An Outline of theHistory of Economic Thought Second Edition Revised and Expanded ERNESTO SCREPANTI and STEFANO ZAMAGNI Translated by David Field and Lynn Kirby AC
AC Great Clarendon Street, Oxford OX2 6DP Oxford University Press is a department of the University of Oxford. It furthers the University’s objective of excellence in research, scholarship, and education by publishing worldwide in Oxford New York Auckland Cape Town Dar es Salaam Hong Kong Karachi Kuala Lumpur Madrid Melbourne Mexico City Nairobi New Delhi Shanghai Taipei Toronto With ofﬁces in Argentina Austria Brazil Chile Czech Republic France Greece Guatemala Hungary Italy Japan Poland Portugal Singapore South Korea Switzerland Thailand Turkey Ukraine Vietnam Oxford is a registered trade mark of Oxford University Press in the UK and in certain other countries Published in the United States by Oxford University Press Inc., New York # Ernesto Screpanti and Stefano Zamagni, 2005 The moral rights of the authors have been asserted Database right Oxford University Press (maker) First published 2005 All rights reserved. No part of this publication may be reproduced, stored in a retrieval system, or transmitted, in any form or by any means, without the prior permission in writing of Oxford University Press,or as expressly permitted by law, or under terms agreed with the appropriate reprographics rights organization. Enquiries concerning reproduction outside the scope of the above should be sent to the Rights Department, Oxford University Press, at the address above You must not circulate this book in any other binding or cover and you must impose the same condition on any acquirer British Library Cataloguing in Publication Data Data available Library of Congress Cataloging in Publication Data Data available Typeset by Newgen Imaging Systems (P) Ltd., Chennai, India Printed in Great Britain on acid-free paper by Biddles Ltd., King’s Lynn, Norfolk ISBN 0–19–927913–6 (Hbk) 978–0–19–927913–5 ISBN 0–19–927914–4 (Pbk) 978–0–19–927914–2 1 3 5 7 9 10 8 6 4 2
PREFACE TO THE SECOND ENGLISH EDITIONOur satisfaction in writing the second English edition of this book is easy toimagine: not only are we assured of the utility of our work, but also have theopportunity to enlarge and revise it. We have attempted to do this in variousways. We have removed oversights and errors; we have made a few additionsand expanded a little on all chapters; we have re-written and simpliﬁedvarious parts which students had found obscure or difﬁcult to understand;lastly, we have updated the bibliography, with the aim of offering usefulsuggestions for further reading. More substantial integrations have been made to chapters 1, 2, 4, 9 and 11.In the ﬁrst chapter we felt it necessary to recall the role played by humanismand the Renaissance in the birth of political economy and, in particular, thecontribution they made to the formation of ‘civil humanism’, a philosophicalapproach that fell into disuse following the advent of utilitarianism, but nowappears set for a second revival. In the chapter on Smith we have integratedour exposition of the interpretations of his thought by recalling the one thatis today considered the most convincing, that of Smith as an institutionalisteconomist. The chapter on Marx has also been enlarged to recall his conceptof man and his investigation into the social and institutional conditions ofcapitalist production, two of the most topical parts of his thinking. Lastly,in chapter 9, we have separated treatment of the post-Keynesian approachfrom the so-called ‘new Keynesian macroeconomics’, by further expandingon both and pointing out the important differences that distinguish the twoschools. We have also added a summary paragraph with a simple diagramcomparing the views of the various contemporary schools of macroeconomics.In chapter 11 we have added extensive paragraphs on evolutionary games andthe theories of growth and complexity. In addition, we have introduced a new chapter—the twelfth—whichdeals with the current situation of economic science. The state of crisiswhich has beset our discipline over the last thirty years appears even moreevident today than when we wrote the ﬁrst edition of this book. Now webelieve it to be a healthy crisis and in chapter 12 we have endeavoured toexplain why. A crisis can also be a revolution. We do not pretend to knowwhat will happen in economic science over the next twenty years or so, butit seemed important to us to clarify the reason why, in our opinion, we arein the middle of a crisis of foundations that may make history begin againfrom Adam. Finally, a formal change has been made which we hope will be useful forstudents. We have removed many references to relevant works from the maintext and entered them in special bibliographic lists at the end of each chapter.
vi preface to the second english editionOnly those references to fundamental works, which no student can afford tooverlook, have been left in the text. Let us conclude by thanking friends and colleagues who have taken itupon themselves to read and comment on the integrations to this edition:Elettra Agliardi, Luigino Bruni, Luca Fiorito, Nicholas Theocarakis, CarloZappia, and Luca Zarri.
