ECONOMIC THEORY IN RETROSPECT Mark BlaugECONOMIC THEORY IN RETROSPECT Fourth edition MARK BLAUG University of London Institute of Education and University of Buckingham CAMBRIDGE UNIVERSITY PRESS CAMBRIDGE NEW YORK PORT CHESTER MELBOURNE SYDNEYECONOMIC THEORY IN RETROSPECT Fourth edition ‘This is a fully revised fourth edition of a book that has made a name for itself asa unique textbook on the history of economic thought. Teachers who have long deplored the antiquarian flavor of so many books in this field will welcome a text such as this one which studies theories rather than theorists, and which focuses on the logical coherence and explanatory value of the mainstream of economic ideas, undiluted by biographical coloring or historical digressions. ‘Students who have grown weary of reading secondhand commentaries on the great economists, which really bring them no nearer to the original masterpieces of economics, will derive fresh inspiration from the detailed Reader's Guides provided here: chapter by chapter, and sometimes paragraph by paragraph, the author takes us through the leading works of Adam Smith, David Ricardo, John Stuart Mill, Karl Marx, ‘Alfred Marshall, Philip Wicksteed, and Knut Wicksell. A series of annotated biblio- graphies then guide the student through the enormous literature that has grown uparound these classics. For the present edition, the later chapters of the book on monetary theory and ‘macroeconomics have been entirely rewritten to take account of the rise of monetarism and rational expectations. The continuous debate on what-Keynes-really-meant has resulted in a thorough revision of the Keynes chapter, marking the successive stages in what is now a history of interpretations of Keynes over a period of almost 50 years. There is an entirely new chapter on the history of location theory, a subject almost totally neglected in rival histories of economic thought. There are minor additions to the earlier chapters on Ricardo and Marx and major additions to the middle chapters on marginal productivity theory and welfare economics, such as new sections on the history of the concept of entrepreneurship and recent developments in the never-ending controversy about marginal cost pricing of public utilities. And, of course, the Notes on Further Readings have been thoroughly updated.Published by the Press Syndicate of the Univesity of Cambridge The Pitt Building, Trumpington Street, Cambridge CB2 IRP 40 West 20th Street, New York, NY 10011, USA. 10 Stamford Road, Oakleigh, Melbourne 3166, Australia First edition © Richard D. Irwin. Inc. 1962 Second edition © Richard D. Irwin. Inc. 1968 Third edition © Mark Blaug 1978 Fourth edition © Mark Blaug 1985 First published by Richard D. Irwin. Inc. 1962 Second edition 1968 Third edition published by the Cambridge University Press 1978 Fourth edition published by the Cambridge University Press 1985 Reprinted 1986, 1987, 1988, 1990 Printed in Great Britain at Woolnough Bookbinding, Irthlingborough, Northants. British Library Cataloguing in Publications Data Blaug, Mark Economic theory in retrospect. —4th ed. 1. Economics - History I Title Library of Congress Cataloguing in Publications Data Blaug, Mark Economic theory in retrospect. Includes bibliographical references and indexes 1, Economics — History. I. Title. HBT75.B664 1977 330.1709 ISBN 0 521 30354 0 hard covers ISBN 0 521 31644 8 paperback‘Someone said: “The dead writers are remote from us because we know so much more than they did.’ Precisely, and they are that which we know. 1. 8. ELIOT We hold that for the mastery of a speculative controversial science a certain multiplication of authorities is desirable. The false tendency of teachers to inculcate, and pupils to learn by rote, the very phrases and ‘metaphors of a favourite author can only be corrected by dividing the allegiance of those who, like the Romans of old, ‘rush to slavery’. Hence the history of theory is particularly instructive in political ‘economy as in philosophy. History and literature, dialectics and all that the Greeks comprehensively called ‘words,’ seem the best correc- tion of the narrow prejudices and deceptive associations which are sure to be contracted by those who have been confined to asingle school or system. F. ¥. EDGEWORTHPreface First edition ‘This book is a study of the logical coherence and explanatory value of what has come to be known as orthodox economic theory. The history of this body of received doctrine goes back at least as far as Adam Smith. I am not concerned, however, with historical antecedents for their own sake. My purpose is to teach contemporary economic theory. But contemporary theory wears the scars of yesterday’s problems now resolved, yesterday’s blunders now corrected, and cannot be fully understood except asa legacy handed down from the past. Itis for this reason that I have adopted ahistorical presentation. Nevertheless, the focus is on theoretical analysis, undiluted by entertaining historical digressions or biographical coloring. Students are often told of the inspiration to be derived from the study of the history of economics. They are not so often reminded of the inspiration which the historian of economic thought derives from a study of contemporary economic theory. In truth, one should no more study modern price theory without knowing Adam Smith than one should read Adam Smith without having learned modern price theory. ‘There is a mutual interaction between past and present economic thinking for, whether we set it down in so many words or not, the history of economic thought is being rewritten every generation. The study of the history of economics must derive its raison d’étre from the extent to which it encourages a student to become acquainted at first hand with some of the great works of the subject. It is for this reason that I have included Reader’s Guides to the works of Smith, Ricardo, Mill, Marx, Marshall, Wicksteed, and Wicksell. The importance of reading original sources in a subject such as economics cannot be overemphasized. We must all have had the experience, after reading a commentary on some great book, of going back to the text itself and finding how much more there is in it than we had been led to expect. Commentaries are tidy and consistent, great, books are not. This is why great books are worth reading. I wish to express my gratitude to H. Barkai, B, Balassa, W. Fellner, T. W. Hutchison, R.L. Meek, and G. Shepherd who read parts of the manuscript and made many helpful suggestions. I am also grateful to my graduate students, too numerous to mention, who from time to time argued me off some of my pet hobbyhorses. Further, I must thank Miss Margaret Lord for her stylistic improve- ments and Mrs A. Granger for the efficient typing of the manuscript viivill Preface I am indebted to the following publishers for permission to quote from works published by them: Harper and Brothers - J. Viner, Studies in the Theory of International Trade, copyright 1937; University of Chicago Press - Adam Smith, 1776-1926, ed. J.M. Clark, and others, copyright 1928 by the University of Chicago, and G.J. Stigler, ‘The Development of Utility Theory, II’, Journal of Political Economy, October, 1950; Harcourt, Brace and World - J.M. Keynes, The Economic Consequences of the Peace, copyright 1919; Review of Economic Studies - O. Lange, ‘Marxian Economics and the