A History Of Economic Thought

by William J. Barber

Overview

An invigorating study of the development of systematic economic ideas

Study of the grand ideas in economics has a perpetual intellectual fascination in it's own right. It can also have practical relevance, as the global economic downturn that began in 2007 reminds us. For several decades, the economics establishment had been dismissive of Keynesianism, arguing that the world had moved beyond the "depression economics" with which it dealt. Keynesian economics, however, has now staged a comeback as governments attempt to formulate policy responses to the Great Recession of the first decade of the twenty-first century.

Many of the issues that faced economists in the past are still with us. The theories and methods of such men as Adam Smith, T. R. Malthus, David Ricardo, J.S. Mill, Karl Marx, Alfred Marshall, and J. M. Keynes are often relevant to us today—and we can always learn from their mistakes.

In his stimulating analysis Professor Barber assesses the thought of a number of important economists both in terms of the issues of their day and in relation to modern economic thought. By concentrating on the greatest exponents he highlights the central properties of the four main schools of economic thought – classical, Marxian, neo-classical, and Keynesian – and shows that although each of these traditions is rooted in a different stage of economic development, they can all provide insights into the recurring problems of modern economics.

Product Details

ISBN-13:	9780819569387
Publisher:	Wesleyan University Press
Publication date:	03/31/2009
Pages:	270
Sales rank:	784,121
Product dimensions:	5.00(w) x 8.00(h) x 0.56(d)
Age Range:	18 Years

About the Author

WILLIAM J. BARBER is Andrews Professor of Economics, Emeritus at Wesleyan University in Middletown, Connecticut, where he taught from 1957 to 1993. He has served as the president of the History of Economics Society (1989–1990) and in 2002 was named a Distinguished Fellow of that society.

Read an Excerpt

CHAPTER 1

Adam Smith and the Framework of Classical Analysis

The Wealth of Nations has suffered the fate accorded to most classics: it is more talked about than read. To the popular mind in the mid-twentieth century, Smith's work is now commonly associated – not always accurately – with observations on economic policy. Though Smith was clearly an opponent of 'the mercantile system' and of the apparatus of privilege and state protection supporting it, one may reasonably doubt whether those who pigeon-hole the man solely as an apologist for unregulated business enterprise have fully appreciated such passages as the following:

People of the same trade seldom meet together, even for merriment and diversion, but the conversation ends in a conspiracy against the public, or in some contrivance to raise prices. ...

The interest of dealers ... in any particular branch of trade or manufactures, is always in some respects different from, and even opposite to, that of the public. ... The proposal of any new law or 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 public, who have generally an interest to deceive and even to oppress the public, and who accordingly have, upon many occasions, both deceived and oppressed it.

At the same time, Smith saw manufacturers and 'projectors' as the carriers of progress and he urged that they be afforded more space in which to manoeuvre. Much of his practical message was that institutional restrictions (whether legislated by governments or rooted in parochial traditions) were unhealthy. They cramped the rate at which a new and more productive industrial era could mature. Smith's vision of the 'industrial revolution', however, was still remarkably circumscribed. He wrote more about pin factories than about iron fabrication and failed to appreciate fully the pace at which technological change was occurring during his lifetime.

Despite its impressive impact on popular attitudes (and thus, indirectly, on economic policies) Smith's work deserves to be remembered primarily as a highly ingenious contribution to economic theory. The Wealth of Nations brought to the foreground the issues that were to dominate the attention of economists for the next three quarters of a century and which, for that matter, have never lost their pertinence. This aspect of his thought, set out most fully in the first two of the five books into which his treatise is divided, calls for careful inspection. With a degree of comprehensiveness unrivalled by his predecessors he here formulated the grand design of an economic order in which all the parts could be seen in relation to one another. His views on policy, however, were derivative and cannot be adequately understood if detached from their theoretical moorings.

