT equation-of-exchange version of the quantity theory. J. R. Hicks (1937) offered an extremely influential interpretation of what set Keynes (1936) apart from the “classical” tradition, and is so doing created the IS-LM diagram that dominated later macroeconomic teaching for decades (see Young, 1987, on the similar models of Champernowne, Reddaway, Harrod and

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Meade, and how Hicks’s two-good model differed from later one-good textbook IS-LM analysis). Samuelson (1946) even asserted that Keynes did not understand what he had done until Hicks and others transformed the General Theory into diagrams and systems of simultaneous equations. Hicks did not share this view, holding that IS-LM captured only one side of Keynes’s theory. Notes taken by students (Rymes, 1987) reveal that Keynes had presented a fourequation model in his 1933 lectures but chosen not to use it in his book. According to Hicks, in the classical theory (as represented by Dennis Robertson’s and Frederick Lavington’s loanable funds theory of the interest rate), the interest equilibrates saving (loanable funds) and investment, while income is given by full employment of resources (a vertical aggregate supply curve at potential output). In the Keynesian liquidity preference theory, the interest rate equates money demand (liquidity preference) to money supply, while the level of national income is the variable that equilibrates investment to saving. For Hicks, these become special cases of a more general theory in which investment, saving, and money demand depend on both national income and the interest rate, with those two endogenous variables simultaneously satisfying both the IS (investment = saving) and LM (liquidity preference = money supply) equilibrium conditions (in the notation of Alvin Hansen’s later one-good version). In equilibrium, it made no more senses to argue whether the interest rate was determined by the IS curve or the LM curve than to argue whether the price of a good was determined by the demand curve or the supply curve in Marshall’s scissors diagram. The writings of Keynes’s student, colleague, friend, and rival Sir Dennis Robertson were neglected like those of Hawtrey, Hayek, Fisher and Mitchell during the high-tide of Keynesian dominance, until his work was re-examined by John Presley (1979), Laidler (1999, pp. 90–99) and Gordon Fletcher (2000). Like Pigou (1927), Robertson (1926) emphasised the influence of expectations on investment decisions, and was doubtful about the ability of the market to coordinate intertemporal allocation. Despite the claims of Klein (1946) and Samuelson (1946), the public policy views of Pigou and Robertson was not very different from those of Keynes, as Keynes recognized. Keynes (1936) complimented the LSE deflationist Lionel Robbins (1934) for taking a policy stand consistent with his economic theory. As Patinkin (1982) argued, Keynes moved away from his Cambridge colleagues Pigou and Robertson in macroeconomic theory, not over public policy. Earlier, Robertson (1915) presented a real theory of fluctuations in national income, based on technology shocks and overinvestment, in contrast to the monetary theory of fluctuations advanced by Fisher (with Brown, 1911) and Hawtrey (1913). Rather than hoping that stabilized policy could entirely smooth out the trade cycle, Robertson held some 129

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fluctuations around trend to be appropriate. Charles Goodhart and John Presley (1994) argue persuasively that Robertson (1915), together with the emphasis of Schumpeter (1912) on bursts of entrepreneurial innovation, prefigured important aspects of Real Business Cycle theory. Sir Ralph Hawtrey stood out from his British contemporaries Beveridge, Keynes, Pigou and Robertson by opposing counter-cyclical fiscal policy on theoretical grounds (crowding out of private investment by public spending), and influenced the “Treasury view” of opposition to such policy. However, he disclaimed any responsibility for the notorious Treasury White Paper during the 1929 election campaign, as he was away at Harvard as a visiting professor in 1928–1929. Ironically, Keynes’s Treasury memoranda during the First World War on the impossibility of expanding available output in a fully-employed wartime economy by demand stimulus or exchange depreciation contributed to the Treasury view in the very different interwar situation. Hawtrey (1913, 1919) advanced a monetary theory of economic fluctuations, and supported the active use of monetary policy for economic stabilization (see Deutscher, 1990). In this, he differed from Lionel Robbins or Friedrich Hayek at LSE, who shared his opposition to activist fiscal policy. Despite his continuing opposition to fiscal policy, Hawtrey was among the developers of a finite-valued spending multiplier, with a numerical example with leakage into imports in a 1928 Treasury memorandum on the German reparations transfer problem, another with leakage into saving in a Macmillan Committee working paper in December 1930, and an algebraic analysis published in Hawtrey (1932), a year after Richard Kahn’s publication of the finite-valued multiplier (see Davis, 1980; Dimand, 1988; Deutscher, 1990). A possible reconciliation of Hawtrey’s multiplier contributions with his continued opposition to fiscal policy is suggested by his later identification of liquidity preference (money demand as a function of interest as well as of income) as Keynes’s crucial advance. If money demand does not depend on the interest rate, fiscal policy will be subject to complete crowding out even though monetary policy is still effective in changing aggregate demand. Anthony Endres and Grant Fleming (1999a, b) examine the International Labour Organization (ILO) in Geneva as an innovative source of economic analysis and policy advice between the wars, including publication of Irving Fisher’s “Phillips curve” article (Fisher, 1926) and advocacy of deficit-financed public investment as a response to unemployment and depression. Endres and Fleming draw attention to J. R. Bellerby (1923, 1925), a colleague of Keynes at Cambridge in the early 1920s (joining with Keynes in opposing deflation and Britain’s 1925 return to the gold standard at the prewar parity) and a leading ILO economist in the late 1920s. This previously little-known economist

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(omitted, for instance, from Eshag, 1963; Dimand, 1988; Laidler, 1999) will undoubtedly figure more prominently in future accounts of Cambridge monetary economics. Away in the Antipodes, L. F. Giblin (1930), a graduate of King’s College, Cambridge (the college of Keynes and Pigou), made a noteworthy contribution to multiplier analysis in his inaugural lecture at the University of Melbourne, derive a finite-valued spending multiplier with leakages into imports alone, so that it was only finite if the rest of the world was taken as given. Giblin’s status as a possible proto-Keynesian macroeconomist has been the subject of considerable discussion (Copland, 1960; Dimand, 1988; Milmow, 2000).

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STOCKHOLM AND LAUSANNE

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The pioneering Swedish monetary theorist Knut Wicksell continued to participate in debates on deflation and cycles in the early 1920s (Boianovsky, 1995, 1998). Building upon Wicksell, Erik Lindahl (1939), Erik Lundberg (1937, 1994), Gunnar Myrdal (1939) and Bertil Ohlin (1933), among others, contributed to macroeconomic dynamics (Jonung 1991, 1993; Uhr 1990). Some, like Myrdal, were later confident that the Stockholm school could have produced The General Theory for themselves without Keynes’s contribution, but Lundberg (1996) distanced himself from Schumpeter’s efforts to build up Lundberg as a rival to Keynes. Don Patinkin (1982) argued that the Stockholm school did not have Keynes’s central message, the principle of effective demand (determination of a stable equilibrium level of income). They concentrated instead on price-level dynamics, and did not develop a theory of aggregate output or employment, although they gave policy advice on unemployment. Bertil Ohlin emphasised changes in income rather than prices in his 1929 Economic Journal exchange with Keynes over the transfer problem (being more Keynesian than Keynes in that exchange), and in a 1933 memorandum he summed a geometric series to find the multiplier effect of public works (Eskil Wadensjo in Jonung 1991, 116 B the calculation was deleted from the memorandum before publication because of criticism by Dag Hammarskjold), but in the Economic Journal in 1937 Ohlin rejected the stability of the consumption function and the usefulness of multiplier analysis. The Norwegian econometrician Ragnar Frisch also contributed to business cycle analysis in the 1930s (see Andvig, 1985 and the exchange between Frisch & Tinbergen on statistical testing of business cycle theories, reprinted in Hendry and Morgan 1995), while Jens Warming in Denmark brought leakages into saving into the multiplier analysis in a 1932 comment on Kahn. The Scandinavian economists did not invent Keynes’s General Theory independently, but what they did 131

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contribute to macroeconomic dynamics and macroeconometrics is recognized as having considerable interest and importance. In France, Albert Aftalion (1913, 1927) also worked on macroeconomic dynamics, stressing the role of investment (Dangel & Raybaut, 1997). The Lausanne school of general equilibrium theorists was also concerned with monetary and employment questions (see Tarascio, 1969 about Pareto on employment). Pascal Bridel (1997) examines the problematic attempts of Walras and Pareto to incorporate money in their general equilibrium analysis, a still unresolved issue that became of wider interest to the economics profession only after the Second World War, as Walrasian general equilibrium analysis became more widespread.

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THE AMERICANS: FISHER, CHICAGO, YOUNG, AND CURRIE

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“The story of 20th century macroeconomics begins with Irving Fisher,” declares J. Bradford De Long (2000, p. 83). The quantity theory goes back “to David Hume, if not before. But the equation-of-exchange and the transformation of the quantity theory of money into a tool for making quantitative analyses and predictions of the price level, inflation, and interest rates was the creation of Irving Fisher” (De Long, 2000, p. 85). Fisher (1896) stressed expected inflation as the difference between real and money interest (with appropriate acknowledgement of J. S. Mill & Marshall), extending this distinction to uncovered interest parity and the expectations theory of the term structure. The two-period consumption diagram of Fisher (1907, p. 407), embodying consumptionsmoothing and the present discounted value of expected lifetime disposable income as the budget constraint, is the basis for modern theories of consumption and saving, while Keynes acknowledged that his marginal efficiency of capital was the same as Fisher’s rate of return over costs. Fisher (1930) offered what may be the first clear, correct statement of the marginal opportunity cost of holding money, but he did not incorporate this in his studies of the velocity of circulation of money. Fisher’s contributions ranged from “money illusion” (to be eradicated by education and by publishing price indexes) through indexed bonds and a price level rule for monetary policy to his “ideal index” formula, which is increasingly used, but he never drew his monetary, capital theory, and general equilibrium work together in a grand synthesis. He helped found the Econometric Society (serving as its first president) and the Cowles Commission. From a scientific standpoint, Fisher’s crusades for Prohibition, a new calendar, a new world map projection, eugenics, and dietary reform were a waste of his time and energy. Fisher’s public reputation (and personal finances) suffered

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from his dramatic mis-prediction of stock prices in 1929, and he was caricatured in postwar textbooks as upholding a rigid, constant velocity, constant output version of the quantity theory. Contrary to that caricature, Fisher was concerned (notably in The Purchasing Power of Money, 1911, Chapter 4) with changes in output during “transition periods” from one equilibrium to another, driven by real interest fluctuations as nominal interest adjusted slowly and imperfectly to monetary shocks. Fisher’s hypothesis about real interest fluctuations determining booms and crises was challenged on empirical grounds before the First World War by Minnie T. England of the University of Nebraska, a theorist closer to Schumpeter (O’Brien, 1997; Dimand, 1999a), but Fisher remained committed to his monetary theory of fluctuations acting through real interest. Fisher (1926) was even reprinted in 1973 as “I Discovered the Phillips Curve.” Since Fisher’s causality ran from monetary shocks to a distributed lag of price changes to unemployment, his formulation bore greater resemblance to the “Phillips curve” of later macroeconomics than did that of A. W. H. Phillips (whose causality ran from unemployment to wage changes). Fisher’s 1933 debt-deflation theory of how some recessions turn into great depressions was, after a long period of neglect, taken up Hyman Minsky and James Tobin, among others. Interest in Fisher’s economics has been revived by James Tobin (notably through his New Palgrave entry on Fisher), by William Barber’s edition incorporating correspondence, Fisher’s key journal articles, and Fisher’s exchanges with reviewers along with Fisher’s major books (Fisher, 1997), and by a conference volume (Loef & Monissen, 1999). Don Patinkin (1981) contested Milton Friedman’s description of his restatement of the quantity theory of money as a continuation of a Chicago oral tradition of money theory and policy expounded in the 1930s by Henry Simons, Lloyd Mints, Frank Knight and Jacob Viner (see Tavlas, 1998 and the exchange between Friedman and Patinkin in Gordon, 1974). Patinkin, himself educated at Chicago, argued that Friedman’s view of money demand as a stable function of a handful of variables owed more to Keynes’s liquidity preference and to non-Chicago quantity theorists such as Fisher than to Chicago oral tradition. Henry Simons had endorsed rules rather than discretion in monetary policy, but, like the other Chicago economists of the 1930s, had neither written money demand as a function of the interest rate, as Keynes did, nor made use of Fisher’s distinction between real and money interest, both central features of Friedman’s monetarism. J. Ronnie Davis (1971) showed that the Chicago economists of the early 1930s countenanced deficit-financed public works in the Depression, and that one, Paul Douglas, showed an understanding of multiplier analysis before The General Theory was published (but, unnoticed by Davis, after the publication of multiplier analysis by Richard Kahn in 1931 133

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and 1933 and Keynes in a 1933 pamphlet, all three of which Douglas cited – see Dimand, 1988). If, as Patinkin (1981, 1982) argues, Keynes’s innovation was in economic theory rather than in advocacy of public works or budget deficits, support of activist fiscal policy by Chicago economists or by some of their German contemporaries (see Backhaus, 1997; Klausinger, 1999), however interesting in itself, does not constitute anticipation of Keynes. Allyn Young, who died prematurely in 1929 two years after leaving Harvard for a chair at LSE, is belatedly recognized as a significant monetary and growth theorist. His 1928 presidential address to Section F of the British Association on “Increasing Returns and Economic Progress” (reprinted in Mehrling & Sandilands, 1999; and in Dimand, 2002) is a key precursor of endogenous growth theory (see Currie, 1997; Sandilands, 2000a). Beyond his scattered writings (many as contributions to textbooks or encyclopaedias), Young was an influential teacher, making lasting impressions on Frank Knight at Cornell, Edward Chamberlin, Lauchlin Currie and Arthur Marget at Harvard, and Nicholas Kaldor at LSE. Perry Mehrling (1997, Chapters 1–4) makes a case for Young’s broader importance as a monetary economist, but Young’s reputation continues to rest on his contribution to growth theory. The promising beginning for modern growth theory suggested by independent publications in 1928 by Young, the Cambridge philosopher Frank Ramsey, and the Soviet central planner G. F’eldman (all reprinted in Dimand, 2002) was cut short by the deaths of Young and Ramsey (the latter at the age of twenty-six) and F’eldman’s disappearance in the Stalinist purges. Young’s student Lauchlin Currie wrote a Harvard dissertation that anticipated elements of the later Friedman and Schwartz monetary interpretation of the Great Depression as a Great Contraction of the money stock, although Currie (1934) differed from Friedman and Schwartz (1963) over the money supply mechanism (see Frank Steindl 1995 and Karl Brunner’s introduction to the 1968 edition of Currie, 1934). In the later 1930s, Currie took the lead in introducing Keynesian economics (“Curried Keynes”) into Washington policy discussions (see Roger Sandilands, 1990, 2000b).

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The statistical approach to business cycles, decomposing time series into trend, cycles of assorted amplitude and length (Kitchin cycles, Juglar cycles, twentyyear Kuznets cycles, and fifty-five year Kondratiev long waves among others) with little emphasis on a priori economic theory, flourished between the wars, particularly after the foundation in 1920 of the National Bureau of Economic

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Research, directed by Wesley Mitchell (see Mitchell, 1913, 1927, 1951; Sherman, 2001). While the institutional economics to which Mitchell gave a statistical turn was primarily an American phenomenon, Mitchell’s writings and example had great influence on business cycle analysis throughout the industrialized countries in the 1920s. A Business Cycle Institute directed by Nikolai Kondratiev opened in Moscow in 1921 (only to disappear along with its director in Stalin’s purges). The Rockefeller Foundation partially funded similar institutes established in Berlin in 1925 and Vienna (directed first by Hayek, then by Oskar Morgenstern) in 1927 (Craver, 1986; Kondratiev, 1998; Klein, 1999; Louçã, 1999), as well as research on cyclical growth at the alreadyestablished Kiel Institute of World Economics. Kalecki worked at the Business Cycle Research Institute in Warsaw, and there were others active from Belgium to Bulgaria. In Britain, the London and Cambridge Economic Service (promoted by Sir William Beveridge of LSE) produced a business barometer in the manner of Mitchell’s NBER or Warren Persons’s Harvard Committee Economic Service. Only after the Second World War did such institutes retitle themselves Institutes of Economic Research. A few economists continued to look for physical cycles to explain economic cycles: Herbert Stanley Jevons, lecturing in Sydney and holding chairs in Wales, Rangoon, and Ahmedabad, continued to uphold his father’s sunspot theory of the trade cycle into the 1930s, while H. L. Moore, Mitchell’s colleague at Columbia, emphasised the influence of Venus on weather and economic cycles (Le Gall, 1999). With a sufficient number of superimposed cycles, any time series could be represented as cyclical. Using an ancestor of spectral analysis called the periodogram, Beveridge decomposed wheat prices into nineteen cycles with periods ranging from 2.735 years to 68 years, eleven of them very prominent. Such large numbers of cycles inspired scepticism about this statistical approach to business cycle analysis, as did Eugen Slutsky’s 1927 demonstration that summation of random shocks could produce a series that looked cyclical. The relatively atheoretical statistical investigators of business cycles did not come into conflict with the more theoreticallly-oriented econometricians in the interwar period. However, Tjalling Koopmans (1947), research director of the Cowles Commission, criticized the NBER empirical approach as “measurement without theory” in a review article of Burns and Mitchell (1946) (Hendry and Morgan 1995 reprint Kopmans’s article and the resulting controversy). The vector autoregression (VAR) or “atheoretical macroeconometrics” associated with Christopher Sims (1980) may be viewed as a return to the NBER empirical approach to studying cycles, with more sophisticated statistical techniques. 135

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The Real Business Cycle stream of “The New Classical research program walks in the footprints of Joseph Schumpeter’s Business Cycles (1939), holding that the key to the business cycle is the stochastic character of economic growth” (De Long, 2000, p. 83). Aghion and Howitt’s Endogenous Growth Theory (1998) explicitly formalizes Schumpeter’s concept of creative destruction, in which entrepreneurial innovation destroys the value of existing physical and human capital. Schumpeter himself has attracted renewed attention, with some 1,600 citations between 1981 and 1985, not far below the 2,000 citations of Keynes in those years and respectable even in comparison to the 3,000 citations of Paul Samuelson or the 3,500 citations of Milton Friedman (Dogan & Pahre, 1990, p. 424). Like Hayek, Schumpeter opposed policy activism during the Great Depression (Klausinger, 1995), but Schumpeter’s interpretation of the severity of the Depression as the fortuitous coincidence of downturns in several cycles of differing periodicity (exacerbated by New Deal policies restricting output to support prices) diverged from the Austrian trade cycle theory. The banker L. Albert Hahn, who taught part-time at the University of Frankfurt and later at the New School for Social Research (the “University in Exile”) in New York, founded the Frankfurt Society for Research on Business Cycles in 1926. Going beyond Schumpeter (1912), Hahn (1920) made strong claims for the power of bank credit-creation to stimulate real output. Hahn (1949, pp. 6–7) later declared that “all that is wrong and exaggerated in Keynes I said myself much earlier and more clearly” and reprinted critiques of his own 1920 volume by Ellis (1934) and Haberler, on the grounds that their objections also applied to Keynes (1936). Boudreaux and Selgin (1990) present Hahn as a precursor of both Keynes and the monetarist counter-revolution. One may note, however, that Hahn championed demand stimulus during the German hyperinflation of the 1920s, when Keynes analysed the costs of inflation in his Tract, and then turned to advocacy of hard money during the Great Depression, when Keynes looked to demand stimulus to remedy mass unemployment. To say the least, Hahn had a timing problem in matching his policy proposals to the current situation.

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VIENNA AND LSE

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The success of a series of four lectures delivered at the London School of Economics in February 1931 by Friedrich Hayek (1931), then director of the Austrian Institute for Business Cycle Research in Vienna, led to his election to a chair at LSE at the age of thirty-two, the championing of Austrian trade cycle theory by another young LSE professor, Lionel Robbins (1934 and introductions to Hayek, 1931; and von Mises, 1935), and the translation into English of other

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works by Hayek and of The Theory of Money and Credit (1935) by Hayek’s mentor, Ludwig von Mises, who had taken the lead in founding the Austrian Institute. The Austrian monetary overinvestment theory of the trade cycle argued that expansionary monetary policy made subsequent depression inevitable by encouraging excessive lengthening of the average period of production (see Ellis, 1934). The LSE-Austrian school was severely sceptical of reasoning in terms of aggregates such as the price level, yet a key Austrian concept was the average period of production, which became ensnared in the early 1930s in one of the recurring outbreaks of capital theory paradoxes and controversies. The LSE-Vienna school was devastated by the loss to Keynesian economics or eclectic positions of such promising young Hayekians studying or teaching at LSE as John Hicks, Benjamin Higgins, Nicholas Kaldor, Abba Lerner, and G. L. S. Shackle, with a few, notably Paul Sweezy, moving beyond Keynes to Marx (McCormick, 1992). Even Lord Robbins appeared to recant his deflationism of the 1930s in his 1971 autobiography, although the extent and meaning of his recantation is reconsidered in the biography of Robbins being written by Susan Howson. Milton Friedman (in Gordon, 1974, pp. 162–163) argues that the General Theory had more appeal to young economists at LSE than at Chicago because at LSE the dominant view was that the depression was an inevitable result of the prior boom, that it was deepened by the attempts to prevent prices and wages from falling and firms from going bankrupt . . . that the only sound policy was to let the depression run its course, bring down money costs, and eliminate weak and unsound firms. By contrast with this dismal picture, the news seeping out of Cambridge (England) about Keynes’s interpretation of the depression and the right policy to cure it must have come like a flash of light on a dark night . . .. It was the London School (really Austrian) view that I referred to in my ‘Restatement’ when I spoke of ‘the atrophied and rigid caricature [of the quantity theory] that is so frequently described by the proponents of the new income-expenditure approach B and with some justice, to judge by much of the literature on policy that was spawned by the quantity theorists.’

Gerald O’Driscoll (1977) and G. R. Steele (1994) have renewed serious study of Hayek’s economics as a theory of how markets deal with the coordination problem (see also Colonna and Hagemann 1994), as Laurence Moss (ed., 1976) has done for Mises. There is now a Society of Historians of the Austrian Tradition in Economics, based in France, while Wilhelm Röpke (1936), a German cycle theorist associated with the Vienna school, is the subject of a Roepke Review published in Ohio. The emphasis has been on Hayek’s development of Carl Menger’s concept of spontaneous order and his extension of von Mises’s critique of the rationality of socialist planning, rather than on his formal trade cycle theory and capital theory of the interwar years. As The Economist (March 31, 2001, p. 77) concludes, “Hayek was not much of a 137

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technical economist, as Keynes and Mr Friedman in their different ways understood. But he was a social philosopher of rare system and power.” The Theory of Idle Resources (1939) by W. H. Hutt, an LSE graduate who was Dean of Commerce at the University of Cape Town, presented a searchtheoretic explanation of unemployment as an alternative to the Keynesian demand-deficiency explanation. An acerbic critic of trade union power, Hutt drew on both Hayek’s Austrian emphasis on market process and discovery of information, and on the analysis of unemployment as a frictional problem of market organisation by LSE’s director, Sir William Beveridge (1930), even though Hutt dismissed “Beveridge’s world-famous book on unemployment” as “a beautifully written descriptive, empirical study with no analytical content” (see Dimand, 1999b, on Beveridge, 1930). Hutt (1939), which may be viewed as the culmination of LSE-Austrian theorizing about unemployment in the 1930s, long unfortunately attracted little study (but see Horwitz 1997). Leijonhufvud (1969, 31n) identified neglect of Hutt (1939) on search behaviour as “the worst sin of omission that I have so far found myself guilty of” in Leijonhufvud (1968).

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THE OUTSIDERS: MONETARY HERETICS

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Monetary heretics and dissenters, asserting the existence of some flaw in the automatic adjustment mechanism of a capitalist monetary economy, raised questions not faced by the mainstream of economists (not always well-posed questions by any means). In times of economic upheaval, they received a hearing or a reply from academic economists, with Robertson and Hayek rebutting the underconsumption arguments of Foster and Catchings, and Fisher, Hawtrey, and Keynes taking up the stamped scrip proposal of Silvio Gessell. In the early 1930s, the Economic Forum, published in New York provided a venue for an exchange of views between monetary heretics such W. T. Foster, Ezra Pound, Robert Eisler, and Frederick Soddy and established economists such as Irving Fisher and James Harvey Rogers of Yale, Frank Graham of Princeton, and Bertil Ohlin (see Dimand, 1991). Keynes (1936, Chapter 23) praised “the proud army of heretics”, most notably the underconsumption theorist John Hobson, who had paid attention to effective demand as a determinant of aggregate output. Underconsumption theories are surveyed by Michael Bleaney (1996) while E. E. Nemmers (1956), Roger Backhouse (1990, 1994), and Michael Schneider (1996) study Hobson’s macroeconomics, revealing Hobson as more than just the theorist of imperialism (with Backhouse, 1994 finding an anticipation of the accelerator in the early work of Mummery & Hobson).

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For all his respect for Hobson and for earlier unconventional writers like Bernard Mandeville, Keynes (1936) disdained Major C. H. Douglas of Social Credit as a private but not a major in the brave army of heretics (see King, 1988). Social Credit had some political success in the 1930s, especially in the Canadian province of Alberta, where Social Credit won 56 of the 63 legislative seats in 1935 (and all 15 of Alberta’s seats in the federal House of Commons later that year). Frances Hutchinson and Brian Burkitt (1997) attempt to rehabilitate not only Douglas’s A + B theorem (which assumed that B payments such as interest are not spent) but even Douglas himself. Hutchinson (1995, 47n) admits only that “Although Douglas was an outspoken opponent of fascism, Social Credit’s opposition to usury was attractive to anti-semitic elements”, a statement not challenged by her commentator Amartya Sen. However, Douglas (1945, pp. 41, 42) insisted that to believe “that the genuine higher policy of Germany is anti-Jew is patently absurd . . .. Hitler himself is an illegitimate descendant of a Viennese Baron Rothschild” and he referred to “the bureaucratic state alike envisaged by the Jews and the Great German General Staff as the instrument of World Domination” – all of which was discussed by C. B. Macpherson in a book listed in Hutchinson’s bibliography. Douglas (1945, p. 10) even attributed Domesday Book to “William the Norman’s Jewish advisers.” Douglas himself was one of the most rabid of the anti-Semitic elements attracted to Social Credit, and his economics was cruder than Hobson’s.

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KALECKI AND THE MARXIAN TRADITION

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Marxian economics was even further out of the mainstream of the discipline than monetary heresies. Michal Kalecki has been claimed by Joan Robinson (1977), Lawrence Klein, and others as an independent discoverer of Keynes’s General Theory, building upon the Marxian economics of Rosa Luxemburg (1913). This was disputed by Don Patinkin (1982), who held that the central message of Kalecki’s articles from 1932 to 1935 concerned investment cycles, while that of the General Theory was the principle of effective demand, interpreted as the IS goods-market equilibrium condition, both the mathematical solution of the equilibrium equation F(Y) = Y and the demonstration of the stability of equilibrium by the adjustment equation dY/dt = G[F(Y) – Y], where G´ > 0. Even Mario Sebastiani (1994, p. 61), arguing that “unemployment equilibrium is the core of Kalecki’s thought about capitalism”, accepts that “Only later – probably after the General Theory was published – did Kalecki seem to realise that the outstanding problem was the systematic waste of 139

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resources, and that dealing with it required separating the analysis of equilibrium from that of the dynamic process.” Simon Chapple (1991) argues that Kalecki determined output in a manner consistent with Patinkin’s formulation of the principle of effective demand in a 1933 article in Polish (Kalecki, 1990, pp. 165–74) that Patinkin (1982, p. 69n) dismissed in one sentence in a footnote for arbitrarily assuming a fixed share of profits in national income. Chapple (1993) shows capitalist spending decisions determining aggregate income in another 1933 Kalecki essay, with a procyclical profit share, unitary marginal propensity to consume out of wages, and zero marginal propensity to consume out of profits. Most strikingly, Chapple (1995a) examines Kalecki’s 1934 Polish journal article “Three Systems” (Kalecki, 1990, 201–219) which includes a three-equation model of goods market equilibrium, money market equilibrium, and aggregate supply. However, Kalecki did not choose “Three Systems” for translations of his selected articles in 1966 and 1971, and he did not refer to it later or develop its static equilibrium method, preferring dynamic models in which investment alters the capital stock. This may reasonably exclude “Three Systems” from Kalecki’s “central message” to the economics discipline, but the essays studied by Chapple (1991, 1993, 1995a, 1995b) remain of great interest as showing what Kalecki was able to produce in the early 1930s working in a strand of the Marxian tradition (see also Feiwell, 1975; King et al., 2000). Kalecki aside, Howard and King (1989–1992, pp. II, 19) conclude that other “Marxist analyses of the Depression proved deficient, and the ultimate reason is similar to that applying in the case of bourgeois economics: they lacked an adequate theory of effective demand.”

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CONCLUSION: MACROECONOMICS BEFORE THE GENERAL THEORY

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Harry Johnson (in Johnson & Johnson, 1978) and David Laidler (1999) argued that for the Keynesian revolution or monetarist counter-revolution to succeed to capturing the attention and allegiance of the profession and policy makers, differences with previous theories had to be over-dramatized, terminology altered, and continuities under-played. This led to a period of neglect of the streams of monetary theory flowing from the work of Marshall, Fisher, and Wicksell and of business cycle theory following from Juglar and Jevons. This rich and varied body of writings included contributions with links to later developments (e.g. Robertson & Schumpeter to Real Business Cycles, Schumpeter and Young to endogenous growth theory, Mitchell to VARs, Fisher to much of later monetary macroeconomics). Keynes was steeped in the Marshallian tradition, and also exposed to Fisher and Wicksell (but not the

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Lausanne general equilibrium school). Don Patinkin’s concept of a central message helps clarify where Keynes stood in relation to his predecessors, and to sort out the Mertonian problem of multiple discoveries (Patinkin, 1982; Merton, 1973). While Keynes also stressed the fundamental uncertainty underlying volatile investment decisions, Keynes’s central message, as seen by Patinkin, was the principle of effective demand, the determination and stability of an equilibrium level of income and employment, in place of the quantity theory’s central message about the price level (with output affected during transition periods) and of business cycle analysis’s central message about dynamics and fluctuations. Keynes transformed macroeconomics, but a substantial and valuable body of macroeconomic literature already existed for him to transform.

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Economists have traditionally been interested in methodological issues; during the heyday of British political economy any economist worth his or her salt wrote at least one learned essay on the subject. Names like Senior, Mill, and Keynes, Robinson and Robbins come to mind. Today, however, most mainstream economists regard methodology as unnecessary and irrelevant to serious economic science. Discussions of methodology are absent in the top journals and are given short shrift in most graduate programs. The tradition has, however, been kept alive by a relatively small, dedicated group of scholars who take methodology seriously. Reflection Without Rules: Economic Methodology and Contemporary Science Theory, by D. Wade Hands, is an important contribution to this esteemed, but under-appreciated tradition. It is no wonder, really, that methodological reflections are given such short shrift among economists today. Economics has been wildly successful in establishing itself as a hard science in the eyes of the academy, the government and the general public. Serious methodological reflections, however, cannot help but starkly reveal the huge disparity that exists between the social, cultural and political authority enjoyed by economics and its manifest failings as a science when evaluated in terms of what Hands has dubbed, “the Received View.”

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Simply put, the Received View refers to the positivist tradition in AngloAmerican philosophy of science, manifested in economic methodology as a “loose amalgam of logical empiricism plus the falsificationism of Karl Popper” (p. 71). It is a view that demarcates the scientific from the unscientific, articulates the contours of the scientific method, and privileges scientific knowledge. It is likewise a view that has been fatally undermined in contemporary science theory, both by its own internal contradictions and paradoxes, and by the challenges posed by W. V. O. Quine, Thomas Kuhn and others working in the post-positivist tradition. Hands argues that the Received View in economics is an integral part of the “shelf-of-philosophy” approach to economic methodology, an approach that entails evaluating economic theory in terms of how well it conforms to the meta-rules established by philosophy of science. Given the important recent developments in science theory, such as Quine’s naturalized epistemology (constructing evaluative accounts of knowledge production) and the sociology of science programme, the nature of methodological inquiry needs to change. The good news, according to Hands, is that this change is already taking place. The disappearance of rules-based methodology does not mean the end of methodology. Quite the contrary, “[I]f methodology is defined as the interpenetration of economics and science theory, then economic methodology is not only alive, but alive and well” (p. 7, emphasis in the original). He argues that the field ought to be redefined as “any literature that substantively involves both economics and science theory,” and refers to this expanded field as “the new economic methodology” (p. 394, emphasis in the original). To arrive at this point, Hands takes his reader through an exhaustive survey beginning with the work of John Stuart Mill. This survey allows him to argue that the rules-based view of methodology is somewhat of a historical aberration, a way of thinking about economic methodology that emerged only in the middle of the twentieth century. His treatment of Mill is particularly instructive when considered in light of this claim. Mill clearly articulated the issues that would remain central to economists throughout the 19th century and well into the 20th. In addition to firmly establishing methodological individualism as the paradigm in economics, his great contribution was to reconcile empiricist epistemology – knowledge is obtained inductively from sense experience – with Ricardian economic theory – economic propositions follow deductively from a few rationally derived assumptions. For Mill the distinction between deductive and inductive inference was not the central question – because deduction does not add any new knowledge to universal laws established by inference – but rather the question was, which sciences can be made deductive, and which sciences must remain

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experimental? Economics is, of course, an example of the former. Hands’ exposition of Mill provides the foundation for his reading of subsequent developments in methodology by the British political economists. For these economists, methodology did not consist of articulating the rules laid down by a particular epistemological position and then evaluating whether or not economics lived up to those rules. Rather, it consisted of articulating the particular nature of economics as distinct from other sorts of sciences. This gradually changed. Clear indications of the move toward rules-based methodology are evident in the work of Lionel Robbins, and the movement comes to fruition in the aggressively positivist work of Terence Hutchison. By the 1950s the notion that economics was a positive science was firmly established, and the Received View was the guardian of its epistemically privileged status. The next section of the book traces the philosophical antecedents and underpinnings of the Received View – logical positivism, logical empiricism, and Popperian falsificationism. The problems of theory-ladenness and underdetermination, however, cast doubt on the claims of foundationalist epistemology and foretold the demise of the Received View. The story is a familiar one. Quine demonstrated that theories are always underdetermined by the evidence: since statements about the world face the tribunal of evidence not in isolation but as parts of a larger belief system, the same evidence can support a variety of theories. Kuhn showed that observations are always theory laden: the data used to test theories and hypotheses are seen through the lens of the theories that are supposed to refute or support the hypotheses. In addition to its roles in undermining foundationalism, Hands points out another important implication of Kuhn’s work: since the privileged position of the natural sciences can not be explained by adherence to the scientific method, the social sciences are needed to explain it. Hence, social science comes first; it is the stable ground for the more problematic natural sciences (although Kuhn himself did not endorse this implication, Hands certainly does). This is a theme that resonates throughout the rest of the book. At any rate, trying to address the difficulties raised by theory-ladenness and underdetermination was fundamental to the philosophy of science in the late 20th century. Hands leads the reader through these subsequent developments with rich treatment of naturalism, pragmatism, the sociological approach to scientific knowledge, contemporary work in economic methodology, and a brief incursion into the economics-of-science literature. Given the scope of the work and the relative brevity of this review, I will only briefly discuss a few themes from these developments. First, given the huge impact that Karl Popper has had on economic methodology, Hands’ discussion of Popper needs to be noted. It is commonplace for 153

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economists to believe that falsification is the appropriate methodological approach for economics. In practice, however, economists rarely practice what they preach. Hands makes sense out of this seeming contradiction by arguing that falsification serves as a “particular type of empiricist foundationalism – the good old fashioned rule-making of the early positivists . . . and it is this perceived foundationalism that generates most of the program’s charm” (p. 290, emphasis in the original). Reading falsification as foundationalist is incorrect because Popper was not a foundationalist (nor was he a relativist). Moreover, falsification was not the position that Popper endorsed with regard to the social sciences. When Popper did write about the social sciences he stressed two concepts, situational analysis and the rationality principle. Situational-analysis explanations of human behavior start by describing the individual’s problem situation, a description that includes beliefs, goals, desires and so forth, as well as the relevant constraints. The individual’s actions are then explained by the rationality principle: individuals act appropriately given their situation. Now it is clear that many microeconomic explanations are a special case of this approach, and Popper himself admitted that economics was the inspiration for it. The problem, however, is that given Popper’s use of falsification to demarcate the scientific from the unscientific, explanations based on this approach are hardly science at all. And as Hands points out, the problem lies with the falsification criterion itself: in the end falsification can only be interpreted as foundationalism or relativism; it fails to provide a way to reject foundationalism and still retain the privileged character of scientific knowledge. Hands’ goes on to discuss Lakatos’ methodology of scientific research programs (MSRP) which combined a Kuhnian approach to the history of science with a Popperian approach to normative theory appraisal. This program also had a significant impact on methodology as researchers tried to identify the structure of economics by identifying the hard core, positive heuristics, negative heuristics, and so forth, and then appraised the structures with respect to its theoretical and/or empirical progressivity. Roy Weintraub’s Lakatosian appraisal of Neo-Walrasian economics is particularly interesting because by identifying general equilibrium theory as part of the hard core of economics it seems to demonstrate that “general equilibrium theory is scientifically just fine.” This is a curious result since “[f]or most methodologists sympathetic to Lakatos, general equilibrium theory is the paradigm case of what is wrong with contemporary economics” (p. 294, emphasis in the original). Thus, Lakotos fails to provide rules that will enforce tougher empirical standards on economics. The bottom line, according to Hands, is that if one wants the MSRP to provide rules for demarcating scientific economics from non-scientific economics, it fails in its task, as have all other

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such methodological projects. The problem is that the search for rules-based methodology is a dead end. Remember, this does not mean abandoning either the idea of economic science or methodology, and the work of Karl Popper comes again to the fore here. Hands argues for an alternative reading of Popper as a critical rationalist. Critical rationalism is an approach that is normative without providing strict rules for science. Instead, it asserts that there are rational reasons for choosing one theory over another, and these reasons are based on systematic criticism. It is the emphasis on criticism that gives this approach its normative bite. The important thing is to arrive at ways of organizing “our scientific and educational institutions in ways that maximize productive criticism” (p. 299, emphasis in the original). What the elements of that critical environment are, is the key question. In a work this encyclopedic in scope, readers will likely find something to find fault with in the treatment of his or her specialty. I am no exception. While I was gratified to see that Hands includes a discussion of feminist epistemology and economics, I think the discussion could have gone further. Feminist epistemology begins with the well-established notion that scientific knowledge is theory-laden and interest-laden. Its distinct focus is on the androcentric bias of conventional science practice and the gendered construction of science studies. Hand’s discussion focuses on two particular approaches to feminist epistemology – standpoint epistemology, associated with Sandra Harding, and contextual empiricism, associated with Helen Longino. Both approaches strive to avoid the Scylla and Charybdis of relativism and positivism by rethinking the nature of the knowing subject in science. Positivist epistemology begins with the assumption that the specific social relations and context in which the solitary knower is situated are completely irrelevant to knowing. Clearly this is a problematic assumption given the insights of theory-ladenness and underdetermination. Harding and Longino, along with most feminist epistemologists, reject this assumption and begin from the notion that scientific knowledge is created in science communities (Harding, 1993; Longino, 1993). Given the theory/social ladenness of facts, diversity in scientific communities is an epistemic value, necessary to question and reveal the shared values and implicit assumptions that shape science theory and practice. This insight plays itself out differently for the two philosophers. Harding argues that inclusion of marginalized standpoints is necessary to good science practice, which she calls strong objectivity, because dominant groups fail to critically interrogate the effect their advantaged social position has on their scientific beliefs and practices. The material lives of those at the bottom of the social hierarchy provide the starting point for constructing epistemically privileged 155

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standpoints that reveal previously unseen or misunderstood social relations. Longino, on the other hand, rejects the notion that one’s social situation either enables or limits what one can know. She argues that diversity is necessary because science knowledge is created when individuals and groups, holding different points of view, engage in critical dialog with one another. Diversity is necessary not because of epistemic privilege, or the lack thereof, but because it is necessary for transformative criticism. Both of these philosophers are prolific writers who have disseminated their ideas widely. They are, however, considered as special cases – as feminists, and thus their insights only relevant for feminist research. This is a pity. Their work addresses central issues in post-positivist philosophy of science and provides insights into other methodological approaches. For example, consider the question raised by Popper’s critical rationalism: what are the conditions that will maximize productive criticism? Longino’s criteria for transformative criticism and Harding’s criteria for strong objectivity could go a long way toward answering this question. Moreover, since the relationship between science, values, and interests is central to feminist epistemology, it can play an important role in any new economic methodology. Having said that, let me conclude by saying that I think this is an excellent book. It provides a comprehensive and sophisticated map that covers the methodological tradition in economics, recent developments in science theory, and contemporary economic methodology. It is, among other things, encyclopedic in scope, and so there will naturally be both agreements and disagreements over what is included and excluded, and with how particular subjects are covered. Overall though, it provides a wonderful overview of where we are and where we have come from, an overview that will help new scholars see the forest through the trees, and will help established scholars construct new maps of the methodological thoughtscape.