Modern Economic Theory’, Review of Economic Studies, June, 1935; The Macmillan Company - A. Marshall, The Prin- ciples of Economics, copyright 1930, and K. Wicksell, Lectures in Political Economy, copyright 1934; and Routledge and Kegan Paul - P. Wicksteed, The Common Sense of Political Economy, copyright 1934. New Haven, Conn. M. BLAUG November, 1961Preface Second edition What I have tried to do in this book has been so frequently misunderstood that T would like to restate my aims. Presented with the ultra-Marxist thesis that the economic theory of a given period is nothing but a reflection of the prevailing historical and political circumstances, I have wondered whether the diametrically opposite thesis — economic theory for economic theory's sake ~ is no less misleading Suppose one were to read a history of economics which contained no reference whatever to nontheoretical events: would it be less enlightening than a typical Marxist or quasi-Marxist presentation? Of course it would be limited and in- adequate, but that is true of all monocausal interpretations of intellectual history. It is perfectly obvious that much of what we think of as economics had its origin in intellectual responses to major unsettled policy questions: Adam Smith and mercan- tilist restrictions, David Ricardo and the difficulty of raising Britain’s food supply from domestic resources, Keynes and the treatment of mass unemployment in the 1930s are favourite examples. But equally obviously, it must be insisted, great chunks of the history of economic thought are about mistakes in logic and gaps in analysis, having no connection with contemporary events. And so, without pretend- ing that this is the whole story, or even the best part of the story, but merely that itisa part rarely told, I have tried to write a history of economic analysis which pictures it as evolving out of previous analysis, propelled forward by the desire to refine, to improve, to perfect, a desire which economists share with all other: scientists. There is a danger in this sort of treatment. As Francis Bacon said over 300 years ago: ‘For the wit and mind of man, if it work upon matter, which is the contemplation of the creatures of God, worketh according to the stuff and is limited thereby; but if it work upon itself, as the spider worketh his web, then it is endless, and brings forth indeed cobwebs of learning, admirable for the fineness of thread and work, but of no substance or profit’ (The Advancement of Learning, London: 1865, page 32). This book is all about those ‘cobwebs of learning’ but we shall be asking continually: ‘of no substance or profit"? As in the first edition, we begin with the mercantilist writers of the 18th century, not with the medieval schoolmen or with Plato and Aristotle. No doubt, the Greeks made contributions to the history of economic thought, but their economic ideas were so intimately associated with other preoccupations that only a full-scale ixx Preface treatment of Greek philosophy, and particularly Greek political theory, can do them justice. Similarly, scholastic analysis of usury is fascinating in its own right but the background that is required in medieval catholic doctrine to prevent misunderstand- ing of scholastic reasoning would absorb more space than is warranted in a book of this kind. Economics, as a separate discipline of inquiry, did not emerge until the 17th century, perhaps because in preceding centuries economic transactions were not integrated on a national or even a regional basis, perhaps because economic institutions were severely circumscribed by military and political considerations, perhaps because economic motives were prevented from affecting more than a limited aspect of social behaviour. It is not obvious why all economic reasoning before the 17th century was ad hoc, unsystematic and devoid of the recognition of an autonomous sphere of economic activity, but that it was so is hardly ever controver- ted. And since this is a book about economics rather than economists, we will ignore what might be described as the ‘paleontology’ of the subject. As before, the story is carried down to our own times, roughly 1960, although there is more material on activity analysis, economic dynamics, welfare economics, growth models, and technical change — topics that have dominated economics in recent years — in this edition than in the first. To put all my cards on the table, new sections have been added to the chapters on Adam Smith and John Stuart Mill, dealing with their views on the role of the public sector; the notion of the ‘single tax’ is now discussed in some detail in the chapter on population and rent; the treatment of Harrod-Domar growth models in the chapter on Say’s Law has been extended; a new section on the Leninist theory of imperialism has been added to the Marx chapter; a new section on the theory of monopolistic competition has been added to the second Marshall chapter; the chapter on marginal productivity theory has been thoroughly revised and now contains a new section on innovations and relative shares; the chapters on Walras, Pareto, and Keynes have been extensively rewrit- ten; the last chapter of the book, ‘A Methodological Postscript’, has been expanded into an essay on the future prospects of scientific economics; and almost every page of the first edition has undergone some amendment and, I like to think, improve- ment. It is now a better book; it is for others to say whether it was a good book in the first place. In order to encourage students to doubt all commentators, including the author of this book, this edition, like the first one, contains detailed Reader's Guides to seven major works in the history of economic thought. But as some reviewers of the first edition felt that these were more welcomed as heaven-sent cribs than as stimuli to consult the original writers, I should warn readers again that the Guides are neither summaries nor précis; they are running commentaries and more concerned with what the great economists might have meant than with what they actually said. In short, they are expressly designed to be provocative and the student who uses them as a Substitute for the originals is like a connoisseur of vintage wines who has seen old bottles but has never tasted the contents. T wish to thank K. Kubota, E.Kuska, and R.M. Olsen for making specific suggestions that have entered into this revision. I owe a particular debt to MissPreface xi R. Towse and Miss M. Woodhall for their ruthless combing of the entire manuscript: we were friends when we started and, surprisingly enough, we are still friends. London, England MARK BLAUG January, 1968Preface Third edition The first edition of this book appeared in 1962, by which time the history of economic thought had virtually disappeared as a teaching subject in British and American universities. In a perceptive article published in that year, entitled ‘What Price the History of Economic Thought?’, Donald Winch explained why most economists knew little and cared even less about the history of their own discipline: owing to recent developments in modern economics, economists had increasingly come to feel that at long last they were beginning to provide new answers to new problems, or, at any rate, better answers to old problems; such a confident state of mind naturally tends to discourage an interest in predecessors