PREFACE TO THE FIRST EDITIONOur experience in the teaching of economics and its history has made onething plain to us: that keeping the two subjects separate, if it was ever jus-tiﬁed, is certainly not today. In the face of the crisis of the theoreticalorthodoxies of the 1950s and 1960s, the ﬂowering of innovations in recentyears, and the numerous rediscoveries of traditional wisdoms, it is no longeran easy task to teach economic principles. We feel it necessary, therefore, toteach economic theory by paying careful attention to its history. We havetried to satisfy this need in our book, and this already says a great deal aboutthe way it has been conceived. We have endeavoured to present traditionaltheories as living matter, as well as presenting modern theories as part of ahistorical process and not as established truths. On the one hand, we have tried to resist the double temptation ofrereading the past only in the light of the present and explaining the presentonly by the past, or, to be more precise, to avoid searching in the traditionaltheories for the seeds of the modern theories and explaining the latter assimple accumulations of knowledge. On the other hand, we have attemptedto distance ourselves from the implicit banality of the great historiographicalalternatives, such as ‘internal’ and ‘external’ history or ‘continuism’ and‘catastrophism’. We have also tried to avoid the dichotomy which still existstoday, and which seems to us to cause misleading simpliﬁcations, betweenthe ‘pure’ historians of thought, who dedicate themselves exclusively tostudying ‘facts’, and the ‘pure’ theorists, who are only interested in theevolution of the logical structure of theories. We believe that knowledge ofthe ‘environment’ in which a theory is formed is just as important asknowledge of its logical structure, and we do not accept the view that ananalysis of the emergence of a theory must be considered as an alternative tothe study of its internal structure. This historical outline is, therefore, neithera 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 cannotbut be a subjective decision. We have chosen the 1970s, but we have reservedthe right to break this rule each time we felt it necessary—for example, in thecase of research work and debates which produced important results in the1980s but which began earlier. The only precaution we have taken in thesecases has been to avoid citing names and titles, with a few exceptions, andlimiting ourselves to outlining the essential elements of the most recenttheoretical developments. The reader accustomed to traditional history books may be surprised bythe large amount of space we have reserved for the thought of the last ﬁftyyears—approximately half the extent of a book that still remains (all things
viii preface to the first editionconsidered) fairly concise. If there is an imbalance of this type, however, webelieve it is that we have dedicated too little space to modern theories.Quantitative historiographical research has shown, whichever index is used,that scientiﬁc production has grown at an exponential rate in the lastﬁve centuries, with the remarkable consequence that certainly more than70 per cent of the scientists who have ever lived are living today, and perhapsa great many more. The decision to devote less than 70 per cent of our bookto modern theory was, in fact, prudent. Finally, we have no wish to avoid certain difﬁculties, or, rather,responsibilities, connected with our endeavour to treat the present ashistory. We are well aware of the danger of the attempt to be wise in thesense advocated by William James, who believed that the art lays in knowingwhat to leave out. We realize that this danger becomes greater the smallerthe distance from the material dealt with and the larger the quantity ofmaterial about which decisions must be made; but we believe that theseresponsibilities must be faced. We do not know whether we have been wise inthis sense, or to what degree, but we are convinced of one thing: even if wehave omitted many things from this book, the resulting selection has beenjustiﬁed, in fact necessitated, by the importance of the material upon whichwe focus. This book is not directed to a specialist public, nor solely to a studentaudience. We also hope to reach the educated person, or, rather, the personwho wishes to educate herself or himself. Specialist training is not, therefore,necessary to understand this book; a basic knowledge of economics, how-ever, especially the main themes of micro- and macroeconomics, would be ofhelp. This is true for most of the book. There are, however, sections, espe-cially those dealing with the modern theories, in which the analytical difﬁ-culties cannot be avoided without falling into the trap of oversimpliﬁcation.In these cases, which we have tried to keep to a minimum, we have chosen toavoid banality and to ask the reader for a little more effort. This knowledge of the audience to whom the book is directed may help inunderstanding several things about its structure; we have chosen, forexample, to avoid weighing down the narrative with footnotes, a choice thathas often restricted us, but which we hope will beneﬁt the reader. On theother hand the bibliographies presented at the end of each chapter do notpretend to be complete; they contain, apart from details of works quotedfrom, only a short guide to further reading. Finally, we should like to express our gratitude to the many colleagues andfriends who have kindly and generously agreed to read and comment on theﬁrst drafts of our book, or on parts of it. In particular we would like tomention Duccio Cavalieri, Marco Dardi, Franco Donzelli, Riccardo Faucci,Giorgio Gattei, Augusto Graziani, Peter Groenewegen, Vinicio Guidi, GeoffHodgson, Alan Kirman, Jan Kregel, Marcello Messori, Pierluigi Nuti,Fabio Petri, Pier Luigi Porta, Maurizio Pugno, Piero Tani, and Warren
preface to the first edition ixYoung. Of course any inadequacies or mistakes in this book are our own soleresponsibility. Our thanks also go to Andrew Schuller and Anna Zaranko ofOxford University Press for their perceptive editorial work and advice. E. S. S. Z.