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Harding, S. (1993). Rethinking Standpoint Epistemology: What is Strong Objectivity? In: L. Alcoff & E. Potter (Eds), Feminist Epistemologies (pp. 49–82). London and New York: Routledge. Longino, H. (1993). Subjects, Power and Knowledge: Description and Prescription in Feminist Philosophies of Science. In: L. Alcoff & E. Potter (Eds), Feminist Epistemologies (pp. 101–120). London and New York: Routledge.

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A review essay on D. Wade Hands, Reflections Without Rules: Economic Methodology and Contemporary Science Theory. Cambridge: Cambridge University Press, 2001. Pp. xi, 480.

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Hands’ book Reflection Without Rules examines the relationship between economic methodology and the contemporary theory of science, and its main argument/finding is indicated by the expression “reflection without rules”. The underlying rationale for such an examination is that economics is “inexorably intertwined” (Hands, 2001, p. 7) with contemporary science theory. Thus, the views of economists and other social scientists about the “epistemic order” or epistemology, including methodology, are “inexorably intertwined” with those about the economic order and social ontology overall. According to Hands, contemporary science theory incorporates the sociology of scientific knowledge, the rhetoric of science and traditional fields like the philosophy of science and epistemology. He identifies one of the key developments causing substantial changes in contemporary science theory in the “unraveling” of empiricist foundationalism to the point of diagnosing the narrow borrowed-rule-giving economic methodology as “effectively dead”. Nevertheless, Hands (2001, p. 7) considers this to be a “very fertile and productive period for work in a new more broadly defined field of economic methodology” in the sense of an interpenetration of economics and science theory. Hands’ book is an original and major contribution to modern economic methodology considered in relation to contemporary science theory. The book also substantially contributes to the research in the history of economic thought and methodology, which warrants a more extensive review in this annual serial. This review is divided into two parts: a description and discussion of the book by chapter and a concluding section.

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DESCRIPTION AND DISCUSSION

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Hands’ book is divided into seven rather lengthy chapters, in addition to introduction (Chapter 1) and conclusion (Chapter 9). Chapter 2 presents an insightful overview of the various methodological traditions in economics, which can be of particular interest to those interested in the history of economic thought and methodology. For instance, Hands notices that methodological pluralism has 157

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been comparatively rare relative to its single-method counterparts in the history of economic thought and methodology. In his view, “quite uncommon” (Hands, 2001, p. 43) has been especially methodological dualism as a subset of methodological pluralism positing that social science, including economics, essentially differs from physical science, and thus two different methodologies: one applied to human society, including the economy, and another to nature. (As it stands, this appears to be one of those rare questionable or contradictory statements in this book, as Hands sometimes implies by saying, for instance, that the conventional rules-based and by implication non-pluralist economic methodology has not actually been the “traditional view”.) This chapter also reconsiders the role of prediction relative to explanatory “realism” within economic theory and methodology. As Hands remarks, if prediction is all that matters (as argued by Friedman et al.), the realism of the assumptions and propositions becomes completely impertinent to the scientific status of an economic theory, paradigm, or research program. He notices that in the history of economic thought and methodology this impertinence of unrealistic assumptions had an evident influence on the “marginalist controversy” in theories of the firm (profit maximization) and labor markets as well as on debates about the adequacy of the premise of perfect or pure competition. In accordance with the prediction criterion, the admitted unrealism of their assumptions is virtually impertinent to their scientific importance if models of profit maximization and perfect competition are more successful in predictive terms than their alternatives. However, for Hands, even if economists are only concerned with prediction, the assumptions and their realism do “still matter”. He concludes this chapter and intimates the general argument of the book by suggesting that the view of economic methodology as “simply taking (relatively pristine) ideas off the shelf of scientific philosophy” (Hands, 2001, p. 69) has been gradually but inexorably eroded during the recent stages of the history of economic thought and methodology. Alternatively, he notices that “politics, context and contingency are deeply involved in the selection process” of economic methodology, which is in turn a key premise of the sociology of scientific knowledge as shown below. Chapter 3 detects and elaborates on what is called the “breakdown of the received view within the philosophy of science” (Hands, 2001, p. 70). Hands characterizes the received view as positivism, logical empiricism and falsificationism (a la Popper et al.) originating or anticipated in the classical empiricist and positivist epistemology of Hume, Comte, etc. Furthermore, he notices that the “same positivist dictums that ostensibly allow economics to transcend the political fray were themselves forged in the cauldron of and thus conditioned by political-economic debate and methodological controversy” (Hands, 2001,

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p. 82). As an instance of such a methodological controversy, the underdetermination thesis posits that any scientific theory or hypothesis can be “immunized” against falsifying empirical evidence, so tests are never definitive and theories or hypotheses not tested in isolation, contrary to falsificationism a la Popper and, in a modified form (e.g. the empirically irrefutable “hard core”), Lakatos’ scientific research program. In this connection, Hands observes that a major factor in the breakdown of the received view in the philosophy of science has been the rise of the contemporary sociology of scientific knowledge, pointing to Kuhn’s role (but, surprisingly, overlooking that of Mannheim as the widely recognized founder of the sociology of knowledge1). In particular, Kuhn’s view of theory-ladenness and its fundamentally social nature, or paradigm dependency of empirical observations, has been instrumental in this breakdown by leading to the incommensurability of different scientific methods or theories as to their adequacy or validity. Chapter 4 centers on what is called the “naturalist turn” within the contemporary philosophy of science. Hands describes naturalism in the philosophy of science as a set of claims that any phenomenon in the world, including society and its economy, can be explained by “natural” scientific methods. Naturalism therefore suggests that the theory of knowledge should apply the same scientific methods used to explore “any other aspect of nature” thus becoming “naturalized epistemology” (Hands, 2001, p. 129). Still, Hands regards naturalism in the modern sense as not being equivalent to methodological monism, though in the old sense naturalism was equated (since Condorcet) with the latter and as such a major theme in the history of economic thought and methodology. In the chapter, Hands (2001, p. 171) also describes methodological individualism as traditionally implying reductionism, i.e. the reduction of “the social to the individual”. He concludes the chapter by noting that the standard position on micro-foundations in economics is reductionist in that it contends that the “macro needs to be reduced to the [specific form of] micro” (Hands, 2001, p. 171). The “sociological turn” in the contemporary philosophy of science is the focus of Chapter 5. Hands characterizes the sociological approach to scientific knowledge (with Kuhn as a reference point) as treating science as essentially societal in character, a social activity performed in communities, with collectively shared paradigms greatly affecting what scientists “see and do not “see”.” Hence, scientific theories become a “particular type of socially held beliefs”, which suggests that the former should be analyzed in the same way as any beliefs shared by “any other social group” (Hands, 2001, p. 173). Yet, somewhat unexpectedly, Hands (2001, p. 174). treats the sociological approach to scientific 159

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knowledge as “one particular version of naturalism” [sic!], while admitting that this is a relatively rare and seemingly dubious treatment.2 Notably, the sociological turn driven by Kuhn et al. (and Mannheim before) has been a major force in the breakdown of the received view within the contemporary philosophy of science, so that science, including economics, is no longer seen as sacrosanct but as “social and theory-laden” (Hands, 2001, p. 175). And Hands (2001, p. 180) characterizes the economics of science (discussed later), especially its Marxian variant, as a “version of the sociology of science.” In turn, he makes a distinction between the sociology of science that views the context, but not the content, of science as social (e.g. Merton) from the contemporary sociology of scientific knowledge for which both aspects of science is social. Hands then subdivides the contemporary sociology of scientific knowledge into the Strong Program that, in contrast to Mertonian school, focuses on the content of scientific knowledge as a social phenomenon and explains scientific beliefs by the social interests of scientists. Another subdivision is social constructivism that regards scientific knowledge as the result of a continuous and contingent process of “negotiation” among scientists (and their institutions), and asserts that the world is constructed, with scientists making (not finding) knowledge, rather than discovered by science. Still, being an economist, Hands (2001, p. 198), while admitting that science and knowledge are socially constructed, makes the qualification that such social construction occurs within a “context of material resistances” to be accommodated or conformed with. In regard with the impact of the contemporary sociology of scientific knowledge on economics, he remarks that the former has been instrumental in undermining the traditional philosophy of science and so the conventional view of economic methodology, i.e. methodological borrowing from the “philosophical shelf” without “much reflection or reconfiguration”. Namely, the sociology of scientific knowledge has “clearly contributed” to the philosophy of science’s disarray that then makes this view become “extremely problematic” (Hands, 2001, pp. 207–208). Further, to Hands, much of the sociology of scientific knowledge (SSK) looks like what economists would say about the (rational) behavior of “scientific agents.” Notably, he notes the “involvement of SSK in the recent literature on the history of economic thought [which] applied SSK directly to the study of contemporary economics” (Hands, 2001, pp. 210–211). Chapter 6 deals with pragmatism, discourse and situatedness as another relevant turn within the contemporary philosophy of science. For Hands, modern pragmatism endorses the social perspective on science, as characteristic of the sociology of scientific knowledge and even the “mainstay” of post-Kuhnian meta-science. Thus, like the sociology of scientific knowledge neo-pragmatism

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is attentive to theory-ladenness and under-determination in science, i.e. that empirical facts are not independent of the “theory-, social- and interest-laden context of human practice.” In turn, neo-pragmatism as well as discourse analysis are, as Hands notices, influenced by postmodernism. Yet, in light of what he sees as postmodernism’s “overall impact on contemporary intellectual life”, it seems to him “rather surprising” that the post-modernist “aestheticization of knowledge” has so “little direct impact” on modern economics (Hands, 2001, p. 251). In any event, Hands regards the application of discourse analysis in the form of the rhetoric of economics as a main current contender within, if not replacement for, conventional economic methodology. According to this analysis, social interests as well as individual personalities are important in the determination of the dominant discourse in science (as well as science theory), including economics. For instance, Hands (2001, p. 252) notes that a “particular contingent constellation” of social and individual forces in economics at a certain time period (e.g. the 1930–1940s) was reportedly responsible for rendering Popperian epistemology and discourse (falsificationism) more relevant “in economic methodology than in the philosophy of science.” Generally, it is noted that “Modernist Methodology does not capture the great insights of economics – the brilliance of a Smith, a Ricardo, a Marx, or a Keynes – [as] to understand why the rhetoric of these individuals was persuasive one needs to understand their context, their audience, and thus to understand and appreciate their work better” (Hands, 2001, p. 260). Recent pertinent developments in economic methodology are analyzed in Chapter 7. The common thread of these developments is that science, including economics, now appears to be, as Hands (2001, p. 275) states, “more disunited; under-determined; theory-, metaphysics-, context- and interest-laden; inherently social, fundamentally complex” than the “Legend” made economists and others believe. He re-emphasizes that formal or methodological arguments about the epistemic order in economics are not independent of substantive or empirical propositions concerning the ontological socio-economic order. Hands identifies the following recent developments in economic methodology. One is the Popperian tradition, and it is ironic for him that Popper’s impact among economists has been actually greater than among philosophers of science overall. In Hands’ view, one problem with the Popperian tradition is that scientific theories are never tested in isolation; another is that the same conventional procedure serves both falsification and confirmation, which undermines the overall “falsificationist project” of substituting refutation for verification. He also notices that the recognized problems of under-determination and theory-ladenness make “falsificationism stuck between the Scylla of 161

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discredited foundationalism and the Charybdis of radical relativism”3 (Hands, 2001, p. 280). Notably, he points to some underlying tensions within the Popperian tradition itself, viz. that the rationality principle (RP) and situational analysis (SA) are very difficult to reconcile with falsificationism. Moreover, social science premised the rationality principle and situational analysis appears to be no science at all by Popper’s own falsificationist criterion of demarcation or theory selection. In particular, Hands (2001, p. 284–285) finds the “most obvious difficulty” in the epistemic status of rationality as Popper’s “almost empty principle” in that the latter is the “animating law” in putatively scientific explanations and predictions, and yet “immunized against potential falsification”. For if rationality is defined a la Popper in a “very weak way (as say whatever people do), then no one could ever violate the RP and thus an economic theory involving [it] would be unfalsifiable (and thus unscientific)” (Hands, 2001, p. 286). Another recent development in economic methodology is what is called the “Lakatosian turn” purporting to shift the unit of analysis from particular theories or hypotheses to scientific research programs and arguing, unlike the Popperian tradition, that even a degenerating research program need not be abandoned. For Hands, a case in point within economics is the neo-Walrasian research program, with Walrasian general equilibrium analysis as the “hard core” insulated from potentially falsifiable empirical evidence by the specific theories (and auxiliary assumptions) in the program’s “protective belt”, as “contact points” between that core and data. He allows that, while not being a “good tool for assessment,” Lakatos’ methodology might help to understand the “structure of economics”, viz. economic theories’ “hardcores, protective belts, positive and negative heuristics”, as well as to highlight the notion of theoretical progress “at work in the history of economic thought” (Hands, 2001, p. 297). In Hands’ view, the Millian tradition, or rather its contemporary adoption and restatement, is a next recent development in economic methodology. According to this tradition, economics represents an inexact and autonomous social science vis-à-vis physical science, first because what Mill and Marshall call the laws of tendency observed in the economy hardly ever afford accurate empirical predictions of economic phenomena, second because unique causal forces pervade these phenomena (e.g. pursuit of wealth, or scarce means and unlimited wants). Still another recent development in economic methodology involves what is called realist themes, including critical realism. Hands notices that critical realism rejects what it sees as neoclassical economics’ reduction of economic

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(and other human) behavior and choice to folk psychology. Alternatively, he takes note of its emphasis on macro social structures and complex causal mechanisms that exist, alongside individual intentionality, and significantly impact micro-behavior on the “surface of social life”. Particularly, Hands (2001, p. 325) identifies a similarity to Giddens’ theory of structuration in that critical realism also assumes “both individual intentional action and deep social structures and relationships”, so that the social and the individual alike matter, and yet neither being the prime mover. Finally, other recent development in economic methodology include what Hands calls cognitive and semantic themes, the conception of capacities and tendencies, etc. Chapter 8 detects and analyzes the “economic turn” in contemporary science theory. Hands (2001, p. 357) remarks that just as in rational choice theory, including the economics of the family, economists often appear more interested in “demonstrating the breadth of economic analysis than with making new discoveries”, the economics of science is “driven more by the desire to extend the explanatory reach of economics than by the desire to make new discoveries about the behavior of scientists or the character of scientific knowledge.” Simply, the economics of science approaches the conduct of scientists in the identical manner as that of business organizations or consumers. By analogy to the distinction between sociology of science and sociology of scientific knowledge, Hands distinguishes economics of science from economics of scientific knowledge (ESK). The latter, in contrast to the economics of science but like the sociology of scientific knowledge, addresses the problem of whether the economy of science produces the “epistemologically right stuff.” Further, Hands views the distinction between the economics of science and the economics of scientific knowledge as mirroring not only that between sociology of science and the sociology of scientific knowledge, but also the traditional one between microeconomics seeking prediction of behavior of agents and welfare economics centering on the efficiency or optimality of the social configuration produced by these agents. In his view, there is a “relatively short” step from welfare economics to the economics of scientific knowledge, viz. the problem of determining whether the social configuration generated by scientific agents is rational, efficient or optimal. For instance, as he almost ironically puts it, “start with a game theoretic model from industrial organization theory; change firms or players into “scientists”; add the adjective “epistemic”; make a few more technical changes and suddenly you have a philosophical model of scientific knowledge” (Hands, 2001, p. 373). Specifically, the economics of scientific knowledge aims at extending the standard economic concept of rationality as utility or profit maximization into the analysis of scientific rationality, including discovery of knowledge. However, Hands seems 163

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to concur with the view of Simon et al. that real-life human rationality is not identical to economic rationality in that actual humans are, at best, boundedly rather than perfectly rational. Hands mentions another stream of literature on scientific knowledge involving economic ideas, e.g. social-exchange models drawing on sociological or anthropological concepts of reciprocal exchange like gift-giving and essentially different from the way exchanges are analyzed within economics. Relatedly, he examines the relation between the economics of scientific knowledge and economic sociology or sociological economics. In his view, what he calls the Economic Sociology of Scientific Knowledge can be derived from economic sociology by simply substituting (a sociological perspective on) scientific knowledge for (the same perspective on) scarce goods and services. He notes that since “economic sociology originated in the work of the sociological big three – Weber, Marx and Durkheim – there are assuredly some aspects of this approach already embedded in some of the sociological literature on scientific knowledge” (Hands, 2001, p. 387). Curiously, Hands (2001, p. 388) adds that by virtue of focusing on “socially situated actors”, economic sociology is an “obvious candidate for application in ESK”. (This inference seems almost a non sequitur so long as the latter precisely lacks or rejects such a focus, as he intimates above. It also blurs, if not conflates, the distinction between the sociology or social conception of scientific knowledge and the economics or rational choice theory of scientific knowledge.) Chapter 9 contains conclusions. The main conclusion and assertion is: “(1) that simple rules-based economic methodology has quietly and unceremoniously passed from the scene, and that (2) its disappearance need not be, and has not been, the death knell for philosophical and science-theoretical reflections on and involvement with the discipline of economics” (Hands, 2001, p. 393). Alternatively, according to Hands, a broader type of economic methodology is in the process of developing and thriving in spite of this failure to establish a narrow set of methodological rules that should differentiate “good” scientific economics from its departures. Furthermore, he describes the conventional narrow rules-based economic methodology as being “something of an historical aberration” in that it “was not really the traditional view in a wider sense”, as witnessed by Mill, Cairnes, N. Keynes, Robbins, Hayek, etc., but just a “particular way of thinking” emerging in the mid-20th century “ (Hands, 2001, p. 397). (Yet, as hinted, this description appears to be in tension with the statement that methodological dualism or pluralism has been “rare” in the history of economic thought and methodology so long as, as Hands implies, most of these economists hold such a position or, alternatively, reject monism, especially naturalism.4) In turn,

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Hands (2001, p. 397) attributes the rise of the conventional narrow rules-based economic methodology to the “impact of positivism and the Received View” in the philosophy of science, to the social experience of the interwar period as well as to the “stabilization of economic science around the twin towers of Walrasian neoclassicism and Keynesian macroeconomics”. Moreover, he describes the period between the 1930s and the current revival as the “dark days” of economic methodology. In particular, Hands (2001, p. 404) singles out falsificationism as a salient aspect of these “dark days”, stating that if economists rejected all those theories falsified by empirical evidence “nothing would be left standing”, and neither would any science “if judged by such methodological rules. As he puts it, while falsificationism and other strict rules draw a “clear line in the sand”, the problem is that every existing natural or social science, including economics, “ends up on the non-science side” (Hands, 2001, p. 404–405). In light of these “lessons” from the new economic methodology, Hands suggests that contemporary economists should avoid forcing economics into the “procrustean bed of science theory” that originally dealt with the natural sciences5. Overall, he concludes that the relation between science, including economics, and society is much more complex than the “Legend” would have economists believe, simply because the former is “fundamentally social” (Hands, 2001, p. 401).

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CONCLUSION

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A major formal virtue of Hands’ book is its impressive interdisciplinary scope conjoining economic theory and methodology with the philosophy of science and epistemology, the sociology of knowledge and other social theory, evolutionary biology and psychology, etc. Particularly fascinating is the command – probably unprecedented within mainstream economics – of contemporary social theory and epistemology, including the sociology of knowledge and the philosophy of science, in relation to economic thought and methodology. As such, this book signals and ushers in the revival of an inter-disciplinary climate within contemporary economics, including the history of economic thought and methodology. Another major methodological virtue is the use of a historical approach to analyzing the relations of economic methodology to the philosophy of science, the sociology of knowledge, etc., even though this use is somewhat implicit. The historical coverage of themes and authors is no less than impressive, spanning from classical political economy and its predecessors in social philosophy to marginalism and neoclassicism to modern mainstream and heterodox economics.6 On this account, Hands’ book (also) represents a 165

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substantial undertaking in, and contribution to, the history of economic thought and methodology. The probably main substantive or theoretical virtue of Hands’ book is the elaborate exposition and adoption (as the conclusion suggests) of a social conception of science and epistemology, including economics and its methodology. While well-established within the sociology of knowledge and science in the tradition of Mannheim, Merton, Kuhn and others, the treatment of science, including economics, as a “fundamentally social” endeavor is original, if not revolutionary, from the stance of conventional or “pure” economic theory a la (neo)Walrasian general equilibrium (and marginalist) analysis modeled after mathematical physics. (This, incidentally, exhibits or harbors the tension between “naturalism”, especially its older version cum methodological monism, and the “sociological turn” with its implied dualism or pluralism in method.) Therefore, Hands’ books helps mainstream economics, especially its view of scientific methodology, to “catch up” with the sociology of scientific knowledge as well as with contemporary social theory (e.g. post-modernism) and the philosophy of science. Historically, contemporary mainstream economics has been surprising slow or reluctant in adopting or examining the implications of the sociology of scientific knowledge, especially of Mannheim’s formulation, for economic methodology, while being somewhat more attentive to Kuhn’s sociology of science. In addition, as Hands notices, mainstream economic theory and methodology has been almost un-touched by postmodernism (viz. the “aestheticization of knowledge”) and other contemporary social theory, which he sees as quite surprising in view of the postmodernist pervasive influence on “contemporary intellectual life”. Also, he implies that mainstream economic theory and methodology has been for long, especially during what he calls the “dark days” since the 1930s, lagging behind some pertinent developments in the contemporary philosophy of science and social epistemology overall as the general theory of knowledge of society. For instance, Hands considers it ironic that in contemporary economics the influence of the Popperian tradition of falsificationism has been in fact greater than in the philosophy of science generally where this impact has been relatively weaker or declining. In particular, he traces this asymmetrical influence to a “particular contingent constellation of forces” (Hands, 2001, p. 252) within mainstream economics during the 1930–1950s. In general, Hands’ book therefore both exposes and remedies much of the traditional isolation and parochialism of mainstream economics vis-à-vis other social sciences as well as the philosophy of knowledge and epistemology. To conclude, Hands’ book is likely to become a tour de force in the contemporary literature on the relations of economic methodology to the theory

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of science. The book perhaps heralds and even ushers in a new era in thinking about economic methodology (and theory) within a wider epistemological and theoretical framework encompassing the philosophy of science and social epistemology, the sociology of knowledge, modern social theory (e.g. postmodernism, neo-pragmatism), etc. It will be of interest and benefit to many economists, notably those concerned with the history of economic thought and methodology in relation to developments within the philosophy of science and social epistemology. Also, other social scientists and theorists, especially the sociologists and philosophers of scientific knowledge, will find this book challenging, informative and beneficial.

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NOTES 1. Mannheim himself considers Marx and Scheler (a German philosopher and sociologist) the founders or precursors of the sociology of knowledge. Mannheim (1936, pp. 309–310) remarks that the sociology of knowledge “actually emerged” in Marx in that the latter’s views reached the “heart of the matter”. Also, he credits Scheler for integrating the “sociology of knowledge into the structure of a philosophical worldview” (Mannheim, 1936, p. 310). Yet, Mannheim seems to overlook that elements of the sociology of knowledge broadly understood are also implicit in Durkheim. He presents what he calls a “sociological theory of knowledge” in which ideas are “elaborated on the model of social things”, thus positing the “social origin” of ideational categories or collective representations, including classifications, in that they “show the mental states of the group” or “only translate social states” (Durkheim, 1965, pp. 25–32). His disciples like Mauss and others in sociology and cultural anthropology have further elaborated Durkheim’s theory. In sum, the Durkheim-Mauss thesis of the social origin of ideas states that conceptions of nature and society “are shaped by the social relations within the culture that generates them, and these are used to express in a reified format the essence of that culture’s ideal of order. This ideal of order consequently molds the expression of social concepts and classifications, eventually transforming the original notions of mastery and control in the social sphere” (Mirowski, 1988, p. 110). Alas, Hands’ book contains no single reference to Durkheim et al. 2. Hands (2001, p. 174–175) adds that “although the effectiveness of sociology as a naturalizing base is clearly undercut by the fact that it does not have the prestige of biology . . . there is nothing conceptually problematic about taking a social (rather than natural) theory as the relevant given for the naturalization of knowledge.” Still, it seems difficult to reconcile “naturalism” arguing that social science, including economics, should adopt the “same scientific tools” as the natural sciences or a “naturalized” epistemology and the “sociological turn” that treats science as “fundamentally social” and scientific theories/methodologies as a “particular type of socially held beliefs” (Hands, 2001, p. 173). In particular, this holds true if (old) “naturalism” leads to methodological monism, while by contrast “sociologism” is conducive to pluralism in this respect. 3. Hands (2001, p. 283) comments that “if Popper cannot explain how severely tested but non-falsified theories are closer to the truth in natural science, then there certainly 167

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isn’t any reason to believe that falsificationism will provide a successful technique for finding truth in economics.” 4. Rejection or suspicion of methodological monism, including naturalism, and, alternatively, an embrace of pluralism is implied in, for instance, Böhm-Bawerk’s (1929, p. xxv) early statement that no method “could in itself lead us to the truth, but conversely, each method is good, if, in a given case, it leads us to the objective of science.” Specifically, his colleague, Wieser (1967, p. 52) contends that the methods of mathematical physics a la Walras “are not suited to the subject-matter of economics”, which suggests rejecting methodological monism or naturalism in favor of dualism or pluralism. This methodological pluralism, especially dualism, is common to most members of the Austrian school, from Menger, Böhm-Bawerk and Wieser to their contemporary followers, not just Mises and (in part) Hayek, as Hands seems to suggest. So is it mutatis mutandis to those economists that in Hands’ (2001, p. 397) view do not endorse the “rules-based view of economic methodology”, e.g. Mill, Cairnes, J. N. Keynes, Robbins (plus Hayek), etc. This list can be extended to include, for example, Malthus (“political economy bears a nearer resemblance to the sciences of morals and politics than to the science of mathematics”), in part Say (economic phenomena “are not susceptible of any rigorous appreciation” or “absolute calculation”), Wicksteed (economic laws as the “laws of human conduct, are psychical, not physical”), J. M. Keynes (economics as a “moral science”), Schumpeter (economic analysis as part of the “theory of cultural evolution”), etc. If all these reject or at least mitigate methodological monism in the form of naturalism, then pluralism or dualism is far from being “quite uncommon” in the history of economic thought and methodology. In turn, no doubt most early marginalists adopt methodological monism or naturalism (e.g. methods of mathematical physics, celestial mechanics, etc.) in their economic theory, with Walras, Jevons, Edgeworth, Fisher, Pareto (in part) and Marshall (evolutionary biology as the “Mecca of the economist”), as prominent examples (as well-documented in Mirowski, 1989). A fortiori, methodological and theoretical pluralism, including, alternatively, the explicit or implicit rejection of naturalism and other species of monism, has been historically characteristic of social economics. For instance, one can identify four theoretical-methodological strands in the history of social economics: theological idealism, pragmatism-instrumentalism, materialism and moral humanism (Samuels 1990, p. 274). 5. In regard with the dimension of normativity, Hands (2001, p. 405) predicts that the “most likely [approach] to involve economics is to move to a social epistemology that continues to make epistemically normative evaluations but makes them on the social structures and organizations involved in science rather than on the behavior (ruled-guided or otherwise) of individual scientists.” 6. However, Hands (2001, p. 382) suggests that the “distinction between mainstream and non-mainstream economic ideas is rather fuzzy.”

REFERENCES Böhm-Bawerk, E. (1929) [1899]. Theorie positive du capital. Paris: Marcel Girard. Durkheim, E. (1965) [1915]. The Elementary Forms of the Religious Life. New York: Free Press. Hands, W. (2001). Reflection without Rules: Economic Methodology and Contemporary Science Theory. Cambridge: Cambridge University Press.

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Mirowski, P. (1988). Against Mechanism. Totowa: Rowman & Littlefield. Mirowski, P. (1989). More Heat than Light. Cambridge: Cambridge University Press. Samuels, W. (1990). Four Strands of Social Economics: A Comparative Interpretation. In: M. Lutz (Ed.), Social Economics: Retrospect and Prospect (pp. 269–309). Boston: Kluwer Academic Publishers. Wieser, F. von (1967) [1914]. Social Economics. New York: Kelley.

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A review essay on D. Wade Hands, Reflections Without Rules: Economic Methodology and Contemporary Science Theory. Cambridge: Cambridge University Press, 2001. Pp. xi, 480.

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Before 1980, the methodology of economics was a relatively unexplored subdiscipline. Two works helped to transform the situation and to encourage a stream of new articles, books and journals into the area. They were Mark Blaug’s Methodology of Economics (1980) and Bruce Caldwell’s Beyond Positivism (1982). Twenty years have now passed and an enormous amount of work in the area has been published. D. Wade Hand’s rich and impressive volume appears as another major landmark in the field. It is particularly useful in that it helps to update the reader in the many developments in methodology in the last two decades. The title and subtitle of Hands’s weighty volume require some explanation. To some extent like Caldwell’s (1982) critique of existing methodologies, but in contrast to Blaug’s (1980, 1992, 1994) ‘unrepentant’ Popperianism, Hands argues that all prescriptive and rule-bound methodologies have been shown to be untenable. Hence the title of the volume. But although Hands proposes methodology ‘without rules’ he is not in general ‘against method’ (Feyeraband, 1975). Hands’s aim is to situate epistemological and methodological considerations in a wider context. Hence he provides a much broader perspective than the preceding works by Blaug and Caldwell. His work goes beyond the boundaries of Blaug’s book (even in its later editions) and Caldwell’s treatise by providing extensive discussion of the sociology of scientific knowledge, the economics of science, actor-network theory, culture theory, rhetorical analysis, postmodernism and much else. Several of these discourses were traditionally outside methodology but have been increasingly addressed and incorporated by philosophers of science. Hence the broad and inclusive term ‘science theory’ in the subtitle of the book. The work consists of nine substantial chapters, with an average length per chapter of 45 pages. The first chapter is introductory, and among other things it expands on the themes mentioned in the preceding paragraph. The second chapter surveys the central methodological tradition in economics from John Stuart Mill to Karl Popper, from Mill’s influential empiricism to the decline of positivism. The third chapter discusses ‘the breakdown of the received view within the philosophy of science’. It surveys the devastating attacks on logical

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positivism by Willard van Orman Quine, the contributions of Thomas Kuhn, the work of Imre Lakatos, and the recent interventions of philosophical realists, and much else. The fourth chapter is on ‘the naturalistic turn’ in the philosophy of science. This refers to a philosophical – and particularly epistemological – vision that is informed by the practice of science itself, by using the conceptual tools of science to inform the theory of knowledge. The evolutionary epistemology of Donald Campbell and Karl Popper is an example of a naturalized epistemology. It involves the direct application of principles taken from Darwinian biology to the theory of knowledge. Another good example is the way in which epistemology has been affected by developments in neuroscience and cognitive psychology. Herbert Simon’s work is particularly apposite here. The fifth chapter is on ‘the sociological turn’. Here the focus is on the contribution of sociological studies in science, the sociology of scientific knowledge and social constructivism. Among the approaches discussed are the ‘Strong Program’ or ‘Edinburgh School’ around David Bloor and others. This aims to examine the social causes behind the adoption of beliefs by scientists. Hands’s review of all these developments in the sociology of scientific knowledge ends with the observation that they have eroded the faith in traditional approaches in the philosophy of science and a rule-based methodological protocol. The sixth chapter is devoted largely to pragmatism, both in its previous incarnation from the 1880s to the 1930s in the United States, and in its modern version. This is one of the best short introductions to pragmatism that I have read. In this chapter there are also discussions of postmodernism, rhetorical analysis, feminist epistemology and their impacts in economics. The seventh chapter is entitled ‘recent developments in economic methodology’. Its first section surveys developments and problems within the later Popperian tradition, including a consideration of the work of Imre Lakatos. The second section of this chapter discusses the rehabilitation, by Damiel Hausman and others, of the philosophical approach to economics of John Stuart Mill. Critiques of Hausman’s work are also reviewed. The third section devotes fourteen pages to the modern revival of realist philosophies, including their applications to economics by Tony Lawson, Uskali Mäki and others. The fourth section discusses the recent contributions of a number of other authors, including Alexander Rosenberg and Wolfgang Stegmüller. The penultimate chapter is called ‘the economic turn’ and is devoted to the application of principles from economics to the general study of the nature and growth of scientific knowledge, as well as to science policy. This is an important, fitting and welcome addition to a work on the methodology of economics. Hands 171

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does not simply address the contributions of mainstream economists to the analysis of the growth of knowledge, but also the studies of science and knowledge by evolutionary economists, ‘old’ institutional economists, Austrian School economists, behavioural economists, and economic sociologists. The concluding chapter is relatively short, but usefully extracts some ‘take home’ messages from the long volume. Among these are ‘metaphysics matters’, ‘pragmatism is back’, ‘ethics has re-entered the discussion of how philosophy and economics interact’, ‘philosophy of mind matters’, and ‘philosophy of mathematics matters’. But on considering these messages, they are more like an agenda for future enquiry. This is because, despite its length and breadth, Hands devotes most of his attention to epistemology, and less to ontology (metaphysics), ethics, the philosophy of mind and the philosophy of mathematics. It has taken me well over 600 words to provide the briefest of summaries of this massive and breathtaking volume. This fact alone sustains the most important verdict about this book: it is hugely ambitious and largely successful. Very much has happened in the methodology of economics since the appearance of the Blaug and Caldwell volumes, yet Hands has admirable grasp of all of this material and he provides a largely clear and thorough summary of every twist and turn of the story. Quite simply, this is the best, most comprehensive and most up-to-date account of the methodology of economics in existence. Every social scientist should read it, and will benefit from its remarkable tour through the scenery of modern methodological enquiry. Criticism in this context may seem a bit churlish, but I do have some reservations about the volume and some of its omissions. In voicing some criticisms, I do not wish to detract from its positive achievements. The first point I wish to question is Hands’s abandonment of the possibility of any prescriptive methodology. Hands is far from representing the opinion of all methodologists of economics in this respect. To give him credit, he does carefully appraise existing prescriptive approaches such as Blaug’s ‘unrepentent’ Popperianism and Lawson’s critical realism, and claim that they are prescriptively defective, but the criticised options do not exhaust all possibilities. For example, Hands does not provide an adequate answer to Lawson’s (1997) critique of formalism in economics. Furthermore, some of Mäki’s work has a critical or prescriptive edge. Building on ontological considerations, particularly concerning ‘the way the world works’, Mäki (1999, 2000, forthcoming) has been able to reach some prescriptive conclusions about theories. Both Lawson’s strongly regulatory stance, and Mäki’s less sweeping (but nevertheless partly prescriptive) methodological writings, have at least one thing in common. They are both realist approaches grounded on ontology. Yet

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ontology receives relatively little attention in Hands’s book. When he proclaims the end of all rule-based methodologies, he is really proposing a much narrower outcome: the apparent demise of rule-based epistemology. Hands does not adequately explore the possibility that ontology may be able to provide or sustain at least a few prescriptive rules for the conduct of economics as a science. In any case, whether it leads to prescriptive conclusions or not, the relative neglect of ontology by Hands is significant. There has been an ‘ontological turn’ in philosophy and social theory. The works of John Searle (1994) and David Wiseman (2000) are among many of relevance. Neither of these names is mentioned. Another serious set of omissions from the literature on ontology concerns the literature of causality, from Mario Bunge (1959) to Wesley Salmon (1998). Clearly, matters of causality are vital for economics. Hands’s bias towards epistemology leads to several serious omissions. In a related area, there is very little discussion of social theory in Hands’s book. Anthony Giddens and Pierre Bourdieu each receive a very brief mention on one page only. This omission could be regarded as more serious given Hands’s emphasis on the ‘naturalist turn’ in methodology. If methodology turns to the sciences to develop its methods then sociology and social theory should rank among those sciences. Furthermore, discussions in social theory – concerning methodological individualism for example – are clear of enormous relevance for economics. Hands does indeed raise the question of methodological individualism in various places, but he does not review the important contribution of social theory to this debate. One presentation of ‘methodological individualism’ quoted in his text looks much more like ontological individualism, with the statement that individuals rather than collectives have ‘existence’ (p. 43). This is challengeable both as a statement and as a definition of methodological individualism, but Hands passes it over. While there is a relatively full discussion of the concept of supervience, recent debates over methodological individualism in particular and reductionism in general are largely ignored. Biology, like economics, addresses complex, open and changing systems. Again the ‘naturalist turn’ is relevant here. For several decades the philosophy of biology has been an important refuge for anti-reductionist arguments and emergentist philosophies that are of enormous relevance for economics. Biology is also important for philosophers because its subject matter contrasts significantly with that of physics, yet issues from physics have tended to dominate the philosophy of science until recently. Yet Hands neglects the philosophy of biology. While David Hull’s work on science does receive a mention, other important philosophers of biology such as Ernst Mayr, Elliott Sober and Michael 173

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Ruse, are omitted. David Blitz’s (1992) important book on emergent evolution deserves a mention. More general discussions of the impact of complexity, chaos or non-linearities are also absent. The volume does not refer to Santa Fe. I would also endorse Hands’s statement that the philosophy of mind is of enormous significance for economics and other social sciences. The demise of positivism has made it possible to discuss issues such as consciousness that have major consequences for our conceptualisation of the human agent. To this I would add the (critical) relevance of developments in psychology – including evolutionary psychology – for economics (Cosmides & Tooby, 1994). The minimal discussion of developments in ethics and their relationship to economics also omits much of interest and importance. Relevant names such as Amartya Sen (1987) are missing. I fully admit, however, that to rectify all these omissions would be an impossible task. It would be too much to ask an author to take all these matters on board, especially when so many other issues have received such careful and substantial treatment. On the other hand, however, Hands finds the cupboard of rule-based methodologies bare, and instead opens to the house of economic methodology to a very wide range of other guests. The problem with holding such a fulsome and exciting house party is that obvious and big-name omissions are all the more conspicuous by their absence. Yet to invite them all would be to overwhelm the house and the host, making fruitful conversation impossible. Nevertheless, the door has been deliberately opened. Perhaps this is one of the costs of abandoning hope that the cupboard of rule-based methodologies cannot once again be filled in the future. Perhaps too, after opening the door to all and sundry, Hands has achieved something that in future decades will be impossible: a fairly comprehensive survey of all developments in science and philosophy related to the methodology of economics. With the continuing explosion of such material such a task will quickly move beyond the reach of single author, at least working within the covers of a single monograph. Perhaps this book is the last great survey of the methodology of economics, ever. In any case, it is an awesome achievement.