and forerunners. The complacency of the 1960s, however, has given way to the nail-biting of the 1970s. There is nowadays a pervasive and repeatedly expressed sense of ‘crisis’ in economics. In part this reflects, the failure to come to grips with such outstanding contemporary economic problems as stagflation, pollution, and sex and race discrimination in labour markets. This failure to tackle the major economic problems of the day has in turn given rise to such alternative economic doctrines as radical political economy, neo-Marxian economics, and post-Keynesian economics, all of which purport to throw light on these unsolved problems, in the course of which they first criticize and then reject mainstream modern economics. If there is anything to the Winch thesis, we may expect that the current anxiety about the state of modern economics will bring about a revival of interest in the history of economic thought. And, indeed, it is possible to discern definite signs of such a renaissance in the flood of articles and books that has appeared on the history of economics in the last few years, not to mention the reappearance of history-of-thought courses in economics departments around the world. What has been revived, however, is not quite the good old history of economic thought that we knew fifteen or twenty years ago. Some have argued in recent years that we have long misrepresented the historical evolution of modern economics: the so-called Marginal Revolution of the 1870s was not the great breakthrough that marked the advent of modern analytical techniques but a detour from the more fruitful line of attack charted by Ricardo and Marx; starting from Ricardo and Marx on the one hand and from Keynes on the other, a wholly different economics can be constructed than that which rules the textbooks of today, resting as it does on the xiiPreface xiii shoulders of Walras and Marshall. Alternatively, modern economic analysis can be married to Marx or Veblen to produce a strikingly new framework with which to replace the prevailing orthodoxy. Others have no quarrel with Walras and Marshall but take the view that Keynesian macroeconomics has been misunderstood in modern textbooks and that Keynesian economics as we know it bears little resem- blance to the economics of Keynes himself. These sorts of arguments open up questions in the history of economic thought that many had long considered closed. Suffice it to say that the history of economic thought now seems to be becoming the arena in which some of these controversial questions will be fought out. Inshort, the subject is back on the map and any book onit, such as the present one written as long ago as 1962, stands in need of drastic revision and updating. Most of the changes have come in the last two chapters of the book dealing with Keynesian economics and economic methodology. Indeed, these chapters have been entirely rewritten in the light of recent debates on the Clower-Leijonhufvud dis- equilibrium interpretation of Keynes and the structure of scientific revolutions among philosophers of science. I still believe that questions about the meaning of economics must be asked at the end and not at the beginning of the study of the history of economic thought. Nevertheless, an increasing number of methodological issues are now raised throughout the text, pointing forward to the final ‘Methodolo- gical Postscript’ which closes the book. Apart from drastic revisions in the last two chapters, chapter 4 on Ricardo is now followed by a discussion of Sraffa’s classic book, Production of Commodities by Means of Commodities (1960), which may be justly described as Ricardo in modern dress. Chapter 7 on Marx is likewise revised here and there to take account of the remarkable rejuvenation of Marxian economics in recent years. The post-Keynesian theory of distribution of Robinson, Kaldor, and Pasinetti has made us think again about the so-called ‘marginal productivity theory of distribution’, thereby producing further changes in chapter 11. Similarly, the reswitching debate that has filled the journals over the last few years has altered our perspective of the Austrian theory of capital interest and this new perspective is reflected in a sharpening of issues raised in chapter 12. The final outcome is a book in the same spirit as the original but geared to the theoretical concerns of the 1970s rather than those of the 1960s. In 1962, bibliographies in the history of economic thought were few and far between and my extensive ‘Notes on Further Reading’ at the end of every chapter may be said to have filled a real need. Since then, however, the appearance of History of Political Economy, the first English specialist journal in the history of economic thought, and the book lists and abstracts of articles in the Journal of Economic Literature, coupled with the published Index to Economic Journals in fourteen volumes (spanning the period 1886 to 1972 by author and subject), have simplified the problem of keeping up with the literature. Nowadays, a student in search of reading material would be better advised to skip my Notes and go straight to the 135, pages of bibliographical notes appended to H. W. Spiegel, The Growth of Economic Thought (1971), which includes almost everything that I cite and much more besides. Nevertheless, I have not discarded the ‘Notes on Further Reading’ in this thirdxiv Preface edition of the book, partly because a reader may wish to check my personal preferences among the secondary literature and partly because the Notes serve me as footnotes, listing not only what I recommend to others but also what has particularly influenced me in the course of writing this book. However, in revising and updating these bibliographical essays, I have become more selective than before in the knowledge that obsessive readers have other places to go for encyclopaedic lists of books and articles. Over the years I have had many unsolicited but welcome reactions from various readers, some of whom have pointed to errors, misprints, and downright mistakes in the text. Their names are too many to mention but I owe a particular debt to D. Hamblin for his careful reading of the previous edition and to S. P. Hersey for similar diligence applied to the present one. London, England MARK BLAUG December, 1976Preface Fourth edition I have sometimes been asked: How should this book be read? ‘From beginning to end’ is my answer. Nevertheless, this answer never satisfies readers with the maddening habit of dipping into books, browsing through a chapter here and a chapter there. To those readers, I must insist that the arguments build up slowly and that later chapters take for granted knowledge conveyed in earlier ones: I have provided numerous summaries of what has gone before but, nevertheless, cannot hope to make every chapter truly self-contained. Thus, the browser pays a heavy price. However, for those who persist in starting in the middle of books, the natural breaks in this work are chapters 2-7 on the classical economists, chapters 8-14 on the neoclassical economists, and chapters 1, 5, 15 and 16 on monetary theory and macroeconomics. Chapter 17, the last chapter, stands by itself as a commentary on 250 years of economic theorizing. ‘The major changes in this edition come in the later chapters of the book on the quantity theory of money and Keynesian economics. I