CONTENTSPreface to the second edition vPreface to the ﬁrst edition viiIntroduction 1 PART I FROM THE ORIGINS TO KEYNES1. 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 522. 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
xii contents 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 883. 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 Thunen ¨ 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
contents xiii 3.4.3. Henry Thornton 127 Relevant Works 130 Bibliography 1314. 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 1625. 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. Leon 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
xiv contents 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 1946. The Construction of Neoclassical Orthodoxy 196 ´ 6.1. The Belle Epoque 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 2307. 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
contents xv 7.1.5. The multiplier and the accelerator 241 7.1.6. The Harrod–Domar model 243 7.2. John Maynard Keynes 245 7.2.1. English debates on economic policy 245 7.2.2. How Keynes became Keynesian 249 7.2.3. The General Theory: effective demand and employment 251 7.2.4. The General Theory: liquidity preference 254 7.3. Michał Kalecki 258 7.3.1. The level of income and its distribution 258 7.3.2. The trade cycle 260 7.4. Joseph Alois Schumpeter 262 7.4.1. Equilibrium and development 262 7.4.2. The trade cycle and money 265 Relevant Works 266 Bibliography 2688. The Years of High Theory: II 270 8.1. The Theory of Market Forms 270 8.1.1. The ﬁrst signs of dissent 270 8.1.2. Sraffa’s criticism of the Marshallian theoretical system 271 8.1.3. Chamberlin’s theory of monopolistic competition 273 8.1.4. Joan Robinson’s theory of imperfect competition 275 8.1.5. The decline of the theory of market forms 278 8.2. The Theory of General Economic Equilibrium 280 8.2.1. The ﬁrst existence theorems and von Neumann’s model 280 8.2.2. The English reception of the Walrasian approach 284 8.2.3. Value and demand in Hicks 286 8.2.4. General economic equilibrium in Hicks 287 8.2.5. The IS-LM model 289 8.3. The New Welfare Economics 291 8.3.1. Robbins’s epistemological setting 291 8.3.2. The Pareto criterion and compensation tests 292 8.4. The Debate on Economic Calculation under Socialism 295 8.4.1. The dance begins 295 8.4.2. The neoclassical socialism of Lange and Lerner 296 8.4.3. Von Hayek’s criticism 298
xvi contents 8.5. Alternative Approaches 299 8.5.1. Allyn Young and increasing returns 299 8.5.2. Thorstein Veblen 301 8.5.3. Institutional thought in the inter-war years 304 8.5.4. From Dmitriev to Leontief 308 8.5.5. The reawakening of Marxist economic theory 313 Relevant Works 316 Bibliography 318 PART II CONTEMPORARY DEVELOPMENTS OF ECONOMIC THEORY9. Contemporary Macroeconomic Theories 323 9.1. From the Golden Age to Stagﬂation 323 9.2. The Neoclassical Synthesis 325 9.2.1. Generalizations: the IS-LM model again 325 9.2.2. Reﬁnements: the consumption function 328 9.2.3. Corrections: money and inﬂation 330 9.2.4. Simpliﬁcations: growth and distribution 333 9.3. The Monetarist Counter-Revolution 335 9.3.1. Act I: money matters 335 9.3.2. Act II: ‘you can’t fool all the people all the time’ 337 9.3.3. Act III: the students go beyond the master 340 9.3.4. Was it real glory? 343 9.4. From Disequilibrium to Non-Walrasian Equilibrium 346 9.4.1. Disequilibrium and the microfoundations of macroeconomics 346 9.4.2. The non-Walrasian equilibrium models 347 9.5. The Post-Keynesian Approach 351 9.5.1. Anti-neoclassical reinterpretations of Keynes 351 9.5.2. Distribution and growth 353 9.5.3. Money and the instability of the capitalist economy 358 9.5.4. Heterodox microfoundations of macroeconomics 360 9.6. The New Keynesian Macroeconomics 363 9.6.1. A distant Hicksian background 363 9.6.2. Nominal rigidities 365 9.6.3. Real rigidities 368
contents xvii 9.6.4. A comparison between some contemporary schools of macroeconomics 371 Relevant Works 374 Bibliography 37710. Neoclassical Economics from Triumph to Crisis 380 10.1. The Neo-Walrasian Approach to General Economic Equilibrium 380 10.1.1. The conquest of the existence theorem 380 10.1.2. Defeat on the grounds of uniqueness and stability 384 10.1.3. The end of a world? 