An Outline of the history of economic thought

AN OUTLINE OF THE HISTORY OF

ECONOMIC THOUGHT

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An Outline of the

History of Economic

Thought

Second Edition Revised

and Expanded

ERNESTO SCREPANTI

and

STEFANO ZAMAGNI

Translated by David Field and Lynn Kirby

AC

Great Clarendon Street, Oxford OX2 6DP

AC

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# Ernesto Screpanti and Stefano Zamagni, 2005

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First published 2005

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

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

1 3 5 7 9 10 8 6 4 2

PREFACE TO THE SECOND ENGLISH

EDITION

Our satisfaction in writing the second English edition of this book is easy to

imagine: not only are we assured of the utility of our work, but also have the

opportunity to enlarge and revise it. We have attempted to do this in various

ways. We have removed oversights and errors; we have made a few additions

and expanded a little on all chapters; we have re-written and simplified

various parts which students had found obscure or difficult to understand;

lastly, we have updated the bibliography, with the aim of offering useful

suggestions for further reading.

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

In the first chapter we felt it necessary to recall the role played by humanism

and the Renaissance in the birth of political economy and, in particular, the

contribution they made to the formation of ‘civil humanism’, a philosophical

approach that fell into disuse following the advent of utilitarianism, but now

appears set for a second revival. In the chapter on Smith we have integrated

our exposition of the interpretations of his thought by recalling the one that

is today considered the most convincing, that of Smith as an institutionalist

economist. The chapter on Marx has also been enlarged to recall his concept

of man and his investigation into the social and institutional conditions of

capitalist production, two of the most topical parts of his thinking. Lastly,

in chapter 9, we have separated treatment of the post-Keynesian approach

from the so-called ‘new Keynesian macroeconomics’, by further expanding

on both and pointing out the important differences that distinguish the two

schools. We have also added a summary paragraph with a simple diagram

comparing the views of the various contemporary schools of macroeconomics.

In chapter 11 we have added extensive paragraphs on evolutionary games and

the theories of growth and complexity.

In addition, we have introduced a new chapter—the twelfth—which

deals with the current situation of economic science. The state of crisis

which has beset our discipline over the last thirty years appears even more

evident today than when we wrote the first edition of this book. Now we

believe it to be a healthy crisis and in chapter 12 we have endeavoured to

explain why. A crisis can also be a revolution. We do not pretend to know

what will happen in economic science over the next twenty years or so, but

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

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

from Adam.

Finally, a formal change has been made which we hope will be useful for

students. We have removed many references to relevant works from the main

text and entered them in special bibliographic lists at the end of each chapter.

Only those references to fundamental works, which no student can afford to

overlook, have been left in the text.

Let us conclude by thanking friends and colleagues who have taken it

upon themselves to read and comment on the integrations to this edition:

Elettra Agliardi, Luigino Bruni, Luca Fiorito, Nicholas Theocarakis, Carlo

Zappia, and Luca Zarri.

vi preface to the second english edition

PREFACE TO THE FIRST EDITION

Our experience in the teaching of economics and its history has made one

thing plain to us: that keeping the two subjects separate, if it was ever jus￾tified, is certainly not today. In the face of the crisis of the theoretical

orthodoxies of the 1950s and 1960s, the flowering of innovations in recent

years, and the numerous rediscoveries of traditional wisdoms, it is no longer

an easy task to teach economic principles. We feel it necessary, therefore, to

teach economic theory by paying careful attention to its history. We have

tried to satisfy this need in our book, and this already says a great deal about

the way it has been conceived. We have endeavoured to present traditional

theories as living matter, as well as presenting modern theories as part of a

historical process and not as established truths.

On the one hand, we have tried to resist the double temptation of

rereading the past only in the light of the present and explaining the present

only by the past, or, to be more precise, to avoid searching in the traditional

theories for the seeds of the modern theories and explaining the latter as

simple accumulations of knowledge. On the other hand, we have attempted

to distance ourselves from the implicit banality of the great historiographical

alternatives, such as ‘internal’ and ‘external’ history or ‘continuism’ and

‘catastrophism’. We have also tried to avoid the dichotomy which still exists

today, and which seems to us to cause misleading simplifications, between

the ‘pure’ historians of thought, who dedicate themselves exclusively to

studying ‘facts’, and the ‘pure’ theorists, who are only interested in the

evolution of the logical structure of theories. We believe that knowledge of

the ‘environment’ in which a theory is formed is just as important as

knowledge of its logical structure, and we do not accept the view that an

analysis of the emergence of a theory must be considered as an alternative to

the study of its internal structure. This historical outline is, therefore, neither

a collection of discoveries nor a portrait gallery.