have now taken account of the rise of ‘monetarism’ and the ‘new classical macroeconomics’, emphasizing the connections between these recent developments and the older monetary economics ‘of Hume and Ricardo. The persistent debate on ‘what Keynes really meant’ has accelerated in the 1970s, almost as if the passage of time has aggravated rather than alleviated the problem of making sense of Keynes’ arguments. This has resulted in a significant revision of my chapter on Keynes, marking the successive stages in what is now a history of interpretations of Keynes over a period of almost 50 years. I have drastically cut the final chapter on methodology because it duplicates a more detailed discussion of these issues in my book, The Methodology of Economics (1980). There is an entirely new chapter on the history of location theory, a subject almost totally neglected in rival histories of economic thought, which is of great interest in its own right and also serves to explain the recent emergence of urban and regional economics as specialized fields of study. There are minor additions to the earlier chapters on Ricardo and Marx and major additions to the middle chapters on marginal productivity and welfare economics, such as new sections on the history of the concept of entrepreneurship and recent developments in the never-ending controversy about marginal cost pricing of public utilities. And, of course, the Notes xvxvi Preface on Further Readings have been scrupulously updated. Over and above such specific changes, the text in this edition has been pruned and simplified in various places where earlier versions left something to be desired in the way of clarity. Thad hoped to make the fourth edition shorter than the third edition but so great are the pleasures of adding and so great are the pains of cutting that, at the end of the day, I was only too pleased to discover that I had not actually lengthened what is already a much too long book. London, England MARK BLAUG February, 1984Contents Glossary of mathematical symbols page xxiii Abbreviations xxvi Introduction. Has Economie Theory Progressed? 1 NOTES ON FURTHER READING 1 Pre-Adamite Economics 10 MERCANTILISM: 1. The Balance-of-Trade Doctrine. 2. The Specie-Flow Mech- anism. 3. The Defence of Mercantilism. 4. Precursors of Keynes? 5. Rational Elements in Mercantilist Theory. THE 18TH-CENTURY PREDECESSORS: 6. The Mercantilist Dilemma and the Quantity Theory of Money. 7. The Theory of Creeping Inflation. 8. Cantillon’s Essay. 9. Monetary Analysis, 10. The Real Rate of Interest. paysrocracy. 11. The Meaning of Physiocracy. 12. The Tableau Economique. 13. The Single Tax. 14. Say'sLaw. 15. Scholastic Influences: An Afterthought. NOTES ON FURTHER READING 2° Adam Smith 35 1. Adam Smith and the Industrial Revolution. READER'S GUIDE TO THE ‘WEALTH OF NATIONS’: 2. Division of Labour. 3. The Measure and Cause of Value. 4. Costof-Production Theory. 5. Supply Determined Prices. 6. Wages. 7. Profits. 8. Relative Wages. 9. Rent. 10.A Social Unit of Accounting. 11. The Trend of Prices. 12. Capital and Income. 13. Banking. 14. Productive and Unproductive Labour. 15. An Optimum Investment Pattern. 16, Synoptic History. 17. The Invisible Hand. 18. Taxation and the Public Debt, 19. Adam Smith as an Economist. NOTES ON FURTHER READING 3 Population, Diminishing Returns, and Rent 67 ‘THE THEORY OF POPULATION: 1. The Population Explosion. 2. Malthus’ Analy- tical Schema. 3. The Empirical Content of the Theory. 4. Automatic Checks. 5. The Optimum Theory of Population and Subsistence Wages. 6. Malthus- ianism Today. DIMINISHING RETURNS AND THE THEORY OF RENT: 7. The Law of Diminishing Returns. 8. Differential Rent. 9. The Alternative Cost of Land. 10. Land asa Factor of Production. 11. Site Value Taxation. NOTES ON FURTHER READING xviixviii Contents Ricardo’s System 1. The Theory of Wheat Profits or the Corn Model. 2. The Labour Theory of Value. 3. Capital Costs and Labour Values. 4. The Ricardo Effect. 5. The Invariable Measure of Value. 6. The Fundamental Theorem of Distribu- tion. 7. The Effect of Capital Accumulation. 8. The Trend of Relative Shares. 9. Technical Change. READER'S GUIDE TO ‘PRINCIPLES OF POLITICAL ECONOMY’: 10. Value. 11 Relative Wages. 12. The Invariable Measure of Value. 13. Demand and Supply. 14. Social Accounting. 15. Did Ricardo Hold a Labour Theory? 16. Rent. 17. Agricultural Improvements. 18. Wages. 19. Profits. 20. Foreign Trade. 21. Law of Comparative Cost. 22. The Natural Distribution of Specie. 23. The Purchasing Power Parity Theory. 24. Say’s Law. 25. Pessimism? 26. Monetary Theory. 27. The Bullionist Controversy. 28. The Machinery Ques- tion, 29. Taxation. 30. The Lasting Influence of Ricardo. 31. Sraffa: Ricardo in Modern Dress. 32. Ricardo in Still More Modern Dress. NOTES ON FURTHER READING Say’s Law and Classical Monetary Theory SAY'S LAW OF MARKETS: 1, Say’s Identity. 2 Dichotomization of the Pricing Process. 3. Say’s Identity and the Quantity Theory of Money. 4. Say’s Equality. 5. Say’s Equality in Classical Writings. 6. Keynes and Say’s Law. 7. The Direct Mechanism. 8. The Indirect Mechanism. 9. Saving, Invest- ment, and Hoarding. 10. The Real Interest Rate. 11. Forced Saving. 12. Conclusion. MALTHUS’ THEORY OF GLUTS: 13, Malthus’ Case. 14, The Doctrine of Underconsumption. 15. Exponential Growth. 16. What Malthus Actually Said. 17. Ricardo and Malthus. NOTES ON FURTHER READING John Stuart Mill READER’S GUIDE TO THE ‘PRINCIPLES OF POLITICAL ECONOMY’: 1, Laws of Pro- duction and Distribution. 2. The Doctrine of Productive Labour. 3. Theory of Capital. 4. The Wages Fund Doctrine. 5. Advance Economics and Synchroni- zation Economics. 6. The Machinery Question. 7. The Rate of Growth of the Factors of Production. 8. Socialism. 9. Custom and the Laws of Distribu- tion. 10. The Distributive Shares, 11. The Abstinence Theory of Interest. 12. The Theory of Value. 13. The Quantity Theory of Money. 14. Inflation. 15. The Loanable Funds Theory. 16. Say's Law. 17. The Currency-Banking Controversy. 18. The Real Bills Doctrine. 19. Mill’s Position on Monetary Management. 20. Theory of International Values. 21. International Wage and Price Levels. 22. Hume's Law. 23. Transfer Payments. 24. The Vent-for- Surplus Doctrine. 25. The Basis of a Theory of International Trade. 26. Statics and Dynamics. 27. The Falling Rate of Profit. 28. The Stationary State. 29. Taxation. 30. The Incidence of Taxes. 31. The Public Debt. 32. The Scope of Government. 33. Education in Classical Economics. 34. The Classical Economists and the Factory Acts. 35. John Stuart Mill as an Economist. NOTES ON FURTHER READING Marxian Economics 1, Terminology. 2. Value and Surplus Value. 3. The Great Contradiction. 4. The Transformation Problem. 5. Solutions of the Transformation Problem. 6. Historical Transformation. 7. What Price Value? 8. The Marxist Case for the Labour Theory. 9. Profit as Unearned Income. 10. Marx and Bohm- 88 149 179 225Contents 10 Bawerk. 11. Surplus Value and Economic Surplus. 12. The Laws of Motion of Capitalism. 13. The Law of the Falling Rate of Profit. 14. A Glance at the Data. 15. Capitalsaving Innovations. 16. The Reproduction Schema. 17. Business Cycles. 18. The Investment Function. 19. The Myth of a Labour- saving Bias. 20. Impoverishment of the Working Class. 21. Economic Imperialism. 22. The Role of Institutional Assumptions. READER'S GUIDE TO ‘CAPITAL’: 23. Value. 