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Blaug, M. (1980). The Methodology of Economics: Or How Economists Explain (1st ed.). Cambridge: Cambridge University Press. Blaug, M. (1992). The Methodology of Economics: Or How Economists Explain (2nd ed.). Cambridge: Cambridge University Press. Blaug, M. (1994). Confessions of an Unrepentant Popperian. In: R. E. Backhouse (Ed.), New Directions in Economic Methodology (pp. 109–136). London: Routledge.

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Blitz, D. (1992). Emergent Evolution: Qualitative Novelty and the Levels of Reality. Dordrecht: Kluwer. Bunge, M. A. (1959). Causality: The Place of the Causal Principle in Modern Science. Cambridge, MA: Harvard University Press. Caldwell, B. J. (1982). Beyond Positivism: Economic Methodology in the Twentieth Century. London: Allen and Unwin. Cosmides, L., & Tooby, J. (1994). Better than Rational: Evolutionary Psychology and the Invisible Hand. American Economic Review (Papers and Proceedings), 84(2), 327–332. Feyerabend, P. K. (1975). Against Method: Outline of an Anarchistic Theory of Knowledge. London: NLB. Lawson, T. (1997). Economics and Reality. London: Routledge. Mäki, U. (1999). Science as a Free Market: A Reflexivity Test in an Economics of Economics. Perspectives on Science, 7(4), 486–509. Mäki, U. (2000). Kinds of Assumptions and Their Truth: Shaking an Untwisted F-Twist. Kyklos, 53(3), 317–336. Mäki, U. (forthcoming). Explanatory Unification: Double and Doubtful. Philosophy of the Social Sciences (forthcoming). Salmon, W. C. (1998) Causality and Explanation. Oxford: Oxford University Press. Searle, J. R. (1995). The Construction of Social Reality. London: Allen Lane. Sen, A. K. (1987). On Ethics and Economics. Oxford and New York: Basil Blackwell. Wiseman, D. (2000). A Social Ontology. New Haven, CT: Yale University Press.

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Economists have traditionally been interested in methodological issues; during the heyday of British political economy any economist worth his or her salt wrote at least one learned essay on the subject. Names like Senior, Mill, and Keynes, Robinson and Robbins come to mind. Today, however, most mainstream economists regard methodology as unnecessary and irrelevant to serious economic science. Discussions of methodology are absent in the top journals and are given short shrift in most graduate programs. The tradition has, however, been kept alive by a relatively small, dedicated group of scholars who take methodology seriously. Reflection Without Rules: Economic Methodology and Contemporary Science Theory, by D. Wade Hands, is an important contribution to this esteemed, but under-appreciated tradition. It is no wonder, really, that methodological reflections are given such short shrift among economists today. Economics has been wildly successful in establishing itself as a hard science in the eyes of the academy, the government and the general public. Serious methodological reflections, however, cannot help but starkly reveal the huge disparity that exists between the social, cultural and political authority enjoyed by economics and its manifest failings as a science when evaluated in terms of what Hands has dubbed, “the Received View.”

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Research in the History of Economic Thought and Methodology, Volume 21-A, pages 151–212. © 2003 Published by Elsevier Science Ltd. ISBN: 0-7623-0996-2

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Simply put, the Received View refers to the positivist tradition in AngloAmerican philosophy of science, manifested in economic methodology as a “loose amalgam of logical empiricism plus the falsificationism of Karl Popper” (p. 71). It is a view that demarcates the scientific from the unscientific, articulates the contours of the scientific method, and privileges scientific knowledge. It is likewise a view that has been fatally undermined in contemporary science theory, both by its own internal contradictions and paradoxes, and by the challenges posed by W. V. O. Quine, Thomas Kuhn and others working in the post-positivist tradition. Hands argues that the Received View in economics is an integral part of the “shelf-of-philosophy” approach to economic methodology, an approach that entails evaluating economic theory in terms of how well it conforms to the meta-rules established by philosophy of science. Given the important recent developments in science theory, such as Quine’s naturalized epistemology (constructing evaluative accounts of knowledge production) and the sociology of science programme, the nature of methodological inquiry needs to change. The good news, according to Hands, is that this change is already taking place. The disappearance of rules-based methodology does not mean the end of methodology. Quite the contrary, “[I]f methodology is defined as the interpenetration of economics and science theory, then economic methodology is not only alive, but alive and well” (p. 7, emphasis in the original). He argues that the field ought to be redefined as “any literature that substantively involves both economics and science theory,” and refers to this expanded field as “the new economic methodology” (p. 394, emphasis in the original). To arrive at this point, Hands takes his reader through an exhaustive survey beginning with the work of John Stuart Mill. This survey allows him to argue that the rules-based view of methodology is somewhat of a historical aberration, a way of thinking about economic methodology that emerged only in the middle of the twentieth century. His treatment of Mill is particularly instructive when considered in light of this claim. Mill clearly articulated the issues that would remain central to economists throughout the 19th century and well into the 20th. In addition to firmly establishing methodological individualism as the paradigm in economics, his great contribution was to reconcile empiricist epistemology – knowledge is obtained inductively from sense experience – with Ricardian economic theory – economic propositions follow deductively from a few rationally derived assumptions. For Mill the distinction between deductive and inductive inference was not the central question – because deduction does not add any new knowledge to universal laws established by inference – but rather the question was, which sciences can be made deductive, and which sciences must remain

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experimental? Economics is, of course, an example of the former. Hands’ exposition of Mill provides the foundation for his reading of subsequent developments in methodology by the British political economists. For these economists, methodology did not consist of articulating the rules laid down by a particular epistemological position and then evaluating whether or not economics lived up to those rules. Rather, it consisted of articulating the particular nature of economics as distinct from other sorts of sciences. This gradually changed. Clear indications of the move toward rules-based methodology are evident in the work of Lionel Robbins, and the movement comes to fruition in the aggressively positivist work of Terence Hutchison. By the 1950s the notion that economics was a positive science was firmly established, and the Received View was the guardian of its epistemically privileged status. The next section of the book traces the philosophical antecedents and underpinnings of the Received View – logical positivism, logical empiricism, and Popperian falsificationism. The problems of theory-ladenness and underdetermination, however, cast doubt on the claims of foundationalist epistemology and foretold the demise of the Received View. The story is a familiar one. Quine demonstrated that theories are always underdetermined by the evidence: since statements about the world face the tribunal of evidence not in isolation but as parts of a larger belief system, the same evidence can support a variety of theories. Kuhn showed that observations are always theory laden: the data used to test theories and hypotheses are seen through the lens of the theories that are supposed to refute or support the hypotheses. In addition to its roles in undermining foundationalism, Hands points out another important implication of Kuhn’s work: since the privileged position of the natural sciences can not be explained by adherence to the scientific method, the social sciences are needed to explain it. Hence, social science comes first; it is the stable ground for the more problematic natural sciences (although Kuhn himself did not endorse this implication, Hands certainly does). This is a theme that resonates throughout the rest of the book. At any rate, trying to address the difficulties raised by theory-ladenness and underdetermination was fundamental to the philosophy of science in the late 20th century. Hands leads the reader through these subsequent developments with rich treatment of naturalism, pragmatism, the sociological approach to scientific knowledge, contemporary work in economic methodology, and a brief incursion into the economics-of-science literature. Given the scope of the work and the relative brevity of this review, I will only briefly discuss a few themes from these developments. First, given the huge impact that Karl Popper has had on economic methodology, Hands’ discussion of Popper needs to be noted. It is commonplace for 153

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economists to believe that falsification is the appropriate methodological approach for economics. In practice, however, economists rarely practice what they preach. Hands makes sense out of this seeming contradiction by arguing that falsification serves as a “particular type of empiricist foundationalism – the good old fashioned rule-making of the early positivists . . . and it is this perceived foundationalism that generates most of the program’s charm” (p. 290, emphasis in the original). Reading falsification as foundationalist is incorrect because Popper was not a foundationalist (nor was he a relativist). Moreover, falsification was not the position that Popper endorsed with regard to the social sciences. When Popper did write about the social sciences he stressed two concepts, situational analysis and the rationality principle. Situational-analysis explanations of human behavior start by describing the individual’s problem situation, a description that includes beliefs, goals, desires and so forth, as well as the relevant constraints. The individual’s actions are then explained by the rationality principle: individuals act appropriately given their situation. Now it is clear that many microeconomic explanations are a special case of this approach, and Popper himself admitted that economics was the inspiration for it. The problem, however, is that given Popper’s use of falsification to demarcate the scientific from the unscientific, explanations based on this approach are hardly science at all. And as Hands points out, the problem lies with the falsification criterion itself: in the end falsification can only be interpreted as foundationalism or relativism; it fails to provide a way to reject foundationalism and still retain the privileged character of scientific knowledge. Hands’ goes on to discuss Lakatos’ methodology of scientific research programs (MSRP) which combined a Kuhnian approach to the history of science with a Popperian approach to normative theory appraisal. This program also had a significant impact on methodology as researchers tried to identify the structure of economics by identifying the hard core, positive heuristics, negative heuristics, and so forth, and then appraised the structures with respect to its theoretical and/or empirical progressivity. Roy Weintraub’s Lakatosian appraisal of Neo-Walrasian economics is particularly interesting because by identifying general equilibrium theory as part of the hard core of economics it seems to demonstrate that “general equilibrium theory is scientifically just fine.” This is a curious result since “[f]or most methodologists sympathetic to Lakatos, general equilibrium theory is the paradigm case of what is wrong with contemporary economics” (p. 294, emphasis in the original). Thus, Lakotos fails to provide rules that will enforce tougher empirical standards on economics. The bottom line, according to Hands, is that if one wants the MSRP to provide rules for demarcating scientific economics from non-scientific economics, it fails in its task, as have all other

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such methodological projects. The problem is that the search for rules-based methodology is a dead end. Remember, this does not mean abandoning either the idea of economic science or methodology, and the work of Karl Popper comes again to the fore here. Hands argues for an alternative reading of Popper as a critical rationalist. Critical rationalism is an approach that is normative without providing strict rules for science. Instead, it asserts that there are rational reasons for choosing one theory over another, and these reasons are based on systematic criticism. It is the emphasis on criticism that gives this approach its normative bite. The important thing is to arrive at ways of organizing “our scientific and educational institutions in ways that maximize productive criticism” (p. 299, emphasis in the original). What the elements of that critical environment are, is the key question. In a work this encyclopedic in scope, readers will likely find something to find fault with in the treatment of his or her specialty. I am no exception. While I was gratified to see that Hands includes a discussion of feminist epistemology and economics, I think the discussion could have gone further. Feminist epistemology begins with the well-established notion that scientific knowledge is theory-laden and interest-laden. Its distinct focus is on the androcentric bias of conventional science practice and the gendered construction of science studies. Hand’s discussion focuses on two particular approaches to feminist epistemology – standpoint epistemology, associated with Sandra Harding, and contextual empiricism, associated with Helen Longino. Both approaches strive to avoid the Scylla and Charybdis of relativism and positivism by rethinking the nature of the knowing subject in science. Positivist epistemology begins with the assumption that the specific social relations and context in which the solitary knower is situated are completely irrelevant to knowing. Clearly this is a problematic assumption given the insights of theory-ladenness and underdetermination. Harding and Longino, along with most feminist epistemologists, reject this assumption and begin from the notion that scientific knowledge is created in science communities (Harding, 1993; Longino, 1993). Given the theory/social ladenness of facts, diversity in scientific communities is an epistemic value, necessary to question and reveal the shared values and implicit assumptions that shape science theory and practice. This insight plays itself out differently for the two philosophers. Harding argues that inclusion of marginalized standpoints is necessary to good science practice, which she calls strong objectivity, because dominant groups fail to critically interrogate the effect their advantaged social position has on their scientific beliefs and practices. The material lives of those at the bottom of the social hierarchy provide the starting point for constructing epistemically privileged 155

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standpoints that reveal previously unseen or misunderstood social relations. Longino, on the other hand, rejects the notion that one’s social situation either enables or limits what one can know. She argues that diversity is necessary because science knowledge is created when individuals and groups, holding different points of view, engage in critical dialog with one another. Diversity is necessary not because of epistemic privilege, or the lack thereof, but because it is necessary for transformative criticism. Both of these philosophers are prolific writers who have disseminated their ideas widely. They are, however, considered as special cases – as feminists, and thus their insights only relevant for feminist research. This is a pity. Their work addresses central issues in post-positivist philosophy of science and provides insights into other methodological approaches. For example, consider the question raised by Popper’s critical rationalism: what are the conditions that will maximize productive criticism? Longino’s criteria for transformative criticism and Harding’s criteria for strong objectivity could go a long way toward answering this question. Moreover, since the relationship between science, values, and interests is central to feminist epistemology, it can play an important role in any new economic methodology. Having said that, let me conclude by saying that I think this is an excellent book. It provides a comprehensive and sophisticated map that covers the methodological tradition in economics, recent developments in science theory, and contemporary economic methodology. It is, among other things, encyclopedic in scope, and so there will naturally be both agreements and disagreements over what is included and excluded, and with how particular subjects are covered. Overall though, it provides a wonderful overview of where we are and where we have come from, an overview that will help new scholars see the forest through the trees, and will help established scholars construct new maps of the methodological thoughtscape.

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Harding, S. (1993). Rethinking Standpoint Epistemology: What is Strong Objectivity? In: L. Alcoff & E. Potter (Eds), Feminist Epistemologies (pp. 49–82). London and New York: Routledge. Longino, H. (1993). Subjects, Power and Knowledge: Description and Prescription in Feminist Philosophies of Science. In: L. Alcoff & E. Potter (Eds), Feminist Epistemologies (pp. 101–120). London and New York: Routledge.

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Wade Hands’s new book, Reflection Without Rules represents the most comprehensive survey of economic methodology since the works of Mark Blaug (1980) and Bruce Caldwell (1982) appeared almost simultaneously twenty years ago. Blaug and Caldwell were writing in the immediate aftermath and ascendancy of Popper, Kuhn, and Lakatos in philosophy of science and economic methodology. Blaug’s book seemed certain that the practices of economists could be appraised by methodologists on the basis of falsification as a standard of scientific practice and status. In contrast, Caldwell’s book, Beyond Positivism, was somewhat more open-ended arguing for a position of methodological pluralism. In Reflection Without Rules we find the story of those conceptions of science that were just beyond positivism in economic methodology. Hands borrows from the discipline of philosophy in order to create a coherent narrative of the story of economic methodology over the last twenty years. He describes recent trends in science studies and economic methodology as a series of turns away from positivism and empiricism: The history of philosophy is often characterized as a series of substantial “turns”; examples include the rationalist turn during the seventeenth century, the idealist turn in eighteenthcentury German philosophy, and the logistic turn that gave analytical philosophy its impetus early in the twentieth century. There are clear indications that epistemology, and perhaps philosophy more generally is currently engaged in one such substantive turn . . . (Hands, 2001, p. 129).

This recent turn in philosophy is termed the “naturalistic turn.” It refers not to subject matter which might mistakenly might suggest a return to a preoccupation with physics and the other natural sciences, but to a method, attitude, or process of doing epistemology, science studies, and economic methodology. What is natural about the naturalistic turn is a reliance on many sciences including the social sciences for information about how reliable knowledge could be obtained by human agents in the processes of scientific inquiry. Hands states the view like this: This naturalistic movement . . . is a turn away from a priori philosophy and toward a philosophical vision that is informed by contemporary scientific practice. According to this

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view, the theory of knowledge should employ the same scientific tools we use to investigate any other aspect of nature; epistemology so informed is naturalized epistemology (Hands, 2001, p. 129).

The spirit of these turns is something like the following. If there is a psychological aspect or question about how human agents create knowledge, then the tools and methods of contemporary psychology should be used in investigating such issues. If there is an issue regarding biological or evolutionary aspects of human knowledge, then evolutionary biology needs to be consulted for its contribution on such matters. Similar comments can be made about sociology, history, the natural sciences, and even economics. In brief, Hands reconstructs the many conversations about science and economic science over the past twenty years as a sequence of several sub-turns within the naturalistic turn. The psychological turn makes up most of the subject matter of Chapter four, titled “The Naturalistic Turn.” It is followed by Chapter five, “The Sociological Turn;” by Chapter six on the pragmatic turn, titled “Pragmatism, Discourse, and Situatedness;” and by Chapter eight, “The Economic Turn.” These four major chapters on turns are preceded by three introductory chapters, punctuated by chapter seven on recent developments in economic methodology, and followed by a brief concluding chapter. The story of a major intellectual turn with multiple sub-turns is preceded by an argument that portrays an inversion of the relationship between philosophy, philosophy of science, and economic methodology. Before the last decades of the 20th century, Hands characterizes the ordering of disciplines in the following way. Intellectually philosophy was given the highest priority and status followed by philosophy of science and then economic methodology. Economic methodology was conceived as a derivative activity applying standards and rules passed down from philosophers and philosophers of science to methodologists. Hands dubs this approach an “off-the shelf-approach” to methodology. With the naturalistic turn, this relationship is reversed. Philosophy and philosophy of science end up in the derivative position and the tools and disciplines of the various sciences become the primary instruments for investigating the nature of science. One reason for this inversion seems to be economic. An argument which Hands (2001, p. 259 and p. 393) attributes to McCloskey and a quote from Giere suggests that the approach that puts philosophy in the privileged position is the epistemological equivalent of a belief in central planning. Since there are strong arguments against the efficiency of central planning in the ordinary economy, there would need to be similar arguments against the efficiency of rules-based epistemology since philosophers and methodologists know less about real science and scientific results than do the practising scientists and economists.

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Since one of the goals of the book is to provide a new survey of economic methodology and science studies, it is useful to provide an overview of the content of Reflection Without Rules. The book is long, extending over four hundred pages of text and fifty-one pages of bibliography. The first chapter is brief and introduces the major theme of the work, to change the nature of the subject of methodology from a rules-based normative activity to a broader approach which allows for the many turns in science studies described previously. The second chapter surveys economic methodology from John Stuart Mill to Friedman and Samuelson making intermediate stops to discuss the methodological ideas of Cairnes, Senior, J. N. Keynes, Robbins, the Austrian methodological ideas of Menger, Mises and Hayek, the Methodenstreit, and Hutchison’s Popperian critique of Mises. This chapter, just short of seventy pages, provides a coherent narrative of more than a century of thinking about the scientific nature of economic inquiry. The major thread of continuity is the dominance of the Millian methodological tradition, its variations and alternatives, together with the realization that current practices in the economics discipline may still very much follow the Millian style. Chapter three tells the story of the breakdown of traditional philosophy of science commonly called the received view. The story of the demise of the received view begins with the rise of logical positivism and the Vienna Circle in the 1920s, moves to the post-World War II view known as logical empiricism, depicts the rise of Popperian falsificationism, chronicles the attacks on the received view by Quine, retells the impact of Kuhn’s Structure of Scientific Revolutions, and ends with the historical response of Lakatos’s research programs and the realist responses of Boyd and Bhaskar. With Chapter four, Hands begins telling the story of the naturalistic turn and the several sub-turns within the naturalistic turn. This is where Hands’s survey differs from previous surveys of economic methodology. Because of the extensive impact of the growth of knowledge literature in philosophy of science in the 1960s and 1970s, previous surveys have turned to review the enormous derivative literature within economics. However, Hands defers a review of recent developments in economic methodology for three more chapters. Chapter four presents the overall thesis of the naturalistic turn in philosophy and philosophy of science and then tells the story of the psychological turn since it was the first instance of the naturalistic turn. The term “naturalized epistemology” is attributed to Patricia Churchland since it appears in a quotation which appears at the beginning of the chapter (Hands, p. 129). According to Hands there are four major issues with naturalized epistemology. One is whether one takes a reformist or revolutionary stance. The author asserts that most of the contributors surveyed in this chapter take a reformist attitude and that the 185

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new approaches to understanding science will yield new information about how science is practiced. A second issue is what science one adopts for the naturalizing project that is the subject of subsequent chapters. A third concern is the issue of prescription vs. description. A naturalizing approach tends more toward description than normative analysis. A fourth issue is circularity or reflexivity for the science that forms the basis of a naturalizing critique. For example, if psychology is used to study psychological questions in the acquisition of knowledge, what role should it play when the discipline being investigated is also psychology? A similar issue is raised for economics. If the tools and insights of economics are useful in the study of other scientific disciplines, are there peculiar issues with using the tools of economic science to study the growth of scientific knowledge within the discipline of economics? After presenting the general arguments about naturalized epistemology, Hands reviews some of the earliest proposals to naturalize on psychology. He overviews Quine’s arguments for naturalizing on behavioral psychology and other proposals for naturalizing on some version of cognitive psychology. The proposals for cognitive psychology take us through a great deal of literature on artificial intelligence and cognitive science. Here Hands highlights Chomsky’s work on linguistics and his critique of behaviorism, Goldman’s contributions on cognitive reliability and social epistemics, and Herbert Simon’s theories of satisficing and bounded rationality. Chapter four also provides an account of evolutionary epistemology including the works of Hull, Campbell, Munz, Bartley and Radnitzky. This chapter ends with a brief characterization of an extreme, revolutionary naturalism, eliminative materialism. Eliminative materialism is the view that all references to mental concepts can be totally eliminated from the study of science. This is the well-known position of Patricia Churchland, that all mental constructs have a neuro-biological counterpart that can be simulated with neural networks. This view seems to assert that neuroscience can tell us everything that can be known about human knowledge. The sociological turn is the subject of Chapter five. Sociology enters the picture in part because Kuhn had argued that science is fundamentally social and also because sociologists had begun to study science decades earlier. With regard to the sociological turn there is a controversy concerning its relationship to the naturalistic turn. Apparently, there is an interpretation that suggests that the sociological turn is an alternative to the naturalistic turn. Instead, Hands endorses the idea that the sociological approach is part of the naturalistic turn. In my view, his reasons seem quite acceptable. After a brief introduction, Hands summarizes the Marxist tradition in science studies noting the contributions of Hessen and Bernal. Next, he highlights the influential work on the sociology of science by Merton from the 1930 to the 1970s. After Merton, several other

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strands of the sociology of science are surveyed. From Merton Hands turns to the sociology of scientific knowledge (SSK) and the strong program associated with Barnes, Bloor, MacKenzie, Shapin and others; to the social constructivism of Collins, Knorr Cetina, and Latour and Woolgar; to the reflexivity and hyperreflexivity debates; and then to Pickering’s conception of the mangle of scientific practice. Near the end of the chapter, Hands provides an account of the skepticism and relativism into which the sociological approach has descended, called the “epistemological chicken debate.” One problem is that “these programs have enervated the sociological approach; they have pushed relativism and skepticism to the point where SSK has ‘nothing to say’” (Hands, 2001, p. 200 summarizing the critique of Collins and Yearly). The sixth Chapter, “Pragmatism, Discourse, and Situatedness,” represents a partial departure from the theme of a naturalizing turn. According to Hands, classical pragmatism, that uniquely American approach to philosophy pioneered by Peirce, James, and Dewey is back, so much so that this resurgence is labeled “the pragmatic turn.” Pragmatism shares many of the same criticisms of the received view that are found in the naturalistic turn and it looks to various disciplines for different kinds of knowledge about human beings and the world in which they live. In his survey of pragmatism, Hands reviews the positions and contributions of both Peirce and Dewey. Then Dewey’s impact on economics through Clarence Ayers and American institutionalist economics is surveyed including some thoughts on Veblen’s influence. This part of the chapter concludes with a methodological controversy of the 1980s in which Hirsch and DeMarchi argued that Friedman’s methodological ideas are essentially Deweyian. From a discussion of pragmatism, Hands next takes up various types of neopragmatism providing an overview of Rorty’s claim that science is a type of post-modern discourse, to the rhetoric of science literature paying special attention to McCloskey’s rhetoric of economics, and to the literature on feminist epistemology and economics reviewing the contributions of Sandra Harding, Helen Longino, and Julie Nelson. After surveying the literature on the pragmatist turn, in Chapter seven Hands provides an overview of recent economic methodology. There are three major lines of research – a Popperian tradition, a Millian tradition, and realist themes – followed by an amorphous category of papers on folk psychology and model building. The Popperian tradition is one of the best-known areas of economic methodology since Popper had such a great influence in the 1960s and 1970s. In economics, Popper is best known for the notion of falsification. However, criticisms of falsification and Popper’s creation of a competing method of situational analysis for the social sciences led to tensions within Popperian methodology. Popper modeled situational analysis on microeconomics and 187

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advocated a generalized version of it rather than falsification as a method for the social sciences. A great deal of this tension over the methodology of the social sciences and additional conflict with Kuhn over revolutionary and normal science led to the ascendency of Lakatos’s methodology of scientific research programs, which Hands (2001, p. 286) labels the “Lakatosian Turn.” Lakatos’s ideas generated an enormous literature within economic methodology. Most of the research centered around the idea of a progressive research program as the defining characteristic of economic science. Of these Lakatosian studies, the most well-known became those of the last half of Blaug’s (1980) methodology text and the most elaborate was Weintraub’s study of general equilibrium theory. Weintraub expanded his account of general equilibrium theory to include Lakatos’s separate criterion (proofs and refutation) for appraising mathematical research programs. Weintraub concluded that the mathematical hard core of neo-Walrasian theory was progressive while questions of empirical progressiveness needed to be directed at the applied science in the protective belt of a research program. Another line of Popperian economic methodology is critical rationalism. In this tradition, falsificationism is just one type of criticism in a philosophical framework which encourages many kinds of criticism. While critical rationalism is associated with Popper’s students who later became philosophers in their own right, philosophers such as Agassi, Bartley, Jarvie, and Radnitzky, in economics critical rationalism has been most developed by Boland. Boland has resisted the attempt to reduce Popper’s philosophy to a narrow set of methodological rules. Instead he has advocated a Socratic type of critical mindedness as the most important characteristic of science. Moving beyond Popperian methodology, the second major tradition in contemporary economic methodology is the Millian tradition. Like the Popperian tradition, it comes in major variations. One of these is the methodological interpretation of philosopher Daniel Hausman who maintains that Mill’s views still offer the best description of what economists do when they do economics. The other is Nancy Cartwrights’s methodology of capacities and tendencies that she illustrates with modern econometrics. Other than the Popperians and the Millians, the third major category of contemporary methodology concerns realist themes and positions. These encompass the critical realisms of Bhaskar and Lawson and Mäki’s distinction between realism and the realisticness of scientific research. The last part of this chapter reviews Rosenberg’s critique of economics involving the ideas of intentionality and folk psychology and Mäki’s and Mary Morgan’s works on abstraction and model building in economics. The last major chapter of Hands’s book is “The Economic Turn.” In the past decade or so, economics has become a source of ideas and tools for thinking about science. According to Hands, there are at least six categories of reasons

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for the more systematic use of economics in science studies. Among these are an attitude that economic growth is related to the growth of science and technology, a concern with the economic implications of science policy, the use of economics as a naturalizing basis, and an awareness that economics and epistemology have often been deeply intertwined. One approach in understanding science from an economic point of view is to take an industry perspective and attempt to explain the structure and performance of that industry using economic tools. Perhaps the best known of recent studies is Dasgutpa and David’s “new economics of science” (Hands, 2001, p. 361) that was preceded with works by Arrow and Nelson. Another approach thaat parallels the SSK literature is what Hands calls an economics of scientific knowledge (ESK) literature. Here the thrust is to use an economist’s understanding of rational, individual behavior and the relation of individual behavior to social patterns of conduct to understand how science functions. There is a great deal of literature that Hands mentions. However, with regard to ESK, he reviews contributions of Kitcher and Wible. Both use economic ideas and models to explain aspects of science. At the end of the chapter, Hands reviews other economic approaches to science that could be developed in more detail including old institutionalist economics, evolutionary economics, and Hayek’s work on economic aspects of science. For anyone who has even a passing interest in economic methodology and science studies, the tour of the literature just described is nothing short of astonishing. Reflection Without Rules provides an almost encyclopedic overview of this field of inquiry. Only Hands’s repeated comments about literature left out suggest that it is somehow incomplete. In my estimation, Reflection Without Rules passes a severe test. A book of this nature should help the reader locate both economic methodology and the discipline of economics in the context of western thought and philosophy. Because contemporary economics has become so tool and model driven, most economists trained today have no idea of the intellectual context or history of economics as a discipline. Here Reflection Without Rules is the perfect antidote. This may be the one scholarly contribution that could best set the intellectual context of economics for an economist. It should be read by every graduate student in every economics program. In this regard, I offer my highest praise of Hands’s book. Beyond these general remarks, I have read the book multiple times and used it in its entirety in a graduate class on economic methodology. It is a long book, but it can be presented in truncated form without loss of generality. This is due to the way the book was written. The narrative of the naturalistic turn and sub-turns and the presentation of specific topics and contributions give the book a modular quality. Many sub-parts of the chapters, though placed appropriately in context, 189

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can be read separately. This permits instructors to teach with Reflection Without Rules by emphasizing the core material and selected illustrations most suitable to the purposes of the instructor. For example, I can imagine the text being used for an undergraduate seminar in which half or two-thirds of the material in the book would be assigned to the students. In writing the work, Hands continually lets the reader know where he has been selective and often he gives his reasons for his choices. Without detracting from the overall success or appeal of the book, there are several subjects that I might have treated somewhat differently. One issue is that I would probably have upgraded the discussion of Hayek. He is not totally neglected and his methodological writings are touched upon in several places. However, Hayek had a multi-disciplinary career that in some respects exemplifies the style of inquiry which is characteristic of the new economic methodology of Reflection Without Rules. Hayek wrote a monograph on psychology, The Sensory Order, which looked to cognitive psychology in the 1940s before Quine and the beginnings of the naturalistic turn in the 1950s. Also, Hayek’s methodological writings on the economy and competition would seem to be precursors of the contributions that are now considered part of the economic turn. Additionally, Hayek seems to have read some of Peirce’s writings. Thus one might picture Hayek as having contributed to two of the major turns summarized in this work. A second concern is the newly emerging literature on the methodology of econometrics. A small number of prominent econometricians and a few others have questioned the direction and efficacy of applied econometrics. This literature actually begins with J. M. Keynes’s critique of Tinbergen and extends to the recent writings of Hendry, Leamer, and Mayer. In Hands’s defense, he does include an overview of Mary Morgan’s research on the history of econometrics and the use of models. Also in the last chapter, Hands recognizes that economics needs a philosophy of mathematics that would include issues of applied mathematical models such as those found in econometrics. A third issue is that the literature on the methodology of Keynes, uncertainty, and macroeconomics is nowhere found in the book. And again, Hands’s book is quite long, so it is not unreasonable that such topics were excluded from a general survey of economic methodology. There is one issue about Reflection Without Rules that Hands does not resolve within the context of the book. On the surface, the book reads as an eclectic survey of many streams of contemporary economic methodology held together with a thematic narrative emanating from the history of philosophy. No stream or turn of thought is portrayed as being better or more privileged than another. There is an extremely strong sense of pluralism throughout the work that I applaud. And there is an extraordinary amount of optimism. The optimism stems

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from the sense that the multiplicity of disciplines and approaches to understanding science and economics have already taught us much more than we could have ever hoped to learn using the old, one-set-of-rules view of science and methodology. But this attitude is found in one of the turns summarized in the book. The pluralism, optimism, and multi-disciplinary perspective so apparent in Reflection Without Rules was a hallmark of the American pragmatists, Peirce, James, and Dewey. Hands recognizes this but reverses the direction of significance maintaining the priority of his overall narrative and making pragmatism a piece of the puzzle. However, in retrospect one can ask whether the whole book amounts to a pragmatist exploration and reconstruction of the many contributions surveyed in the work. Hands himself has been investigating the philosophy of John Dewey and much of Hands’s approach could be considered Deweyian in nature. For example, inclusion of views of science emphasizing cognitive psychology, active processes of inquiry, the social structure of science, and the language and rhetoric of science could be considered broadly Deweyian. In a paper comparing the methodological ideas of Dewey and Samuelson, Hands has this to say about Dewey: The second potential line of response that will not be taken concerns the relative viability of Dewey’s view of scientific observations and operations vs. the positivist-inspired interpretation of these same metascientific concerns. It is well-known that most of the major developments within science theory during the last forty or so years since the publication of Kuhn’s Structure of Scientific Revolutions have pointed toward the theory-, social-, and interest-ladenness of empirical observations; as a result, Dewey’s pragmatic view, while not without problems, is now considered to be a more adequate view, or at least more contemporary, way of thinking about such issues (Hands, 2002, p. 14).

However, besides the Deweyian influence, there is a Peircean dimension to Reflection Without Rules. One of the messages of the book is to go to many disciplines and use their methods and results to study science in so far as they are reliable and pertinent to the subject at hand. This attitude is clearly one that Peirce followed throughout his life. Peirce studied and practiced philosophy, mathematics, and many scientific disciplines, so many that it would be impossible for all but the most extraordinary individual to do this today. The pragmatist way of doing science and philosophy as attempted by its great founders would need to be carried out by many groups of scholars from many disciplines in today’s expansive scholarly environment. Thus the overall picture about how a new economic methodology would function as an intellectually open-ended and multi-disciplinary form of individual and social inquiry seems to share much of the vision of science in classical pragmatism. There is one last significant issue raised in Reflection Without Rules that deserves further comment. In the last chapter, Hands considers the fact that the 191

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new economic methodology, which draws on the many turns described in the book, may not have the methodological bite of the older, rules-based methodology. No longer can a methodologist or dissenter from a school of economics write a paper that some famous economist’s research or some school of economics is unscientific. It appears that methodology has little to say to contemporary economics. However, there is a response to such concerns which Hands did not have the opportunity to explore. One can compare the enterprise of the new economic methodology as laid out in its many versions in Reflections Without Rules with mainstream neoclassical economics. Neoclassical economics in the many decades of its development created a conception of the individual as a mechanistic, behaviorally motivated, competitive individual, who is stripped of abstractions and for whom social and historical context makes no difference. Furthermore, the neoclassical view of the maximizing individual seems to place the social context of economic man within an ontology of mechanistic equilibria. In contrast, if we consider the scientist as an economic agent, as we can do in the context of the new economic methodology, then we have a more expansive conception of the economic process. We have a view of the scientist as a brilliant, socially situated individual producing some of the greatest systems of abstract concepts of human history within a social and institutional setting where those concepts can be tested and criticized by others. Additionally, in contrast to the mechanism of conventional economics, the new economic methodology assumes an ontology of evolutionary complexity. In my view, what this all means is that conventional economics excludes systematic consideration of the greatest human minds and the social contexts in which they function. Science as a creative evolutionary process is a great anomaly for conventional economics. It has assumed away most of the features of human action that result in the great contributions of science. This implies that those who most efficiently create the greatest ideas are excluded from the purview of traditional economics. One wonders how much longer conventional economics can continue with such a narrow theoretical perspective that excludes one of the greatest sources of knowledge and economic growth in the economy and in society. The new economic methodology that Hands identifies in Reflection Without Rules is the type of inquiry that economics needs in order to expand its purview to include the most creative minds and social processes, not just in science, but in ordinary economic affairs as well.

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REFERENCES Blaug, M. (1980). The Methodology of Economics: or How Economists Explain. Cambridge, U.K.: Cambridge University Press (2nd ed., 1992).