1. ADAM SMITH (1723–90)

Smith was born to a Lowland Scots family of modest circumstances and reared by a mother who was widowed a few months before his birth. He early distinguished himself as a student and, at the age of fourteen, entered the University of Glasgow. While there, he studied under the colourful Professor Hutcheson, the man credited with coining the phrase 'the greatest happiness for the greatest number', whose naturalistic approach to moral questions and espousal of religious and political liberty clashed with prevailing theological doctrine. Smith was later to count Hutcheson among his important intellectual creditors.

In 1740 Smith was elected to the Snell Exhibition, a scholarship awarded to promising Scotsmen for continued study at Balliol College, Oxford. He was to spend the next six years of his life there. Despite the duration of his stay he found the Oxford academic atmosphere far from congenial. He was not a popular figure and did not get on well with fellow students or with his teachers. He found space in The Wealth of Nations to record his judgement on the latter: 'In the University of Oxford, the greater part of the public professors have, for these many years, given up altogether even the pretence of teaching.' This state of affairs, in his view, was but a manifestation of a general economic principle: that when financial rewards were divorced from criteria of performance, neglect of duties was likely to result.

Smith had originally been sent to Oxford with the expectation that he would enter holy orders. His sceptical turn of mind and sympathy for the works of David Hume (an attachment that strained his relationship with the Balliol tutors) ruled out this career. Upon his return to Scotland in 1746 he sought a teaching position – a search fulfilled five years later when his old university, Glasgow, called him to fill the chair of Logic. In the following year, he shifted to the chair Hutcheson had once held as Professor of Moral Philosophy.

The major fruit of this period in his life was The Theory of Moral Sentiments, published in 1759. This work, which has little distinction as a contribution to philosophy, was a preliminary attempt on Smith's part to formulate the character of a 'natural order' of society. Human conduct was analysed in terms of three pairs of motives: self-love and sympathy; the desire to be free and a sense of propriety; the habit of labour and the propensity to exchange. In Smith's view these natural sentiments acted as checks and balances on one another and supported a social order of natural harmonies in which each man, when left to pursue his own interests, unconsciously promoted the common good. Other themes, later to be worked out more fully in The Wealth of Nations, emerged in his Glasgow lectures. Already he was arguing that 'the division of labour is the great cause of the increase of public opulence, which is always proportioned to the industry of the people, and not to the quantity of gold and silver, as is foolishly imagined.' In 1762 Smith resigned his professorship to accept a position as tutor to the son of the Duke of Buccleuch. Quite apart from its financial attractions this appointment brought opportunities for continental travel and made few demands on his energies. He wrote from France to his friend, David Hume, on 5 July 1764: 'I have begun to write a book in order to pass away the time. You may believe I have very little to do.'

The incubation period of The Wealth of Nations was extended. Writing from Edinburgh in 1772, Hume, who had been led to believe that the work was near completion in 1769, upbraided Smith:

I should agree to your Reasoning if I could trust your Resolution. Come hither for some weeks about Christmas; dissipate yourself a little; return to Kirkaldy; finish your work before autumn; go to London, print it, return and settle in this town, which suits your studious independent turn even better than London. Execute this plan faithfully, and I forgive you. ...

Ultimately, The Wealth of Nations appeared in 1776.

Smith spent the last thirteen years of his life as His Majesty's Commissioner of Customs for Scotland. He is reported to have discharged his administrative duties competently. It is one of those ironies of the times that a man who had devoted a substantial part of his intellectual activity to producing arguments favouring the promotion of free trade and the minimization of governmental interference in economic affairs should have ended his days as the beneficiary of such patronage.

2. THE DEFINITIONAL BASIS OF THE WEALTH OF NATIONS

The central focus of Smith's analysis was stated clearly in the full title of his work – An Inquiry into the Nature and Causes of the Wealth of Nations. Put in more modern terms, he was concerned with developing a theory of economic growth.