24. Socially Necessary Labour. 25. Commodity Fetishism. 26. Theory of Money. 27. Surplus Value. 28, The Factory Acts. 29. Marx’s Use of Historical Material. 30. Division of Labour and Machinery. 31. Surplus Value and Labour Productivity. 32. The Accumu- lation of Capital. 33. Absolute and Relative Impoverishment. 34. Primitive Accumulation. 35. The Costs of Distribution. 36. The Turnover of Capital. 37. The Reproduction Schema. 38. The Great Contradiction Again. 39. The Transformation Problem. 40. The Law of the Falling Rate of Profit. 41. Capitalsaving Innovations. 42. Foreign Trade. 43. Business Cycles. 44. Money and Interest. 45. Theory of Rent. 46. Marx as an Economist. NOTES ON FURTHER READING ‘The Marginal Revolution THE EMERGENCE OF MARGINAL UTILITY: AN ABSOLUTIST OR RELATIVIST INTER- PRETATION? 1. The New Departure. 2. The Maximization Principle. 3. Value and Distribution, 4. The Genesis of Marginal Utility Theory. 5. A Multiple Discovery? 6. When is a Revolution a Revolution? 7. The Slow Uphill Struggle. JEVONS: 8. The Theory of Exchange. 9. Bilateral and Competitive Exchange. 10. The Catena. 11. Disutility of Labour. 12. Negatively or Positively Sloped Labour Supply Curves. 13. Capital Theory. OTHER FORERUNNERS: 14. Cournot on Profit Maximization. 15. Duopoly Theory. 16. Dupuit and the French Engineering Tradition. 17. Thiinen’s Marginal Productivity Theory. 18. Gossen’s Second Law. NOTES ON FURTHER READING Marshallian Economics: Utility and Demand uritity THEORY: 1. The Measurability of Utility. 2. Operational Measurement of Utility. 3. The Bernoulli Hypothesis. 4. Gambling and Insurance. 5. The Bernoulli Hypothesis and Progressive Taxation. 6, Derivation of Demand Curves. 7. The Constancy of the Marginal Utility of Money. 8. Restatement. 9. The Indifference-Curve Approach. 10. The Revealed Preference Approach. 11. Marshallian Demand Curves, 12. The Status of the Subjective Theory of Value. WELFARE ECONOMICS: 13. Consumer's Surplus. 14, Restatement. 15, The Four Consumer's Surpluses. 16. Tax-Bounty Analysis. NOTES ON FURTHER READING Marshallian Economics: Cost and Supply 1. The Short Run. 2. Quasi-Rents. 3. The Long Run. 4, External Eoon- omies. 5. What are External Economies? 6. Producers’ Surplus. 7. The Asymmetrical Welfare Effect. 8. The Representative Firm. 9. Monopolistic Competition. READER'S GUIDE TO THE ‘PRINCIPLES OF ECONOMICS”: 10. Introduction. 11 Scope, Substance, and Method. 12. Wants and Activities. 13. Marginal Usility. 14. Consumer's Demand, 1S. Consumer's Surplus, 16, The Law of Diminishing Returns. 17. The Growth of Population. 18. The Growth of 294 328 37111 Contents Capital. 19. The Division of Labour or Industrial Organization. 20. Equi- librium of Demand and Supply. 21. Stability Conditions. 22. Short Run and Long Run. 23. Joint and Composite Demand and Supply. 24. Marginal Net Product. 25. Rent and Quasi-Rent. 26. Increasing Returns. 27. The Particular Expenses Curve. 28. Tax-Bounty Analysis. 29. Theory of Monopoly. 30. The Marginal Productivity Theory of Distribution. 31. The Supply of Productive ‘Agents. 32. The Peculiarities of Labour. 33. The Theory of Interest. 34. The Theory of Profit. 35. The Theory of Rent. 36. The Course of Economic Pro- gress. 37. The Greatness of Marshall's Contribution. NOTES ON FURTHER READING Marginal Productivity and Factor Prices THE DEMAND FOR FACTORS OF PRODUCTION: 1. Marginal Productivity Theory. 2. The Normative Implications, 3, Exploitation. 4. Is Continuous Substitution Possible? 5. The Theory of Imputation. 6. Linear Programming. 7. The Hobson Objection. 8 The High-Wage Economy Theory. 9. The Present Status of Marginal Productivity Theory. LINEARLY HOMOGENEOUS PRODUCTION FUNCTIONS: 10. Product Exhaus- tion. 11. The Formal Properties of Linearly Homogeneous Production Func- tions. 12. The Economic Meaning of Linearly Homogeneous Production Functions. THE OPTIMUM SIZE OF THE FIRM: 13, Wicksell’s Proof of Product Exhaustion. 14. The Indivisibility Thesis. 15. Genuine Variable Returns to Scale. 16. Dis- economies of Management. 17. The Growth of Firms. THE THEORY OF PROFIT: 18. The Meaning of Pure Profit. 19. The Entrepreneur as a Factor of Production. 20. The History of the Concept of Entre- preneurship. 21, Profit as a Return to Uncertainty Bearing. 22. Profit as a Return to Innovations. 23. Profit as a Return to Arbitrage. AGGREGATE PRODUCTION FUNCTIONS: 24. The Concept of Micro-Production Functions. 25. The Problem of Aggregation. 26. Measurement of Capital. TECHNICAL CHANGE AND PROCESS INNOVATIONS: 27. Taxonomy. 28. The ‘Automation Bias in Technical Change. 29. The Inducement Mechanism. 30. ‘The Neglect of Technical Change. 31. Marginal Productivity Once Again. READER'S GUIDE TO THE “COMMON SENSE OF POLITICAL ECONOMY’. 32. Con- sumer Behavior, 33. The Content of the Maximand, 34. Price Formation. 35. Supply as Reverse Demand. 36. The Doctrine of Alternative Costs. 37. Alternative Costs and Factor Prices. 38. Distribution. 39. The Laws of Return. 40. The Law of Rent. 41. Applied Economics. NOTES ON FURTHER READING The Austrian Theory of Capital and Interest BOHM-BAWERK’S THEORY OF INTEREST: 1. The Productivity of Greater Round- aboutness, 2, The Three Reasons for Interest. 3. The First Reason. 4. The Second Reason. 5. The Third Reason. 6. The Interaction of the Three Reasons. 7. The Determination of Interest. THE AVERAGE PERIOD OF PRODUCTION: 8. Bohm-Bawerk’s Model. 9. The Definition of the Average Period. 10. The Calculation of the Average Period. 11. Is the Average Period Infinitely Long? 12. Waiting as an Original Factor. 13, Synchronization of Production and Consumption. 14. The Average Period and the Capital-Output Ratio. THE SWITCHING THEOREM: 15. Double Switching. 16. The Many-Products- One-Technique Simplification. 17. Is Switching Likely? 18. A Post-Mortem. FISHER’S THEORY OF INTEREST: 19. Willingness and Opportunity. 20. Rate of 425, 498Contents 13 14 15 16 Return over Cost. 21, Diagrammatic Exposition. 22. Some Uses of the Diagram. 23. The Theory of Investment Decisions. 24. The Real and the Money Rate of Interest. 25. The Real Rate in a Dynamic Economy. 26. Real ‘Versus Monetary Theories. THE RICARDO EFFECT: 27. The Concertina Effect. 28. The Demonstration of the Effect. 29. The Meaning of Capital Rationing. 30, Conclusions. 31. Money and Real Wages. READER'S GUIDE TO THE ‘LECTURES ON POLITICAL ECONOMY’, VOLUME 1: 32. Utility and Value. 33. Welfare Economics. 34, Imperfect Competition, 35. Production and Distribution. 36. Capital. 37. The Capital Structure. 38. Béhm-Bawerk’s Theory of Interest. 39. The Optimum Storage Period. 40. The Value of Capital. 41. The Wicksell Effect. 42. Definitions of Capital. 43. The Accumulation of Capital. 44. Cassel’s Theory of Social Economy. 45. Durable Capital Goods. 46. Wicksell as an Economist. NOTES ON FURTHER READING General Equilibrium and Welfare Economics WALRASIAN GENERAL EQUILIBRIUM: 1. The Concept of General Equi- librium. 2. The Walrasian System. 3. The Existence of General Equi- librium. 4. Stability and Determinacy. 5. Capital Theory. 6. Monetary Theory. 7. Evaluation of Walras’ Contribution. PARETIAN WELFARE ECONOMICS: 8. The Optimum Exchange Conditions. 9. A. Pareto Optimum. 10. The Scitovsky Double Criterion. 11. Recent Welfare Economics. 12. The Marginal Conditions, 13. The Optimal Characteristics of Perfect Competition. 