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Caldwell, B. (1982). Beyond Positivism: Economic Methodology in the Twentieth Century. London: Allen and Unwin (rev. ed., 1994, London: Routledge). Hands, D. Wade. (2002). Operationalisms and Economics. Paper prepared for the 6th Annual Conference of the European Society for the History of Economic Thought, Crete, Greece; also presented at the University of New Hampshire, April 2002.

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PALIMPSEST AND “THE NEW METHODOLOGY”

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Stephen T. Ziliak

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A review essay on D. Wade Hands, Reflections Without Rules: Economic Methodology and Contemporary Science Theory. Cambridge: Cambridge University Press, 2001.

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“I’m not going to do any methodology here,” the economic historian, Alexander Gerschenkron, told his students at Harvard in the 1960s. “The methodologists are like eunuchs in a harem,” Gerschenkron said. “They know everything about love, but they can’t do anything about it” (N. Dawidoff, 2002, p. 145). Ouch. Very ouch. Yet Gerschenkron was evidently ahead of his time. In the 1960s, economic methodologists were not in search of the philosopher’s stone; most believed they had found some version of it. One version was called “logical empiricism,” an outgrowth of 1920s Vienna Circle positivism. Renamed in 1962 by Hilary Putnam as “the Received View,” logical empiricism penetrated economics through a complex pattern of visitation and migration of refugee scholars from Central and Eastern Europe, including Moritz Schlick, Friedrich Hayek, Rudolf Carnap, Herbert Feigl, Carl Hempel, Otto Neurath, Richard von Mises, Gustav Bergmann, and, for diversity, Bertrand Russell (Frank, 1953, pp. 3–11; Putnam, in F. Suppe (Ed.), 1974 [1977], p. 3). The other “stone” was “falsificationism,” a piece of science theory imported into economics from a friend of the Vienna Circle, the philosopher Karl Popper, and codified by, inter alia, the widely-cited books of Terrence Hutchison (1938 [1960]) and Mark Blaug (1980 [1992]). Falsificationism and the Received View (there are historians who prefer to think of them as one Big Thing) offered a method for separating “science” and “meaningful statements” from the “metaphysics” and “meaningless statements” manifested in the balance of inquiry, such as the Vienna Circle believed they had found in poetry, history, Marxism, and theology. When falsificationism and the Received View were the standards of appraisal in economic methodology the economic methodologist was primarily concerned to judge a research article for its adherence to abstract “scientific” rule-following. This was the source of Gerschenkron’s complaint, his own Dr. Evil. Was it science or not? If the answer was “no,” then the paper was not circulated and the author of the paper was not invited into the department. (Tragically, Moritz Schlick, the founder of the Vienna Circle, was shot dead by a crazed student who could not tolerate Schlick’s Jewish ancestry.) The answer to the science question did not take much thinking or research to tell.

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In truth, Gerschenkron was saying to his students, the methodologist could separate science from nonscience while remaining shamefully ignorant about the specific subject under investigation. To evaluate a paper examining the effect of public assistance on labor supply, for example, one did not have to know anything about the institutions of charities and corrections, or about the historical evidence on privatization and the size and direction of estimated parameters. You could merely “test” the steps of the research paper against abstract “rules” of the scientific method, like Blaug’s (1980 [1992], pp. 12–26) rules of science according to the philosophy of Karl Popper, or some other list derived from the “Ten Commandments of modernism” (McCloskey 1985 [1998], pp. 143–144). In its sabotage of scholarship the scientific philosophy produced more leisure time. “Utility” is “mentalistic” and not observable so there was no need for logical empiricists to strain themselves theorizing it (Paul Samuelson at one time held this view [Hands, pp. 66–68]); likewise, “love,” “alienation,” and “dialectic” are not falsifiable hypotheses so there was no need to read the metaphysical books of Marxist or religious historians. Falsificationism and the Received View, when faithfully followed, could make anyone into a hard scientist.

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THE LEGEND IS DEAD

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In Reflection Without Rules: Economic Methodology and Contemporary Science Theory, Wade Hands presents 65 years of argument and 407 pages of evidence demonstrating that falsificationism and logical empiricism are now lifeless and, with them, the old “rules-based” way of doing economic methodology.

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The Received View and the Legend are gone [says Hands]. They are not available to be used as economic methodologists have attempted to use them in the past. There is nothing left on the shelf. This means that a certain rules-based methodology . . . is no longer available (Hands, p. 396).

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Hands speaks of the two traditions as one Big Thing. The Received View, the “Legend,” as a student of Thomas Kuhn has called it, is “dead” (Kitcher, 1993, pp. 3–10). Before, in the Legend, there was a science that could speak “objectively” about the world as it is. Now there is an “inquiry” whose only “constraints” are “conversational ones” imposed not by “the nature of the objects, or of the mind, or of language, but only by . . . the remarks of our fellow-inquirers” (Rorty, 1982, p. 165). Before there were facts “given” by the world, justified and distinguished by Hume’s fork. Now there are rhetorics of evidence, warranted by the proofs of Thomas Kuhn (1962 [1970], p. 111; Hands, pp. 101–114) and Paul Feyerabend (1975 [1993], pp. 151–158) that facts are 195

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“theory-laden,” and by the grammar and rhetoric of motives (Burke, 1945 [1969], 1950 [1969]), “rhetorics of assent” (Booth, 1974; McCloskey, 1985 [1998]; Nelson et al. (Eds), 1987), and other sociological and literary understandings of “evidence” (Chandler, Davidson & Harootunian (Eds), 1994). Before there was correspondence of reality to a protocol language, “the rock bottom basis of knowledge” (Carnap, 1963, p. 38, quoted in Hands, p. 95). In the Legend, “[if] some persons want to come to an agreement about the formal correctness of a given derivation, they may leave aside all differences of opinion on material questions or questions of interpretation. They simply have to examine whether or not the given series of formulas fulfils [sic] the formal rules of the calculus” (Carnap, 1939, pp. 37, 66, in Frank, p. 19). Now, in an “interpretive economics” (McCloskey, 1994, p. 22), the methodologist has to know something about the subject and its previous interpretations. The new methodologist asks, What is persuasive in this text? How, for example, does the persuasiveness of the text rely on appeals to higher authority for its success? Now, in an interpretive economics – or in what Hands wants to call “the new economic methodology” (Hands, p. 394) – a methodologist tries to understand the overlaps of epistemology, ethics, style, authority, and social commitment. In the Legend, epistemology was the “first philosophy,” and philosophy was the first science, the source of “foundations” for all knowledge. Epistemologists told scientists where they stood in a hierarchy of knowledge. Now, social sciences are “privileged” ways of investigating the production of scientific knowledge. Positivism, as Richard Rorty put it, “preserved a god in its notion of Science . . . the notion of a portion of culture where we touched something not ourselves, where we found Truth naked, relative to no description” (Rorty, 1982, p. xliii). Philosophers were the gate keepers of the secret garden. Now there is metaphor, metonymy, synecdoche, irony, power, and motive. There are no foundations. In a word, “foundations” have been replaced by “rhetoric” or “discourse” (Nietzsche, 1873, in W. Kaufmann (Ed.), 1985, pp. 46–47; Burke, 1945; Rorty, 1979, p. 12; McCloskey, 1985 [1998]; S. Fish [1990] and P. Bove [1990] in F. Lentricchi & T. McLaughlin (Eds), 1990). Philosophy is no longer “first.” After the naturalistic and sociological turns, the students of science begin their inquiries by studying a special science; using a science such as anthropology or sociology, they study the rhetoric and the social production of a belief in another inquiry before they begin to theorize belief epistemologically (Quine, 1969; Kuhn, 1962; Feyerabend, 1975 [1993]; Latour & Woolfgar, 1986; Mirowski (Ed.), 1994; Morgan & Morrison (Eds), 1999). Before, hypotheses were “refuted” by “falsification,” whether “naive” (requiring one test) or “sophisticated” (requiring multiple tests) (Blaug, 1980 [1992], p. 250). Now the Duhem-Quine thesis (“the underdetermination thesis)” undermines any claim, naive or sophisticated, to falsify a test

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system (Quine, 1951; Hands, p. 96). Before, “metaphysics” meant “a claim to knowledge such as is inaccessible to empirical science.” According to the Legend, in “metaphysical sentences it is altogether impossible to specify a method of verification, they are not reducible to what may be empirically given, and therefore they are without specifiable meaning . . . they are mere pseudostatements” (Frank, p. 33). Now, the works of Kuhn, Feyerabend, Quine, Putnam, Rorty and Polanyi show that “metaphysics matters” and “can now be discussed in economic methodology without . . . positivist finger wagging” (Hands, p. 399). Before, there was a lone scientist “mirroring” Nature so that humans could cope with it (Rorty, 1979, p. 12). Now there are speech communities in science, with “incredulity toward metanarratives” (Lyotard, 1987, p. 74). Images and narratives produced by science “do not enable us to cope” because they “correspond” with Nature as it really is. That description is no longer available. Science “just plain enables us to cope” (Rorty, 1982, p. xvii). Reflection Without Rules is immensely learned. It is nothing less than a firstrate statement on the contemporary problem situation of science theory and its relation to economic methodology. A primary objective of the book is to survey the work on science theory and economic methodology from John Stuart Mill to the present. This, it does, with economy and finesse. But Hands’ ambition does not stop there: more importantly, he wants “to convince the reader that the subject [of economic methodology] has changed” (Hands, p. 2, emphasis in original; also see Rorty, 1982, p. xiv). The change, and this book, are especially relevant for courses on the history and methodology of economic thought which, in the United States, are now being taught increasingly by a charitable colleague or professor emeritus, usually from an unrelated subfield of economics, reared on a book of Blaug’s and a schmear of Schumpeter, and flatly clueless about the wuthering. Hands does his best work in telling the story of the break-down of the Received View (Chapter 3) – especially in explaining the contributions of the Duhem-Quine thesis, and theory-ladenness, relativism, naturalism, pragmatism, rhetoric, and the sociality of science to the inevitable break-down (Chpters 4–6). Hands’ scholarship runs deep in areas that many historians and methodologists have not bothered to tread. The connection Hands makes between “naturalizing epistemology” and the fall of the hierarchy of knowledge will be of particular interest to economists bothered by physics-envy (Chapter 4).

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Yet for all its excellence as a survey, this is probably not Hands’ mature work as historian and critic. Read as a piece of historical and rhetorical criticism, the book 197

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is more in league with, say, Alasdair MacIntyre’s sometimes muscular Against the Self-Images of the Age (1971 [1978]) than it is with the brief but piercing essay by James Agee on the history and rhetoric of silent films (Agee, 1949 [1967]). But that is not saying anything very negative. Years later, MacIntyre guaranteed a major turn in ethical philosophy with his book After Virtue (1981), and Agee produced a great American novel with his Pulitzer-prize winning, A Death in the Family (1957). Reflection Without Rules is, I believe, a terribly necessary book, despite the flaws any single reader might perceive. In the most evident framing device of the book Hands promises to speak on the importance of “politics, context, and contingency” which “are deeply involved in the selection process” that puts ideas “onto the philosophical shelf” (p. 69). “[I]n science theory, as in science,” he adds later, “individual personalities and social interests play a significant role in the determination of what becomes the dominant discourse” (p. 252). Hands is implicitly asking readers to engage with him in the kinds of questions one finds in the sociology of science, one of the “turns” in science theory he celebrates. Mostly, however, Hands fails to deliver on the promise beyond a whiff of Mertonian assertion. A possible exception is the section on McCloskey’s article, “The Rhetoric of Economics,” published in 1983 in the Journal of Economic Literature (pp. 252–260). But even here Hands does not add to our understanding of why McCloskey’s piece made such a large and rapid impact upon economic methodology. Hands is merely repeating the convention, arguing that “The Rhetoric of Economics” was written “by someone who was already a distinguished economist” giving “the project a rather grand grand-opening” (p. 254). But if there were a sea change in methodology every time a distinguished economist published a provocative and unpopular paper then economics could not plausibly any longer be called “the dismal science;” a better appellation would be “Real Astrology,” or “The Jerry Springer Show.” The “selection process” would be governed by personalities only. In 1940 Frank Knight published in The Journal of Political Economy, “‘What is Truth’ in Economics?” In two simple sentences Knight exposed an error that positivists (like “Mr. Hutchison)” were making by labeling “meaningless” any “emotional” or “non-verifiable” statement of value:

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[A positivist is] one of those who always thinks of “science” with a capital S . . . [and uses] it in a context which conveys instructions to pronounce in the awe-inspired tone chiefly familiar in public prayer. This emotional pronouncement of value judgments condemning emotion and value judgments seems to the reviewer a symptom of a defective sense of humor (Knight, 1940, in Emmett (Ed.), 1999, p. 372; Hands, p. 70).

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In the 1940s American economists were not listening to Knight’s musings on methodology (his student Stigler was especially resistant). The biggest sea

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change at that time was not of course away from positivism but toward Samuelson’s notion of “operationally meaningful” statements – toward “a theory of consumer’s behavior freed from any vestigial traces of the utility concept” (Samuelson, 1938a, p. 71, in Hands, p. 66). (Could Knight have been more exact in revealing the vestigial traces of Samuelson’s positivism?) Similarly, Lawrence Summers delivered a dozen years ago some heavy blows to the rhetoric of empirical macroeconomics. “Macroeconomists,” said Summers in a word, were not being “honest” about the meaning of their econometric estimates. But his audience of elders at the National Bureau of Economic Research did not like what the distinguished philosopher-statesman was saying (McCloskey 1994, p. 334). They refused to publish his paper in the conference proceedings, and that is how it turned up in the Scandinavian Journal of Economics (1991), a site where hardly anyone has heard or heeded the message. In 1996 Deirdre McCloskey published with an unknown author (Stephen Ziliak) in the Journal of Economic Literature, “The Standard Error of Regressions.” The article is a crushing critique of statistical significance as used in the 1980s in the 182 papers of the American Economic Review. It contains an easy-tounderstand proposal for how to reverse the economically and humanly wasteful mistakes implicit in the papers. Still, our mounting evidence on the papers of the 1990s show that the practice has only gotten worse (Ziliak & McCloskey, 2002). In other words, though Hands doesn’t say, papers on methodology authored or co-authored by distinguished economists – even distinguished economists of the Chicago and Samuelsonian Schools – may not produce more than a ripple in economic methodology, big M or small m. McCloskey’s essay on “The Rhetoric of Economics” made a large impact on the attitude of methodologists toward the Received View; yet our essay on the rhetoric of statistical significance has not had the parallel effect. Knight’s antipositivist paper is unknown by normal economic scientists under the age of 60: they have grown up on the methodology of Popper, Samuelson, and Stigler. Falsificationism, Hands notes, gave Popper iconic status in economics, though the same idea made him something less in departments of philosophy. Hands claims that politics, context, contingency, and personalities are the variables that determine what the methodologists care about, what books are on the shelf. But he has not offered arguments showing the reader that it is so, and, when it is so, in what combination, and to what comparative degree. Hand’s failure to deliver on his model of shelf-building is I think related to another difficulty with the book, the problem that literary critics call the problem of the “unreliable narrator.” When done purposefully, the technique of the unreliable narrator can be welded into serious art, as it is, for example, in the 199

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works of Eudora Welty (1941) and Philip K. Dick (1981). Hands admits to being “happy” about the shift to rhetorical, sociological, pragmatic, naturalistic, and postmodern turns in economic methodology. Yet chapter by chapter he is at pains to tell his audience that his is an “interpretative” essay rather than a purely “descriptive” essay (pp. ix, 2, 394, and throughout). Interpretative vs. descriptive is not a distinction that a postpositivist, rhetorical, or pragmatist philosopher would make if she were not still in the grip of Hume’s fork, or believed anyway that she was loosening its hold on the audience, page by page. In important parts of the introductory and concluding remarks, however – in the apostrophe, those just-between-you-and-me murmurs of confidence between author and reader – Hands addresses traditional methodologists with the conciliatory manner of a Hoosier grocer, and this adds to the problem (Lanham, 1991, p. 20). After 394 pages of killing off the Legend, Hands retracts, believing “the desire for rules-seeking methodology should be described and understood, not judged” (p. 394). An “unreliable narrator” is a character in a story whose judgments create an incoherence in the interpretive frame of the reader. The resultant incoherence of Reflection Without Rules is I think derivative of its catholic attempt to give alms to tradition. It is also possible that some traditional methodologists will not notice. Still, the unreliable narrator distracts. For instance, Hands does not discard the normative-positive distinction that damages the reasonableness of science (think of the artificial but paralyzing rubrics in Harvey Rosen’s best-selling Public Finance: conclusions from econometric research on taxation are said to be “positive” and the Second Welfare Theorem, “normative.”) The very title of Hands book – Reflection Without Rules – brings to mind protocol languages and the Received View, only more groovy; it does not evoke any of the changes of subject in science theory. Unfortunately, the word “reflection” evokes what Dewey called disparagingly, “the spectator theory of knowledge,” the idea, as Rorty would later say, that the philosopher is a “Mirror of Nature.” By Hands’ own rendering the title backslides. On page 227 Hands speaks in celebratory tones of Dewey’s instrumental notion of truth: “For Dewey, truth is what works in the solution of concrete problems and furthers or enhances human life . . . It is an active, not a passive or reflective, notion of truth” (p. 227; italics in original). Passive habits of speech can suffocate a vital idea (as in this sentence), even when a flesh-and-blood author has the best of intentions (as Hands does).

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PALIMPSEST

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Hands fears that the new economic methodology will not appeal to the “normative” or “prescriptivist” tendencies of traditional methodologists

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(pp. 402–407). Hands is correct, I believe, that the fear is lacking good reasons. But Hands, perhaps because he is so open to the various and contending “replacement” models for the Legend, is I think exaggerating the meaning of his metaphor, “the barren shelf of philosophy,” in a way that backfires for both audiences. From the death of the Legend it does not follow that “the shelf is barren.” The shelf is messier, and wider, and more crowded, and changing sometimes radically in heterogeneous meaning, but the shelf is not barren. Rather, the shelf is simultaneously weighted down and lifted up with palimpsests. This sounds like intellectual comfort food; I am pretty sure it is not. “Palimpsest” has been defined since the 17th century roughly as a text or tablet that is literally or figuratively written over, especially where earlier writings have been partially erased, or show through only faintly. The ancient frescos of Herculaneum, below Mount Vesuvius, are an example of palimpsest. The laboratory notes of Louis Pasteur are an example of palimpsest (Latour, 1988): Pasteur kept in private notes the facts of his experiments that clashed with conventional notions of scientific method. The oratory of Martin Luther King, Jr. provides a vivid example of palimpsest. King’s sermon on the “Drum Major Instinct,” the one famously broadcast on television during his memorial service, was heavily borrowed (though significantly personalized) from a sermon of the same name, composed by a white preacher named J. Wallace Hamilton (Miller, 1982, pp. 1–6). Palimpsest in the visual arts is amply seen in the multiply-layered images and overlapping genres characteristic of the paintings of David Hockney. Historians try to scrape through the words of J. S. Mill to find the editorial hand of Harriet Taylor in what must be the most glaring example of palimpsest in economic discourse. A palimpsest, then, like ancient stone, contains layers of meaning. The new economic methodologist, the analyst of the palimpsest, is a kind of archaeologist who excavates, hides, repeats, celebrates, adds, and reinterprets those meanings. She admits that practising economists still speak like “confirmationists” or “falsificationists” though they have heard of Kuhn and Feyerabend. She notices in the short term that economists will not stop speaking of “given data” though they have heard of theory-ladenness and Hayek’s take on “capta.” Economists, like the new economic methodologists, are “writing over” the words and symbols of interlocutors, the old order, unable or unwilling to replace it entirely even when archaic, or dead. King, whose habit of rewriting other peoples sermons is ordinary, even encouraged, among preachers, was keenly interested in the white order. Knight noted in 1940 that even the positivist worked on palimpsest. The idea of palimpsest suits the “new” notion of science as conversation, a notion Hands approves of. The very word palimpsest will alienate conventional 201

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economists, who contribute unaware to a palimpsest of Samuelson’s Foundations. Think, for example, of the economists who repeat uncritically the words of James Heckman, a winner of the Nobel Prize in economics, when he says that his operational econometric techniques allow “the data to speak for themselves” (Heckman, 1991). Under Heckman’s leadership the University of Chicago is producing leading econometricians, future senators for a future Augustus, who believe they can “mirror nature.” They are on another planet. The idea of palimpsest, then, is apparently unavoidable to criticisms of science after Kuhn (and in economics it has a lot of traveling to do). One virtue of thinking about economic literature-as-palimpsest is that it blurs the line of demarcation between postpositivist critic and normal scientist – “between,” as Hands says, “theory and practice” (Hands, p. 217). Unlike the Popperian priest on the hill, the new methodologist can contribute to normal science on the ground while deconstructing normal science. Consider, as a pioneer, the critic and rhetorician Kenneth Burke, as he deconstructs and then retools to sharpen the ideas of “invidious distinction” and “conspicuous waste” in Veblen’s Theory of the Leisure Class (Burke, 1950 [1969], pp. 127–132).

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To use key terms as censorially charged as “invidious” and “waste” [, Burke says,] while at the same time assuring one’s reader that one is being merely technical, and does not want the reader to read any unfavorable implications into them – well, it is a good stylistic device, and may be enjoyed for its blandness (rhetorically dramatizing in the name of the non-dramatic). Yet it reminds us of the wag who, having called his enemy a son of a bitch, went on to explain: “I want it understood that I employ the expression, not as an oath, but in the strictly scientific sense” (p. 128).

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In Veblen’s usage, Burke shows, the appeal to a value-neutral vocabulary is not credible. Marx, says Burke, desired to show how the classes got “divorced.” But Veblen desired to show how the “leisure class” was “fascinated” (p. 127) by appeals to itself. Burke on Veblen is a minor though telling example of blurring the alleged line between theory and practice. Veblen’s “conspicuous waste,” in Burke’s hands, does not speak for itself or stand on its own. Burke fingers a figure of speech in economic discourse the way other people finger a Lincoln penny, a Japanese prayer stone, or a discarded bottle cap. He examines a symbol for its size, its shape, its stretch, its surface textures, and, of course, for its strength. The example suggests that the “literary” Burkean methodologist is a lot like a normal science empirical investigator, checking out the descriptive properties and the economic significance of his data, while introducing new “topics” to push forward an economic interest. (Burke’s interest is in complicating Veblen, not debunking him.)

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Or consider Deirdre McCloskey, in a paper intending to reveal the styles of argumentation common to humanists and economists, using of all things differential equations for the seduction. Here is an example of a rhetorician of economics making a case for preferred models and stories and findings while deconstructing those very models and stories and findings. McCloskey’s achievement, a step up from Burke on Veblen, has implications for the practice of science. In “History, Differential Equations, and the Problem of Narration” (1991), McCloskey shows how historians share a style of argument with economists and engineers, in linear and non-linear dynamics (in Ziliak (Ed.), 2001). The basic difference between the two dynamics is simple: if a “path” of events (such as economic growth or battle history or women’s liberation) is in fact non-linear, then small beginnings can have large effects. And if the true path is linear, then large effects can only stem from large beginnings. Using a mix of differential equations and stories about Civil War battles, McCloskey makes the case: historians and economists argue alike. Therefore, historians and economists have a shared language for criticizing each other’s stories. What dawns on the reader slowly and thrillingly about the rhetoric of the piece is that she uses small beginnings (“metaphors differ from stories)” to make small points (“metaphor and story are linked by a theme)” and she uses small beginnings (“metaphors differ from stories)” to make big points (“humanists and economists need each other)”. In other words, McCloskey uses the means of linear and non-linear dynamics to construct an argument about the narratival ends of linear and non-linear dynamics. The rhetoric of the rhetoric explains itself. To put it differently, McCloskey offers her readers an efferent and an aesthetic way of reading any scholarly performance. The efferent way is to look for something tangible-seeming to take back to the office: a mathematical model of charitable giving, say, or some facts about the history of welfare dependence. The aesthetic reading emphasizes the poetry of the experience, the how-youfeel and what-you-feel from the dynamics of the piece. In “History, Differential Equations, and the Problem of Narration” McCloskey is merging the two ways of reading, efferent and aesthetic. She makes the meaning of the model persuasive by using that very model to shape the narrative. Hands could have made a stronger case that rhetorical analysis, the new economic methodology, is new research. Blurring the lines between “doing research” and “doing philosophy,” the economic scientist acknowledges the inevitability and the obligation of making value judgments while revealing something scientifically novel: a new model, some clever facts, a story not previously considered. A third and final example, blurring the line between theory and practice, is taken from McCloskey and Ziliak (1996), and concerns the rhetoric of statistical 203

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significance in the full-length papers of the American Economic Review. In a paper examined by McCloskey and Ziliak, the authors estimated benefit-cost ratios for the state of Illinois following the implementation of two unemployment insurance experiments. In one experiment a number of workers were given a cash bonus for getting a job quickly and keeping it for several months. In another experiment, the “Employer Experiment,” employers were given a cash-bonus if claimants found a job quickly and retained it for some specified amount of time (AER September, 1987, p. 517, in McCloskey & Ziliak, 1996). The intent of the “Employer Experiment” was to “provide a marginal wage-bill subsidy, or training subsidy, that might reduce the duration of insured unemployment” (p. 517). Here is how the conclusion is presented:

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The fifth panel also shows that the overall benefit-cost ratio for the Employer Experiment is 4.29, but it is not statistically different from zero. The benefit-cost ratio for white women in the Employer Experiment, however, is 7.07, and is statistically different from zero. Hence, a program modeled on the Employer Experiment also might be attractive from the state’s point of view if the program did not increase unemployment among nonparticipants. Since, however, the Employer Experiment affected only white women, it would be essential to understand the reasons for the uneven effects of the treatment on different groups of workers before drawing conclusions about the efficacy of such a program (p. 527).

Here “affected by” means that the estimated coefficient is statistically significantly different from a value the authors believe to be the relevant one. The 4.29 benefit-cost ratio for the whole Employer Experiment is, according to the authors, not useful or important for public policy. The 7.07 ratio for white women is said to “affect” – to be important – because it passed an arbitrary test of significance. That is, 7.07 affects, 4.29 does not. It is true that 4.29 is a realization from a noisy random variable, whereas 7.07 is from a more quiet one. Though the authors do not say so, the 4.29 benefit-cost ratio is marginally discernible from zero at the 12% level (p. 527). Yet for policy purposes even a noisy benefit-cost ratio is worth talking about. The argument that the 4.29 figure does not “affect” is unsound, and could be costly in employment and income forgone. Looked at another way, the argument of the paper does not preclude a bizarre survey instrument, asking economists if they recommend separate lines in the employment office for white and black women on grounds of the “significant” findings. It would be pointless to then ask, “Yes, but is it econometrics or rhetoric? Art or science?” Articles on differential equations, statistical significance, and Veblen’s “symbols of advantage” confirm – despite the fears of traditional methodologists – that an interpretive economics is not characterized by an “anything goes” attitude, incapable of making value judgements. In truth, the new economic methodology may insure economics against the former (such as the rampant practice of dropping “insignificant” variables) and ennoble us in the latter.

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AESTHETICIZING EFFICIENCY

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Academic economists have been living for at least 40 years in a cultural moment that in the words of the historian Allen Megill self-consciously “aestheticizes” the beautiful, the good, and the true. From the perspective of a post- or metamodernist this estimate puts unfairly into positive light the retardation of traditional economic methodology. Nietzsche, Du Bois, Burke, and Dewey were aestheticizing “the efficient” in the late nineteenth and early twentieth century, and the good and the beautiful have been particularized and culturally situated, stripped of any pretense to universal experience, since ancient times. Wade Hands has made a learned and accessible addition to the problem situation imploring economists to rejoin the conversation, aesthetically. The bottom-line reason to aestheticize efficiency, when other reasons seem bankrupt, is that writers with little grasp of markets, like Rorty, are already doing it. Articulating the rhetoric of economics in a naturalistic and postmodern culture could save economic theory from its paradoxical role as impotent conqueror. The other sciences, physics included, show there really is no choice. Economists will gain respect if they write about new understandings of the good, the beautiful, and the true, and maybe a joint appointment if they publish something on “The Good, the Bad, and the Ugly.” The line between theory and practice is already blurred. Falsificationism is intellectual comfort food. Epistemology is not a first philosophy. Amigos: the Legend is dead. Neopragmatists in the mainstream are not hesitating to join heterodox economists, who are in this sense ahead of the curve. That the new methodologists trace their genealogies differently through Oakeshott and Dewey, or Nietzsche and Habermas, is immaterial. What matters is that they recognize in the palimpsests of economic discourse the opportunities of the new age – the greatest being to once again argue in academic journals the tastes and values of economic actors, affirming a belief, in communion with Frank H. Knight, that tastes and values were always already, rigorously and rationally, disputable.

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REFERENCES Agee, J. ([1949]1967). Comedy’s Greatest Era. In: James Agee: On Film (Vol. 1, pp. 2–19). New York: Grosset and Dunlap. Blaug, M. ([1980]1992). The Methodology of Economics. New York: Cambridge University Press. Booth, W. (1974). Modern Dogma and the Rhetoric of Assent. Chicago: University of Chicago Press. Bove, P. (1990). Discourse. In: F. Lentricchia & T. McLaughlin (Eds), Critical Terms for Literary Study (pp. 50–75). Chicago: University of Chicago Press. Burke, K. ([1945]1967). Grammar of Motives. Berkeley: University of California Press. Burke, K. ([1950]1967). Rhetoric of Motives. Berkeley: University of California Press.

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Carnap, R. (1939). Foundations of Logic and Mathematics. International Encyclopedia of Unified Science (Vol. 1, No. 3). Chicago: University of Chicago Press. Chandler, J., Davidson, A. J., & Haroounian, H. (Eds) (1994). Questions of Evidence. Chicago: University of Chicago Press. Dawidoff, N. (2002). The Fly Swatter. New York: Pantheon. Dick, P. K. (1981). Valis. New York: Bantam Books. Feyerabend, P. K. ([1975]1993). Against Method. New York: Verso. Fish, S. (1990). Rhetoric. In: F. Lentricchia & T. McLaughlin (Eds), Critical Terms for Literary Study (pp. 203–222). Chicago: University of Chicago Press. Frank, V. (1953). The Vienna Circle. New York: Philosophical Library. Heckman, J. J. (1991). Identifying the Hand of the Past: Distinguishing State Dependence from Heterogeneity. American Economic Review (May), 75–79. Kitcher, P. (1993). The Advancement of Science. New York: Oxford University Press. Knight, F. H. ([1940]1999). “What is Truth” in Economics? In: R. Emmett (Ed.), Selected Essays by Frank H. Knight (Vol. 1, pp. 372–399). Chicago: University of Chicago Press. Kuhn, T. S. ([1962]1970). The Structure of Scientific Revolutions. Chicago: University of Chicago Press. Lanham, R. (1991). A Handlist of Rhetorical Terms. Berkeley: University of California Press. Latour, B., & Woolfgar, S. (1979). Laboratory Life. Beverly Hills, CA: Sage Publications. Latour, B. (1988). The Pasteurization of France. Cambridge, MA: Cambridge University Press. Lyotard, J. J. (1987). The Postmodern Condition. Minneapolis: University of Minnesota Press. McCloskey, D. N. ([1985]1998). The Rhetoric of Economics. Madison: University of Wisconsin Press. McCloskey, D. N. (1994). Knowledge and Persuasion in Economics. Cambridge, U.K.: Cambridge University Press. McCloskey, D. N., & Ziliak, S. T. (1996). The Standard Error of Regressions. Journal of Economic Literature, 34, 97–114. MacIntyre, A. ([1971]1978). Against the Self-Images of the Age. Notre Dame: University of Notre Dame Press. Miller, K. D. (1982). Voice of Deliverance: The Language of Martin Luther King, Jr., and Its Sources. Athens: University of Georgia Press. Mirowski, P. (Ed.) (1994). Natural Images in Economic Thought. Cambridge: Cambridge University Press. Morgan, M., & Morrison, M. (Eds) (1999). Models as Mediators: Perspectives on Natural and Social Science. Cambridge: Cambridge University Press. Nelson, J., Megill, A., & McCloskey, D. N. (Eds) (1987). The Rhetoric of the Human Sciences. Madison: University of Wisconsin Press. Nietzsche, F. ([1873]1985). On Truth and Lie in the Extra Moral Sense. The Portable Nietzsche. Transl. by Walter Kaufmann. New York: Penguin Books. Quine, W. V. O. (1951). Two Dogmas of Empiricism. Philosophical Review, 60, 20–43. Quine, W. V. O. (1969). Epistemology Naturalized. In: Ontological Relativity and Other Essays (pp. 69–90). New York: Columbia University Press. Rorty, R. (1979). Philosophy and the Mirror of Nature. Princeton: Princeton University Press. Rorty, R. (1982). Consequences of Pragmatism. Minneapolis: University of Minneapolis Press. Summers, L. (1991). The Scientific Illusion in Empirical Economics. Scandinavian Journal of Economics, 93, 27–39. Suppe, F. (Ed.) ([1974]1977). The Structure of Scientific Theories. Urbana: University of Illinois Press.

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Welty, E. ([1941]1969). A Worn Path. In A Curtain of Green and Other Stories. New York: Harcourt Brace Jovanovich. Ziliak, S. T. (Ed.) (2001). Measurement and Meaning in Economics: The Essential Deirdre McCloskey. Cheltenham, U.K.: Edward Elgar. Ziliak, S. T., & McCloskey, D. N. (2002). The Standard Errors of the Nineties. Unpublished manuscript. Georgia Institute of Technology and University of Illinois-Chicago.

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ECONOMIC METHODOLOGY AND THE MANY FACETS OF “CONTEMPORARY SCIENCE THEORY”

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Andrea Salanti

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A review essay on D. Wade Hands, Reflections without Rules: Economic Methodology and Contemporary Science Theory. Cambridge: Cambridge University Press, 2001, 480 pp.

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According to the author himself, the scope of this important new work is threefold. Indeed, the book has been conceived in order to provide: (1) a “survey of recent developments in the field of economic methodology”; (2) a “survey [of] contemporary science theory as it relates to economics and economic methodology”; and (3) a number of arguments intended to foster the recognition that “the subject has changed” (pp. 1–2). Reflections without Rules can thus be regarded as a comprehensive, detailed and impressively documented survey of what has been going on within the field during the last twenty years or so,1 as well as an attempt to convince fellow methodologists that it is time to abandon traditional approaches to economic methodology in favour of new ones (for which, according to Hands, we should look at “contemporary science theory”). As the most updated survey of recent literature on economic methodology, all the good things that could have been said in praise of it have been already emphasized in (the first part of) Hausman (2001). In this respect I cannot but endorse his enthusiastic appreciation of what the author has accomplished in this book. The introduction is followed by two chapters devoted, respectively, to the methodological tradition in economics and to the critiques which prompted philosophers of science to abandon the so called “received view”, that was dominant in their field during the 1950s and the 1960s. These two chapters, together with Chapter 7 on recent post-positivistic developments in economic methodology, cover familiar issues and I guess that they will receive unanimous positive reception by all people interested in economic methodology. The same can be said, with some caution, of the content of Chapter 4, devoted to the “the naturalistic turn” within epistemology. Probably not all the prospective readers will agree with the most radical versions of epistemological naturalism, but the great majority should agree with the view according to which present-day epistemology, having divested itself of the traditional fundamentalist (and therefore intrinsically prescriptive) pretensions, pays much more attention to the descriptive traits of the discipline. This is a crucial distinction, which is worth of special attention. As the author himself puts it:

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The reformist brand of naturalism employs science to reform epistemology; the traditional epistemological questions remain the same, science just provide a new set of answers/solutions. Revolutionary naturalized epistemology seeks to change the subject entirely. According to the revolutionary vision, the old epistemological questions are faulty and should be replaced by an entirely different set of questions (pp. 132–133).

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As just said, while nowadays “reformist” naturalism is a somewhat common stance among philosophers (of science) and (economic) methodologists, the various versions of “revolutionary” naturalism are likely to turn out to be more controversial. Consequently, the chapters in Hands’s book where the author offers to the reader his own assessment of such “revolutionary” approaches are doomed to incur the darts of critics. The whole matter is organized in three chapters respectively devoted to: the sociology of scientific knowledge (Chapter 5), pragmatism in its classical and more recent versions together with its postmodernist connections (Chapter 6), the economics of science and scientific knowledge (Chapter 8). Even if not all of the content of these chapters is beyond criticism, it must be admitted without hesitation that this part of the book (and not only this part, for that matter) is really impressive for the competence and scholarship displayed by the author in so many different fields. Hands’s book touches on such a remarkably wide number of issues that no review, however long, could render full justice to it. Given the scope of the book, intended to became a standard reference source for a number of years, instead of proceeding to pick up a few examples of more or less relevant points open to criticism (the usual strategy of reviewers in these cases), I would dare to focus on some general issues on which, in my opinion, the appearance of Reflection without Rules should foster further reflections (hopefully with some rules).2 Such issues, as far as I can see, may be summarized as follows:

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• The account of the scope of traditional methodology given by the author is surely open to criticism. While Hands is substantially correct in reconstructing the stream of critiques that led to the “breakdown of the received view within the philosophy of science”, here and there he depicts the scope of traditional approaches to epistemology as that of dictating norms for good scientific practice from the standpoint of some philosophical watchtower. No objection, of course, if this is taken to mean that their aim was to provide criteria for identifying “good” science and justifying our trust in explanations which (ex post) satisfy such criteria. But if it is said that According to this traditional view there exists a hierarchy of intellectual ideas and philosophy comes in at the very beginning: philosophy, epistemology in particular, has the responsibility for laying the foundations, or the groundwork, for empirical science. [. . .] philosophy of

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science is simply applied epistemology; once the job of first philosophy has been done and the fundamental categories of “knowledge” have been analysed, the final step is to instantiate that first philosophy in the rules of scientific method. These methodological rules are normative, they describe what scientists ought to do to produce the type of knowledge that epistemology justifies (pp. 130–131)

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we have, as a result, a somewhat misleading account of the intended goals. It is misleading because the (innocent) reader might take it as asserting that the main aim within the “traditional view” was to formulate a sort of practical guidebook for scientist in their everyday research activity. This view would be nothing but an ungenerous caricature of what “traditional philosophy of science” was looking for. One may well maintain that traditional approaches have ultimately failed in their search for sound criteria of demarcation, but one should not propagate the silly idea that such criteria were devised to provide the scientists with a set of ready-to-use instructions on how to obtain reliable results (a claim, to be sure, that had been dismissed long ago even within traditional approaches). • To refer to “contemporary science theory” may be a useful expository device in order to mark the abandonment of the traditional view, but the reiterated use of this expression could ingenerate the false impression that the sociology of scientific knowledge, (neo)pragmatism, and the economics of scientific knowledge may be regarded as different parts of a common vision. Actually, these distinct bodies of literature address different questions by means of different conceptual tools and it is doubtful if all of it could ever contribute to a perspective with some resemblance of a unitary approach. Between the sociology and the economics of scientific knowledge, for instance, there are (at least) the same differences in initial presumptions, methods of analysis, and so on that we find between sociology and economics tout court. This is by no means surprising: we have a number of different social sciences just because human activity is open to inquiry from a number of different perspectives. Scientific research, after all, is nothing but a particular kind of human activity and as such it is obviously approachable in different ways. Each perspective, however, is concerned with different question and is doubtful (or, at least, it cannot be taken for granted) that it can be easily integrated with the others. • In any case, just because the “old” and the “new” economic methodology (as defined by Hands) answer different questions, to see a decisive progress in the switch from the former to the latter is more problematic than the author would us to believe. “New” economic methodology, by its own admission, is not concerned with the “old” questions. It may well be that we now find the old answers to the old questions quite unsatisfactory, but entirely changing the questions is not, in principle, a sign of sure progress.