388 10.1.4. Temporary equilibrium and money in general-equilibrium theory 394 10.2. Developments in the New Welfare Economics and the Economic Theories of Justice 396 10.2.1. The two fundamental theorems of welfare economics 396 10.2.2. The debate about market failures and Coase’s theorem 400 10.2.3. The theory of social choice: Arrow’s impossibility theorem 404 10.2.4. Sen and the critique of utilitarianism 406 10.2.5. Economic theories of justice 409 10.3. The Controversy on Marginalism in the Theory of the Firm and Markets 413 10.3.1. Critiques of the neoclassical theory of the ﬁrm 413 10.3.2. Post-Keynesian theories of the ﬁrm 415 10.3.3. Managerial and behavioural theories 418 10.3.4. The neoclassical reaction and the new theories of the ﬁrm 420 Relevant Works 423 Bibliography 42611. At the Margins of Orthodoxy 428 11.1. Games, Evolution and Growth 428 11.1.1. Game theory 428 11.1.2. Evolutionary games and institutions 432 11.1.3. The theory of endogenous growth 435 11.2. The Theory of Production as a Circular Process 437 11.2.1. Activity analysis and the non-substitution theorem 437 11.2.2. The debate on the theory of capital 440 11.2.3. Production of commodities by means of commodities 444
xviii contents 11.3. Marxist Economic Thought between Orthodoxy and Revision 446 11.3.1. Marxist thought before 1968 446 11.3.2. Marxist heresies 449 11.3.3. Toward a theory of value with the feet on the ground 451 Relevant Works 453 Bibliography 45512. A Post-Smithian Revolution? 456 12.1. At the Threshold of the Millennium 456 12.1.1. Globalization 456 12.1.2. Modern and post-modern 461 12.2. Sources of Contemporary Institutionalist and Evolutionary Theory: Four Unconventional Economists 466 12.2.1. Karl Polanyi 466 12.2.2. Nicholas Georgescu-Roegen 469 12.2.3. Albert O. Hirschman 472 12.2.4. Richard M. Goodwin 473 12.3. Approaches to Institutional Analysis 475 12.3.1. The ‘new political economy’ and surroundings 475 12.3.2. Contractarian neo-institutionalism 476 12.3.3. Utilitarian neo-institutionalism 479 12.3.4. The new ‘old’ institutionalism 484 12.3.5. Evolutionary neo-institutionalism 489 12.3.6. Irreversibilities, increasing returns, and complexity 491 12.3.7. Von Hayek and the neo-Austrian school 495 12.4. Radical Political Economy 500 12.4.1. The monetary circuit and structural change theories 500 12.4.2. Analytical Marxism 503 12.4.3. Post-Marxism 508 12.4.4. The feminist challenge 510 12.5. Beyond Homo oeconomicus 512 Relevant Works 515 Bibliography 519Index of Subjects 523Index of Names 543
Introduction Epochs of Economic TheoryOne of the most interesting and controversial of the arguments put forwardby Schumpeter in The History of Economic Analysis is that the evolution ofeconomic ideas does not proceed smoothly, but in jumps, through a suc-cession of epochs of revolution and consolidation; of language confusionand ‘classical’ periods. This is also a useful idea for the historian of economicthought because, if true, it would provide a clear organizational frameworkfor the subject. In fact, this idea immediately leads to an almost naturaldivision of the history of economic thought into epochs, a division based ona succession of ‘classical situations’ and revolutionary periods. Here, whileagreeing with Schumpeter that any periodization, ‘though certainly basedupon provable facts’, must not ‘be taken too seriously’ (p. 52), we willattempt one inspired by his idea. Modern economic science originates from a ﬁrst great theoreticalrevolution that occurred, roughly, in the period, 1750–80. This was an epochof great breaks with tradition; an epoch that began with Galiani, Beccaria,and Hume, continued through Genovesi, Verri, Ortes, Steuart, Anderson,Condillac, Mirabeau, Quesnay, Turgot, and the whole physiocratic move-ment; and reached its climax with The Wealth of Nations. There was achaotic ﬂow of audacious and brilliant ideas which, even allowing for thediversity of, and conﬂicts among, the various approaches, was driven for-ward by a few fundamental themes. Common to many of these authors wasthe revolt against mercantilism, the perception or the foreboding that therewas to be a deep revolution in the economic structure of society, the faith innatural laws and in the possibility of understanding them scientiﬁcally, and,above all, the belief in free trade, which, even if it was only professed by someof the above-mentioned economists, was soon to become the basic ideologyof the new science. The Wealth of Nations was the supreme synthesis of allthis work. For twenty years after its appearance, as Schumpeter suggests,‘there is little to report as far as analytical work is concerned’ (p. 379). In fact, the recovery from theoretical stagnation occurred with the ‘neweconomics’, immediately after the Napoleonic wars, and was started byRicardo. He, far from being a servile follower of Smith, set to work on thearguments which differentiated his opinions from those of the greatauthorities—the greatest of which was The Wealth of Nations. Ricardo wasthe ﬁrst of a long series of great innovators, among the most important ofwhom were Sismondi, Malthus, Torrens, Bailey, Hodgskin, Thunen, ¨Longﬁeld, Rae, Senior, Cournot, Dupuit, List, Rodbertus, Jones, andRoscher.