14. Nonmarket Interdependence. 15, Public Goods. 16. Pigovian Welfare Economics. 17. Second-Best Solutions. 18. Marginal Cost Pricing. 19. The Mislaid Maxim. 20. Cost-Benefit Analysis. 21. Back to the Conflict Between Efficiency and Equity. NOTES ON FURTHER READING Spatial Economics and the Classical Theory of Location 1. The Isolated State. 2. Rent Theory. 3. The Thiinen Problem Again. 4. The Theory of Rings. 5. Industrial Plant Location Theory. 6. The Three- Points Problem. 7. Sales Areas. 8, New Developments in Location Theory. 9. Weber's Theory of Industrial Location, 10. Market Area Analysis. 11. Isard’s General Equilibrium Theory. 12. Linear Transport Functions. 13. What Survives of Classical Location Theory? 14. The Continued Neglect of Location Theory. NOTES ON FURTHER READING The Neoclassical Theory of Money, Interest and Prices 1. What is the Quantity Theory of Money? 2. Fisher and Marshall. 3. Wick- sell’s Rehabilitation of the Indirect Mechanism. 4. The Cumulative Process. 5. Monetary Equilibrium. 6. Saving-Investment Concepts. 7. Price Stabili- zation. 8. Expectations. 9. Keynes and Wicksell. 10. The Demand for Money After Keynes. READER'S GUIDE TO WICKSELL’S ‘LECTURES’, VOLUME II: 11. Velocity. 12. The Demand Curve for Money. 13. The Direct and Indirect Mechanism. 14. The Two Rates. 15. Business Cycles. 16. Currency Reform. NOTES ON FURTHER READING Macroeconomics ‘THE KEYNESIAN sysTEM: 1. The Hicks-Hansen Income-Expenditure Model. 570 614 632 654xxii 17 Contents 2. Full Employment Equilibrium. 3. The Liquidity Trap. 4. Interest-Inelastic Investment Demand. 5. Wage Rigidities. 6. Unemployment Equilibrium. 7. The Pigou Effect. 8. Keynesian Dynamics. 9. The Counter-revolution. 10, Rereading Keynes. 11. Keynes versus the Classics. 12. The Traditional Case for Public Works. 13. What Economists Said About Wage-Cutting 14, Keynes's Contributions to Economics. MACROECONOMICS SINCE KEYNES: 15. The Phillips Curve. 16. The Natural Rate of Unemployment. 17. How Expectations are Formed. 18. Rational Expectations. 19. Monetarism Summed Up. NOTES ON FURTHER READING ‘A Methodological Postscript 1. Falsifiability in Classical Economics. 2. Falsifiability in Neoclassical Economics. 3. The Limitations of the Falsifiability Criterion in Economics. 4. The Role of Value Judgments. 5. American Institutionalism. 6. Why Bother with the History of Economic Theory? NOTES ON FURTHER READING Index of names Index of subjects 697 cee 7257S ESBWCSRMVUINSE ag pears Ss = iF Glossary of mathematical symbols in order of appearance the stock of money the number of times M turns over per time period the volume of trade per time period the average level of prices in a time period the annual output of an industry or sector the input-output coefficient money income the number of workers total money wages the money wage rate the rate of profit or the rate of interest money prices of goods and services time total real wages the real wage rate the stock of physical capital = total real rentals of land = total real profits in an industry or sector total money profits the average product of a factor the marginal product of a factor the elasticity of a production function the elasticity of an average product function the demand for goods and services the supply of goods and services the demand for money the supply of money the excess demand for commodities excess supply of commodities excess demand for money an arbitrary positive constant the degree of a homogeneous functionxxiv AF PSO essaesa Glossary = the demand for cash balances as a fraction of total transactions or total income = the transactions demand for active money balances the speculative demand for inactive money balances planned saving AK = planned investment the average propensity to save the incremental capital-output ratio the actual rate of growth of income the fraction of the real wages bill spent on luxuries and personal services elasticity of the average revenue function or price elasticity of demand the average revenue of a product marginal revenue of a product ‘constant capital’ ‘variable capital’ i+; turnover rate of ‘constant and variable capital’ = durability of ‘constant and variable capital’ fixed capital working capital ‘surplus value’ ‘rate of surplus value’ per time period ‘organic composition of capital’ the average organic composition of capital in the economy as a whole capital-labour ratio output of a sector in Marx turnover rate of raw materials turnover rate of fixed assets = proportion of ‘surplus value’ spent on labour proportion of ‘surplus value’ spent on consumer goods proportion of ‘surplus value’ spent on capital goods posable ‘surplus value’ ‘variable capital’ minus salaries ‘rate of rent’ total utility marginal utility marginal utility of money mat ul utility of expenditures marginal rate of substitution of pairs of commodities or factors = marginal product of labour marginal product of capital price of a unit of labour price of a unit of capital marginal costGlossary xxv = total factor productivity elasticity of the production function with respect to labour elasticity of the production function with respect to capital the real rental per unit of capital the money rental per unit of capital elasticity of substitution between factors total revenue total cost elasticity of total costs average cost elasticity of average costs the average period of production present value of future income streams the internal rate of return the income velocity of money earned income disposable income planned income realized income hoarding the rate of change of prices per time period & 4 Reape swe a yor x a VERS ENSAbbreviations: Journals and anthologies AAPSS ~ Annals of the American Academy of Political and Social Science AE] ~ Atlantic Economic Journal AER ~ American Economic Review AMCA_ ~ Alfred Marshall: Critical Assessments, ed, J.C. Wood (1982) ASCA = Adam Smith: Critical Assessments, ed. J.C. Wood (1984) BPS ~ British Journal for the Philosophy of Science BNQR ~ Banca Nazionale del Lavoro Quarterly Review BREI _— British Review of Economic Issues CAMJE ~ Cambridge Journal of Economics CIE = Canadian Journal of Economics CJEPS ~ Canadian Journal of Economics and Political Science DET _~ The Development of Economic Thought, ed. H.W. Spiegel (1952) Ec = Economica Ecom - Econometrica EEH — ~ Explorations in Entrepreneurial History EE] ~ Eastern Economic Journal EET _~ Essays in Economic Theory, eds. J.J. Spengler, W.R. Allen (1960) EHR ~ Economic History Review EL — Economia Internazionale EI — Economic Journal EMDT ~ Evolution of Modern Demand Theory, eds. R.B. Ekelund Jr., E.G. Furnbotn, W.P. Gramm (1972) EQ ~~ Economic Inquiry ER ~~ Economic Record ERV_—_~ Economic Review ES — Economy and Society ESS ~ Encyclopaedia of the Social Sciences, eds. E.R.A. Seligman, A.E. Johnson (1930) ET ~ Economisk Tidskrift ETHA ~ Economic Thought: A Historical Anthology, ed. J.A. Gherity (1965) HESB - History of Economics Society Bulletin HOPE ~ History of Political Economy XXViAbbreviations xxvii IEP ~ International Economic Papers JESS ~ International Encyclopedia of the Social Sciences, ed. D.L. Sills (1968) ISSB — — International Social Science Bulletin JEL ~ Journal of Economic Issues JEL ~ Journal of Economic Literature JHI — ~ Journal of the History of Ideas JLE — ~ Journal of Law and Economics JMCB — ~ Journal of Money, Credit and Banking JMKCA ~ John Maynard Keynes: Critical Assessments, ed. J.C. Wood (1983) JPE — ~ Journal of Political Economy JPUE —~ Journal of Public Economics JRS ~~ Journal of Regional Science JWH — Journal of World History KYK — — Kyklos MeEc — ~ Metroeconomica MME ~ Marx and Modern Economics, ed. D. Horowitz (1968) MS ~ Manchester School of Economic and Social Studies OEP ~ Oxford Economic Papers PDPE ~ Palgrave's Dictionary of Political Economy, ed. H. Higgs (1963) PS ~ Population Studies QJE — ~ Quarterly Journal of Economics REA ~ Readings in Economic Analysis, ed. R.V. Clemence (1950) REP ~~ Revue d’économie politique REStat_ — Review of Economics and Statistics REStud — Review of Economic Studies RHET ~ Readings in the History of Economic Thought, ed. 1.H. Rima (1970) RRPE__~ Review of Radical Political Economics RSE ~ Review of Social Economy RPE ~ Rivista di Politica Economica SAJE — ~ South African Journal of Economics SEHR ~ Scandinavian Economic History Review SEI ~ Southern Economic Journal SIPE — ~ Scottish Journal of Political Economy SQ ~ Southwestern Social Science Quarterly SR Social Research SS ~ Science and Society SZV _ ~ Schweizerische Zeitschrift fiir Volkswirtschaft TEC ~ The Eighteenth Century. Theory and Interpretation UT ~ Utility Theory. A Book of Readings, ed. A.N. Page (1968) WA ——_~ Weltwirtschaftliches Archiv WEI — ~ Western Economic Journal WP - World Politics ZN ~~ Zeitschrift fir NationalazkonomieIntroduction. Has economic theory progressed? This is a critical study of the theories of the past: it concentrates on the theoretical analysis of leading economists, neglecting their lives, their own intellectual develop- ment, their precursors, and their propagators. Criticism implies standards of judg- ment, and my standards are those of modern economic theory. This would hardly be worth saying were it not for the fact that some writers on the history of economic thought have held out the prospect of judging past theory in its own terms. Literally speaking, this is an impossible accomplishment for it implies that we can erase from our minds knowledge of modern economics. What they have meant to say, however, is that ideas should be weighed sympathetically in the context of their times, lest the history of economic thought degenerate into a boring exercise in omniscience. The danger of arrogance toward the writers of the past is certainly a real one — but so is, ancestor worship. Indeed, there are always two sorts of dangers in evaluating the work of earlier writers: on the one hand, to see only their mistakes and defects without appreciating the limitations both of the analysis they inherited and of the historical circumstances in which they wrote; and, on the other hand, to expand their merits in the eagerness to discover an idea in advance of their own times, and frequently their own intentions. To put it somewhat differently: there is the anthropomorphic sin of judging older writers by the canons of modern theory, but there is also what Samuelson once called ‘the sophisticated-anthropomorphic sin of not recognizing the equivalent content in older writers; because they do not use the terminology and symbols of the present’. For an example of the former, take Pigou’s reaction when asked to review a work on the Theories of Value before Adam Smith: “These antiquarian researches have no great attraction for one who finds it difficult enough to read what is now thought on economic problems, without spending time in studying confessedly inadequate solutions that were offered centuries ago.’ For an example of the latter, take the opening page of any doctoral dissertation on the works of a neglected forerunner. The conflict between those who regard earlier economic doctrine as simply ‘the wrong opinions of dead men’ and those who view it as the repository of a series of prescient insights goes deeper than economics. It is a fundamental division of attitude toward intellectual history as such. With a little training in German philosophy it is possible to represent the conflict in terms of two polar opposites: 12 Economic theory in retrospect absolutism and relativism. The relativist regards every single theory put forward in the past as a more or less faithful reflection of contemporary conditions, each theory being in principle equally justified in its own context; the absolutist has eyes only for the strictly intellectual development of the subject, regarded as a steady progression from error to truth. Relativists cannot rank the theories of different periods in terms of better or worse; absolutists cannot help but do so. Now, of course, few commenta- tors have ever held either of these positions in such an extreme form, but almost every historian of economic thought can be placed near one or the other pole of what is in fact a continuum of attitudes to the theories of the past. Either of the two positions is capable of further subdivision. One version of the relativist position, for example, is that the ideas of economists are nothing more than the rationalization of class or group interests, or, to go one step further, the motivated pleadings of people with a political axe to grind. This is the doctrine of ‘ideology’ or ‘false consciousness’ which in its Marxist form is forever equating ideological bias with apologetic intent, though the two are by no means equivalent. ‘The first edition of E. Roll’s History of Economic Thought (1939) perfectly exemp- lifies this approach, although in later editions the author goes no further than claiming that changes in economic institutions are ‘major influences’ - a question- begging phrase! — on economic thinking. Relativism is driven to extremes in W. Stark’s History in Its Relation to Social Development (1944) which views theories as little more than a mirror reflection of the contemporary world: we are asked to believe, to open the book at random, that Ricardo was justified in advocating a labour theory of value in 1817 because fixed capital was little used at the time, but when he qualified the theory three years later he simply ‘yielded to the victorious march of mechanization’. A singularly untenable version of the relativist interpreta- tion is to be found in L. Rogin’s study The Meaning and Validity of Economic Theory (1956). In appraising the validity of an economic theory, relativists are always likely to ignore considerations of internal coherence and explanatory scope and to fix attention solely on congruence with the historical and political environment. But Rogin goes further and argues that the objective meaning of a particular economic theory lies in its practical policy recommendations; what is worse, he seems to mean by this, not the logical implications of a theory for the policy problems of its time, but rather the policy implications as they appear to a 20th-century economist writing under the influence of the Great Depression. The trouble with the entire thesis is that economic theories are seldom devised to reach specific policy conclusions: time and time again, economists have recommended diametrically opposed policies while appealing to the same theory for authority. In its moderate versions, the relativist interpretation can yield a really valuable fusion of the history of economic thought with the history of political and moral philosophy against the background of economic and political history. One of the best examples of this broad approach is W.C. Mitchell’s lecture notes on Types of Economic Theory (1949), which deliberately plays down ‘the passing on of ideas * Stark's later book, The Sociology of Knowledge (1959), a really stimulating work, suggests that he ‘no longer adheres to this extreme position.Introduction 3 from one to another and the development of these ideas by successive generations’ as ‘an intellectual stunt’. The same viewpoint is upheld in A. Gray’s delightful introduc- tory survey, The Development of Economic Doctrine (1931): ‘Economic science, if it be a science, differs from other sciences in this, that there is no inevitable advance from less to greater certainty; there is no ruthless tracking down of truth which, once unbared, shall be truth to all times to the complete confusion of any contrary doctrine.’ A glance at the latter portions of Mitchell's or Gray’s book, dealing with the period after 1870, shows immediately what is wrong with the argument. Economics only became an academic subject in the 1880s, and thereafter, for the first time perhaps, ‘the passing on of ideas from one to another’ did dominate the development of the subject. No relativist has been able to carry the institutional or historical interpretation beyond the classical era that ended around 1870; and so, like Mitchell and Gray, they either neglect the modern period or, like Roll and Rogin, shift grounds in their treatment of economic ideas after 1870. Speaking generally, it is absurd to think that economic and social history alone can furnish the key to intellectual variations in a discipline like economics. Many relativists claim only that economists write always sub specie temporis and that a knowledge of the prevailing historical context ‘illuminates’ the theories of the past. This is obviously true, but one wonders why it is necessary to argue this so insistently unless it is subtly designed to make us forget that ideas have a momentum of their own. As Jacob Viner observed, relativism frequently amounts to a kind of whitewashing with historical necessity: ‘The economic historians seem to derive from their valid doctrine, that if sufficient information were available the prevalence in any period of a particular theory could be explained in the light of the circumstances then prevailing, the curious corollary that they can also be justified by appeal to these special circumstances. There are some obvious obstacles to acceptance of this point of view. It would lead to the conclusion that no age, except apparently the present one, is capable of serious doctrinal error. It overlooks the fact that one of the historical circumstances which has been undergoing an evolution has been the capacity of economic analysis (Studies in the Theory of International Trade, p.110.) No assumptions about economic behavior are absolutely true and no theoretical conclusions are valid for all times and places, but would anyone seriously deny that in the matter of techniques and analytical constructs there has been progress in economics? Adam Smith, for example, had a firm grasp of the way in which the market mechanism is capable of coordinating the independent decisions of buyers and sellers, but anything so fundamental as the functional relationship of demand and price escaped him. It never occcurred to him that it was possible to demonstrate precisely in what sense a decentralized economy produces optimum results and it took a hundred years before Walras, Marshall, Pigou, and Pareto worked out the logic of Smith’s convictions about the workings of ‘the invisible hand’. Thoughts such as these produce the absolutist who, looking down from present heights at the errors of the ancients, cannot help but conclude that truth is largely concentrated in the marginal increment to economic knowledge.4 Economic theory in retrospect It is very likely that absolutists are created by reading the works of too many relativists. It is difficult nowadays to appreciate the freshness of Cannan’s icono- clastic approach in his famous book The History of the Theories of Production and Distribution (1893) - a veritable catalog of the elementary blunders of great economists - to a generation nurtured on the relativist texts of Blanqui, Roscher, Ingram and Cossa. Nevertheless, the recognition that economic theory has indeed progressed should not be allowed to obscure the highly uneven rate of improvement which has typified the history of analytical progress in economics. General insights into the pure logic of the price system make their appearance embedded in a particular theoretical framework associated with conditions and problems peculiar to the times. As the body of ideas gives way under criticism, much of what is still valuable gets discarded in an enthusiasm over the latest novelty. As a result, the history of economics is not so much the chronicle of a continuous accumulation of theoretical achievements as the story of exaggerated intellectual revolutions in which truths already known are neglected in favour of new revelations. Indeed, sometimes it seems as if economics has been propelled forward by a sense of symmetry which demands that every new theory should always be the exact reverse of the old. In the first half of the 19th century, economics itself was regarded as an investi- gation of ‘the nature and causes of the wealth of nations’ (Smith), ‘the laws which regulate the distribution of the produce of the earth’ (Ricardo), and ‘the laws of motion of capitalism’ (Marx). After 1870, however, economics came to be regarded as a science that analyzed ‘human behaviour as a relationship between given ends and scarce means which have alternative uses’ — an apt definition formulated in 1932 by Robbins, which, if taken strictly, would deny that much of what had gone before was economics. After two centuries of being concerned with the growth of resources and the rise of wants, economics after 1870 became largely a study of the principles that govern the efficient allocation of resources when both resources and wants are given. Classical economic theory was as much macro as microeconomics; neoclassi- cal theory was nothing but microeconomics; macroeconomics came back into its own with Keynes and for a decade or so virtually replaced microeconomics. It is doubtful whether such dramatic shifts in the focus of attention can be explained solely in terms of intellectual forces - as absolutists are inclined to argue. In the final analysis, even pure economic theory is framed for the purpose of throwing light upon the actual workings of the economic system. A change of emphasis as drastic as ‘the marginal revolution’ or the Keynesian Revolution must surely have been associated with changes in the institutional structure of society and with the emergence of new practical problems? One possibility is that such shifts in emphasis within economics are due to changes in philosophical attitudes or dominant modes of reasoning. It was in opposition to this relativist interpretation that Schumpeter insisted upon the strictly autonomous nature of scientific economics. Although the political preferences and philosophical value judgments of economists impinge upon the development of economics, he declared, they leave it fundamentally unaffected: ‘economic analysis has not been shaped at any time by the philosophical opinions that economists happen to have’.