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• The confident support to new methodology displayed by the author seems to be at least partly motivated by the conviction that the new approaches are likely to gain wider audience among scientists. His conclusive chapter is preceded by a passage from Giere (1999, p. 16), which ends by noting that the “typical result” of the traditional way of doing philosophy of science “has been the creation of relatively isolated subdisciplines populated by philosophers and a few scientific sympathizers. The sciences in question have continued to develop following their own dynamics”. Undoubtedly, there is something true in this crude description of what has actually happened. Until now, however, I do not see glaring evidence that the new approaches have the benefit of a deeper impact on scientific activity. Apart from enthusiasm for novelty, I am unable to figure out why purely descriptive3 analysis should became more popular among scientists than the traditional (normative) approaches.4

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Let me conclude by stressing that the above critical remarks are absolutely not intended to discourage prospective readers: they are simply meant to be a sample of reactions to be expected by those who are not prepared to embrace the most radical versions of recent naturalistic approaches within epistemology. As said from the very outset of this review, as an updated survey of recent literature on economic methodology, this book has the merit of showing in a highly documented manner the plurality of approaches that are presently pursued within the field. It, therefore, really deserves to become a compulsory source of reference for all those interested in the more recent developments within economic methodology.

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NOTES 1. In this respect Hands’s book is surely doomed to become, so to speak, the sequel of Blaug (1980) and Caldwell (1982) as a major reference book on economic methodology in the last quarter of the twentieth century. 2. I am conscious, in so doing, of the risk to be generic and sketchy about questions that should be discussed much more carefully. However, I prefer to take such a risk in order to draw the attention of the reader on this kind of questions rather than to deal precisely with relatively minor points. 3. In the case of the economics of science or of scientific knowledge it is open to question even their “descriptive” character. Indeed, as is well known, many authors deem some of the very basic postulates of economic theory descriptively false. 4. It is an undisputable fact of experience that people are usually quite uninterested in meta-analyses, even when they themselves are more or less directly involved. Consider, for instance, the men in the street who typically are not very well versed in psychology and have only an amateurish knowledge of the studies on sexuality, or 211

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religious people who show the same lack of concern towards the philosophy, history or sociology of religion. Scientists’ indifference to any kind of “science theory” is, therefore, no exception to the rule.

REFERENCES Blaug, M. (1980). The Methodology of Economics. Or How Economists Explain. Cambridge and New York: Cambridge University Press. Caldwell, B. (1982). Beyond Positivism. Economic Methodology in the Twentieth Century. London: Allen & Unwin. Giere, R. N. (1999). Science without Laws. Chicago: University of Chicago Press. Hausman, D. (2001). Review of: Reflections without rules. Economic methodology and contemporary science theory. Journal of Economic Literature, 39, 902–904.

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Multiple Reviews of Nelson’s ECONOMICS AS RELIGION: FROM SAMUELSON TO CHICAGO AND BEYOND

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ECONOMICS AND RELIGION: A TROUBLING INTERFACE

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Melvin W. Reder

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A review essay on Robert H. Nelson, Economics as Religion: From Samuelson to Chicago and Beyond. University Park, PA: Pennsylvania State University Press, 2001.

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Despite reservations and disagreement on a number of points, I found this book stimulating and informative. The author has read widely and writes well. Best of all, he has a deeply felt message to deliver. That the message does not altogether persuade this reader should not deter others: it is well worth thinking about. In a nutshell, the message of the book is that, not withstanding its scientific trappings, economics is best thought of as a secular religion propounding a set of ultimate values. Ancillary to this view of the discipline, it proposes that economists view themselves as secular priests whose primary function is to spread the faith and act as guides to the laity in matters of religious practice. Nelson is well aware that most economists are unaware of the possibility of interpreting their social function in this manner and – faithful to the scientific image that the profession ostentatiously cultivates – would very likely reject (and resent) the interpretation that he proposes.

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Research in the History of Economic Thought and Methodology, Volume 21-A, pages 213–238. © 2003 Published by Elsevier Science Ltd. ISBN: 0-7623-0996-2

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To avoid probable misunderstanding, in the Preface (pp. xxiv–xxv) Nelson explicitly addresses the question of whether the concept of religion entails belief in the relevance of supernatural entities or forces to human affairs. I take his view of the matter to be indicated (p. xxv) by his quotation from the 1990 edition of the Dictionary of Christianity in America:

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Since the 1970s there has been much discussion as to whether secular humanism is a religion and should be regarded legally as such. This question hinges on one’s definition of religion. If belief in a god is necessary to define a religion, secular humanism does not qualify. If on the other hand, religion (or a god) is defined as one’s ultimate value, then secular humanism is a religion.

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As the book would make no sense unless the second definition was accepted, I feel comfortable in assuming that it is this definition with which Nelson operates. However, I would find it easier to interpret his argument if the definition were amplified to include the following idea: one’s religion is characterized not only by ultimate value(s) but also by an associated set of beliefs about the nature of the universe and one’s place within it. Before discussing the “ultimate values” that identify economics as a religion, let me note that ultimate values may differ from one brand of economics to another. As this book is concerned exclusively with mainstream professional economics in the United States during the second half of the twentieth century, the values, attitudes and beliefs to be discussed are relevant only to economics of this description. As judged by Nelson the ultimate value associated with economics of this kind is “efficiency.” In support of this judgment, he quotes George Stigler (p. 76):

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the dominant theme has been that good policy favors, and bad policy interferes with, the maximizing of income of a society . . . the goal of “efficiency” has been the main prescription of normative economics.

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Although this definition of the ultimate value of economists requires qualification, I shall use it as a point of departure. The book has two aspects which I shall discuss separately. One aspect is the argument that economics is a secular religion: this is considered in Section II. The other is an interesting though somewhat tendentious overview of economic thought in the United States during the second half of the twentieth century: this is discussed in Section III. Section I is ancillary to both of the later sections. To keep this review within reasonable length it has been necessary to glide over many details, especially in Section III, that would otherwise warrant critical attention.

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Before considering economics as a religion associated with the ultimate value of efficency, it is necessary to remove several ambiguities in the definition of (economic) efficiency.

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(i) A seemingly innocuous characteristic of the conventional definition is that the only entities whose condition (utility, status, welfare, income, wealth) is considered relevant to a measurement of efficiency are human beings. All other forms of matter are considered as instrumental to the well being of humans, with their “welfare” entering an objective function solely as a means to the promotion of human welfare. The point of the previous sentence becomes clear as soon as we contrast the typical economist’s value system with that of a typical Animal Rights advocate. To an economist, the welfare of (at least some) other humans is not only a determinant of her own level of utility, but is also a moral constraint upon the set of actions she may take to increase that level. Her feelings for non-human entities are quite different: however well she may treat such entities, the ultimate rationale of whatever kindness she dispenses is the resulting increase in her own utility. Should there be a change in her tastes or resources, her concern for the welfare of a given non-human entity might lessen drastically without inducing an attribution of justified blame. But the Animal Rights advocate would view such an attitude – and associated behavior – differently. Regardless of her feelings toward non-humans, the Animal Rights advocate considers animals to have rights that may not be infringed regardless of the disutility for humankind that respecting them would entail. The above remarks about (the attitude of the typical economist toward) non-humans may apply not only to animals, but also to vegetables. While many economists are tree lovers, typically their concern is with the benefits that the presence of trees confers upon humans. They are apt to ask about the “optimal quantum” of forestry per (human) capita as though the quantum of forestry were a variable of choice the level of which should be set solely in the interest of humans: in the ancillary calculations the interests of trees and other non-human entities are ignored, if even contemplated. The anthropocentric perspective implicit in such calculations is anathema to thoroughgoing environmentalists whom Nelson characterizes (pp. 308–316) as “environmental fundamentalists.” As Nelson points out, such environmentalists explicitly reject the goal of maximizing (human) consumption in favor of some incompletely specified goal that might require 215

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sacrifice of human satisfaction for the benefit of non-human entities. Obviously, such a goal would be incompatible with the conventional concept of economic efficiency. (ii) Despite occasional tergiversations (e.g. “Defense is better than Opulence”, pace Adam Smith), generally economists speak as though the wealth of humans were the summum bonum of human striving. But frequently economists have expressed concern not only for the aggregate quantity of wealth, but also for its distribution. Let me begin by remarking on the sharp decline in concern with issues of income and wealth distribution that has occurred among mainstream economists during the second half of the last century. Circa 1950 (alleged) distributional impacts were a major concern in evaluations of any trend in economic life or proposal for change in economic policy. In making such evaluations, the typical presumption was that reduction in inequality was desirable per se: e.g. it was generally accepted that progressivity of incidence was a point in favor of any proposed tax. However, during the last thirty-five years or so the dominant trend in economic thought has been both to abandon this presumption and generally to downplay the importance of distributional issues in favor of a focus upon the per capita level of income and/or wealth. In discussing economic thought during the latter twentieth century, Nelson barely recognizes this shift of emphasis, but merely accepts Stigler’s dictum that the dominant criterion of economic appraisal is efficiency without regard to equity in the distribution of its fruits. Focus upon efficiency without regard to equity in distribution leads to neglect of a plurality of values embedded in the weltanschauung of contemporary mainstream economists. This plurality is revealed in the problem of choosing between a larger population and a higher per capita (real) income. Since the “Malthusian devil” was laid to rest in the mid-nineteenth century, economists have fudged the moral issues associated with birth control by pointing to the fact that as per capita income rises family size declines, thereby obviating any need to make family size a matter of social concern to avoid pressure on the means of subsistence. But in taking this gambit, economists have made implicit appeal to a value distinct from efficiency: freedom of individual choice. Economists, like most others in developed countries, feel that where feasible, social choices should be made by allowing each person to make an individual choice. Respect for this feeling implies that the “burden of proof” should be placed upon those seeking to override individual choices in order to promote conformity with a social norm. Notoriously, choice of

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family size and sexual behavior generally, has been a continuing cockpit for advocates of freedom of individual choice and their opponents. Although the values of efficiency and freedom of choice tend to get conflated (by exaggerating the reach of the invisible hand) it is important to distinguish between them. (iii) Embedded in the common beliefs of mainstream economists are two value judgments: (a) only contributions to the well being of human beings should be reflected in measurements of production; and (b) when measuring the net output of an economy not all sources of utility loss (to human beings) should be counted. Having already discussed (a), let us proceed to (b). As Nelson points out in discussing “Existence Value” (pp. 84–87), the sources of psychic loss resulting from economic change go far beyond what is normally considered “cause for compensation.” For example, consider the sensibilities of individuals who are sentimentally attached to a hometown or old neighborhood from which they have long since departed. Or those of individuals greatly concerned with the survival of occupations associated with a particular way of life, e.g. farming. Such individuals may be greatly saddened by the destruction (or deterioration) of places or occupations whether caused by economic progress or natural disaster. Similarly, individuals of strong religious convictions often suffer great loss of utility from the behavior of unrelated people (e.g. sexual behavior) that contravenes these convictions. Not infrequently such utility loss is reflected in actions intended to inhibit or impede such objectionable activity. Yet a further example to the same point is the utility derived by awareness of the existence of natural or man-made wonders, particular species of plant or animal life, etc. This source of utility is commonly described as “existence value.” Nelson’s discussion of existence value (pp. 84–87) is perceptive and right to the point. As he puts it: (pp. 84–85).

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economists could introduce into “gross national satisfaction” – now going well beyond “product” – an existence value for the real anger felt by many people when they know of a bank or other party charging a usurious interest rate . . .. One immediate consequence, however, would be to undermine most past conclusions of economic efficiency analyses of the market system. Because many existence values have no prices for most of the people who benefit from them, the market would provide the wrong signals . . . The full incorporation of existence values into economic analysis thus could transform much of what is now considered private activity in the market into forms of public-sector activity requiring government management to achieve a socially efficient result.

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Let me rephrase these remarks to emphasize Nelson’s point. In measuring societal output economics considers as inputs only such goods or services 217

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as are (or might be) judged ancillary to the process of producing a marketable good or service. Absent such a judgment, wounded feelings will not be counted as a cost, however grievously they may be injured. It is only this convention of social accounting that makes possible the familiar textbook demonstrations of the beneficent effect of free trade, specialization and division of labor, technical progress, etc. Formal theory says nothing about what may or may not be considered an input to a production process and/or what may be included as an element of the cost of its output. Judgments on such matters are “pre-theoretic” and often reflect beliefs that are value laden.1

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II

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Granted that economics is intimately connected with the promotion of certain values, does it follow that it is a religion? Let me begin my ambivalent response by remarking that whatever its status as religion, economics claims to be a science. And during the past half millenium, science has been considered alternative to religion as a touchstone of truth. As I have argued elsewhere (Reder, 1999) during the past century economics has sought to conform to the criteria of science – however diverse these may be – and both its status and some of its social function(s) depend upon its perceived success in this attempt. But however successful economics may be as a science, in this role it does not pretend to serve as a source of ultimate values. Considered as a science, economics, like other sciences, claims to be simply a provider of instruments to achieve objectives (values) that are given exogenously. If one of these ultimate values is “TRUTH”, science claims a monopoly of access and thereby competes directly with traditional religion. To the extent that it is successful in making this claim, science (including economics) displaces religion in this domain and thereby assumes one of its functions. However religion is concerned not only with the true, but also with the good and the beautiful. Putting aesthetics aside, the claim of science to pre-eminence in the domain of morals is far weaker than in the domain of truth, and most scientists are careful to avoid claiming that their work contributes to knowledge of the good. Nevertheless, many economists – though doubtless a minority – contend that economics and moral philosophy are inseparable: Nelson is one of these. It is this conflation – of economics and moral philosophy – that leads Nelson to attempt a parallel conflation of economics and religion. While I sympathize with this objective, I resist it. I agree that economic analysis is often mixed with value judgments – avowed and otherwise – and believe that it is not always

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worth the trouble to disentangle the two. Consequently, much of my resistance to the conflation would disappear if “ideology” was substituted for “religion” in the book’s title, and its argument adjusted accordingly. But to do this would fundamentally alter Nelson’s message. He believes that the principal teachings of economics are secular translations of themes of (Judeo-Christian) religion and loads the book with theological arguments to this effect. My objection to this contention is more a matter of emphasis than of downright disagreement. Over the past millenium there has been a trend toward increased specialization and division of subject matter among “intellect workers.” In the early part of that millenium, advisors to rulers often wore clerical hats and cloaked worldly advice in religious verbiage. Also, in this period the prestige of religion was such that even lay advisors felt constrained to make use of its vocabulary and categories when discoursing on purposive actions: i.e. what a sovereign was advised to do had to seem in keeping with what could be ascribed to the will of god. As the actions prescribed for sovereigns (and/or subordinate lords and masters) needed to be kept in harmony with behavioral instructions to lesser folk, religious doctrine permeated the practical maxims of conduct offered to the entire population. In short, maxims of religious doctrine were applied to all aspects of life, among them economic behavior. However, despite concern for conformity with biblical injunctions and (especially) terminology, the behavior that was either encouraged or enjoined was selected with a careful eye to economic efficiency and the practical limits of self-restraint. Thus, the religious doctrines inherited by the secular philosophers, merchants and other counsellors who came to assume some of the roles previously performed by priests were not so markedly at odds with secular ideas as to mandate rejection tout court. Consequently, the theological arguments to which Nelson makes copious reference often seem remarkably parallel to those of subsequent lay philosophers. That is, the virtues of thrift, enterprise, commercial honesty and hard work have been proclaimed throughout the past millenium as values of a common culture. In its early centuries these virtues were supported by theology but later, as science appropriated much of the authority of religion in human affairs, economics came to replace religion as a support of moral instruction. However Nelson exaggerates the salience of this role. Only a small part of religion’s lost moral authority has accrued to economics. Much of this authority has devolved upon the family which has, in turn, delegated it increasingly to the individual under the rubric of freedom of choice. Other parts of this authority have been dispersed among educational institutions and various peer groups. 219

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While ideas about economic behavior have had great influence on the ideologies of these diverse entities, it is doubtful that much of that influence has come from contemporary economic thinking. The cumulative effect of two centuries of economic thinking on contemporary common sense is another matter: ideas about the invisible hand, the advantages of specialization and division of labor, economies of scale, etc. have currency outside of professional economics, and not merely as buzz words. But in pointing to this channel of influence, care must be taken to recognize the importance of reverse causality. Over the past two centuries the thinking of economists has responded to changes in the ambient society. Without elaborating, let me point to the drift of productive activity from agriculture to manufacturing and later to services, and to the innovations in communication and information processing. The reader can readily trace the impact of such developments upon the content of economic thought and the associated changes in moral standards; e.g. injunctions against false advertising, violations of intellectual property rights and pollution of the environment. In short, I do not think that the contemporary effect of economic thinking upon the values either professed or lived by the public at large is great enough or sufficiently distinct as to support a claim that economic ideas are a major determinant of societal values. On the other hand, I agree with Nelson that present day economists underrate the importance of their pedagogical function as presenters of ideas, both as to how economies actually function and the maintained values upon which such functioning depends. Although its effect is dispersed over a long horizon, such presentation constitutes an important part of what economics contributes to the society that supports it.

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As Nelson recognizes, during the past half century the self-image of most economists has been that of scientist. Although there has been sharp disagreement among them as to the proper application of their expertise, overwhelmingly economists have claimed the role and status of scientist, and still do. However, during the past half century the interpretation of the role of economic scientist has undergone a sharp change. Although there was never an overwhelming consensus on that role, during the period from (say) 1945 to 1965–1970 the dominant view was that the economic-scientist was akin to an engineer or a physician, capable of applying technical skills to the accomplishment of assigned tasks. But since then, this view shifted to one in which the economist was seen to function like an astronomer, explicating the course of history and (perhaps) predicting the future, but incapable of influencing it purposefully.

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While this shift of perspective occurred, though with significant difference of detail, in both the micro and macro branches of the subject, Nelson’s primary concern is with macro. In the early part of the (post World War II) period, economists shared in the “can do” spirit of the New Deal and the succeeding war period. The pervasive belief was that, guided by science and inspired by goodwill, governments could solve social problems of which the most salient was large-scale unemployment. Nelson shares the “Chicago View” that this belief was wrong: governments are inherently incapable of accomplishing such objectives and would imperil personal freedom by any serious attempt to do so. Moreover, and not incidentally, Chicagoans generally believe that to use economics as an instrument in such attempts would overtax its capabilities and damage its reputation as a science into the bargain. Nelson selects – properly I think – the first edition (1948) of Samuelson’s introductory textbook, Economics, to epitomize the ideas of 1945–1970. He perceives Economics to embody an implicit value judgment that the proper objective of a society is the advancement of the material well being of its members. He perceives further that the text suggests that this advancement requires the sagacious intervention of the state to remedy the intermittent failures of a largely unregulated capitalist economy: such intervention was to be directed by scientific knowledge of which economics, as introduced in the text, was a major ingredient. Acquisition of such knowledge was deemed to be independent of how it was to be applied. That is, a properly trained economist was to be equipped with tools that could be used to achieve whatever objectives were presented to her: valuation of the objectives was considered orthogonal to valuation of the skills displayed in achieving them. Though a bit overdrawn, I would agree that the statement of the preceding paragraph represents the mind set of Samuelson’s (1948) text and, more to the point, of his generation of economists (of whom I am one). For brevity, I shall term this mind set “optimistic positivism.” The defect of this mind set was not so much its positivism as its optimism. It was not only that we believed that applying scientific method in the spirit of Logical Positivism was the right (only?) way to advance economics, but we also believed that economics was poised to make rapid technical advances that soon would enable governments successfully to pursue monetary-fiscal policies that would maintain full employment without inflation. In part this optimism of economists stemmed from the general euphoria about the capabilities of science that emerged during the second quarter of the twentieth century. This optimism was in sharp contrast with pessimism about the capability of existing social arrangements to avoid war and depression. The juxtaposition of the two attitudes fostered contempt both for the arrangements 221

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in question and the ideologies that served to legitimize them. Because of its historic association with the doctrine of laissez-faire, “classical economics” became a prime target for the spears and arrows of the apostles of change. Conversely, the “can do” attitude of The General Theory as well as the specific policy recommendations which it suggested served to make it an intellectual banner for a generation of economists that wanted to do something about a defective economy that they blamed for the mass unemployment of the 1930s. The impact of the conceptual framework of The General Theory which highlighted seemingly simple relations among aggregate flows (e.g. the Multiplier and the Accelerator) was reinforced by the contemporaneous development of empirical counterparts to its principal variables: e.g. statistics of National Income and its major components, Investment and Consumption. It was further reinforced by the rapid development of econometrics which promised to provide the means to translate (refined) versions of Keynes’s vague, qualitative relationships into quantitatively specific policy instruments susceptible to manipulation by central governments at the direction of properly trained economists. While never explicit, underlying the confidence of Samuelson’s generation of economists was the widespread acceptance of the new tools of quantitative economics in the prosecution of the war effort reinforced by glory reflected upon all of science by the achievements of nuclear physics. The widely perceived moral ambiguity of the military applications of physics served to heighten the image of science as value neutral: it was the task of science to provide instruments to final users whose objectives were whatever they might happen to be. While scientists could judge these objectives as they saw fit – oppose them and even boycott their users – the quality of their scientific work was considered independent of the purposes it might serve. But although they believed the findings of science (including economics) to be merely instrumental to whatever objectives its users happened to hold, this did not mean that they (Samuelson’s contemporaries) had no values of their own. As Nelson points out (Chapters 2–4), they were heavily influenced by the traditions and values of American Progressivism that had informed the teaching and application of social science since the latter part of the 19th century. This tradition and its associated (instrumental) values culminated in the New Deal whose spirit animated Samuelson’s text. Foremost among these values was the elimination of poverty. Efficiency in resource use was at most a secondary goal, to be promoted when possible, but sacrificed when and if necessary to improve the living standards of the poor. However, this ideology did not constitute a religion. Enthusiastic though he may have been about the scientific prospects of his discipline, the typical Samuelson-using economist regarded economics as instrumental to the

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achievement of a good society but not constitutive of its substance. While a good society presupposed a decent standard of living for all of its members, this was thought to be only a necessary condition: the quality of life was determined by how material abundance was used. Like contemporaries in other academic disciplines, when searching for “ultimate values” or for the characteristics of the “good life” economists of all ideologies looked beyond science. Science provided means; it did not throw light upon ends. Though diluted by the opposition of critics such as Deirdre McCloskey, the positivism of the first edition of Samuelson remains the dominant attitude of the profession. However, the accompanying optimism has largely disappeared. Optimism was lost for two reasons: the diminished salience of the full employment objective and a growing appreciation of the complexity of economic processes. The objectives that replaced unemployment prevention, or at least came to share top billing with it, were not amenable to simple applications of “demand pull.” It became necessary to estimate unemployment-inflation tradeoffs and, a bit later, to consider the effect of attempting to exploit such tradeoffs upon future tradeoffs, etc. Attainment of these objectives did not seem as simple as maintaining full employment. Although data sets have multiplied and econometric techniques have become increasingly powerful, the strength of professional consensus on magnitudes, and even on some of the signs, of policy relevant parameters has not increased pari passu. In consequence the confident belief that improvements in scientific procedures would automatically improve policy making has vanished. While most economists still believe that the only road to better policy advice goes through improved science, they have come to realize that this road is rough and that progress will be slow. The sea change in economic thinking that started around 1960 involved not only a chastening of post New Deal optimism, but also a shift of focus in economic theorizing. Emphasis has shifted from the Samuelson (1948) framework (i.e. stable relations among aggregates in macro combined with various kinds of non-perfect competition in micro) to one that seeks micro foundations for all relationships and has a strong tropism for models that feature rational individual decision making under competitive conditions. Although many phenomena that are presented in the 1948 framework as results of non-perfect competition reappear in the post 1960 framework as consequences of transactions cost, search cost, asymmetric information, etc., the behavior of typical economic agents is described quite differently in the two frameworks. Nelson clearly rejoices in these changes and without reservation hails them as marks of theoretical progress. Correspondingly, he deprecates the Samuelson framework as theoretically defective. Although I would generally concur in his 223

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favorable appraisal of the post 1960 innovations in micro, especially those associated with the concepts of transaction costs and asymmetric information, I think Nelson is a bit uncritical in his enthusiasm. I regret his failure to recognize the great reduction of concern with distributional equity – so prominent in the 1948 framework – in economic theory since 1960. Moreover, I consider his (predominantly negative) obiter dicta on Samuelson to be quite unfair, and indicative of inadequate appreciation of the theoretical achievements of the 1930s – the years of “High Theory” – that are embodied in his text. However, for reasons of space I shall not dwell on these details beyond noting one of their consequences. This is the de-emphasis of reducing distributional inequality, presented as an important desideratum of economic policy in the 1948 framework, and a corresponding increase in the relative importance attached to efficiency in the post 1960 framework. The reader of Samuelson 1948 would hardly be aware that to reduce inequality might entail sacrifice of efficiency (i.e. reduction in per capita real income), while partisans of the post 1960 framework hardly bother to mention the case for reducing inequality – and sometimes dispute it outright – in their concern to protect the rewards of effort and enterprise. But Nelson does not seem to consider this shift of emphasis to have had an intellectual cost, or even to be aware that it has taken place. Although he overdoes it a bit, by and large I think that Nelson is correct in assigning major credit for the above shift in frameworks to Chicago economists. While I do not believe that an economist’s choice of analytical framework is independent of her attitude toward economic policy (especially the role of the state in economic life) this is not the place to discuss the matter. Accordingly, and despite its undoubted importance, I shall discuss the Chicago view of economic policy without reference to whatever methodological entanglements it might reflect. A basic characteristic of Chicago economists in the past half-century, and the main intellectual link between Frank Knight and succeeding generations of Chicagoans, has been rejection of the idea that an (improved) social science could give beneficial guidance to policy making. This characteristic has both doctrinal and attitudinal aspects. Doctrinally, it is reflected in expressed disdain for “scientific” arguments offered in support of policy initiatives or proposals for institutional change. Repeatedly, Chicagoans – notably Milton Friedman, but others as well – have found such arguments to be wanting on various grounds, especially lack of empirical support. Another line of argument to the same effect has been to emphasize the unintended – and unwanted – effects of government actions: that such effects occur frequently is used to indicate the inadequacy of the underlying scientific support for the proposals.

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A particular class of unintended effects is highlighted in the “Lucas Critique” of monetary and/or fiscal policies aimed at stabilizing the level of economic activity: i.e. attempts of governmental authorities to exploit perceived regularities in economic activity are likely to be frustrated by changes of behavior by individuals responding to alterations of governmental behavior. Such arguments are intended to show not only the inadequacy of social science – although that is the primary target – but of human knowledge generally to guide purposive activity by the state. At the hands of Chicago, the practical wisdom of men of affairs offering ad hoc cures for societal ills fares no better than proposals of social scientists made with the same intent. What is under attack is the capability of human intelligence to achieve any societal objective – national defense and maintenance of law and order excepted – through actions of the state. While social science may make intellectual progress in discovering – and possibly explaining – regularities of behavior, the knowledge involved cannot be used to achieve social objectives: attempts to do so will be self-defeating and counterproductive. This negative attitude toward the application of human intelligence to “social uplift”, which derives from Frank Knight, is associated with a general distrust of intellectuals in positions of political influence. As Nelson perceives (especially in Chapter Five, “Frank Knight and Original Sin),” this attitude is analogous to the traditional Protestant rejection of priestly authority based on claims of esoteric knowledge. (Knight held that) the knowledge thus claimed is spurious and the purpose it serves – direction of individual behavior to promote social objectives – is undeserving of support. This pervasively negative attitude lends itself to a generally skeptical view of any political activity whatever. This attitude, characteristic of Knight, was and is in plentiful supply around Chicago. But, obviously, such an attitude is inconsistent with efforts to roll back the welfare state established by the New Deal and the successor Fair Deal. Such efforts required a positive attitude toward the prospects for success of an intelligently organized political campaign. Among Chicago economists, this attitude has been exemplified by Milton Friedman and Henry Simons. Though differing in content, each of them offered specific proposals for public policy that (they believed) would promote the cause of laissez-faire. But whatever its content, implementation of any program of political change requires mobilization of public opinion which entails use of esoteric knowledge of ancillary techniques. This leads to the establishment of an oligarchy of experts – pollsters, spin meisters, public relations experts, etc. – to whom economists and other social scientists may serve as ancillaries. Whatever the scientific basis of their expertise, in recent years such experts have acquired the status and influence over (public) policy making that Chicago 225

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would deny to economists. And, like other economists, Chicagoans of all varieties deplore their influence. However, Knight and his spiritual descendants have always felt that organized resistance would be self-defeating: whether the objective is political or otherwise, organization for any political purpose generates an oligarchy whose claim to influence will be based on a (false) claim of expert knowledge. The sole predictable consequence of such exercises is capture of rents by the so-called experts. The only self-consistent outcome of such an attitude is political indifference which many Chicagoans often affect, though rarely in a whole-hearted manner. The limitations to such an attitude of half-hearted political indifference were reflected in the unconcealed pleasure of most Chicagoans at the course of events in the 1980s, and the accompanying Zeitgeist. That is, they rejoiced in the reduction of the role of the state in economic activity by the Reagan and Thatcher governments and in the collapse of the Soviet Union. Moreover they took evident delight in Friedman’s success in the role of chief ideologue although – for the sake of theoretical consistency – they attributed his success to charisma rather than superior knowledge. While Nelson clearly recognizes the difference between the Friedman and Knight-Stigler views of the role of expertise in accomplishing political objectives, he does not ask how these views have been reconciled. Although part of the answer to this important question lies in the strong personal affinities among leading Chicagoans, an analytically more interesting explanation lies in common adherence to the negative objective of impeding efforts to achieve any societal goal that would entail substantial curtailment of personal liberty, especially the rights of individuals to use or dispose of their property. Thus, however much Friedman’s efforts at political reform may violate preconceptions about the inefficacy of such activity, desirability of their common objective has made his successes cause for rejoicing: his failures are considered (additional) confirmation of their negative preconceptions. In short, Chicago pessimists sit back and wish Friedman well while continuing to doubt the wisdom of his efforts. However the tension between optimistic and pessimistic Chicagoans may be judged by Nelson – or his readers – it is clear that Nelson rejoices in the belief that their common rejection of the Samuelson-New Deal outlook was an important current in the Zeitgeist at the turn of the Millenium. I would concur in this judgment if the point of reference were (say) 1990 rather than 2000 something. However, it seems to me that the laissez-faire euphoria of the Reagan-Thatcher-Gorbachev years has somewhat evaporated and been replaced by a sober realization that there is a hard core of governmental responsibilities (e.g. health care, protection of the environment, poverty alleviation, education,

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public transportation) that the electorates of developed countries will not entrust to the working of markets. Memories of the 1960s and 1970s will probably temper any revival of the optimism of Samuelson’s first edition, but the political history of the 1990s strongly suggests that a state with substantial responsibility for the performance of the economy will characterize all developed societies in the foreseeable future. If this prophecy proves correct, there will be a perceived need for technical knowledge of economics – integrated with other sources of wisdom – to direct the state’s acquisition and use of economic resources. This would frustrate the shade of the hero of the book, Frank Knight. As Nelson puts it (p. 336) The cutting edge of social thought today, probably the best indicator of future trends, can be found in the libertarian and environmental movements. Both have the advantage that they define themselves in significant part by . . . rejection of . . . scientific management aspirations that are at the heart of the progressive gospel . . .. The one economist of the twentieth century who comes closest to an integration of libertarian and environmental sensibilities is Frank Knight. Among the many professional economists of the twentieth century, Knight may be thus be rated the highest in the histories of the future.

This remarkable encomium bears eloquent witness to the charisma of Knight’s intellect. His ability to fascinate powerful minds (e.g. Buchanan, Coase, Friedman, Stigler) was remarkable, especially in view of the increasing opacity of his exposition – written and oral – after (say) 1935. I shall not attempt to analyze the sources of this fascination beyond noting that they are quite distinct from what can be attributed to his contributions to technical economics (notably Risk, Uncertainty and Profit) that were made almost entirely before 1930. But the fascination that Knight exercises, not least on Nelson, should not be confused with influence. Knight had no positive message for anyone: his (post 1935) insights were almost always negative and aimed at demonstrating that some idea or other was wrong. He provided inspiration, but not guidance. I concur in Nelson’s characterization of Knight’s thinking about ethics and religion as secular Calvinism. Obsessed with the intellectual incompetence and moral frailty of the human race, Knight regarded intellectual pride as one kind of Original Sin. It was this pride that he perceived in the claims of social scientists to competence as guides to improvement of the human condition. He believed that the success of such claims would result in the exercise of power by some individuals – through the instrumentality of the state – over others. The mischief they (social scientists) would cause results partly from their inherent inability to deliver on the promise of economic improvement, but even more from the irrelevance of such improvement to the proper objective of human striving. This objective, moral uplift, is distinct from economic well-being or human happiness generally, and was specified no more clearly by Knight than by others 227

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seeking to strike at the roots of hedonism. However, in Knight’s case, it is clear that a salient part of the objective was to combine freedom of individuals from the authority of the state with establishment of the terms of cooperation among them without resorting to violence. While not claiming much for its virtues, Knight regarded laissez-faire capitalism as the least bad approximation to this goal that miserable humans could attain and, I suspect, he felt that this was better than they deserved.

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1. The point of this sentence is vividly illustrated by considering the increase in national income that would result from treating the various services rendered by housewives as outputs valued at the prices they would fetch if purchased through market transactions.

REFERENCE Reder, M. W. (1999). Economics: the Culture of a Controversial Science. Chicago: University of Chicago Press.

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A review essay on Robert H. Nelson, Economics as Religion: From Samuelson to Chicago and Beyond. University Park, PA: Pennsylvania State University Press, 2001. Pp. xxvi, 378. ISBN 0-271-02095-4, £35.00.