Our choice to give a fair amount of historical weight to modern devel￾opments has entailed the problem of where to end our narrative. This cannot

but be a subjective decision. We have chosen the 1970s, but we have reserved

the right to break this rule each time we felt it necessary—for example, in the

case of research work and debates which produced important results in the

1980s but which began earlier. The only precaution we have taken in these

cases has been to avoid citing names and titles, with a few exceptions, and

limiting ourselves to outlining the essential elements of the most recent

theoretical developments.

The reader accustomed to traditional history books may be surprised by

the large amount of space we have reserved for the thought of the last fifty

years—approximately half the extent of a book that still remains (all things

considered) fairly concise. If there is an imbalance of this type, however, we

believe it is that we have dedicated too little space to modern theories.

Quantitative historiographical research has shown, whichever index is used,

that scientific production has grown at an exponential rate in the last

five centuries, with the remarkable consequence that certainly more than

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

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

to modern theory was, in fact, prudent.

Finally, we have no wish to avoid certain difficulties, or, rather,

responsibilities, connected with our endeavour to treat the present as

history. We are well aware of the danger of the attempt to be wise in the

sense advocated by William James, who believed that the art lays in knowing

what to leave out. We realize that this danger becomes greater the smaller

the distance from the material dealt with and the larger the quantity of

material about which decisions must be made; but we believe that these

responsibilities must be faced. We do not know whether we have been wise in

this sense, or to what degree, but we are convinced of one thing: even if we

have omitted many things from this book, the resulting selection has been

justified, in fact necessitated, by the importance of the material upon which

we focus.

This book is not directed to a specialist public, nor solely to a student

audience. We also hope to reach the educated person, or, rather, the person

who wishes to educate herself or himself. Specialist training is not, therefore,

necessary to understand this book; a basic knowledge of economics, how￾ever, especially the main themes of micro- and macroeconomics, would be of

help. This is true for most of the book. There are, however, sections, espe￾cially those dealing with the modern theories, in which the analytical diffi￾culties cannot be avoided without falling into the trap of oversimplification.

In these cases, which we have tried to keep to a minimum, we have chosen to

avoid banality and to ask the reader for a little more effort.

This knowledge of the audience to whom the book is directed may help in

understanding several things about its structure; we have chosen, for

example, to avoid weighing down the narrative with footnotes, a choice that

has often restricted us, but which we hope will benefit the reader. On the

other hand the bibliographies presented at the end of each chapter do not

pretend to be complete; they contain, apart from details of works quoted

from, only a short guide to further reading.

Finally, we should like to express our gratitude to the many colleagues and

friends who have kindly and generously agreed to read and comment on the

first drafts of our book, or on parts of it. In particular we would like to

mention Duccio Cavalieri, Marco Dardi, Franco Donzelli, Riccardo Faucci,

Giorgio Gattei, Augusto Graziani, Peter Groenewegen, Vinicio Guidi, Geoff

Hodgson, Alan Kirman, Jan Kregel, Marcello Messori, Pierluigi Nuti,

Fabio Petri, Pier Luigi Porta, Maurizio Pugno, Piero Tani, and Warren

viii preface to the first edition

Young. Of course any inadequacies or mistakes in this book are our own sole

responsibility. Our thanks also go to Andrew Schuller and Anna Zaranko of

Oxford University Press for their perceptive editorial work and advice.