Smith announced his major explanation for economic growth in the early pages of his work with a phrase that has since become the stock-in-trade of economists – 'the division of labour'. This expression has a deceptive simplicity. Smith employed it in two quite distinct senses. The first referred to the specialization of the labour force accompanying economic advance that brought with it the 'greatest improvement in the productive powers of labour, and the greater part of the skill, dexterity, and judgement with which it is any where directed, or applied. ...' The full benefits of the progressive sub-division of tasks were available, however, only to a society in which production for exchange could take place. The capacity of a subsistence economy to generate these output-raising innovations and adaptations was severely restricted. From these considerations it followed that the division of labour was limited by the 'extent of the market' and that measures widening the market – whether geographically (e.g. through improvements in transport and communication) or economically (e.g. through the removal of restraints on trade) – were in the general interest.

Smith's interpretation of 'the division of labour' was not confined to job specialization. It also referred to the division of the labour force between those 'employed in useful labour ... and those not so employed'. The 'division of labour' in this second sense – which referred to the allocation of the labour force between various lines of employment – played an important role in his analysis of capital accumulation and of the 'progress of improvement' (as Smith was often to describe economic growth). The distinction he had in mind is one which modern readers are likely to find perplexing. Nowadays economists are reluctant to stand in judgement over particular types of jobs, declaring some to be 'productive' and others to be 'unproductive'. They prefer to follow the market's guidelines by regarding labour as productively employed whenever there is a buyer for its services; in short, the gainfully employed population is by definition productive.

Smith, on the other hand, was prepared to divide the working population into two distinct categories. The basis for this segregation can only be understood in relation to his preoccupation with the process of economic expansion over a prolonged period of time. From such a perspective it can be argued – though it is by no means as self-evident as Smith appeared to believe – that differing allocations of the labour force have quite different implications for economic expansion. As he viewed the matter, workers engaged in certain occupations were more likely to promote the advancement of output in the future than those employed in others. He developed the point by asserting that the 'productive' employments must meet two tests: (1) that they led to the production of tangible objects, a condition prerequisite to accumulation; and (2) that they gave rise to a 'surplus' that could be made available for future re-investment. For most practical purposes he equated the 'productive' employments with those in which labour worked with capital.

In Smith's scheme of things the line dividing 'productive' from 'unproductive' employments was not regarded as a value judgement but as an analytical distinction of fundamental importance to the study of long-period economic change. He was, in effect, giving a fresh twist to the distinction used by the Physiocrats before him who had maintained that agriculture was the only 'productive' (or surplus-generating) economic activity. It is worth noting that some modern economists, despite an uneasiness when doing so, have adopted a similar practice when examining the problems of underdeveloped economies. They often describe part of the working population in these areas (most particularly persons engaged in traditional agriculture, but often also in certain services) as 'disguisedly unemployed' – i.e., though working, they make no contribution to the social product.

The implications of Smith's definition of 'productive' also found their way into his interpretation of the national product. Concerned as he was with analysing the changes in an economy's output over extended time periods, he was obliged to operate with a concept that could serve the function now performed by calculations of the national income. In fact, Smith's usage of the term 'wealth' can, with one important qualification, be translated into modern terminology as 'national income'. The point at which Smith and today's national income accountants in Western countries part company turns on the definition of 'productive' activity. In Smith's view, only the outputs of the productive employments of labour should count in calculations of the social product. Virtually all 'service' activities were excluded, on the grounds that they failed to yield either tangible products or reinvestable surpluses. This definition also reinforced Smith's general attitude towards a wide range of policy issues. It followed that all activities of governments were unproductive as well as:

... some both of the gravest and most important, and some of the most frivolous professions: churchmen, lawyers, physicians, men of letters of all kinds; players, buffoons, musicians, opera-singers, opera-dancers, etc.

Smith would not deny these groups an income for services rendered. He merely wished to insist that their efforts did not help to make society richer tomorrow.