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In their history of sociology in the United States, Arthur Vidich and Stanford Lyman (1985, p. 281) argue that the central concerns of American social science “emanate from the dilemmas and contradictions in the relationship between God, the state, and civil society.” Social scientists in America are asked to explain the “ways of society” to those within it, although in a modern secular society they are asked to do so without reference to God or divine providence. Social scientists may not be theologians, but in modern society their work plays the same role religion played in prior societies. In Economics as Religion, Robert Nelson extends Vidich and Lyman’s argument to economics in the twentieth century. While most economists avoid reference to God or divine providence, throughout the twentieth-century they have devoted themselves to explaining the “ways of the market” – for example, how the market mechanism works, and the relationship between the market and the state – to members of contemporary society. Because the market has become the central coordinating mechanism in modern society, economists have become the theologians of modernity. Nelson’s book, therefore, “offers a theological exegesis of the contents of modern economic thought, regarding the economic way of thinking as not only a source of technical understanding of economic events, but also for many . . . a source of ultimate understanding of the world” (p. xxv). Does Nelson’s “theological exegesis” succeed? If the purpose were to remind economists that their science was first and foremost a human activity and that the line between science and other human activities may be smaller recognize than they realize, the answer might be yes. But Nelson sets out to do much more, and it is the “much more” that causes some trouble. The purpose of this review, then, will be to assess Nelson’s use of the religion as an organizing metaphor for twentieth-century economics and evaluate his claim that economics is the religion of modernity. Regarding his account of the discipline of economics as a religion, we will ask what the benefits and limitations of the metaphor are. Is it more appropriate to think of economics as a religion than as a science? Regarding Nelson’s story of the history of twentieth-century economics, we have to ask if the metaphor of Northern Ireland’s cultural divide, 229

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based on the religious differences between Protestant and Catholic, is appropriate for telling the story of economics in the melting pot of the USA? And why does he exclude the new institutional economics from a theological exegesis? The organization of Economics as Religion is straightforward. After considering what it means to say that economics is a religion (Part One), Nelson turns to a theological exegesis of the two main strands of the economics religion in twentieth-century America: the Progressive Catholicism of Paul Samuelson and MIT economics (Part Two) and the Calvinist Protestantism of Frank Knight and the Chicago School (Part Three). The identification of Samuelson with both Catholicism and the American Progressive movement, and of Knight with Calvinism, provides a link between the argument of this book with that of Nelson’s first book on this theme, Reaching Heaven on Earth (Nelson, 1991), which traced similar concerns through pre-twentieth-century economic thought. While there are differences in the way Nelson characterizes economics as a religion in the two books, the overall message is the same: economics is theological (absent God), both because it addresses questions similar to those faced in theology (explaining the mysteries of the “ways of society”), and because it plays a social role of validating the existing (or an alternative) social order. The fourth part of Economics as Religion examines the changes in American economics during the past thirty years stemming from the emergence of New Institutional Economics. While suggesting that the new economics re-writes economics in ways that avoid the Cambridge-Chicago split of the prior fifty years, Nelson also examines what the new economics has to say about the role of religion in fostering a culture conducive to economic development. The book concludes with another look at economics as religion at the beginning of the twenty-first century. Is the market “God”? Is the notion of “progress” under enough attack to call into question economics’ role as the religious validation of modernity? Where should we then turn? Nelson’s characterization of economics as religion is built upon the observation that economics provides for a modern secular society the types of answers and validation that various religions provided for prior societies. As Nelson says, “To the extent that any system of economic ideas offers an alternative vision of the ‘ultimate values,’ or ‘ultimate reality,’ that actually shapes the workings of history, economics is offering yet another grand prophesy in the biblical tradition” (p. 23). And again, later in the book, he argues that with the loss of confidence in traditional Christianity in the wake of scientific discovery, “social science . . . became the religion of the modern age in regard to the conduct of affairs in this world . . ., and in this capacity social science became responsible for resolving the collective action problems

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of the economic system that only a common religious bond . . . can resolve (p. 266). The example of Marxism, which Nelson uses (pp. 24–27), is instructive. Marxism provides a framework in which one can understand not only how society works, but why it works the way it does, and what future one might expect. Underlying the story Marx tells, of course, are the omnipotent economic laws of history. Although most twentieth-century economists are quick to point out that Marxism’s inability to provide testable hypotheses render it more of a religion than a science, they must also face the uncomfortable fact that some of their implicit assumptions are similar to those of Marx. Nelson mentions the similarity of Marx’s and Keynes’ visions of the future (pp. 30–34), but a similar observation was made about Chicago economics and Marxism by Robert Fogel, the formerly-Marxist Chicago economic historian. Fogel apparently once remarked to George Stigler, “George, did you know you are a Marxist?” The question brought a sharp retort from Stigler, but Fogel then explained: “George, your economics may be different, but you both believe that all human activity is ultimately determined by economics.” It is on this uncomfortable fact that the implicit assumptions of an economic approach may be held as commitments akin to religious beliefs that Nelson builds his exegesis of the two main currents of American economics in the twentieth century. While the schools have different emphases, Nelson’s treatment of them follows a similar pattern. He focuses first on the religious commitments implicit in the work of one of the school’s master – Paul Samuelson in the case of Cambridge; Frank Knight for Chicago (in Chicago’s case, he also includes a chapter on Friedman, Stigler & Becker). Then he picks up a particular theme in the school’s work and organizes his consideration of the school’s policy orientation around that theme. The Cambridge school is interpreted as a continuation of American Progressivism, seeking to use the tools of scientific management to realize a better world here on earth. Nelson’s interpretation of the Chicago school is organized around the school’s commitment to the rationality inherent in economic self-interest, an emphasis compared by Nelson to Calvinism. We will consider each of these in turn. Using Samuelson’s famous textbook as his primary source, Nelson suggests that Samuelson’s economic arguments fit together only when one uncovers the implicit assumptions he holds about the market, inequality, and the role of the state. The key assumptions are: (a) Samuelson’s belief that the market provides a natural order for society; (b) that economics understands how the market mechanism works (and does not work, in the cases of externalities and public goods); and (c) that the natural order of society can be scientifically managed to create the best social order possible given the available resources. How do 231

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these assumptions function as religious beliefs? One example of Nelson’s exegesis will suffice. In a number of places in Economics, Samuelson deals with the benefits and costs of economic progress, whether it be the adoption of free trade or alterations to land use. Nelson argues that, in these cases, Samuelson always weighs the benefits of progress as greater than the costs of remaining in the present economic state. But there are costs Samuelson does not consider – including the stress and psychic pain caused by economic transition. For Nelson, Samuelson’s willingness to discount the costs of economic progress reveals his fundamental commitment to progress through scientific management. The closing paragraph of Economics reaffirms the hope that economic progress will lead to a day “when everyone has the opportunity for a good job, an adequate income, and a safe environment” (Samuelson, quoted Nelson, 2001, p. 112). Nelson suggests Samuelson is best understood as a latter day prophet of this secularized version of the Judeo-Christian vision of heaven on earth. More attention is devoted in Economics as Religion to the Chicago economists than to Samuelson’s extension of the Progressive movement’s vision of the perfectibility of the social order. Perhaps this is because the Progressive themes are ones he has developed elsewhere (Nelson, 1991), or perhaps it is because Frank Knight fascinates him. In any case, in Part 3 Nelson examines Knight’s focus on uncertainty and human depravity, and the extension of his ideas in the work of Friedman, Stigler, Becker and others in the Chicago School. While the temptation to discuss Nelson’s view of Knight at length will be avoided, a few comments should be made. First, Nelson’s interpretation of Knight’s understanding of the relation between religion and economics is largely compatible with my own (Emmett, 1994), which is not surprising given our shared appreciation for Vidich and Lyman’s (1985) framework. Secondly, the contrast between Samuelson’s desire to create heaven on earth and Knight’s appreciation for uncertainty and the tension between self-interest and social progress provides a contrast that runs throughout the history of American (and perhaps all) economics. Is economics the science which will steer us to prosperity, or does it remind us that even the best laid human plans go awry? Thirdly, Nelson’s identification of Knight with the American tradition of Puritanism provides an intellectual history that is frequently missed when commentators try to understand his skepticism. His skepticism is often attributed to his rejection of religion, when in fact it may emerge from the religious perspective he gave up. Yet it is surprising that Nelson himself misses the importance for Knight’s thought of his upbringing and education in the Disciples of Christ. The Disciplines were an indigenous American religious movement to restore New

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Testament Christianity that rejected key aspects of Calvinist theology (election and predestination) and sought a non-creedal basis for unity among Christians. Knight’s background in the Disciplines helps us understand at least a couple of aspects of his social philosophy: his virulent attacks on Catholic social thought (anti-Catholicism was a common feature of restoration movement tracts), and the passionate call for the economics profession to speak publicly only when it could do so with a unified voice (Knight, 1935). The dictum “we speak where the Bible speaks, and are silent where the Bible is silent” is rivaled in restoration circles only by the Augustinian motto, “In Essentials, Unity; in Non-essentials, Liberty; in All Things, Charity” (although it must be admitted that Knight was not known for charity towards fellow academics). It is clear from the chapter on Knight, and comments elsewhere in the book, that Nelson is fascinated with Knight’s complex understanding of human conduct and social organization. That fascination does not, however, carry over into his interpretation of the rest of the Chicago School. Chicago, Nelson argues, has a narrow and simplistic understanding of human conduct and social organization. If Samuelson is chastised by Nelson for an idealistic belief in progress, Nelson thinks that he at least had a vision which led him to think beyond the confines of narrow self-interest. The Chicago School preached selfinterest as the gospel; the rich young man of Matthew 19 would have been happy to join their company. Friedman (the social responsibility of a business is to increase its profits), Stigler (whose orientation we have already seen), and Becker (theft may be rational if the constraint set is appropriate) seemed to enjoy rankling those who subscribe to moral codes like the ten commandments (Chapter 7 is entitled “Chicago and the Ten Commandments”). Yet Nelson seems even more concerned about the methodology of Chicago: the willingness to build an entire social science on the basis of a narrow conception of human nature. We will return to both his moral and methodological concerns shortly. So where might the problems with Nelson’s view of economics as religion be? The parallels Nelson draws between medieval Catholic natural law theology and the Cambridge school, or Chicago economics and Calvinism, are not the problem. Nor is his use of religious imagery to explain the rhetorical power of Samuelson’s and Knight’s visions of the world. Nelson’s interpretative framework also provides several ways of seeing the continuity between modern social science and the Western intellectual tradition, and his approach fits well with the current interest among historians of science and economics in breaking down the barrier between science and other human activities (see Golinski, 1998). The problem appears when he claims that economics is a religion. To argue that x (economics) is analogous to y (religion) because x plays the same role in society w that y plays in society z is different than arguing that x 233

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and y are the same thing. Vidich and Lyman (any myself in Emmett, 1994) make the former argument regarding the social sciences and theology. Nelson’s book is frustrating because he often slips into the argument that economics, at least in some of its forms, is a religion. Dangers of which Nelson does not seem aware lurk close when he moves from the analogy of economics as religion to the metaphor that economics is religion. The clearest instance where Nelson’s slip across this line brings him close to danger is in his exegesis of the Chicago School. At the heart of Nelson’s problems with the Chicago School is the Chicago propensity to extend self-interested rationality as far as possible, and to discount the possibility of irrationality, altruism or other such non-rational behavior as separate aspects of human conduct (see Lazear, 2000 for a recent Chicago statement of this view). Sarcastically, Nelson remarks:

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If something cannot be explained today in a narrowly individualistic framework of economic analysis, it is the belief of the “Chicago project” that in the future there will be a smarter graduate student, a more insightful theory, a better statistical method that will permit us to show the full workings of the forces of self-interest in more and more areas of life (p. 168).

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For Nelson, this approach is the Great Idolatry, leaving no room for God: From the Chicago perspective, . . . any claim that, say, 40% of human behavior in some realm is irreduceably noneconomic, would be virtually to say that science is in principle restricted in its scope – that in some domains of life perhaps God has simply reserved them for his understanding alone . . .. Clearly, there can be no such “stopping points” within the value system – the moral philosophy – of the Chicago project today (p. 170).

But let us ask the question, is the Chicago understanding of economic science any different than, say, that embedded in evolutionary theory? Religion has always faced the challenge of science seeking to explain every aspect of natural and human activity. The worst response to science by religious thinkers was the attempt to “rope off” some aspects of human life – the human psyche or the personal – from scientific inquiry. Either God is in all or not at all. Either science explains all or it is not science. Herein lies the fundamental paradox of faith in the modern world. Nelson cannot understand how someone might affirm both sides of this paradox. His response to the Chicago School is reminiscent of the debate in the early 1800s over the relation between classical political economy and the Philosophical Radicals (Utilitarians). Because the Philosophical Radicals combined classical political economy with atheism and a social policy agenda which the Church opposed, many argued that Christians must reject the emerging science as well. Richard Whately’s Introductory Lectures on Political Economy (1832) responded by distinguishing between scientific and religious

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knowledge on epistemological grounds, arguing that they represented two different types of knowledge. Whately’s characterization of the difference between religious and scientific knowledge constituted the first formation of what economists today know as the positive-normative distinction (Waterman, 1994). While there are problems with later formulations of that distinction, Whately’s basic intuition that religion and science are different language games has saved many Christian social scientists from making the mistake of doing what Nelson seems to want them to do: form a “Christian economics” to compete with Chicago (and other) economics. Of course, Nelson might want to claim that this is not exactly what he meant, and that, even if he was overzealous in identifying economics with religion, it is still the case that the economics of Chicago supports the basest human values rather than our highest values. Religions call us to rise above self-interest for the sake of others, and advance better human values. Economics destroys such values. Surely the realm within which economics and the market are allowed to operate must be restricted? However, why should we assume that the market will only benefit people’s baser values? The ideal in a liberal society is neutrality toward values – live and let live. The market enhances that neutrality by regulating the allocation of resources across preferences in such a way as to broaden the range of values that can be satisfied. This broadening of values allows individuals to pursue both “better” and “worse” values. Won’t some people pursue better values? Even Frank Knight, who was known to criticize the market on this score (1999 [1923]), once said that “the chief thing which the common-sense individual actually wants is not satisfaction for the wants which he has, but more, and better wants” (Knight, 1999 [1922], p. 42). Those who want to restrict the range of values available to people in a market society may be surprised at the unintended outcomes of their restriction. Or, to flip the argument around, those who wish to enforce the “best values” on society often find it hard to accept people’s willingness to exit a restricted-choice society for the wider range of values available in a liberal society. Nelson has another argument that is closely connected with his claim, contra Chicago, that the market is destructive to human values. His second argument is similar to the one made in Francis Fukuyama’s Trust (1995): the market itself depends upon the trust built among individuals in non-market settings, such as religion (pp. 245–260). This argument has received a lot of attention recently, especially in the context of the debate over whether culture matters in economic development (Harrison & Huntington, 2000). Rejecting Adam Smith’s argument in the Wealth of Nations that the market creates interdependencies among the members of a market society which bind people with 235

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disparate values, beliefs and commitments to each other, these scholars argue that prosperity requires a “deeper” commonality. Smith argued that trust emerges from the interdependency built upon the division of labor, and that no underlying commonality is required to produce social order because a self-regulating order will spring, as if by an “invisible hand,” from the market process itself. Nelson and company imply that the market only provides order when an ordered set of values are already present. Most economists would side with Smith: people will trade where they judge there to be an advantage to do so, and such trades will contribute to all participants’ prosperity. Society is bound together by the mutually beneficial advantages individuals find from exchange with one another. This argument has only gained strength from its appearance in game theoretic form: if we limit our trade to a group with whom we share common bonds, we may increase the prosperity of that group relative to other groups, but we will also curtail the total prosperity of all groups. Group-based differences may alter one’s estimation of the benefits or costs of trade, but where a net benefit is seen, trade will occur, as Smith said it would. The majority of Economics as Religion is devoted to exploring the religious aspects of Cambridge and Chicago economics. The fourth part of the book, however, examines the ideas of New Institutional Economics. Nelson’s purpose in bringing this emerging school of economic thought into his discussion is unclear, and in some cases seems to undermine the argument made throughout the remainder of the book. Three elements of his examination of the New Institutionalism warrant our attention. First, Nelson suggests that New Institutionalism should be considered a viable option for economists today, despite its return to historical and institutional analyses that economics abandoned in the post-war period. Nelson argues that many economists view these methods of analysis with suspicion because they have been taught that the older institutionalists were non-scientific both in their methodology and in the fervor of their search for mechanisms of social control. But, as Nelson’s exegesis of Samuelson and Chicago suggests, neo-classical economics has its non-scientific aspects. Hence, the economist should not fear that they are leaving the realm of science if they pursue new institutionalist approaches: “They may think they would be losing their scientific virtue, but it would be more correct to say that they would be abandoning their scientific hypocrisy” (p. 229). The mention of hypocrisy should send off warning bells. Is Nelson once again treading close to the danger of mistaking the similarities between theology and economics as human activities for the religiosity of economics? The problem that this question raises is reinforced by the second thing that warrants our

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attention; namely, Nelson’s unwillingness to undertake the same kind of theological exegesis of the New Institutional Economics that he does for Chicago and Cambridge economics. There is no suggestion that the New Institutional Economics might play the same type of religious or theological function in modern society as earlier forms of economics. Nelson must recognize that the New Institutionalism addresses the same kind of “ultimate” questions that he thinks Cambridge and Chicago did. If he accepts his initial idea that any economics plays a theological function in a modern society by providing an explanation of the “ways of society” for those in it, then he should have at least attempted a tentative theological exegesis of New Institutionalism. Of course, if Nelson really thinks that only Cambridge and Chicago were religious, because of their religious commitment to the underlying assumptions of their system of thought, then he needs to be reminded that the New Institutionalism is not without its committed. An example of the kind of “religious” commitment that may exist in the New Institutionalism was recently relayed to me by Patrick O’Brien, the British economic historian. At a meeting several years ago considering the impact of institutions in economic history, Doug North impatiently remarked at some point that, “surely there was an institutional framework that could have been set in place to avoid the French Revolution.” Despite Nelson’s lack of a theological exegesis of the New Institutionalism, he does compliment the school for providing economists with a means to appreciate the positive role that religion might play in economic development. This third element of his investigation of New Institutionalism is, however, a two-edged sword. On the positive side, the focus on institutions, and in particular on the role of institutions other than markets and the state, allows New Institutionalism to ask questions that economists have largely avoided since the time of Max Weber. What is the relationship between the institutions of religion and economic systems? What relationship does religion have to law and constitutional questions? And are certain religions more conducive to the establishment of markets and of liberal democratic institutions than others? Unfortunately, there is a lot of sloppiness in Nelson’s treatment of this latter topic. There is a tendency to look for an “efficient religion” – the title of the chapter – rather than simply point out that these questions take us beyond neoclassicism into economic sociology and history. Also, Nelson does not recognize that the New Institutionalism may be more threatening to religion than neoclassicism. Neoclassicism, like liberalism, is neutral toward religion, allowing one to find one’s values wherever they might be found. The New Institutionalism, on the other hand, seeks to provide an explanation for religion, and, if one is committed to economic progress, may provide an independent means of adjudicating among religions (Protestantism is good for economic progress, 237

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Hinduism may not be). Can someone who has made a faith commitment to a religion accept an argument which provides a non-faith-based explanation for that faith commitment? These questions return us once again to the fundamental paradox of faith in the midst of modernity, and remind us that solutions that try to divide the world between religion and science are fundamentally problematic. On balance, then, what assessment can we provide of Nelson’s book? One way of expressing the positive and negative aspects of the book is to say that Nelson succeeds where he makes the weakest claims, and fails where he most wants to succeed. The rhetorical device of comparing economics with religion effectively reminds economists that they also have commitments and that their science is simply another human activity. Yet the argument that these commitments have led economists astray by making their economics a religion makes a fundamental category mistake. Economics is not a religion, although it may be like religion in the context of modernity. And religion is not a social science, even when its practioners wish it were.

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REFERENCES

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Emmett, R. B. (1994). Frank Knight: economics vs. religion. In: H. G. Brennan & A. M. C. Waterman (Eds), Economics and Religion: Are They Distinct? (pp. 103–120). Boston: Kluwer Academic. Fukuyama, F. (1995). Trust: the social virtues and the creation of prosperity. New York: Free Press. Golinski, J. (1998). Making natural knowledge: constructivism and the history of science. Cambridge: Cambridge University Press. Harrison, L. E., & Huntington, S. P. (2000). Culture matters: how values shape human progress. New York: Basic Books. Knight, F. H. (1935). Economic theory and nationalism. In: The Ethics of Competition and Other Essays (pp. 277–359). New York: Harper & Bros. Knight, F. H. (1999) [1922]. Ethics and the economic interpretation. In: R. B. Emmett (Ed.), Selected Essays by Frank H. Knight, “What is Truth” in Economics? (Vol. 1, pp. 40–60). Chicago: University of Chicago Press. Knight, F. H. (1999) [1923]. The ethics of competition. In: R. B. Emmett (Ed.), Selected Essays by Frank H. Knight, “What is Truth” in Economics? (Vol. 1, pp. 61–93). Chicago: University of Chicago Press. Lazear, E. P. (2000). Economic imperialism. Quarterly Journal of Economics, 115 (February), 99–146. Nelson, R. H. (1991). Reaching for Heaven on Earth: The Theological Meaning of Economics. MD: Rowman and Littlefield, Savage. Vidich, A. J., & Lyman, S. M. (1985). American Sociology: Worldly Rejections of Religion and Their Directions. New Haven: Yale University Press. Waterman, A. M. C. (1994). Whately, Senior, and the methodology of classical economics. In: H. G. Brennan & A. M. C. Waterman (Eds), Economics and Religion: Are They Distinct? (pp. 41–60). Boston: Kluwer. Whately, R. (1832). Introductory lectures on political economy. London: Fellowes.

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Multiple Reviews of Edgell’s VEBLEN IN PERSPECTIVE: HIS LIFE AND THOUGHT

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THE LIFE AND THOUGHT OF THORSTEIN VEBLEN: A REINTERPRETATION

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Edythe S. Miller

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A review essay on Stephen Edgell, Veblen in Perspective: His Life and Thought. Armonk, NY: M. E. Sharpe, 2001. Pp. ix, 207. Cloth $56.95; paper, $22.95.

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This slim volume is a welcome addition to the growing body of Veblen literature. The work is part biography, part economic history, part intellectual history. It depicts the life and work of Thorstein Veblen, within the context of the circumstances and events of his time. Edgell introduces ideas of predecessors and contemporaries where relevant, seeking the origins and sources of Veblen’s ideas. The author has researched past and contemporary Veblen literature extensively. Although there unavoidably is some retracing of familiar Vebleniana, the author also breaks new ground, and offers several interpretations that differ from prevailing ideas about Veblen, some of which may prove contentious. The work is divided into eight chapters. The first relates Veblen’s biography, describes the America of his time, and presents an overview of the major themes of his work. The two chapters that follow deal with “the myth of Veblen’s marginality,” and Edgell’s alternative to that “myth,” essentially aimed at teasing out the circumstances and events of Veblen’s early life that helped to shape Veblen’s mature thought. Subsequent chapters are devoted primarily to Veblen’s

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work, in contradistinction to his life, not that these are or should be treated in isolation. They examine, respectively, Veblen’s views on evolution, his theory of the leisure class and consumption, and an identification of “the problem” and “the solution;” respectively, predatory institutions and workmanship. The last chapter is in the nature of a wrap-up. Edgell states his intention as a presentation of an account of Veblen’s life and work from “an Anglo-European perspective” (p. xi), which he differentiates from accounts by American Veblen scholars. His claim of Veblen, a scholar who for the most part defies classification, for Europe and sociology, may be presumed to be part of that differentiation. Irrespective of the view held on those issues, however, one can hardly question the scholarship turned to account in the effort. In his research, Edgell extensively reviews and examines a wealth of data. Primary among these of course are Veblen’s own published work. But in addition they include the work of many Veblen scholars, as well as the Thorstein Veblen Collections at Carleton College and Stanford University, and the Joseph Dorfman papers at Columbia University. These collections contain extensive correspondence by, to, and about Veblen with, and by family and friends, student class notes, and much other relevant material. The scholarship involved in the work is impressive. In his discussion of the so-called marginality myth, Edgell rejects the standard interpretation of Veblen’s’s personal characteristics that comes down to us primarily in the landmark work of Joseph Dorfman, beginning with his 1934 Thorstein Veblen and His America and maintained in later work. This impression of Veblen was widely, if not uniformly, accepted until recent years. It is a view of Veblen as a prototypical “marginal man,” a “man from Mars” (p. 30), more or less alienated from both the culture and the customary thought of his society. As Edgell points out, this interpretation of Veblen recently has been challenged. In Dorfman’s account, Veblen’s marginality as an adult results from a childhood and youth in which he was culturally isolated, socially deprived, economically impoverished and a member of an alienated ethnic group. Edgell makes a convincing case that this is an inaccurate and unrealistic account of the circumstances of Veblen’s youth and points out that it is one that has been subject to challenge in more recent accounts of Veblen’s life. That Veblen’s early life was impoverished and deprived was denied during preparation of the Dorfman book in lengthy correspondence between Dorfman and Veblen’s family, most notably Andrew Veblen, Thorstein Veblen’s older brother. Edgell describes the Veblen family, as noted in the Andrew Veblen communications and elsewhere, as a competent and successful midwest farming family. Indeed, he sees Veblen as having modeled his ideal of the skilled

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workman after the example of his father, Thomas Veblen, for whom Veblen had great admiration. Edgell views, and suggests that Veblen viewed, Thomas Veblen as embodying “the skills, self-reliance, self-sufficiency, and democratic values that were the essence” of the class of skilled, masterless workmen that constituted an exemplar for Veblen (p. 95). Edgell also pictures Veblen as having worn his ethnicity proudly, a major ground for Edgell’s assertion of European-ness for Veblen. Edgell perceives Veblen’s Nordic heritage as a significant contributor to the development of his ideas, citing in particular his ideas on feminism and workmanship (p. 59). Edgell also sees Veblen’s views on collectivism vs. individualism, his emphasis on making a living as opposed to receiving a profit, and on necessary compared to wasteful production and consumption as influenced by his Nordic values (p. 64). In short, Edgell rejects Dorfman’s “pathography” of Veblen as “questionable both empirically and interpretably” (p. 49). For the concept of marginality, Edgell substitutes the concept of the stranger, which he views as more applicable to Veblen. He describes marginality as a condition of being unwillingly excluded from a group. For the stranger, in contrast, the condition of exclusion is voluntary, that is, it is a person who because he does not wish to be included in the group purposefully excludes himself (pp. 50–51). It is a pertinent distinction. Edgell implies that the latter term more accurately describes Veblen, although he also makes the point from time to time that he views Veblen as reasonably content, and as very much a part of the mainstream of his society. Although Edgell makes a strong case for discounting Dorman’s marginality thesis, he is on relatively weaker ground when it comes to his explanation of the reasons for Dorfman’s misinterpretation. He suggests that the claim of marginality for Veblen was a projection of the circumstances of Dorfman’s own early life. That is, he claims, that it was Dorfman, rather than Veblen, who was the “marginal man,” a result of Dorfman’s own early social and economic deprivation, his isolation as a “Russian-born Jewish immigrant” and his later “ambitious careerist” professional goals (p. 54). This seems to this reviewer to be more a matter of “hunch” and conjecture than of “empirically or interpretably” grounded observation, to borrow Edgell’s phraseology in the converse context. But in any event, Edgell confirms the view of Veblen as a detached and objective observer of his society (not to be confused with an isolated individual), a description that whatever the dispute over causes, seems well nigh universal. And to Edgell’s credit, his rejection of the Dorfman marginality thesis, does not preclude Edgell’s extensive utilization of other aspects of Dorfman’s work. It probably bears mention that the reason that Veblen’s social and professional life took the turn it did is susceptible to a different interpretation. It is 241

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conceivable that Veblen fits the category neither of the marginalized man nor of the stranger, that is, that it was Veblen’s unconventional ideas (to say nothing of his mode of life) that were responsible for his atypical social and professional status. That these factors explain his career progression seems unexceptionable. And that career barriers existed can hardly be denied, Edgell’s intermittent claims of Veblen’s professional contentment to the contrary notwithstanding. This amounts neither to voluntary self-exclusion nor to involuntary exclusion on account of effects of early experience on personality; instead, it is a condition attributable to unconventional convictions and uncommon perceptions. One does not adopt the unconventional ideas because one desires exclusion, but is excluded because of the ideas. The disengagement occurs as a result of ideas that are out of sync with the mainstream rather than because of personal traits of character. In other words, the root cause of Veblen’s ability to view his society in so penetrating a fashion is conceivably a matter of his intellect rather than his personality. Edgell hints at such an interpretation, in his discussion of the events leading up to publication of The Higher Learning in America, but ends up concluding that on the whole Veblen was content with his lot, his friends and associates, and his life in general. Indeed, it is Edgell’s view that Veblen’s evolutionary viewpoint put him squarely in the mainstream of the intellectual thought of his time (p. 73). At a more substantive level, Edgell describes Veblen’s historical vision. He details Veblen’s account of the progression of society through the broad stages of peaceful savagery, predatory barbarism, the handicraft era and finally the machine age. In each stage Veblen sees a conflict between the technological forces that encourage change (“the state of the industrial arts”) and those that generate stability (“institutional forces”) (p. 89). For example, Veblen’s analysis of the melding of ownership and workmanship during the handicraft era is recounted (pp. 126–128), with ownership eventually gaining the upper hand upon entrance into the machine age. At this time, pecuniary principles gain supremacy and workmanship becomes contaminated with ideals of profit and emulation. Edgell correctly notes that Veblen typically portrays “captains of industry” as predators, rather than cultural heroes (p. 5). The machine era thus is described as a time when serviceability for the many (the group-regarding instinct) is subordinated to the pecuniary interests of the few (the self-regarding instinct). From this time on, the tendency exists for business to dominate industry. But at the same time, Edgell points out that Veblen stresses the dependence of business on industry for its continuity, and indeed, for its survival. In the struggle between the two that characterizes the era, Veblen maintains that it is impossible to foretell a victor, consistent with his insistence upon the non-predictive nature of economics and his non-teleological view of

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history. Edgell identifies as the heart of Veblen’s intellectual project his exploration of questions of the “origins, nature and future of social change” (p. 73). Edgell thus views Veblen’s theory of evolution as a substantial contribution. Somewhat surprisingly, he considers Veblen’s theory of evolutionary change a “relatively neglected aspect of his corpus” with a partial pass given to “those heterodox economists who tend to approach Veblen’s evolutionary theory from the perspective of institutional change” (p. 76). I presume that by this he means economists of the institutionalist school. But these economists, as direct followers of Veblen, have done much of the analysis of Veblen and his work. And there is little question that the evolutionary nature of Veblen’s work has not been ignored in this quarter. Consequently, its identification as a relatively neglected aspect of his work is somewhat puzzling. Edgell differentiates Veblen’s views on human nature, economic theory and social change from the orthodox thought of his (and our) day. In Veblen’s work, individuals are viewed as active and social, rather than the passive “homogeneous globules of desire of happiness,” receptors of and reactors to outside stimuli, as conceived by orthodox theory. Veblen denies the hedonistic conception of human nature contained in orthodox theory. He challenges the trend of development that envisions a natural law leading to a teleological, meliorative, and legitimate end (p. 68), and denies the existence of a final term. The driving historical force for change is seen to be technology – the state of the industrial arts. This force sets off a conflict with institutions, which are static, resting on principles of authority and convention. In The Theory of the Leisure Class Veblen makes the point that the survival of leisure class culture and values from one stage to another tends to preserve obsolete institutions that lack serviceability from the vantage point of workmanship, and therefore from that of the common good (p. 101). At the same time, the ideas of the ruling class are accepted by the population at large and are affirmed as coincident with the national interest. Patriotism is used to buttress business principles. The belief in mutuality of class interests ensures ideological control over the populace by business interests. The business class, the state and government, religion, education, the press – all operate to advance the beliefs and ends of the ruling business elite (p. 133). Edgell emphasizes that Veblen’s concept of workmanship embodies his views about the collective nature of knowledge and of the production and consumption of useful goods. But Edgell also stresses Veblen’s thought that workmanship and predation experience “mutual contamination” (p. 94), as do wastefulness and serviceability. Elements of both wastefulness and serviceability are found in virtually all goods and services (p. 110), that is, goods and services simultaneously demonstrate status and fulfill genuine needs. 243

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The question of the moral stance assumed by Veblen in regard to the many issues he explores has been a subject of discussion, especially in view of Veblen’s many protestations to the effect that his comments are not intended to be judgmental, and other expressions of scientific objectivity. Edgell, quite correctly in my view, dismisses these protestations as part of Veblen’s ironic style. He illustrates the normative thrust of Veblen’s work with examples of Veblen’s proworkmanship, antipredatory language (p. 119). He notes: “There would seem to be little doubt that Veblen was on the side of the forces that were conducive to workmanship, rather than the forces . . . associated with predation” (p. 130). The question of the influences that have helped to shape Veblen’s thought is one that frequently has been examined. The question remains unsettled. Edgel includes in the cast of characters (most of whom, as he acknowledges, have been researched previously) as possible major influences upon Veblen’s thought Edward Bellamy, William James, Charles Pierce (sic), Max Weber, Herbert Spencer, William Graham Sumner and Karl Marx, among others. Because similarities between Marx and Veblen so often are alleged, the grounds upon which Edgell rejects Marx as a major influence are of particular interest. Edgell points in particular to Veblen’s non-teleological theory of change as compared to the teleology of the Marxian system as a major point of difference (p. 142). It is Veblen’s view that individuals have a teleological bent, that is, that individuals are active and purposive, but that history does not. As Veblen conceives history, there is no final term. In addition, Edgell notes that Veblen, unlike Marx, looked to the survival of capitalism, rather than its elimination, and to class cohesiveness rather than class conflict. Edgell fails to specify as additional differentiation between the two Marx’s reliance upon the labor theory of value and the theory of surplus value (with its implication of the operation of natural law), as compared to Veblen’s insistence upon the collective nature of production and distribution. These also are important points of difference. Edgell finds the major influence on Veblen’s work to be that of Charles Darwin, a conclusion with which I fully concur. Veblen applies to the economy a Darwinian view of history as a process of cumulative, consecutive change perceived as an endless causal sequence with no final term. Both reject as explanations of human history the idea of legitimate, meliorative trends. Neither accepts hedonism as an explanation of human activity nor an interpretation of human nature (p. 68). One surprising and intriguing influence upon Veblen that Edgell finds is that of Henrik Ibsen, at least when it comes to literary style but also to some extent in regard to content. To my knowledge this is a novel concept. Ibsen, of course, was a radical thinker of his day, a non-conformist to the ideas of the polite

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society of his time and place. For example, it goes without saying that his views on “women’s place” in home and society scandalized his contemporaries. His style was ironic and satiric, traits Edgell also attributes to Veblen, a judgment with which I do not disagree. I have not seen this connection made previously. I find it interesting, and one that is quite reasonable. Edgell’s interpretation of Veblen’s life and thought, the heart of the book, is faithful to its subject. Some of his minor points, however, in my view constitute a bit of a stretch. Edgell takes as a goal the portrayal of Veblen the sociologist, and Veblen the European. At the risk of sounding provincial, I do not believe that he has succeeded in either. That Veblen defied normal disciplinary boundaries cannot be denied. There is no doubt that Veblen wandered far afield from the bounds and concerns of mainstream economics. For example, Edgell illustrates Veblen’s sociological leanings by noting that Veblen uses the sociological technique in The Higher Learning in America of “participant observation.” But it is the essence of Veblen’s viewpoint and method that he transcended artificial lines, and went where the facts took him. This does not make of him a sociologist, but a heterodox economist. I may be making too much of this. It cannot be denied that Veblen’s approach sent him into areas traditionally defined as sociological, but also as psychological, legal, anthropological, historical, et al. This does not make him any less, but all the more, an economist. That, in any event, is my view. As for Veblen’s identity as European, I find this an eccentric reading. Edgell relies on Veblen’s pride in his Nordic background, his “Nordic capital,” his trips to Europe, his admiration for and the possible influence upon him of Ibsen, even that Veblen dated his letters “the English way” (p. 29, n. 18). Americans, however, are of overwhelmingly, it might even be said universally, ethnic – primarily European – origin. Many, if not most, have pride in their countries of origin and even, to some degree, have some sense of identity with those countries. This does not make them any less American. Nor does the ability to see the flaws in their society and in national observances and rites make of them expatriates. Ibsen was a critic of the traditions and conventions of his society, possibly as critical as was Veblen himself. Ibsen and Veblen were more fellow radicals than fellow Norwegians. But these are mere quibbles. They do not detract from the overall quality of the work nor obviate the fact that Edgell has given us, in this slight volume, a competent and comprehensive reading of the life and work of Thorstein Veblen. It is a worthy addition to Veblen scholarship.

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EDGELL’S REVISED VIEW OF VEBLEN

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The perspective that Stephen Edgell brings to the life and thoughts of Thorstein Veblen is that of a sociologist reflecting upon recent Veblen scholarship for the purpose of assessing the contemporary relevance of Veblen’s contribution to sociology. The book does a real service to Veblen scholars in sorting through several controversies that have engaged Veblen scholars for the last two decades. Additionally the book is sufficiently self-contained to serve as an excellent introduction to Veblen’s scholarship for the novice reader. Edgell begins by recounting the main biographical elements of Veblen’s life. His presentation is thematic rather than temporal. In this presentation Edgell argues that Joseph Dorfman’s biography of Veblen, Thorstein Veblen and His America (1934) is deeply flawed in both the details of Veblen’s life and in its conceptual presentation of Veblen. Specifically he argues, as have others (Tilman, 1992, 1996; Jorgensen & Jorgensen, 1999) that Dorfman’s failure to incorporate the detailed comments of Andrew Veblen and others close to Veblen into the biography and instead focus on the comments of others who knew Veblen considerably less well is the source of Dorfman’s errors regarding Veblen’s life. This failure in turn led Dorfman and many of his successors to misconstrue Veblen’s personal life and its impact on his scholarship. At issue is Dorfman’s characterization of Veblen as poorly acculturated into the mainstream of American culture in general and the scholarly community of which he was a part in particular. Edgell notes that Dorfman’s characterization of Veblen is based on accounts from former students and professional acquaintances that knew Veblen from his professional and public life. Whereas, those scholars who have questioned Dorfman’s characterization of Veblen have focused on accounts of family members and friends who knew Veblen in private life. Thus, Dorfman’s mischaracterization of Veblen possibly followed from his reliance and greater weight given to sources more familiar with Veblen’s professional life. Another possible explanation offered by Edgell for the continued mischaracterization of Veblen is the tendency of scholars to confound rather than differentiate between Georg Simmel’s concept of the stranger and Robert Park’s concept of the marginal man. As Edgell explains, Park was the translator of Simmel’s work and considered the two concepts synonymous. In contrast:

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[Donald] Levine states that Park’s idea of the marginal man is someone “who aspires to but is excluded from full membership in a new group,” whereas Simmel’s stranger “does not aspire to be assimilated; he is a potential wanderer, one who has not quite got over the freedom of coming or going. (Levine, 1977, p. 17). As a consequence, Park’s “excluded marginal man is depicted as suffering from spiritual instability in intensified self-consciousness, restlessness, and malaise,” which is in marked contrast to Simmel’s stranger, who by virtue of “occupying a determinate position in relation to the group, was depicted as a successful trader, a judge, and a trusted confidant” (Levine, 1977, p. 17; Edgell, pp. 50–51).

Edgell argues that the Simmel’s stranger concept is much more appropriate for Veblen, than Park’s marginal man. This reconceptualization has a transformative impact of the resulting characterization of Veblen. Edgell’s Veblen is a well-adjusted observer of American culture. The Midwestern Nordic heritage of Veblen is transformed from a handicap in Dorfman to an integral part of Veblen’s cultural, social and intellectual capital and an important source of the originality of his social analysis. Edgell’s treatment of Veblen’s Nordic heritage as an important source of Veblen’s intellectual life is convincing because it is consistent with the evidence that is available and sheds light on Veblen’s ideas. Edgell argues that Veblen’s originality arose from the admixture of his ethnicity and his understanding of evolutionary theory. Edgell perspective is quite Veblenian. He locates the source of Veblen’s originality and scholarly work as the result of the normal processes of acculturation and the social and intellectual context in which Veblen’s intellect developed, rather than it emerging from some social pathology as characterized by Dorfman. Following his discussion of the social and intellectual influences on Veblen’s work Edgell turns to a substantive discussion of Veblen’s approach to social theory. This discussion occurs in four chapters. Chapter 4 focuses on Veblen’s theory of evolutionary change. Chapter 5 focuses on Veblen’s theory of the leisure class. Chapters 6 and 7 develop in greater detail the sources of institutional conservatism and the power of vested interests in predatory institutions; and the solution to the problems these factors create in workmanship institutions. Edgell locates Veblen’s evolutionary theory primarily in The Theory of the Leisure Class (1899) and The Instinct of Workmanship and the Industrial Arts (1914). The conceptual foundations of Veblen’s evolutionary theory as identified by Edgell are instincts, habits and institutions. The Darwinian foundational assumptions of Veblen’s evolutionary theory are “. . . that people are proactive and the direction of change is indeterminate . . .” (Edgell, 79). Veblen adds two assumptions to these, namely “. . . that human beings are social animals and what is distinctive about this species is their relatively greater intellectual power as compared to all other animals (Edgell, p. 79). 247

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Thus, unlike many other commentators, Edgell does not back away from the concept of instincts as employed by Veblen. In discussing Veblen’s unconventional use of the instinct concept Edgell notes: Veblen was clearly aware of the controversy surrounding the use of this concept in the biological and social sciences, but considered that since he was primarily interested in the ways in which they “take effect in the give and take of cultural growth, no better designation than the time worn ‘instinct’ is available” (Veblen, 1964a, pp. 2–3). Veblen’s reservations concerning the “vague and shifty character of instincts” (Veblen, 1964a, p. 13) are reflected by the plethora of synonyms that he used throughout his works – for example, proclivities, impulses, dispositions, and spiritual endowment – and particularly where he refers to “the underlying traits of human nature (propensities, aptitudes, and what not)” (Veblen, 1964a, p. 242; Edgell, p. 79).