E. S.

S. Z.

preface to the first edition ix

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CONTENTS

Preface to the second edition v

Preface to the first edition vii

Introduction 1

PART I FROM THE ORIGINS TO KEYNES

1. The Birth of Political Economy 19

1.1. Opening of the Modern World 19

1.1.1. The end of the Middle Ages and scholasticism 19

1.1.2. Communes, humanism and the Renaissance 22

1.1.3. The expansion of ‘Mercantile’ capitalism 27

1.1.4. The Scientific Revolution and the birth of political

economy 29

1.2. Mercantilism 32

1.2.1. Bullionism 32

1.2.2. Mercantilist commercial theories and policies 34

1.2.3. Demographic theories and policies 36

1.2.4. Monetary theories and policies 38

1.2.5. Hume’s criticism 40

1.2.6. Theories of value 41

1.3. Some Forerunners of Classical Political Economy 43

1.3.1. The premisses of a theoretical revolution 43

1.3.2. William Petty and ‘political arithmetick’ 45

1.3.3. Locke, North, and Mandeville 47

1.3.4. Boisguillebert and Cantillon 49

Relevant Works 51

Bibliography 52

2. The Laissez-Faire Revolution and Smithian Economics 54

2.1. The Laissez-Faire Revolution 54

2.1.1. The preconditions of the Industrial Revolution 54

2.1.2. Quesnay and the physiocrats 55

2.1.3. Galiani and the Italians 58

2.1.4. Hume and Steuart 63

2.2. Adam Smith 65

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

2.2.2. Accumulation and the distribution of income 68

2.2.3. Value 69

2.2.4. Market and competition 72

2.2.5. Smith’s three souls 73

2.2.6. Smith as an institutionalist 77

2.3. The Smithian Orthodoxy 82

2.3.1. An era of optimism 82

2.3.2. Bentham and utilitarianism 83

2.3.3. The Smithian economists and Say 85

Relevant Works 87

Bibliography 88

3. From Ricardo to Mill 90

3.1. Ricardo and Malthus 90

3.1.1. Thirty years of crisis 90

3.1.2. The Corn Laws 91

3.1.3. The theory of rent 92

3.1.4. Profits and wages 95

3.1.5. Profits and over-production 96

3.1.6. Discussions on value 97

3.2. The Disintegration of Classical Political Economy in

the Age of Ricardo 100

3.2.1. The Ricardians, Ricardianism, and the classical tradition 100

3.2.2. The anti-Ricardian reaction 102

3.2.3. Cournot and Dupuit 104

3.2.4. Gossen and von Thu¨ nen 107

3.2.5. The Romantics and the German Historical School 109

3.3. The Theories of Economic Harmony and Mill’s Synthesis 111

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

3.3.2. John Stuart Mill 113

3.3.3. Wages and the wages fund 115

3.3.4. Capital and the wages fund 118

3.4. English Monetary Theories and Debates in the Age of

Classical Economics 121

3.4.1. The Restriction Act 121

3.4.2. The Bank Charter Act 124

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3.4.3. Henry Thornton 127

Relevant Works 130

Bibliography 131

4. Socialist Economic Thought and Marx 133

4.1. From Utopia to Socialism 133

4.1.1. The birth of the workers’ movement 133

4.1.2. The two faces of Utopia 134

4.1.3. Saint-Simon and Fourier 135

4.2. Socialist Economic Theories 138

4.2.1. Sismondi, Proudhon, Rodbertus 138

4.2.2. Godwin and Owen 139

4.2.3. The Ricardian socialists and related theorists 140

4.3. Marx’s Economic Theory 142

4.3.1. Marx and the classical economists 142

4.3.2. Exploitation in the production process 146

4.3.3. Exploitation and value 148

4.3.4. The transformation of values into prices 151

4.3.5. Equilibrium, Say’s Law, and crises 154

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

the capitalist economy 155

4.3.7. Monetary aspects of the cycle and the crisis 159

Relevant Works 161

Bibliography 162

5. The Triumph of Utilitarianism and the Marginalist Revolution 163

5.1. The Marginalist Revolution 163

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

5.1.2. The neoclassical theoretical system 165

5.1.3. Was it a real revolution? 167

5.1.4. The reasons for success 170

5.2. William Stanley Jevons 173

5.2.1. Logical calculus in economics 173

5.2.2. Wages and labour, interest and capital 176

5.2.3. English historical economics 179

5.3. Le´on Walras 180

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

5.3.2. General economic equilibrium 183

5.3.3. Walras and the articulation of economic science 187

contents xiii

5.4. Carl Menger 189

5.4.1. The birth of the Austrian School and the Methodenstreit 189

5.4.2. The centrality of the theory of marginal utility

in Menger 192

Relevant Works 193

Bibliography 194

6. The Construction of Neoclassical Orthodoxy 196

6.1. The Belle E´ poque 196

6.2. Marshall and the English Neoclassical Economists 198

6.2.1. Alfred Marshall 198

6.2.2. Competition and equilibrium in Marshall 200

6.2.3. Marshall’s social philosophy 202

6.2.4. Pigou and welfare economics 203

6.2.5. Wicksteed and ‘the exhaustion of the product’ 205

6.2.6. Edgeworth and bargaining negotiation 207

6.3. Neoclassical Theory in America 209

6.3.1. Clark and the marginal-productivity theory 209

6.3.2. Fisher: inter-temporal choice and the quantity

theory of money 212

6.4. Neoclassical Theory in Austria and Sweden 215

6.4.1. The Austrian School and subjectivism 215

6.4.2. The Austrian School joins the mainstream 217

6.4.3. Wicksell and the origins of the Swedish School 218

6.5. Pareto and the Italian Neoclassical Economists 223

6.5.1. From cardinal utility to ordinalism 223

6.5.2. Pareto’s criterion and the new welfare economics 226

6.5.3. Barone, Pantaleoni, and the ‘Paretaio’ 227

Relevant Works 229

Bibliography 230

7. The Years of High Theory: I 232

7.1. Problems of Economic Dynamics 232

7.1.1. Economic hard times... 232

7.1.2. Money in disequilibrium 234

7.1.3. The Stockholm School 236

7.1.4. Production and expenditure 238

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