2 introduction The period from 1815 to 1845 was one of the richest in the history ofeconomic thought as well as that of socialist thought. (Owen, Saint-Simon,Fourier, Cabet, Blanqui, Rodbertus, and Proudhon all worked in thisperiod.) It was a period of crisis, as shown by the heterogeneous nature of thetheories which fought for positions in the ﬁeld: Ricardian, Ricardiansocialists, Continental socialists, the old German Historical School, and the‘anti-Ricardian reaction’. The last was the most heterogeneous of all, andonly later was it acknowledged as the precursor of the marginalist revolution.Despite, or perhaps because of, the diverse and contrasting ﬂows of ideas, thedoctrinal counter-positions, and the Babel’s tower of terminologies andconcepts, this period produced a supreme wealth of seeds, some of whichwere soon to bear fruit, others much later. It was J. S. Mill who restored economics as a normal science made up ofestablished and lasting truths, and with him the epoch closed. It was followedby a new period of stagnation, if not decadence: the age of Fawcett andCairnes in England and Bastiat in France, while in Germany the innovativespur faded away with the afﬁrmation of the historical school. After Bastiat,Reybaud could state that work in political economy had almost beenexhausted and that there was nothing else to discover. Cairnes, too, believedthat the work of political economy was ‘pretty well fulﬁlled’. It was 1870! Butstill in 1876, as Schumpeter reminds us, there was a feeling that ‘thoughmuch remained for economists to do in the way of development andapplication of existing doctrine, the great work had been done’ (p. 830). Yet it was just at that time that a new revolution was breaking through.The marginalist revolution occurred between 1870 and 1890: it was openedby Menger, Jevons, and Walras, was continued by Edgeworth, Wieser,Bohm-Bawerk, Pantaleoni, and Clark, and closed by Fisher and Marshall. ¨Also in this period, due to its revolutionary and transitional nature, therewas no predominant orthodoxy; in fact, the epoch was characterized byconﬂict among a remarkable number of contrasting theoretical positions.First of all, there was a revival of socialist theories in the most diverse forms,from the Marxist school to the Fabians and from Christian to agrariansocialism. Institutionalism and the Young Historical School (not onlyGerman) also began during this period and were to develop more fully later.Finally, it is important to note that there were major differences in approach,among the marginalist writers themselves, which caused bitter controversies.These were so widespread that still today it is difﬁcult to recognize ahomogeneous school of thought in the early marginalist approaches. Theirway of seeing the world, in any case, seemed new and unfamiliar to manytheorists, and this caused a great deal of resistance. It was only in the 1890sthat a new ‘classical situation’ was established, and a new feeling of reposespread among the economists. In fact, it was only towards the end of thecentury that the fundamental homogeneity of the various versions ofmarginalist theory was perceived by the historians of economic thought.