Edgell notes that Veblen began in the 1890s employing only two instincts: workmanship and predation. But in his publications between 1900 and 1914 Veblen adds several other instincts including idle curiosity, parental bent, sportsmanship, and pugnacity. Veblen characterized these as a collection of interrelated proclivities that sometimes conflicted and other times reinforced one another. He often characterized them differently as self-regarding and groupregarding, representing a range of aptitudes and propensities that represent alternative directions of human life. According to Edgell this constitutes the major source of conflict at all levels of social analysis (Edgell, p. 80). The concepts of habit and institution are less controversial according to Edgell. Human adaptive behavior becomes habitual. The patterns of habitual behavior are repeated, organized and transmitted as social institutions. Social institutions are generally either workmanlike or predatory. The human behaviors encompassed by these two alternative directions of human life create conflicts between these two types of institutions. These conflicts create a need for change and adaptation and thus are the source of cultural evolution. Rather than building immediately on this observation Edgell inserts an assessment of Veblen’s most famous work The Theory of the Leisure Class. Edgell begins by locating Veblen’s theory in the scholarly trends of his day. He summarizes the argument of the first half of The Theory of the Leisure Class as: In modern societies, where the institution of private property is well established and production is considerably in excess of subsistence, the struggle to survive is transformed into a “struggle for pecuniary reputability” in which “the desire to excel everyone else in the accumulation of goods” is fostered in order to gain the esteem of the community and enhance self-respect (Edgell, p. 104, quoting Veblen, 1970, p. 39). The award of esteem depends upon being able to demonstrate wealth, which is not easily achieved if one engages in a wasteful lifestyle in private (Edgell, p. 104).

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. . . the increased scale and impersonal nature of social interaction puts a premium on the conspicuous consumption of goods rather than on leisure as the main means of demonstrating pecuniary strength and hence repute (Edgell, p. 105).

Then Edgell notes that the second half of The Theory of the Leisure Class “explores the social consequences of the leisure class culture dating from the barbarian era yet surviving into the modern one. Primary among Veblen’s concerns is the conservatism of the leisure class . . .” (Edgell, p. 105). Edgell identifies the two major lines of criticism leveled at The Theory of the Leisure Class. The first is that Veblen’s thesis is specific to America’s Gilded Age from 1890 to 1929. The second is that Veblen’s thesis lacks theoretical coherence. Edgell’s response to the first criticism is to note the “abundance of empirical research . . . suggests that these criticisms are largely misplaced” (Edgell, p. 109). Edgell then goes on to address the significance of Veblen’s work on the development of the sociology of consumption. Later chapters of the book address Veblen’s theoretical coherence. However, as mentioned earlier, this chapter seems out of place. The problem with The Theory of the Leisure Class, in my view, is that both of these concerns must be addressed simultaneously. Clearly the empirical work demonstrates the continued significance of the concepts of conspicuous consumption and pecuniary emulation in modern industrial society. But in order to claim that Veblen’s theoretical contribution is of continuing significance the social mechanism by which these behaviors emerge and the impact they have of society must be addressed. In Veblen’s book the mechanism by which pecuniary emulation and conspicuous consumption impacted the society was that leisure and goods, that were unavailable to the common folk, were conspicuously consumed by the leisure class. As a result of the reputability of this class, the activities and goods came to be a symbol of reputability and thus a necessity among the leisure class to demonstrate and maintain their status – pecuniary emulation. Industrial manufacturing – as an incredibly productive system of making both goods and the captains of that industry wealthy – produced ever-greater amounts of these luxury goods and people who could afford to consume them. Since these goods and activities were associated with reputability their adoption by the newly available and enabled consumers was now possible and desirable. This process referred to as the pecuniary standards of taste by Veblen insured that the leisure class would always be under pressure to adopt some new activities and goods to differentiate themselves from the inferior strata who would always be adopting the newly available reputable goods as their availability increased and price decreased as a result of modern industrial production techniques. This same process worked its way all the way down the strata of the class system 249

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thereby generating an entire culture of consumption based on pecuniary emulation. But this entire system was dependent upon people in one strata being able to observe the activities and consumption of the strata just above it and below it, each strata jealously guarding against any appearance of loss in status. This process would lead to ever-changing fashions and the expansion of the consumption of activities and goods deemed reputable by the leisure class as the activities and goods became less expensive and more available. Undoubtedly this process continues in modern industrial culture. But clearly it is not the only, and probably not the most important social process driving contemporary consumer culture. The propaganda processes developed during World War I led to the emergence of the modern advertising industry. That industry has significantly altered the process of emulation in modern industrial economies. The reference group for observing reputable activities and consumption is no longer merely the neighbors and adjoining social strata, but instead images of a wholly constructed, imaginary reference group are presented by advertising to persuade the public as a whole that new goods, services and activities, now for sale, are necessary to maintain one’s status, image, reputability, popularity, sex appeal and, comically, one’s individuality. This is surely a difference from the argument that Veblen is making in The Theory of the Leisure Class. While I believe these changes can be incorporated into Veblen’s analysis (Waller & Robertson, 1998), it requires that Veblen’s theory of institutions and cultural evolution be employed to explicate his theory of consumption. Consequently, I find that Edgell is not able to adequately address the theoretical coherence of Veblen’s theory of consumption because he presents this theory prior to his exposition of Veblen’s theory of evolutionary cultural change and does not employ that theory adequately to his assessment of Veblen’s argument in The Theory of the Leisure Class. Edgell spends two chapters discussing the types of institutions that emerge from two of the general categories of instincts employed by Veblen. First there are predatory institutions that Edgell identifies as ‘The Problem’ and workmanship institutions that he identifies as ‘The Solution.’ Edgell’s discussion of predatory institutions draws on directly and faithfully from Veblen’s books: The Theory of Business Enterprise and Absentee Ownership: The Case of America. Veblen’s analysis that the institution of private property inhibit social provisioning through their contamination and inhibition of industrial production is assessed and compared favorably to the analysis of capitalism by both Karl Marx and John Hobson. Edgell’s discussion of workmanship institutions is less straightforward because he focuses on controversies surrounding the scholarly assessment of

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Veblen’s Dial essays collected in the book, The Engineers and the Price System. By this I mean that an adequate exposition of Veblen’s position could have been drawn from already cited works of Veblen, particularly The Instinct of Workmanship and The Theory of Business Enterprise. However, Edgell does an adequate job of presenting Veblen’s views on workmanship institutions while doing an excellent job of addressing and assessing the ‘Engineers Controversy’ in Veblen scholarship. The basic issue that is the focus of the ‘Engineers Controversy’ is whether these essays are consistent with Veblen’s scholarly works or an aberration. Mary Douglass suggests that the tendency of scholars to construct and employ binary categorization schema may be the result of us being binary beings – on the one hand . . . on the other hand. I sometimes wonder if she might have also overlooked that we are physically symmetrical along a vertical access and that this might be why we look for balance and symmetry in our theorizing. Veblen’s theory of cultural evolution is clearly non-teleological – there is no direction. Cultural evolution is characterized by blind drift – there is no imperative for progress. The theory provides no reason for optimism. Indeed, Veblen’s theory does provide a reason for pessimism. His theory of the conservatism of predatory institutions suggests that ongoing social processes will inhibit the ability of societies to adapt to new situations and solve new problems. And even though Veblen’s instincts of workmanship and idle curiousity suggest biological mechanisms to facilitate cultural adaptation there are no emergent ‘vested interests’ in altering the social order per se. Thus, blind drift is the character of social movement with a tendency toward maintenance of the status quo even when confronted with changed circumstances or new problems. The unbalanced character of Veblen’s theory of cultural evolution, its lack of symmetry with regard to an inherent tendency to promote workmanship beyond individual instinctual yearnings, is profoundly pessimistic. The Engineers and the Price System essays suggests that there is a progressive group within American society – a soviet of engineers – that might counterbalance the negative and conservative impact of the actions of the vested interests. Veblen scholars are divided on whether these essays are a departure and aberration in Veblen’s presentation of his theory of cultural evolution (Tilman, 1992), or if this theme of progressive engineers is consistently present and an integral part of Veblen’s theory (Rutherford, 1992; Knoedler & Mayhew, 1999). I think Edgell presents an excellent reading, convincing characterization and a satisfying and original resolution to this debate. I believe Edgell rightly interprets the debate as viewing Veblen’s intellectual life and his contribution too narrowly. For Edgell, the aberationists are correct: The emergence of a soviet of engineers as a countervailing tendency in cultural 251

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evolution does not follow from his theory of cultural evolution. But it is equally true that the scholars favoring the consistency of these essays with the rest of Veblen’s work are also correct. Rutherford, Mayhew and Knoedler have carefully documented Veblen’s ongoing interest in and scholarly references to the emergent progressive engineering movement of his day. Edgell then argues, I think convincingly, that Veblen’s extensive, documented knowledge of the utopian literature of his predecessors and contemporaries, suggests that the role of these popular essays was to provide a utopian vision for a possible future. Not a teleological necessary outcome of the inevitable blind working out of cultural processes, but instead a glimpse of a possible, hopeful direction that might motivate, inspire, or at least suggest positive behaviors directed at improving the provision of the common folk. As Edgell notes: “The social construction of a good society, however abstract and unrealizable, is invariably contrasted with the present society. In the process of comparing the latter unfavorably with the former, utopianism criticizes the status quo and stimulates aspirations for change” (Edgell, p. 153). I find that Edgell’s assessment of the “Engineer Controversy” follows from the biographical image of Veblen emerging from the accounts that incorporate the observations and experiences of his family and friends. This is a Veblen of great intellect, humanity, and humor. Whereas, the abberationist view in retrospect more closely corresponds with Dorfman’s pathological view of a maladjusted genius. Edgell’s book does an admirable job of presenting Veblen’s views and assessing his contributions to sociology. Overall, I find his assessment of the cultural, scholarly and ethnic sources of Veblen’s thought provocative. Edgell’s presentation and discussion of the biographical and “Engineer” controversies are penetrating, original analyses that he insightfully integrates into an coherent characterization of Veblen’s theoretical contributions to social theory.

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REFERENCES

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Dorfman, J. (1934). Thorstein Veblen and His America. New York: Viking Press. Jorgensen, E., & Jorgensen, H. (1999). Thorstein Veblen: Victorian Firebrand. Armonk, NY: M. E. Sharpe. Knoedler, J., & Mayhew, A. (1999). Thorstein Veblen and the Engineers: A Reinterpretation. History of Political Economy, 31, 254–272. Levine, D. N. (1977). Simmel at a Distance: On the History and Systematics of the Sociology of the Stranger. Sociological Focus, 10, 15–29. Park, R. E. (1928). Human Migration and the Marginal Man. American Journal of Sociology, 33, 881–893. Rutherford, M. (1992). Thorstein Veblen and the Problem of the Engineers. Revue Internationale de Sociologie (Novelle Serie), 3, 125–150.

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Tilman, R. (1992). Thorstein Veblen and His Critics, 1891–1963. Princeton, NJ: Princeton University Press. Tilman, R. (1996). The Intellectual Legacy of Thorstein Veblen: Unresolved Issues. Westport, CT: Greenwood. Veblen, T. B. (1963) [1921]. The Engineers and the Price System. New York: Harcourt, Brace and World. Veblen, T. B. (1964a) [1914]. The Instinct of Workmanship and the State of the Industrial Arts. New York: Augustus M. Kelley. Veblen, T. B. (1964b) [1923]. Absentee Ownership and Business Enterprise in Recent Times: The Case of America. New York: Augustus M. Kelley. Veblen, T. B. (1970) [1899]. The Theory of the Leisure Class: An Economic Study of Institutions. London: Unwin. Veblen, T. B. (1975) [1904]. The Theory of Business Enterprise. New York: Augustus M. Kelley. Waller, W., & Robertson, L. (1998). The Politics of Consumption and Desire. In: D. Brown (Ed.), Thorstein Veblen in the Twenty-First Century: A Commemoration of The Theory of the Leisure Class (1899–1999). Northampton, MA: Edward Elgar.

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A review essay on Nancy Cartwright’s, The Dappled World: A Study of the Boundaries of Science. Cambridge University Press, 2001. Pp. ix, 247. Cloth $54.95; paper, $19.95.

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Since the publication of How the Laws of Physics Lie in 1983, Nancy Cartwright has been in the forefront of a movement in the philosophy of science aimed at reforming the vision of what it is that science does and what it achieves when it does it. Cartwright is a realist; but in that early book she argued that the laws of physics are, at best, instruments. They systematically distort reality (they “lie”) in order to do their work. Contrary to the understanding – popular even among scientists themselves – that they describe the deepest reality, the laws are best thought of as tools. The scientist is a kind of skilled craftsman who uses them, just as he uses other tools and materials, to manipulate and probe reality and, sometimes to learn something about it. It was, at first, easy to think that Cartwright was just another instrumentalist. But to deny the reality of laws was not to deny realism. In Nature’s Capacities and Their Measurement (1989) she offered a constructive account of reality. The key notion was the capacity. Aspirin has the capacity to cure headaches because sometimes, in the right circumstances, it does in fact cure headaches. There is no law that says aspirin cures headaches. It does so in some cases, and not in others. Those cases may, in fact, be very special. A capacity is a

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real potentiality of something in the world that it carries with it from circumstance to circumstance. Capacities compose and interact. The regularities that we see in the world are generally not laws, not universal truths, but relatively transitory expressions of capacities interacting in special circumstances. A striking – and rather unexpected – feature of Nature’s Capacities is the use that Cartwright makes of econometrics. She sees the goal of the Cowles Commission program as the measurement of the strength of capacities through statistical models that articulate causal structures – that is, through models that trace the interactions of capacities that produce observable regularities. While it must warm the hearts of economists – so used to viewing their discipline as a poor stepchild to genuine science – to see its methods applied to quantum physics, it is only the statistical methods and not the substance of economics that caught her attention in Nature’s Capacities. In the course of the next ten years, however, Cartwright has been engaged in a research program with several collaborators in which economics, as well as physics, is the object of study. To those familiar with the work of the research group on Modelling and Measurement in Physics and Economics at the London School of Economics and with the string of papers produced by Cartwright and her collaborators, the current volume, The Dappled World, will seem familiar. It does not break new ground, but develops and elaborates old themes. And it is a dappled production itself – a patchwork of papers written for other occasions, stitched together to be sure, but with the seams still easily seen.

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In The Dappled World, Cartwright takes two strong stands – one negative, one positive. She is against universalism. Whatever science has learned about the way the world works, it has learned in particular contexts. While science may know a lot that is true, it remains, she argues, a long, and rarely justified leap, from true-in-one-domain to true-in-every-domain. She rejects the picture of science as a hierarchy with applied sciences at the base (and social sciences perhaps in the sub-basement) and physics at the peak of a pyramid. Unlike in her previous books in which law-talk was consciously downgraded, Cartwright now seems rather at ease with laws. She takes it as read that their status is far less exalted than when she first accused them of lying. She now talks of a “patchwork of laws.” Her title refers to a poem by Gerald Manley Hopkins: “Glory be to God for dappled things – /For skies of couple-colour as a brindled cow;/ . . . All things counter, original, spare, strange;/Whatever is fickle, freckled (who knows how?)” True to Hopkins’s vision, Cartwright sees beauty in variety, not in uniformity. And she sees science as a variegated enterprise that knows

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lots about many things, rather than a reductionist enterprise with a feasible goal of one theory of everything. Cartwright also supports a positive thesis: the world is best thought of as constructed from things with specific capacities or – to use Aristotle’s terminology, as she does in the current volume – specific natures. Capacities or natures are properties abstracted from the objects that carry them. They are what the objects are always trying to do. It is the nature of my sister-in-law’s goats to escape their enclosure. How that nature plays out in practice depends on the expression of other natures (such as their nature to regard poison ivy, which happens to grow in the enclosure, as a delicacy or the nature of the electric fence to shock). It is tempting to gloss the notion of a capacity as nothing more than an underspecified ceteris paribus condition: that is, what the thing would do if there were not some interfering factors. But Cartwright is after something else, a central element of capacities is that they compose. They are not expressed only when there are no interfering factors, but are expressed all the time. The outcomes are complex interactions of capacities that, on the one hand, mean that capacities are rarely observed directly, and, on the other hand, explain the production of particular local regularities. The various capacities of the parts explain the actions of the machine. The machine metaphor is important for Cartwright. She argues that regularities are few and far between and are produced only by what she terms nomological machines – i.e. machines that make laws. Here “law” refers not to something universal, but merely to a reliable, robust regularity. It is only in special nomological machines – for example, in the apparatus of a laboratory experiment – that capacities can be made to reveal themselves in fairly pure forms. The laws that appear in highly developed scientific theories – e.g. Newton’s second law of motion – are, on Cartwright’s view, best seen as abstract descriptions of capacities. Force = mass  acceleration really says, if anything is a force applied to another thing that is a mass, then it has the capacity to accelerate. Only in the very special circumstances of a laboratory experiment or of astronauts standing on the moon, in which the mass is shielded from, or compensated for, the expressions of other capacities will F = ma be observed directly in a pure form. Nevertheless, it describes accurately the way different forces and masses act and may, for example, aid us in designing a machine. The key thing is the abstraction must be made concrete. F = ma, tells us little about the world. But, if we can say of gravity that GMm measures its force, or how to calculate the force acting between two charged masses or the force of wind resistance and so forth, then the capacity expressed by F = ma tells us one of the concrete tendencies of the mass in question. 257

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Cartwright fleshes out the relationship between the abstract and the concrete in a manner that has considerable resonance for economists. At the height of the two-Cambridges controversy in capital theory in the 1960s, Robert Solow suggested that the aggregate production function should be viewed as a parable: it did not literally describe production, but it acted as an analogy that carried an important message about what production was like. For Cartwright a scientific law, like Newton’s second, is not an analogy or parable, it is a fable. Cartwright draws on the account of fables due to Gottfried Lessing, the German Romantic poet and playwright. For Lessing, the fables of Aesop and others, do not say that the story is like something in our lives. Rather the moral of the fable is an abstract, but precise, description of an aspect of the story. The fable shows us how to move from the abstraction to one concrete expression of the moral. Its utility lies in our ability learn from the tale about animals how to concretize the moral. It might then be concretized in ways that apply to ourselves or other people. For Cartwright, F = ma is the moral, Newton’s theory of gravity or Columb’s law of electrical interaction or the theory of wind resistance are concrete instances of the moral. Scientific textbooks are essentially books of fables that provide edifying stories of how the moral is exemplified. The student learns how to apply the moral to situations not contemplated directly in the book. Scientific theory, according to Cartwright, is a system of abstractions – a book of morals. Such abstractions are not automatically tied to the world. The substance of science is found in the varieties of ways in which the abstractions are made concrete. In large part, it is found in the construction of nomological machines. Such machines exemplify various scientific morals. Much of scientific analysis, on this view, takes place not at the level of highly abstract theory, but at the level of models. For Cartwright, a model is the blueprint for a nomological machine. It is a plan for making abstractions concrete. Nomological machines produce particular regularities – a different machine for each regularity. Cartwright’s work speaks to economics; for economics is a discipline devoted to modeling. Since in the remainder of this review I shall be trying to highlight points on which I disagree with Cartwright, I would like to conclude this section by stating my general agreement with her perspective in The Dappled World. Cartwright’s earlier work up to, and including, the earlier versions of many of the chapters in The Dappled World have greatly influenced my own thinking about the philosophy of science and particularly how it is applied to economics. On most of the larger points, I think that she is fundamentally correct. Still, there are important points on which I think that she draws the wrong lessons – especially for economics.

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Although trained in physics, Cartwright has the soul of engineer. For her, regularities are rare, they are the products of carefully designed machines. In the famous Argument from Design, God is shown to exist on the premise that the world is a machine of exquisite complexity (and beauty). A wonderful clockwork must have a Divine Clockmaker. Cartwright adopts a secularized version of the argument. Instead of a single machine, there is a variety of machines that produce infrequent regularities in a vast sea of irregularity. Each regularity, she concludes, has its clockmaker. Only exceedingly rarely does there occur a natural clock, a nomological machine that occurs without human intervention. The solar system is, perhaps, one such natural machine. But generally, regularities occur only where they are consciously designed to occur. But is this so? Are regularities really that rare? Clearly not. We rely on regularities constantly – physical and social. I know that there is a regular connection between the amount I depress the accelerator pedal of my car and the speed that it obtains. I know that other drivers generally keep to the right side of the road (at least in the United States). I know that the majority of enrolled students will attend my classes at the announced times. Although much of her work is aimed at reducing the pretensions of scientific laws, Cartwright still carries the ghost of the physicist’s ideal of precision. In order not to deny (absurdly) the reality of the coarse regularities on which our lives literally depend, Cartwright draws what I believe to be an untenable distinction between such quotidian regularities and the precise regularities of science. Far from being exceedingly rare, regularities are exceedingly common. They are – to be sure – highly circumstantial and local. They do not come close to being laws of nature – yet we rely on them constantly. And so must every scientist – not only in ordinary life, but also in the life of the laboratory. For Cartwright, the laboratory scientist is a builder of nomological machines. But how are they built? There is an unbroken chain from the stone hammers and knives of the Neolithic age to the emerging nanotechnologies. The exceedingly precise has been built out of the imprecise; the refined regularities of the laboratory depend on the robust regularities embodied in glass, lenses, machined metal, drawn wire, silicon, and other materials. Nomological machines are constructed out of other machines, or at least out of components, some quite ordinary, others quite special, whose capacities are known and instantiated in the ubiquitous regularities known to skilled and unskilled craftsman. Such workaday regularities and their role in knowledge stand in as much need of philosophical and methodological attention as the refined regularities produced in tightly controlled experiments. 259

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Cartwright’s insistence that the regularities of interest must be precise and, therefore, correspondingly rare seems unnecessary to her general world view. It seems partly vestigial – the result of her background in physics – and partly the result of a shift away from the epistemological focus of Nature’s Capacities towards a concern with the ontology of natures (or capacities). Whatever the reason, the insistence that regularities must be precise and rare colors Cartwright’s understanding of econometrics, its scope and limits.

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Cartwright’s method of analysis is often to draw an expansive lesson from a small number (sometimes just one) example. It is extremely useful to work with concrete cases, but there is a risk of overgeneralization. In the case of econometrics, she chooses Anand and Kanbur’s (1995) cross-country regression study. Why this study is taken to be prototypical is unclear. It investigates the effect of public investment on social outcomes in developing countries. Her objection to the study is of a piece with her stress on design as essential to producing (rare, precise) regularities. Modern econometrics is grounded in the theory of probability. But for Cartwright, the world cannot be generally characterized probabilistically. Probabilities are not there for the taking, but are characteristics of quite particular set-ups (e.g. of roulette tables or particular configurations of unstable atoms). Only in such designed set-ups do objects display well behaved probabilities. Cartwright maintains that the political and economic differences among the countries in Anand and Kanbur’s study render them clearly insufficiently homogeneous to be regarded as the nomological machines generating economic data belonging to the same probability distribution. One cannot in principle learn anything from such a study. No argument or evidence is offered for the lack of homogeneity on relevant dimensions. It is an obiter dictum. The particular study, however, is not the issue. The lesson that Cartwright draws condemns a large swath of applied econometrics as completely useless. I have no interest in defending or condemning Anand and Kanbur’s particular study, but it seems to me that Cartwright’s general attack is misdirected.1 First, she seems to forget a point emphasized in Mary Morgan’s The History of Econometric Ideas (1990) and cited in Nature’s Capacities, that econometrics aims in part to provide a substitute for controlled experiments. Its techniques aim to account for salient differences between cases (in Anand and Kanbur’s case, between countries) in order to render the residuals sufficiently homogeneous for informative comparison. Statistical controls take the place of shielding and compensation mechanisms to permit an underlying shared capacity to be

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clearly observed. Second, she adopts a vision of econometrics grounded in Haavelmo’s and the Cowles Commission’s program of structural econometrics. She sees the goal of every regression as the articulation of the detailed structure of the nomological machine. Few econometricians would agree. Even those who retain an interest in structural estimation are well aware that much of econometrics consists of tools for systematically identifying high level regularities, the structural account of which requires further study. Finally, her point seems to be fatally damaged by her concession that a valid cross-sectional study might be possible if health care plans were distributed across countries by lottery. Much recent cross-sectional econometrics has addressed the question of how to exploit undesigned variations as if they had the sort of design that Cartwright requires. It may not always be possible to use observed data in place of experimental data, but that is a matter of the particular case and not of general principle. The attack on econometrics is part of a surprising disregard for the epistemological problems of establishing what are true regularities – of any degree of precision or universality. On the one hand, the statistics that often form the best basis for uncovering the regularities are held to be suspect. On the other hand, Cartwright claims to know particular capacities almost by direct acquaintance. How do we know that aspirin has the capacity to cure headaches? She often writes as if it were obvious from experience. But experiences of the type I-took-it-and-I-got-better equally well support that laetrile cures cancer or that copper bracelets cure arthritis. When Cartwright states “I know . . . that feeding the hungry and the homeless will make for less misery; and that giving more smear tests will lessen the incidence of cervical cancer” (p. 23) or that the Chicago economists carry rational expectations too far or that the IMF uses inappropriate models to argue for the reduction in direct welfare expenditure in the third world (p. 18), we are entitled to ask on what basis she is so sure. All these claims involve either the establishment of important regularities or the demonstration that a model cannot generate observed regularities. Econometrics and other statistical techniques aim in part to sort out the reliable from the unreliable regularities. It is not just that Cartwright does not tell us the evidence that convinces her, so that someone unsympathetic to her beliefs might conclude that they were wishful thinking or political predisposition, it is that she launches a pretty indiscriminate broadside against methods that aim to resolve just such questions. The methods deserve scrutiny. But rather than scrutinizing them for their efficacy in concrete cases or even on more general epistemological grounds, she aims to dismiss them as out of keeping with sound ontology. Anand and Kanbur, in fact, conclude that the cross-sectional evidence does not allow them to identify a key causal mechanism, but that is something 261

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that they learned from using the tools of econometrics to process data, and not something that they could have legitimately concluded from prior metaphysical analysis. What, in the end, I find most puzzling in Cartwright’s attack on applied econometrics is that it is in no way implied by her general framework of the dappled world. The systematic investigation of such a world needs tools such as those the econometricians attempt to develop and employ. A more sympathetic reading of the practices of applied econometrics would, I believe, reveal a good deal of common ground between Cartwright and applied econometrics.

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1. Hoover (forthcoming) provides detailed criticism of Cartwright’s views of econometrics, including the particular case of Anand and Kanbur’s regression study.

REFERENCES

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Anand, S., & Ravi Kanbur, S. M. (1995). Public Policy and Basic Needs Provision: Intervention and Achievement in Sri Lanka. In: J. Drèze, A. Sen & A. Hussain (Eds), The Political Economy of Hunger. Oxford: Clarendon Press. Hoover, K. D. (forthcoming). Econometrics and Reality. In: U. Mäki (Ed.), The Economic World View. Cambridge University Press. Morgan, M. S. (1990). The History of Econometric Ideas. Cambridge: Cambridge University Press.

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Sciabarra’s TOTAL FREEDOM: TOWARD A DIALECTICAL LIBERTARIANISM

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Paul R. Diesing

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A review essay on Chris Sciabarra’s, Total Freedom: Toward a Dialectical Libertarianism. University Park: Pennsylvania State University Press, 2000, 467 pp. ISBN 0-271-02048-2, $65.00; 0-271-02049-0, $24.50.

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This is a historical work that describes the development of libertarian thought, moving from the slightly dialectical thought of 19th century Spencer and Menger, through the Austrians such as Hayek and Mises, to the recent move to dialectical thinking. Sciabarra wishes to promote this move by describing dialectic and showing how it is changing and can change libertarian theory. The first half of the book describes dialectic. First, dialectical thinking deals with how things change over time (p. 141). Consequently Sciabarra’s elucidation of dialectic is also historical; it shows how dialectical thinking developed from Plato and Aristotle to the present, and how it produced manifold variations. It began as dialogue, discussion, during which thoughts developed, and later included interpretations of earlier dialogues and texts. The texts thus became more complex and varied in their implications. Later it became apparent that societies also change over time, through their own dialectical processes. Consequently dialectical thinking could also be a research process to uncover the underlying dialectic of social change. And so on. Several themes recur through this history of dialectic, and these themes tend to become central characteristics of dialectic in Sciabarra’s interpretation. The

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main theme is the interdependence and internal relations among the parts of society – economy, polity, culture, family structure, personalities, theories, religions, arts . . . Each part must be understood in the context of other parts which form and are formed by it. And since one cannot study everything, one selects a partial context based on one’s perspective, one’s location in society. Different perspectives bring out different contexts, and therefore a different interpretation of the part being studied. Consequently a dialogue among different perspectives is necessary for a fuller understanding. Second, the present society grows out of the past and carries its past with it, so the past is also context to be studied. And the society is moving toward something different, or has different possible futures in it. Third, change over time results from the interplay of contradictory opposites, such as rightists and leftists, husbands and wives, capital and labor, economic and political (or market and planning), individualism and community . . . The second half of the book deals with recent libertarian thinking, and mostly with Murray Rothbard. Rothbard’s absurd, disgusting, contemptible theory is spelled out in detail and at great length, while other libertarians – Hayek, Mises, Rand, Nock and Nozick – are summarized more briefly. Austrian economics is also included as compatible with libertarian thinking. Rothbard’s theory was that society consists of rational individuals who can choose their own goals and values and use their own means to achieve their goals (208ff). They ought to be allowed to do as they please so long as they don’t hurt other people. Some morality, such as altruism, is bad because it leads to interference with other people. Society has two parts: the market, in which people voluntarily exchange goods, and the state, which uses force to take people’s goods away by taxation. The goods are then consumed in war and conquest, or by state officials, and given to the rich, the most powerful class in society, to encourage their loyalty to the state. The state also encourages voluntary obedience by indoctrinating children in its public education. Actually the state is organized crime. Some societies have a weaker state and a welldeveloped market: good. Others have a strong state and weak market: bad. This theory is not dialectical at all. Individuals are treated as independent entities; their upbringing is ignored, except for public schools. Market and state are independent, unless the state interferes. Natural rights and property laws are timeless, absolute. Then Rothbard offers his proposal for a libertarian utopia, especially for the former Soviet states (319ff): Skip piecemeal reform. Privatize all state property immediately, perhaps by lottery. Eliminate the state completely, except for a constitution and laws. Eliminate paper money and the central state bank, leaving only gold coins as money. Then police and judges will compete to offer their

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services for a price, and individuals will take over the production process. The free market will flourish. Next Sciabarra summarizes some criticisms of Rothbard’s theory (340ff). For example: Individuals are not self-contained entities; they learn their moral habits and values in family and society. In Rothbard’s anarchy the rich will win, and set up oligarchies protected by their mercenaries. The state has no monopoly on power and coercion; corporations have power too. How can a system of laws be set up and maintained without a government? How can anyone wipe out present society and create a new one? (The recent Russian experience is relevant here, since they followed Rothbard’s advice to privatize nearly everything immediately, including the Mafia, and then dissolved the Soviet government. See Brady, 1999, pp. 197–214. “Russia was fast becoming a jumble of different economies. The concept of ownership is still not intimately understood here.” “Certain values didn’t have any place here, such as respect for contracts.” “Russia has formed a market economy of a non-competitive type.”) Presumably such criticisms should encourage dialogue and learning. Then Sciabarra reports that Rothbard turned a bit dialectical in his last years. He joined the religious conservatives in praising the communal order that develops out of shared customs, values, institutions, ethnicity, and religion. Individuals living in a community could exchange goods and work together peacefully to achieve happiness. So Rothbard began to appreciate the community-individual dialectical interaction. Finally Sciabarra summarizes the recent dialectical turn of other libertarians like Branden, Rasmussen, Den Uyl, Hoppe, Kinsella, Lavoie, Horwitz, Boettke and others. They assert that people are social, related, embedded in society, and develop jointly with others. There is no state of nature, natural rights, and natural law. People develop differently as well as similarly, and they can discuss their differences with others and thereby learn and expand their outlook. The ethics of dialogue developed by Habermas and Apel, Kantians, provides the basis for discussion. Also the market is a dialogue of related differences. Sciabarra does not develop these new dialectical libertarian ideas; he wants other people to do that. It will be interesting to see how these ideas develop in coming years. One big task facing dialectical libertarians is to relate their theory to the actual global economy, rather than to Rothbard’s imaginary seventeenth century market. To do that, they will have to immerse themselves in the dialectical tensions and dynamics of global finance capitalism and find possible openings for the development of individuality. Marxists, post-Marxists, and institutionalists have researched global capitalism intensely, and libertarians could learn from them. Sciabarra includes Marxist ideas continually in his discussion of dialectic, along with criticism, so this shift would not be difficult. 265

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There is a deeper dialectical process underlying this book, which Sciabarra mentions briefly in the introduction. He learned dialectics from Bertell Ollman, a Marxist, and libertarian theory from Murray Rothbard. Apparently he struggled for years to transcend this contradiction, and seems to be succeeding. The context of this internal contradiction is the huge numbers of philosophers that are discussed in the text; it was a great struggle.

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Brady, R. (1999). Kapitalizm: Russia’s Struggle to Free Its Economy. New Haven: Yale University Press.

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Whatmore’s REPUBLICANISM AND THE FRENCH REVOLUTION: AN INTELLECTUAL HISTORY OF JEAN-BAPTISTE SAY’S POLITICAL ECONOMY

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RELOCATING JEAN-BAPTISTE SAY, AND IN SO DOING RECONSTRUCTING SMITH?