It would be tempting to dismiss this scheme of classification as nothing more than an expression of a misguided 'materialist' bias. This view, however, was notunique to Smith. All of the major figures of classicism worked with a similar notion. In the modern world it survives in Soviet bloc countries, where it influences the preparation of national income statistics – a phenomenon bearing witness to the classical mould of much of Marxian thought.

3. THE ANALYSIS OF VALUE

The emphasis Smith assigned to the market as a regulator of the division of labour called for further probing into the nature of the economic process and, in particular, into the manner in which economic value was determined. In this connexion, his opening move was to draw a sharp line of demarcation between 'value in use' and 'value in exchange'. He found only the latter economically interesting. Some items (his examples were water and air) have vast utility but are not exchanged, while others (e.g. diamonds) possessed in his view little utility though they clearly could command a great deal in exchange. Smith mapped out a three-stage programme for his investigation of the problems of economic value: (1) to identify the 'real' measure to value; (2) to isolate its component parts; and (3) to analyse the factors that might account for a deviation of the 'market price' from the 'natural price'.

From his own characterization of his analytical targets it is readily apparent that Smith was raising questions some distance removed from those most economists would now consider pertinent. A mid-twentieth century economist, asked to state the 'value' of a particular commodity, would normally proceed by trying to establish the price the market was prepared to pay for it. Writers in the classical tradition, on the other hand, were at pains to insist that price and value could not be so readily collapsed into one another. 'Value' was viewed as independent of the market's whims. Nominal (or market) prices might fluctuate, but value remained constant and invariant.

Many later commentators have treated this approach as superfluous metaphysics. Yet most classical writers set great store on the distinction and, by their lights, with good reason. Smith expected his account of value to do two jobs. In the first place, he said that it provided at least a partial explanation of the behaviour of market prices; further (and more important to the general thrust of his reasoning), it promised to provide a basis for measuring aggregate economic change over an extended period. As market prices were too volatile to be satisfactory in measuring inter-temporal changes in output, a stable and invariant standard was sought. This point has caused considerable confusion, partly because the classical approach is quite alien to thought patterns now conventional and partly because classical writers were not themselves always careful to distinguish between the various uses to which they put their concepts of value.

If value was distinct from price, how then was the former established? Smith asserted that labour was 'the measure of value'. This was readily compatible with the themes he had already developed; moreover, it was in harmony with intellectual currents of his time. At least since Locke an influential strand of English thought had been disposed to regard labour as a 'basic' or 'original' contributor to the economic process.

The assertion that labour provided the 'measure of value' was not, however, free from ambiguity. At least two divergent interpretations of the relationship of labour to value are possible. The first might base the value of a commodity on the quantity of labour required for its production. Smith entertained this interpretation, but he chose to apply it only to the circumstances of a hypothetical 'early and rude' society preceding the appropriation of private property and the accumulation of capital. With this situation in mind, he wrote:

If among a nation of hunters, for example, it usually costs twice the labour to kill a beaver which it does to kill a deer, one beaver should naturally exchange for or be worth twodeer. It is natural that what is usually the produce of two days' or two hours' labour, should be worth double of what is usually the produce of one day's or one hour's labour.

(Continues…)

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Table of Contents

Acknowledgments
Prefatory Note
Prologue
CLASSICAL ECONOMICS
Introduction
Adam Smith and the Framework of Classical Analysis
Elaborations and Cleavages within the Classical System: Thomas Robert Malthus
David Ricardo and the Formalization of Classical Analysis
The Revisionism of John Stuart Mill
Postscript to Classical Economics
MARXIAN ECONOMICS
Introduction
Karl Marx and the Economics of Das Kapital
Postscript to Marxian Economics
NEO-CLASSICAL ECONOMICS
Introduction
Alfred Marshall and the Framework of Neo-Classical Economics
Pre-1914 Variations on Neo-Classical Themes
Postscript to Neo-Classical Economics
KEYNESIAN ECONOMICS
Introduction
The Economics of Keynes's General Theory
Postscript to Keynesian Economics
Epilogue
Index of Proper Names
Index of Concepts and Terms