introduction 3 The great neoclassical economists of the third generation, Cassel, Pareto,and Wicksell, were lucky enough to work within what had almost become anew tradition and orthodoxy, and had no need, therefore, to be revolu-tionary. The next revolutionary period occurred during the years of ‘hightheory’, in the 1920s and 1930s. It was, as G. L. S. Shackle stated, ‘animmense creative spasm . . . yielding six or seven major innovations of theory,which together have completely altered the orientation and character ofeconomics’ (The Years of High Theory, p. 5). But perhaps there were morethan six or seven: a great many of the modern theories of growth, cycle,input–output relations, ﬁrm, general equilibrium, money, expectations,employment, distribution, demand, welfare, planning, and socialism—originate from the seeds sown in those years. Coming to the epoch in which we live, there is no doubt that a newclassical situation was created during the 1950s and 1960s. Even thoughdissent was not completely silenced, as shown by the post-Keynesian attackson the neoclassical theory of distribution and growth and by the clamour ofthe debate on capital theory, it is evident that the ‘neoclassical synthesis’constituted at that time the authentic ‘single track’ for economic research.Beginning with the attempt to graft the Keynesian seedling onto the oldtrunk of marginalist theory, the neoclassical synthesis culminated in animpressive ordering of ideas and suggestions derived from the years of thehigh theory. Then, strengthened by the formal elegance of the Arrow–Debreu–McKenzie general-equilibrium model, the theoretical versatility ofthe Hicks–Modigliani macroeconomic-equilibrium model, and the analyticalsimplicity of the Solow–Swan growth-and-distribution model, it was ableto orient economic research and economic policy in a way that no otherscientiﬁc orthodoxy had been able to do. Moreover, the fact that it evenmanaged to transform the critical potential of many dissident theories intointernal debates is a demonstration of its hegemonic strength. During the 1970s, 1980s and 1990s the castle of neoclassical orthodoxyunderwent a sort of a breakdown. The last thirty years have constitutedanother period of theoretical confusion. A large number of theories haveemerged, all, to differing degrees, imperfect, fascinating, and revolutionary.None is completely satisfactory, none dominant. From the ‘new classicalmacroeconomics’ to the non-Walrasian equilibrium theory, from post-Keynesian theories to the various neo-institutionalist approaches, andfrom the neo-Austrian schools to post- and neo-Marxism (the last beingsubdivided into several versions, Srafﬁan, anti-Srafﬁan, regulationist, neo-Schumpeterian, Keynesian, etc.), competition in modern academic marketsin again strong, incessant, and almost perfect. Thus, in 250 years of the history of economic thought, from the middle ofthe eighteenth century to the present day, there have been four great cycles ofprogress followed by periods of stagnation of ideas, four long revolutionaryphases followed by four equally long consolidation phases. We are now right
4 introductionin the middle of the ﬁfth cycle. Each cycle begins with a period of brilliantideas, innovations, and breaks with the tradition, controversies, bitterconﬂicts, and terminological confusion; in short, a stimulating process ofcreative destruction in the production of economic ideas. Old schoolsdisintegrate, dwarfs give way to giants and, just when one believes thateconomic science has attained perfection, chaos breaks out again. Later, outof that hive of activity, the need for a new synthesis gradually emerges. Thisis ﬁnally reached after two or three decades, and produces a new classicalsituation. Then, for another twenty or thirty years political economybecomes a tranquil profession again: stable academic circles form, andmembers of the profession return to concerns with elegance, generality, andthe solution of puzzles. Research follows well-trodden paths and producesexcellent textbooks, reﬁnements, generalizations, and varied applications. Plurality of InterpretationsThe subjective nature of the criteria we have adopted to decide what is to beconsidered innovative or orthodox is inevitable, as is the ‘qualitative’ natureof the periodization derived from it. We are also aware of the inadequacy ofour appeal to the authority of Schumpeter. On the other hand, the idea thateconomic science progresses in jumps rather than in linear progressionshould not cause concern; rather, the problem is how to take account of thisphenomenon. One position is represented by the so-called ‘incrementalist’ approach tothe history of economic thought; an approach according to which ‘scientiﬁcprogress’ has been compared—for example, by Pantaleoni—‘to the growthof a snowball which rolls down a mountain slope, gathering extra snow, withits surface representing the unknown’ (Scritti varii di economia, p. 4). Thispoint of view implies the possibility, according to Pantaleoni, of separatingeconomic science from its metaphysical contour, or rather, according toSchumpeter, separating analysis from visions. By thus reducing the historyof economic thought to that of analysis (or ‘science’), it is conceived as thenarration of the slow and continual growth in knowledge: looking back-wards through time, and ‘starting from what economic science is in thepresent moment’, its history will be a ‘history of the economic truths’(Pantaleoni, p. 484). In recent times, the most convinced supporters of thispoint of view have been neoclassical economists such as Knight, Stigler,Blaug, and Gordon. But it is not a point of view which originated withinneoclassical theory; Say and Ferrara, for example, had held it before. Obviously, the supporters of this position do not accept that the historyof economic thought proceeds in jumps and advances by revolutions.Crises, periods of stagnation, and slow-downs are admitted, but only asperverse effects of the ‘metaphysical foundations’ and the psychologicalconditions in which the individual authors formulated their theories, all