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Willie Henderson

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A review essay on Richard Whatmore’s, Republicansim and the French Revolution: An Intellectual History of Jean-Baptiste Say’s Political Economy. Oxford: Oxford University Press, 2000. Pp. xii + 248. ISBN 0-199-24115-5. Richard Whatmore has two big targets. The first is to specify the ‘intellectual movements’ of ‘France in the 1790s’. This is an objective that challenges the current understanding of the movements in the revolutionary years. Whitmore holds that the move from subject to revolutionary citizen has been insufficiently explored and that the slow development of a ‘public sphere’ underestimates the intellectual and social reconstruction. He considers that existing explanations overlook ‘the uniqueness of France’ in the revolutionary era. The second is to reassess, both as a means towards the first objective and also as an end it itself, the status and significance of the economic and other writings of Jean-Baptiste Say. The two aims are united by Whatmore’s determination to provide an intellectual history written in terms of the development of a new system of manners and behaviour, i.e. a history developed through an analysis of ‘ideas

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that would have been recognised by the historical actors’ themselves. Say is taken as a significant figure. The evaluation of his ideas and the contexts of his life and works serve to focus the discussion of republican ideas though consideration of the details of his political economy, understood in the narrower context of his Traité d’economie politique, is postponed until Part Three. Is Whatmore’s book of interest to historians of economic thought? Apart from the placing of Say’s political economy in the wider historical context – a placing that may or may not go into too much detail, depending upon such a reader’s motivation – two themes concerning the interpretation of Say are of direct relevance. Whatmore challenges the notion, found throughout the nineteenth, and much of the twentieth century, that Say is to be constructed as a disciple and populariser of Adam Smith. He goes further than this and challenges the notion that it is reasonable to consider Say as a member of the Classical School. This notion is still a conceptualisation that is worth challenging. The J. B. Say who emerges from this text is that of ‘an unorthodox political economist, particularly in perceiving Smith’s works to have been a precursor of his own republican ideology’ (p. xiii). What is fascinating about this notion, for me, is that in attempting to reconstruct our understanding of the works of J. B. Say, there is a potential for a reconstructed understanding of Adam Smith and for a repositioning of Say (and, perhaps also Smith?) in relation to the traditional of analysis that developed in England and elsewhere from Smith’s work. Some of this is not new. Say’s disagreements with Ricardo’s abstract methods are well known (in as much as any of this is well known). Say’s differences from Smith, differences that suggest his differences with Ricardo (i.e. on value theory; on the distinction between market price and natural price; on the rejection of the notion of unproductive labour; on the identification of the role of entrepreneurship) are also well known. Say’s ‘twist’ (to use Roll’s insight) was to develop ‘utility as the determinant of market value’ (Roll, 1942, pp. 348–349).1 Whatmore’s work achieves a reframing, and recontextualisation, of the significance of the differences. The reconstruction of Smith is not, of course, Whatmore’s concern though he does raise the (fascinating) question “was the ‘liberal Smith’ the creation of Say’s disciples?” Such a reconstruction, different from that of the conventional, nineteenth century version of Smith, is now emerging in the wider literature on Smith. This literature essentially reclaims Smith’s Wealth of Nations as a work of Enlightenment social philosophy. The Smith that is emerging from this is one who is concerned with the economic well-being of the poor; a Smith who recognises the role of institutions, customs and manners in economic life and who suggests education as a means of avoiding alienation. This literature

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proposes the availability of a different kind of Smith, a possibility recently explored in, for example, Rothschild’s comparison of Smith and Condorcet (Rothschild, 2001). What is interesting in that comparison is the role that sentiment has for both writers with respect to their economic interests. This Smith is one who cannot contemplate the stability of society without securing justice and without ensuring the well-being of labouring folk. This is a Smith that Whatmore also acknowledges, though perhaps not as fully as he could have done, and that Say, according to Whatmore, understood. Whatmore sees Say’s reading of Smith as unorthodox at the time and roots Say’s reading as an interpretation made in the context of Say’s own intellectual development. Whatmore’s principal concern is not, of course, with Smith, but with the reconstruction and relocation of Say and, hence, with the placing of Say’s political economy within the context of the intellectual environment of the revolutionary and post-revolutionary years. Whatmore traces the source of the interpretation of Say as Smith’s disciple to Say’s son Horace who first linked Say with Smith and the Classical School. He contrasts this view with that of Charles Compte (Say’s son-in-law) who discovered in Say’s work an attempt to influence ‘the culture or moeurs of nations’. Say, others also held, did not narrow political economy, in the style of Ricardo and other British writers, but attempted to widen it, to place a moral economy alongside the material one. However it was Horace Say’s interpretation that became standard by the end of the nineteenth century. Say came, then, to be seen as a classical political economist, as a liberal and as a disciple of Smith, a view accepted by Marx and enshrined in later histories of economic thought though. However, if I could just counter-balance a little, even in the pioneering work of Gide and Rist at the turn of the last century, the interpretation of Say as Smith’s disciple is hedged, for it is acknowledged that Say cannot justly be taken to be ‘a mere popularizer’ of Smithian ideas. These authors also acknowledge that Say ‘imparted to French political economy its distinctive character as distinguished from English political economy’ and seek out Say’s distinctive contribution (Gide & Rist, [1909] (1960), p. 123). But they neither locate Say in a republican tradition nor radically alter the idea of Say as Smith’s disciple. Whatmore takes three traditionalist interpretations of Say’s works and overviews his arguments against such views, in Chapter one. Say should not be linked either to a narrow economics (the process that leads to Ricardo) or to liberalism, for Say was opposed to the British approach to the structure of society.2 He considered British society to be unstable, though he was ‘fascinated by Britain’, and remained interested in the progress of British power and affluence, as did other French intellectuals before the revolution. Indeed accounting for Britain’s rise and France’s decline was a French Enlightenment 269

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theme, an intellectual foundation for the work of the Physiocrats. Say’s approach to society and social order is contrasted with Smith who is seen, by implication, like Turgot, a ‘practical’ writer. Smith, in the debates that followed the spread of knowledge about the Wealth of Nations in France is not described as a ‘liberal’. Whatmore is clear that Say saw himself as a republican and it is this self-construct that he uses to explore Say’s political economy. Two questions are key to the rest of the book: ‘What was the relationship between his republicanism and his political economy’ and ‘What did republican political economy mean in pre- and post-revolutionary France?’ Republicanism, rather than monarchical reform, only became a serious consideration in France after the American Revolution. Diderot spotted the application to France (classical republicanism had been a small-state and slaveowning model, and as Hume pointed out, anti-commercial) and developed a line of argument that rejected Britain as a constitutional and commercial model for the restoration of France. By his association with Clavière, Say knew of the challenges that faced the transformation of a political and economic system into one of republicanism.3 It was the acceptance of this challenge that produced the notion of ‘republican political economy’. Such a political economy encompasses: the abolition of ranks; economic well-being for all citizens; commercial society that acknowledges equality and morality; and the acceptance of a system of institutions, and customs built around republican virtues. The ‘Republican Turn in France’ (the title of Chapter four), as an intellectual movement, is dated between 1776 and 1789. Turgot is seen as influential in the development of a new approach to physiocratic ideas and to notions of constitutional change, leading to Condorcet’s use of ‘republican’ (though in a restricted sense) in his arguments concerning law-making and law-makers in 1786. Say’s development is located with the evolution of ideas from Turgot, through Condorcet, Sieyès (whom Say expected, later, to play a full part in the Consulate), Roederer and Clavière. In such an intellectual context, including that of the American Revolution, and in the context of the failures in citizenship exposed by the Terror, Say becomes concerned, in his political economy with the ‘improvement of private manners and the inculcation of public virtue’ i.e. a change from aristocratic values to the values of progressive and economically engaged citizenship. This he did in his ‘Olbie, ou essai sur les moyens d’améliorer les moeurs d’une nation’ (1798), a discourse on an imaginary state. The five books of the Traité grew out of this intellectual background and from his critique of Smith. The aim of the science was to overcome the poverty of the many and the huge divisions of wealth that had marked the richest modern states. Whatmore points out that Say deals in ‘general facts’ as the hallmark of political economy (a notion also derived from ‘Scottish philosophy’) and

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Say’s misunderstood contention that the science of the creation of wealth is independent of the form of government. Reflection upon Say’s ‘well-observed facts’ will show that wealth can progress in many different kinds of constitutional arrangements. Wealth creation came first, in a sense, followed by liberty and security. The idea is to clarify the principles on which wealth creation takes place and to make such principles popularly understood. He is not focused upon the ‘statesman or legislator’ as Smith, so Whatmore contends, had been, but on the development of every citizen. Those who created wealth (in Smith’s system this was also related to the ordinary labour of ordinary people) needed to be made aware of their capacities. What was needed was ‘fixed opinions’ about the generation of wealth, opinions founded upon science and universally accepted. J. B. Say, in this respect (though this is not mentioned by Whatmore), directly influenced the (different order) popularising intentions of Jane Marcet’s Conversations on Political Economy, and through her, Harriet Martineau’s monthly tales.4 The popularisations in Britain raise genre issues that the Traité itself does not raise. The motivation of the economic popularisations in Britain, though derived from the notion that science produced ‘truths’ is different from that of Say with respect to the construction of society. British concerns may be located in the desire to secure stability within a given framework of social divisions, those of Say are located within changing expectations concerning the social fabric.5 Say is not a conventional political economist in the Ricardian mould. At the same time, Say is placing his faith in the development of France in something other than conventional republicanism. His science of economics comes (in time) before constitutional development. His economics are based upon the development of ‘industrious’ citizens (a higher virtue than frugality) capable of undertaking acts that lead to the creation of capital in a context of secure property relationships and an informed populace. Both popularisations were, however, focused on the education of the wider public, concerning the nature of the public good, and focused on finding a basis for doctrinal stability and its manifestation in political stability. Whatmore argues for Say’s continued faith in his version of republicanism as set out in ‘Olbie’. These are that: prosperity requires equality; attention needs to be paid to the distribution of wealth in thinking out issues relating to poverty and luxury; industriousness and frugality are the hallmarks of an active citizen. In short, modern manners (i.e. those of moderation, frugality, industry and ‘enlightened self-interest’) make the modern citizen and the modern citizen moulds the modern world.6 His political economy constructs, in Whatmore’s words, ‘a republic without social hierarchy in conditions of advanced civilisation’. 271

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I have gained much from my reading, including Say’s relationship to a developing republican context both in terms of others texts and in relation to the evolution of political events. The placing of Say’s text in the context of republican manners is itself interesting and the links that are made, by Whatmore, with economic motivation (savings and capital formation) and social values, are well forged. Whilst I was disappointed by some of the details of the relationship between Smith’s writing and Say’s treatise – Whatmore knows the details of Say’s texts much better, and uses them much better, than he knows and uses, the details of Smith’s – I am convinced by the argument that Say saw, in Smith’s writing, concerns that were generally absent from the developing Ricardian tradition. Say had, it would seem, in my own terms, understood the Wealth of Nations as a flawed but nonetheless humane work in which the last three books explore issues such as: institutions, manners and customs (including the long-term consequences of primogeniture); the role of education (a pre-occupation shared with others such as Condorcet); the problems that monopolisation and alienation pose for the system of natural liberty and for its stability and coherence. Ultimately Smith’s system can only be sustained by reasonable behaviour. Say is concerned with such behaviour in the context of wealth creation and equality. How Say achieved and developed his reading is located, according to Whatmore, primarily in the French experience. It is this that makes him, if I have understood Whatmore correctly, neither a ‘liberal’ in the British sense, nor a passive follower of Smith. It is what Say actively brought to his reading of Smith (i.e. his biographical experience and his location in French intellectual life) that helped distinguish his reading from that of Dugald Stewart (who had different concerns with respect to Smith and the French Revolution), James Mill and (later) David Ricardo. And what he did as a result of that reading (and other readings) was directed to French concerns even if he searched for clear principles.7 To interpret Say’s relationship with French thought, and with the Classical School after Smith, I think that Whatmore is right. We need the context of republicanism and Say’s slant of republican virtues to correctly place Say. The book, then, lives up to its title. This is a well-researched and detailed book that meets its major objectives. We are dealing with an interesting contribution to intellectual history of a turbulent period in French history as well as to the re-interpretation of the history of economic thought during a formative period for modern economic thinking. This history will be of interest to academics from a variety of disciplines: intellectual historians; historians of the French Revolution; those interested in the development of French political ideas; those interested in reconsidering the outcomes (as it were) of the Enlightenment. It will also be of interest to historians of economic thought who

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may remember Say as simply the author of ‘Say’s law’ (a law acknowledged in the text but not given much prominence). It is backed by an impressive bibliography so anyone wishing to further his or her knowledge of J. B. Say has an additional means of so doing. The book is a demanding read for it is the case that the target audience is not solely (or even primarily, given the construction of the title) the historian of economic thought. It is, nonetheless, a stimulating one, and it deserves to be widely read. Considering it together with Rothschild’s recent work on Smith and Condorcet, it would seem that new possibilities of comparative approaches to, historically, and hence also biographically as well as textually located, histories of economic thought are opening up. If this is a trend, then it is a very welcome one.

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1. I have used Roll as an example of the approach to Say in a significant history of economic thought, just as I have used Gide and Rist, and others, later in the review. 2. Perhaps Whatmore needs to spell out, a bit more than he does, what he intends by the notion of ‘liberal’. 3. Say was Clavière’s secretary when Clavière managed an assurance company. In 1792, Clavière became Minister of Finance. 4. Jane Marcet, who spoke fluent French, refers to Say’s work as one of the sources of her own education in economics. She incorporates passages from Say’s writing into her work (Marcet, 1816). Hariet Martineau also read Marcet’s Conversations on Political Economy in preparation for her own economic stories. The main difference between the reception of Say’s approach to that of Marcet is that Marcet’s works are not part of the ‘canon’, whereas the Traité, whilst not as central as that of the Wealth of Nations, is nonetheless, normally, just within the margins. This could be prejudice though it is more likely due to the fact that Say makes independent theoretical contributions to the development of economic principles, e.g. in his critique of Smith; in the development of notions of ‘entrepreneurship’; and in terms of ‘Say’s law’. Keynesian criticism of ‘Say’s law’ (also stated in some secondary literature as ‘the law of markets’) and its macro-economic implications, gave it new significance in the nineteen forties and fifties. Of course, Say’s law is one that is endorsed by Ricardo (in an inappropriate manner according to Whatmore) and disputed by Malthus. Hume set out in his economic writing, an understanding that it is supply that gives rise to demand (Skinner, 1993, p. 247). Skinner seems to hint at the possibility of a direct influence. Hume is mentioned several times by Whatmore but not specifically in the context of ‘Say’s law’. 4. Perhaps there is scope for textual comparison between the popular concerns of Say’s writing and the writings of Jane Marcet. 5. These may well be republican, but are they not also Smithian, virtues? Would Smith not also compare the spendthrift nature of courts and great lords with the frugality that is required in order to create a stock of capital? A difference would be that Smith either is not as radical as he seems (though this is a contestable idea given the reaction to Smith’s writing in Britain in the context of the French Revolution), or that he conceals his radicalism so that is easy for the uninitiated to read it out. 273

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6. Some histories of economic thought refer to Say as ‘not always free from obscurity’ (Spiegel, 1971, p. 261) and ‘inexact’ (Schumpeter, 1954, p. 616). Whatmore talks of Say’s own understanding that he was a ‘writer who brought clarity and precision to an important subject for modern citizens’.

REFERENCES Gide, C., & Rist, C. ([1909]1960). A History of Economic Doctrines. R. Richards (Trans.). London: George G. Harrap. Marcet, J. (1816). Conversations on Political Economy. London. Martineau, H. (1832–1834). Tales Illustrating Political Economy. London: Fox. Rothschild, E. (2001). Economic Sentiments, Adam Smith, Condorcet and the Enlightenment. Harvard: Harvard University Press. Roll, E. (1942). A History of Economic Thought. New York: Prentice-Hall. Schumpeter, J. A. (1954). History of Economic Analysis. London: Routledge. Spiegel, H. W. (1971). The Growth of Economic Thought. Durham, North Carolina: Duke University Press. Skinner, A. (1993). Hume: Principles of political economy. Chapter Eight in: D. F. Norton (Ed.), The Cambridge Companion to David Hume. Cambridge: Cambridge University Press.

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Skousen’s THE MAKING OF MODERN ECONOMICS

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Stanley Bober

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A review essay on Mark Skousen’s, The Making of Modern Economics. M. E. Sharpe, Armonk, New York, 2001.

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Professor Skousen is unhappy with the History of Economic Thought course. His complaint is that his experience with the course as an undergraduate was boring and the textbook uninspiring, and that current day students are generally no better off. They are equally bored, and leave the course in a state of bewilderment at the number of theories thrown at them, and they do not perceive any connection among the different schools of thought. And to make matters worse, History of Thought texts usually do not enlighten students about the personal lives of the “Great Thinkers” leaving students with the belief (in Skousen’s view) that the lives of these economists are as dismal as their own feelings about the course. Skousen has therefore decided to do something different and put together what he calls a “New History” (these are brave words requiring a close examination), which is primarily designed to convey a sense of familiarity with the economists being studied. The pedagogical ploy is to lace the book with box-like paragraphs of personal information about the economist being considered which Skousen believes will impart a sense of ‘humanness’, and thereby making it easier for the student to relate to the individual economist and the associated thought material.

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In the study of Veblen one finds boxes with the titles:

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“Where is Veblen’s Tombstone”, and “Veblen’s Incredible Powers of Prophecy”

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In the chapter on Marx we are treated to:

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“Why Did Marx Grow Such A Long Beard?”, and “Marx: An Anti-Semitic Jew”

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And we find a paragraph entitled:

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“Cover-Up: Marx Fathers An Illegitimate Son”

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In Skousen’s chapter on Keynes we find:

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“Keynes The Palm Reader”, and “The Truth About Keyne’s Homosexuality”

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and so on. These days students have come to expect some amusement along with the ‘hard stuff’, and Skousen certainly provides it. These boxes of entertainment, as I refer to them, will no doubt grab students’ attention and evoke discussion. But discussion about what? Are they helpful in understanding a particular economist’s theoretical construction, do you provide insight as to what the individual is opposing or attempting to modify in setting forth a view of economic reality? My observation is that they are not helpful in this regard, but they certainly do provide amusing distractions. And they distract from the central purpose of a History of Thought course which is to teach economic doctrine; but to do so within a broad framework of the historical and sociopolitical environment that helped shape the economist’s points of view. One does learn theory in the Thought course; and if the text is well crafted it will reinforce and expand upon the analysis that students have been exposed to. The course is much more than a cavalier walk-through the lives of the “Great Thinkers” touching peripherally upon some of their ideas. Yet in addition to the presentation of doctrines that are familiar, that are, so to speak, within the bank of thought; the book should introduce new developments that may put into question the theoretical foundations of the mainstream paradigm, and indeed, lead to a different approach to understanding the operations of the economy. Such is the current state within the discipline as

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the emerging post-Keynesian (or post-classical) paradigm is replacing the heretofore generally accepted neoclassical approach. This replacement is almost total in Europe (yes, in England as well) and is gaining strength in the United States. Skousen’s statement that “A growing number of economists recognize that the neoclassical model is the keystone of economic analysis,” (Skousen, p. 432) only indicates how out of touch he is with what has been happening in his own discipline over the last thirty years or so. Or perhaps Skousen has some awareness (though I detect no hint of this) and chooses to avert his eyes from what he is uncomfortable with (Skousen, p. 432). Furthermore, Skousen has written this text to exhibit his own parochial view. One should expect an author to show disagreement with an economist’s approach via marshalling counter analytical arguments; but not to use words that set a negative tone, which may very well foreclose objective thinking. This is not, after all, a polemic written mainly for the profession intending to defend or criticize an individual’s approach; it is supposedly written as a means to have students become acquainted with and appreciate different economic conceptualizations. An example of one’s prejudice in approaching a set of ideas is Skousen’s title of his chapter on Marx which reads, “Marx Plunges Economics Into a New Dark Age.” In what way can this be helpful? Even the neoRicardians’ (Steedman being a prime exponent) who have made some telling points on certain technical aspects of Marx’s analysis did not take this tack. And if I read Skousen’s sentiments correctly, it was Ricardo who opened the door to this dark age, as he begins the chapter on Ricardo with the title, “Ricardo Takes Economics Down a Dangerous Road.” These are rather strange appellations reflecting the author’s bias; and unfortunately it is a bias that is not anchored with any depth in analytical detail. They are as wrong in their message as is Skousen’s belief that the marginal principle was that major breakthrough enabling the solution to the distribution problem; such that one reads the rate of profit as being determined by the marginal productivity of capital. In other words, relegating distribution analysis to being a facet of price theory. Anyone with knowledge of recent developments is aware that this approach has been shown to be without sound theoretical foundation; and as a practical matter, as well as on a theoretical level, offers no realistic explanation of distribution. Furthermore, Skousen’s dismissal of Marx’s economic analysis seems to rest on Samuelson’s position “That almost nothing in the economics of classical Marxism survives analysis.” (Skousen, p.158) Well, Skousen should have done some investigating of his own; and had he done so, he would have been made aware of the recent revival of interest in Marx and Marxian economies that is taking place in conjunction with the decline in the standing of orthodox (neoclassical) economics. And an examination of the works of Shaikh, Roemer 285

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and Morishima to name a few, would have demonstrated to Skousen that much of Samuelson’s and Steedman’s critique of Marxian economics does itself not survive analysis (Skousen, p. 158). What Skousen has overlooked (or may not be aware of) in his Making of Modern Economics is what is really making modern economics. There has been a paradigmatic shift in the understanding of what is the core theme of economics. What is being jettisoned is the approach that the central idea is the problem of allocating scarce resources; that the understanding of economic reality results from viewing the world through the lenses of the scarcity model. It is this approach that is the basis for the idea that the whole of economic analysis can be reduced to, or explained by, the principle of marginalism; that maximization under the constraint of scarcity is the very foundation of the discipline of economics. And it is this orthodoxy that is central to Skousen’s thinking. But it is an approach that is out of harmony with the real world about us. It is not man’s battle with the limitations imposed by ‘nature’ that is the issue; for in a world that is more and more man-made where the elements of knowledge and innovation leads to the continuous reproduction of economic resources and the introduction of different types of resources, man is essentially freed from the ‘imprisonment’ of nature. Whatever economic constraints a society faces, thinking here in terms of the growth of production, stems greatly from ‘perverse’ institutional and social arrangements within the context of production rather than from the commonly understood vision of scarcity. So the shift in thinking is to consider the central theme as the analysis of how society can maintain the reproduction of levels of production and employment and over time realize appropriate growth rates in their levels. It is the concern with production and growth, and not that of an optimum allocation of scarce resources, that constitutes what economics is about. Taking this tack has led to a different line of reasoning regarding many neoclassical constructions, which removes or significantly downgrades the marginalist calculation as the basic explanatory principle. And I am referring here to the re-thinking (if not outright rejection) of those ‘comfortable’ analytical tools such as the law of diminishing returns and the way in which it relates to the cost curve construction of the firm, and that of the so called ‘well-behaved’ production function; or that of the laws of utility in the construction of the demand curve; or that grand piece of mis-education which purports to show how the physical conditions of production determines the rewards to “factors of production” – and by the way, the term factors of production is not even found (for good reason) in classical or Marxian literature. All of this reflects a re-design of economic analysis from a “scientific” description based on predictable behavior as governed by particular laws of

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rationality, to an analysis based on behavior governed by socio-economic relations; economics as “political economy” incorporates social properties into economic theory. What is happening is a return of the economics discipline to its classicalMarxian roots. And what this entails, is that coming to grips with such issues as the distribution of output and the determination of savings and investment, must have as its starting point the social relations between individuals within the process of production. That is, one must explicitly treat the economic environment as one of a class society; with the resulting distributional effects and pricing behavior as they bear upon capital accumulation and growth. A particular aspect of this return is that the distribution of income is explained by macroeconomic considerations, rather than by the micro (marginal) analysis emphasized in neoclassical thinking. To the degree that there is a “microconnection”, it is to the megacorp pricing policies, which reflect market power and mark-up decisions that are themselves related to macroeconomic conditions. What is more generally accepted is that one cannot view a theory of income distribution as incidental to the mechanics of pricing; in that distribution is determined by conditions of exchange as reflected in the conventional construction of the supply and demand apparatus. Indeed, with regard to the determination of wages, the market diagram with its unrealistic assumptions must simply be cast aside as an explanatory mechanism. This re-casting of economic reasoning proposes that theory and accompanying explanatory models be based on realistic hypotheses. An analysis of the economy is to be constructed of elements that are observable and objective rather than metaphysical and subjective. And the central research program of this approach does not deal with the allocation of a fully employed limited amount of resources; but with how to bring about an increase in capital accumulation and production at a point in time so as to utilize the available capability. The basic issue is how to keep production growing in line with society’s capability (its abundance) which itself is greatly driven by ongoing changes in technical knowledge. It is interesting to note that recent contributions to economic understanding – such as Sraffa’s pricing and production scheme, the Kaleckian distribution analysis, the Harrod-Domas growth models and Leontief’s analysis – have all come as a result of challenges to marginal economic reasoning; they deal with the problem of production and not with the allocation of scarce resources. Skousen’s book is strangely silent on this heterodox challenge, which draws economics back to the classical-Marxian surplus approach. These challenges are by now sufficiently congealed so that this alternative approach to mainstream thinking is presented under the overall title of the post-Keynesian paradigm. 287

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Skousen makes two references to this paradigm (Skousen, p. 108). In one instance it is one of those brief box-statements about Sraffa that is dismissive of his contribution. Skousen relies on Blaug’s negative observation about Sraffa’s work, quoting Blaug that “Sraffa’s book is after all a perfect example of what some economists have come to believe is wrong with economics: there is hardly a sentence in the book which refers to the real world” (Skousen, p. 108). This review is not the place to engage Blaug in what I believe is his mis-reading of Sraffa, or to instruct Skousen in Sraffian economics. I would, however, ask Skousen to at least read Sraffa’s 1926 article on “The Laws of Return Under Competitive Conditions.” (should he find it laborious to plow through Production of Commodities by Means of Commodities) (Sraffa, pp. 1–2) where he will find what is generally considered as an unanswerable criticism of the Marshallian scheme of equilibrium, and with it the marginalist theory of value and distribution. The whole idea of determining an equilibrium price based on the independently structured supply and demand curves is without valid theoretical foundation; both from an overall view that these curves will automatically be brought into balance by a change in the market price, and with regard to the assumptions underlying the construction of each curve. Sraffa made it very clear that the theoretical “laws” of diminishing and increasing returns as used by Marshall in the construction of the normally sloped supply curve leads to a dead-end. Perhaps Skousen needs to be reminded that in their original construction these laws were designed for quite different uses: diminishing returns for the analysis of rent, and increasing returns for the division of labor. I leave it to Skousen’s read of Sraffa for him to realize how Marshall’s coordination of this diverse material would lead to a supply schedule that is itself invalid – notwithstanding that Marshallian theory is still the basis for economic courses. But given the curves as they are, Skousen should confront another piece of reality regarding the automatic adjustment of this market apparatus he is so wedded to. In the principal areas of exchange in the economy, that of the manufactured goods market, the labor market and in monetary analysis, there is no independence of supply from demand; it is demand that determines supply making one a function of the other. And importantly this functional relationship operates independently of the price prevailing in the particular market. For example, regarding the labor market, the non-neoclassical approach is a total restructuring of the supply and demand curves so as to reflect the reality of worker behavior in the face of changes in the wage, and to abandon the caricatures of reality that industrial firms are subject to diminishing returns and that the demand curve for labor is based upon the marginal productivity of labor. This leads to a re-thinking of the role of pricing in the economy, and in

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general it is not to be considered as an index of scarcity whose measure can be obtained from a comparison between the quantity demanded and the quantity supplied. I would remind Skousen that for the classical economists (including, of course, Adam Smith who appears as Skousen’s central figure) scarcity was a simple prerequisite of a commodity whose price was considered as being determined on the basis of “physical” costs of production. Thus, the emphasis was given to the characteristic of reproducibility rather than to the characteristic of scarcity. Now this idea was central to Marx’s approach as well; for he put forth a theory of value to embody a principle that the determination of prices shall be based in terms of the conditions of production, as these conditions mirror the existence of value and surplus value. We will see that some of Smith’s analyses contained elements which led in the direction of Marx’s theory of value. Now coming back to the caricatures of reality that one is forced to engage in with the use of the conventionally structured supply and demand curves, in regard, say to the so-called labor market; does Skousen really believe or, more importantly, does he believe that his students really believe, that workers who cannot find jobs are merely exercising their preference for leisure? But let me put this into sharper focus with the following: (Bober 2001, p. 131:3)

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It is a stretching of belief for the student to relate to a circumstance that if a household suffers a decline in purchasing due to a reduction in money wage income (say because of a mandated reduction in the wage rate or hours worked), that the household responds to a reduction in its real purchasing ability in a manner that reduces it even further. Yet this is exactly what the conventional (well behaved) supply curve dictates, as it tells us that as the wage rate declines there will be successive increases in the amount of leisure.

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Sraffa’s rejection of the Marshallian partial equilibrium analysis opened the door to a rethinking and a rejection of accustomed doctrine, being based on an exposure of orthodoxy’s inherent theoretical flaws. And even if one could use the neoclassical apparatus to explain prices in the agricultural sector, it is simply not applicable across the board to a determination of the wage rate or the rate of profit or in determining the “price” of money. In his limited explication of Marshall, Skousen stresses that Marshall required a set of “ceteris paribus” conditions in determining an equilibrium price. Quite so: and Sraffa made it clear that these conditions will not hold within the context of Marshall’s analysis of the supply curve obeying the law of diminishing returns. Without getting into detail, it is that in a Marshallian supply schedule, if the amount produced of the good in question is changed, not only its own price, but the price of many other commodities are changed as well. Thus, the supply schedule based on “ceteris paribus” becomes invalid. 289

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The law of diminishing returns in its original application was within a macro context; and it is with the advent of the marginalist school that the law was taken up in a micro setting, serving to underpin cost curves of the firm and the well-behaved production function. This transferred use of the law was, to say the least, a misapplication. It may be possible to rescue the law and the increasing supply cost image, by presuming very particular circumstances of production; but for the general run of manufacturing industries, the construction of the cost curves and the elaboration of a supply schedule cannot, with a degree of realism, be anchored in production subject to diminishing returns – notwithstanding how nicely it lends itself to the economic calculus which, I think for Skousen, is a sign that “Scientific Economics Comes of Age” (Skousen, p. 193). Indeed, Marshall’s premises are, in general, consistent only with constant returns, which opens up a different approach to the determination and role of prices. As was indicated, this review is not the forum for an explication of Sraffian economics; but an overall look at his contributions to the restructuring of economic thinking is in order. He attacked on two fronts. One objective was to force the jettisoning of the marginal productivity (neoclassical) theory of value and distribution, which has its basic framework that the relative prices of capital and labor and their relative shares are what they are because of relative scarcities. For example, that the rate of profit was high or low depending on whether there existed a “little” or a “lot” of capital relative to the supplies of labor. Or, to put the thought in another way: that income distribution is to be reckoned as a facet of price theory where one invokes the conventional supply and demand apparatus. But this itself rests on the principle of the substitution of factors along a well-behaved production that allows us to read from the “wage curve” a direct relation between the factor price ratio, the factor input ratio (technique of production) and relative shares. It is this entire marginal edifice that the path-breaking work of Sraffa has caused to be abandoned for two related reasons. It is a non-explanatory device for understanding income determination in the real world, and secondly, even in its own rights on an abstract level, its assumptions have been shown to be without sound theoretical foundation. We digress to alert Professor Skousen to the works by Joan Robinson, Luigi Pasinetti and Piero Garegneni on capital theory and the entire ‘reswitching’ debate. Sraffa’s second thrust was in a positive vein in that he directed attention and solved some of the problems encountered in both the analysis of Ricardo and Marx dealing with the invariant standard of value and the transformation problem. For the relatively small number of pages in Sraffa’s major theoretical work, it has had a deep and lasting imprint on the profession. Though he must be

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placed alongside Joan Robinson, that other “giant” who sought to persuade economists to rethink their most basic beliefs (both she and Sraffa played key roles in originating what is known as the “capital theory controversy”). For one to deny this, as Skousen does, is to blindfold oneself, and cling to the security of repeating outmoded principles of economics. Even the most ardent neoclassicists have come to admit some of the theoretical failures of the “neo-classical parable”. Parenthetically, what also falls away is the Keynesian downward sloping MEC curve and his analysis of the demand schedule for assets. These constructions are shown to be inconsistent with the findings of the capital theory debate regarding capital reversing and re-switching. Modern Keynesians are aware of the need to purge Keynes from the vestiges of his neo-classical assumptions. How does Skousen handle these developments as they come through Sraffa’s work? How does he convey to his students the excitement of a discipline that is undergoing a paradigmatic shift, as it draws back to and modernizes the classical surplus approach? Consider the following coming at the end of Skousen’s comments about Sraffa’s contribution where he claims to inform the reader about “What is Sraffian Economics” (he does not explain much at all):

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Sraffa’s economics is a strange mix of Ricardo, Marx and Keynes, in the end rejecting orthodox neoclassical economics and the theory of consumer demand and marginal utility. It is an ideal document for wholesale government intervention and totalitarian central planning. Needless to say, Sraffian economics represents a very small percentage of the economics profession (Skousen, p. 108).

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Well, my startled reaction to this is what is this man saying?; and has he been that absent from the theoretical developments on his own discipline over the last two decades or so? This is the first time I have come across the notion that Sraffa’s work is “strange”; and while Skousen is right about what is being rejected, I have seen no analysis, even on a quite simple level, as to the basis for the rejection. But what is really strange is to consider Sraffian economics as a means to justify a totalitarian political and economic society. It would appear that Skousen’s position is to equate neoclassicism with upholding freedom, and its rejection – even in the face of its inability to explain economic reality and obvious theoretical weakness – is to opt for dictatorship. If this is not strange, then I do not know what is. His statement must be taken to reflect a very narrow anti-scholarly view, which is itself strange coming from a professor teaching a course in the History of Economic Thought. But one finds other statements in the book along similar lines. We did mention that Skousen informs his readers at the onset of his chapter on Ricardo, that Ricardo’s analysis takes economics down a dangerous road. 291

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Thus Ricardo’s primary concern, which was the investigation of the laws which regulate the distribution of the net product among the classes of society, was dangerous because it opened up the reality of class conflict, and turned attention away from what Skousen considers as Adam Smith’s “harmonious” growth model. This harmonious world is seen by Skousen as one in which, “Workers, Capitalists, and Landlords Work Together to Produce Goods and Services – in pursuit of their own self interest” (Skousen, p. 23). Of course they do; but in and of itself this statement tells little and hides more than it reveals. How does this supposedly harmonizing force preclude conflict? What I think is forming Skousen’s mindset here, is his belief that each economic class thinks that the interest of the other classes are identical to his own, and that this commonality is reflected on a belief in a “natural” law solution to the values of the distributive variables that sees factor incomes as flowing from the same explanatory pricing principles. And the operational structures for this belief was Smith’s adding-up theory of prices with its implicit consideration of wages and profits as independent entities in the determination of the cost of commodities. This independence can be seen as an attempt to place labor and capital on the same footing as contributors to the production of output, thereby masking any conflict of interests between capitalists and workers. The various categories of income are seen as rewards for different kinds of sacrifice, each of which provides a contribution to production: the worker foregoes his leisure, receiving wages as the reward; the capitalist foregoes the consumption of his capital receiving profit (or interest) as the reward; the landlord foregoes the use of his land, receiving rent as the reward. This production process is a harmonious one, in which an ‘input’ makes a distinct contribution and receives an appropriate (marginal productivity determined) reward. Thus, harmony is expressed as an income analysis based upon the marginal productivity theory and associated aggregate production function. But the notion of such a function, which possesses the property that capital per man is inversely related to the rate of profit, has been discredited. It may not be possible to order production techniques according to their capital intensity; there is no monotonic relationship between capital intensity and the rate of profit, or between capital intensity and the wage rate. What this amounts to is simply doing away with the aggregate production function and the marginal productivity theory for a determination of income shares based on it. Thus, Ricardo developed his theory as an attack upon Smith’s cost-determined (harmonious) theory of price; that is, on Smith’s view that in a society characterized by private property, the price of a commodity is determined by the sum of its three constituent and independent parts: wages, profits and rent.

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What was later dubbed by Marx as Smith’s “trinity formula”. But if there is no unique equilibrium value for the distributive variables that implies optionally, then what is the theoretical basis for the rejection of the conflict of class interest? It is likely that Smith based his contention that a rise in wages would produce a rise in prices on this implicit assumption of independence of the distributive variables from each other. But Ricardo goes to great lengths to demonstrate that a rise in the real wage would produce a reduction in profits, while causing some prices to fall at the same time as others might rise when considered in terms of a particular commodity chosen as the standard of measure. It is interesting to note that the inverse relation between the wage and the rate of profit has come back in modern times as a piece of the neoclassical edifice in the form of the wage-curve as the “factor-price frontier”, where a point on the frontier established unique equilibrium values for the distributive variables, thus making it possible to overlook the possible conflict of interest. But as it has been shown (Garagzani, Lavor & Bober, p. 4) that one cannot determine distribution within a context of a theory of prices, then the mask falls away and conflict over the distribution of the surplus comes to the fore. The analysis of this does not, as Skousen would have it, take economics down a dangerous road; but it leads along a safe road to a state of enlightment, if one is studying economics to really understand how the society functions and not as an abstract exercise. Let me ask Skousen again, whether he believes that his students believe that the determination of the wage is the usual result of a mutually agreed upon response to some productivity principle; and is not the result of a power structure and struggle normally within the frameworks of a bargaining situation. The student’s own experience or what they have witnessed in their own families provides the obvious answer here. Yet what makes Ricardo dangerous is Skousen’s view of Ricardian economics as leading straight to Marx; and it does open the way for a Marxian interpretation but not as straightforward as Skousen intimates. A bit of instruction may be in order here. Of course, Ricardo did adopt a cost of production approach to formulate his theory of prices, i.e. an ‘embodied labor’ standard as distinct from Smith’s ‘labor commanded’ standard; but this should not be taken that Ricardo believed that prices of commodities are actually proportional to the embodied labor directly and indirectly required for their production (neither did Marx). It was an approach to provide a criticism of Smith’s theory; through it one demonstrates that the distributive variables are not independent of each other. But there is another related point. If we hold wages at the subsistence level, then the rate of profit can be shown to depend on the conditions of production in the industries involved in the production of the wage goods. Profits thus are identified with the surplus produced in the system, with the distributive conflict 293

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being that of labor’s attempt to gain part of the surplus which if successful brings wages above subsistence and, given the production conditions, reduces net profits. Now if we suppose the extreme case of “classical thriftiness” (to highlight the essential role of the capitalist class) then the propensity to save out of profits is unity, so that a volume of profits creates an equal volume of savings and investment. In equational form we have:

8

Pt

9

Yt

=

1 sk

·

I Y

(1)

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and with the savings propensity on the part of capitalists (sk) being unity we find: Pt It = (2) Yt Yt Of course, matters are not this straightforward if we drop the extreme assumption of sw = 0 (the workers propensity to save), so that workers save and receive part of the surplus. But the message in so far as we have taken this analysis, is that the distributional conflict affects economic growth through its impact on profits and thereby on savings and capital accumulation. An analysis of the division of the net product is tied up with that of capital accumulation and economic growth. Skousen’s point in his “analysis” of Ricardo is “He created a new economic way of thinking, away from the ‘harmonious’ growth model of Adam Smith and towards an antagonistic distribution model where workers, landlords and capitalists fought over the economy’s desserts. Ricardo emphasized class conflict rather than Smith’s ‘natural harmony’ of interests.” Upon reading these words one is taken aback with the simplistic nature of it all, and the feeling that the reader comes away thinking that Smith is “good” and Ricardo is “bad”, and that their analyses can be compartmentalized. This presents an erroneous impression regarding the development of economic ideas, and prevents an understanding of how the economy really functions. Skousen’s chapter on Smith (as he puts it “It All Begins With Adam”) does not present even a primitive growth model to show operationally what Smith must have had in mind. The chapter for the most part is relegated to snippets of information that repeat Smith’s optimistic message about a society characterized by self-interest, the “invisible hand” (Smith, 1965, pp. 423–425) that somehow automatically maximizes the growth rate of the national product, free competition, the presence of limited government and so on. Had Skousen bothered to construct a model reflective Smith’s approach to the accumulation of capital, he would have worked through to some interesting,

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though from Skousen’s view, perhaps disquieting observations. A model of Smith’s ideas can be constructed on the bases that the only form of capital is circulating (corn) capital; and the productive corn sector transforms the existing capital stock (last years harvest) into a greater quantity of capital by the use of capital as seed corn and by the employment of labor. We can simply add the corn, which the unit of labor sows to that which he consumes, to give the total amount of corn needed to employ a unit of labor. So that the whole of the corn that the laborer absorbs can be considered as the wage. Now if the wage is given (both in the technical sense as the amount that a unit of labor can sow within a working day and that which is needed for consumption), then the total level of employment is determined by the size of the capital stocks, i.e. last time period’s harvest. We can set out the story in the following ways. Let Yt – 1 be the output of corn in t – 1, w = the wage in terms of corn, and p = labor productivity, i.e. the amount of corn harvested per unit of labor employed. The amount of employment (assuming that all of the capital is itself employed both directly and indirectly) will be equal to Ytw– 1 ; with the gross output of p corn in year (t) being equal to p Ytw– 1 or w Yt – 1. And the growth rate of capital p (i.e. the rate of accumulation) is equal to w – 1. Thus, given the values for (p) and (w) the growth rate of the economy is maximized when the whole of the capital stock (the corn output) is employed. But Smith understood this to be an extreme case, as some of the capital will not be used “productively”; let us say as wage to non-corn producers (“unproductive” laborers). This “leakage” means that the capital stock used in the present period t (Kt) will be less than the available capital at the end of t – 1 – there will be “idle” capital in the sense that it is not used to produce more capital. Then we can write:

27

Kt = k (Yt – 1)

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Total employment now comes to

32

Yt =

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(3)

k