introduction 5factors which do not damage the substance of the scientiﬁc element. Thustheir history would be a history of mistakes. A different point of view, which has been called ‘catastrophist’ or ‘dis-continuist’, is linked to Kuhn’s theory of the structure of scientiﬁc revolu-tions. This approach, which views the evolution of knowledge as passingthrough revolutions and explains the latter as caused by the accumulation ofanomalies within the dominant paradigms, seems extremely useful in tack-ling the problem we have raised. However, the application of Kuhn’sarguments to the history of economic thought has encountered serious dif-ﬁculties, difﬁculties which can be linked both to the ambiguities of theKuhnian deﬁnition of a ‘paradigm’ and to its origin in the history of thenatural sciences. So much so that the characteristics of a truly Kuhnianrevolution in the history of economic thought have only been identiﬁed, andthen not without controversy, in the Keynesian revolution. In fact, thisrevolution could be interpreted, not as a theoretical response to the stimulussupplied by the occurrence, in a historically determined socio-institutionalenvironment, of some new economic facts (crisis, depression, price rigidity,or mass unemployment), but as the realization of the importance of someanomalies which had always existed and yet had always been relegated to thefootnotes by the dominant paradigm. But how does this idea ﬁt in with thefact that the Keynesian revolution was only part of the process of deepupheaval which engulfed the years of high theory? About other revolutions,many neoclassical economists deny that it is possible to ﬁnd those charac-teristics in the marginalist revolution, and refuse even to acknowledge itsrevolutionary nature, believing instead that it consisted of the puriﬁcation,reﬁnement, and generalization of the truly scientiﬁc elements which werealready present in classical economics. Finally, the free-trade and Ricardianrevolutions cannot be analysed according to Kuhn’s schema, as they werelinked to a great historical event, the birth of industrial capitalism, and notdetermined by a logic which was strictly internal to the evolution of aparadigm. Recently, there have also been attempts to apply Lakatos’s ‘methodologyof the scientiﬁc research programmes’ to the history of economic thought.The best-known examples are those by Weintraub and Latsis. According tothis approach, a research programme will be successful if it shows itself tobe progressive, both theoretically (being able to predict new facts) andempirically (if such predictions are conﬁrmed). It will be abandoned whenit becomes degenerating (needing to be modiﬁed in order to account forknown facts without being able to predict new ones), and if a ‘better’programme—i.e. one that is endowed with greater empirical content—isavailable. The attempts to apply Lakatos’s approach to economics haveproduced interesting results with regard to research methodology, especiallyin the direction of weakening faith in empiricist and positivist epistemo-logies, and of a greater open-mindedness towards methodological pluralism.
6 introductionHowever, as far as the history of economic thought is concerned, Lakatos’sapproach has not produced decisively important results and has, on thecontrary, represented a step backwards relative to Kuhn, who at leastadmitted the importance, if not the centrality, of scientiﬁc revolutions.Lakatos’s approach, instead—especially because of the emphasis it places onthe ‘progressiveness’ of successful research programmes, and on their greaterempirical content relative to those which have been surpassed—seems to bemoving towards a resumption of the ‘incrementalist’ arguments. Both the incrementalist and catastrophist approaches are open to criticismat the level of their similar epistemological roots. They have in common apoint of view which Blaug, in Economic Theory in Retrospect, has deﬁned as‘absolutist’ (pp. 20–1)—in the sense that the historian is only interested in theintellectual development of the theories, without being concerned with theirrelationships to the socio-economic conditions in which they emerged. Theabsolutist point of view is clearly present in the incrementalist approach, forwhich the evolution of thought is nothing more than a series of marginalincrements of knowledge upon a stock of aquired truth. But this is also trueof the catastrophist approach, in which scientiﬁc revolutions are caused by athreshold effect generated by the accumulation of anomalies within eachparadigm. In both cases there is no way of linking changes in thought tochanges in social and economic life. The approach which studies the history of economic ideas in relation tosocio-economic contexts in which they have arisen has been deﬁned by Blaugas ‘relativist’ (pp. 20–1). With a little more vis polemica, Pantaleoni called it‘mesological’ (p. 491). It is a point of view which is held by a large number ofinstitutionalist, historicist, and Marxist scholars, and, in general, byhistorians with non-positivist backgrounds. Mitchell, Stark, Roll, Rogin,and Dasgupta, to name a few, are all authors who have explicitly theorizedand knowingly utilized the mesological approach. The epistemologicalfoundation of this position is based—according to Roll—‘on the convictionthat the economic structure of any given epoch and the changes which itundergoes are the major inﬂuences on economic thinking’ (A History ofEconomic Thought, p. 14). One of the mesological approaches aims at identifying the relationshipsexisting between economic theory and the real socioeconomic structure. Andthe simplest type of relationship seems to be that between a historicallydetermined reality and a speciﬁc thought that ‘reﬂects’ it. Working alongthis line, Stark has proposed an interpretation of the Schumpeterian notionof ‘classical situations’ which leads to a simple and apparently obviousexplanation of the phenomenon in question. When comparing the classicalsituations represented by the theories of Smith and Walras, Stark observedthat, while these are two different doctrines, they are still two theories ofequilibrium. He suggests that they reﬂect two different economic orderswhich prevailed in different historical epochs.
introduction 7 Smith’s teachings thus reﬂected the ﬁrst real historical situation in whichthe capitalist order was in equilibrium conditions, an equilibrium based onthe small, non-mechanized factory and on an exchange economy fullydeveloped within a national market, in which the invisible hand was ableto integrate agricultural with industrial production. On the other hand,Walras’s system represented an international economic order in whichcompetition was almost perfect, both on the commodity and labour markets,at least in the most developed economies. Stark says nothing about the other classical situations, neither does heoffer clariﬁcation about what is reﬂected by the theoretical formulationswhich occur in periods of intellectual revolution. But his arguments seemperfectly compatible with the following suggestion by Shackle concerningthe state of economic theory in the 1920s: these years had marked the end of‘a belief in a self-regulating, inherently and naturally self-optimizing, stableand coherent system’ (p. 5). When the economists realized that they were nolonger able, with the old intellectual instruments, to restore the old order ofthings, they began to search for new theories; in this way, by the end of the1930s economic science ‘had come to terms with the restless anarchy anddisorder of the world of fact’ (p. 6). This point of view has an unpleasantpremiss: that social reality is only the object and thought only the subject ofscientiﬁc activity, such that the latter does not obey the laws which governthe former and is able to reﬂect them objectively. Equally unpleasant con-sequences would be that the evolution of economic theory is unequivocallydetermined by the evolution of the objective reality; and that, once again,there is (even though through a series of oscillations) a certain type ofprogress through the accumulation of truth. Another group of mesological approaches considers the political elementas the most important link between theory and reality. This is the well-known argument of the ‘political demand’ for economic ideas, according towhich the emergence of speciﬁc, real economic problems stimulates thecreation of political solutions and therefore of theories which are capable ofscientiﬁcally justifying those solutions. Then, the theories which supply thecorrect solutions are grouped together and are slowly reﬁned until anorthodox theoretical system is formed. Myrdal developed a similar conception, but added several interestingobservations concerning the role played by the process of younger genera-tions replacing older ones within scientiﬁc communities. The study of thenew facts which emerge in the course of economic evolution, would modifypolitical attitudes, especially among young researchers. These, rather thanthe older upholders of the orthodoxy, would be able to change the directionsof research ‘under the pressure of what is becoming politically importantto the society’ (‘Crises and Cycles in the Development of Economics’, p. 20).It is in this way that recurrent theoretical revolutions would be triggered.This position, even though it has the merit of giving the right weight to
8 introductionthe political element, has the defect of reducing the problem to the singledimension of the adjustment of theories to problems: there is still the ideathat the economist observes reality as in a laboratory and is not inﬂuencedby it. These difﬁculties are not encountered by Neumark, who suggests thatthere is normally only one choice open to solve the fundamental economicproblems: the choice between two great alternatives; and that this explainsnot only the perpetual oscillation of the dominant positions in economicpolicy between state control and laissez-faire, protectionism and free trade,balancing the budget and deﬁcit spending, but also the oscillation offundamental theoretical attitudes between preferences for the conceptionsof value as ‘natural’ and ‘just’, between idealistic and materialist philo-sophies, and between industrialism and environmentalism. Our Point of ViewThis outline of the history of economic thought is not intended to be either ahistory of illustrious people, their lives, their work, and their personal con-tributions to the discovery of the truth, or a history of the errors by which thegrowth of scientiﬁc knowledge has occurred. We do not share the idea thateconomics is a ‘Darwinian’ discipline, an idea which claims that the last linkin the evolutionary chain contains all the preceding developments, and thatthese can all be dismissed as irrelevant or superseded. Certainly, we do notdeny the existence of some form of evolution in the process of historicalchange of economic ideas. However, we deny that it is a unidirectional,homogeneous, and unique development; above all, we deny that the key tounderstanding this process must necessarily be provided by the theorieswhich are in fashion today. The approach that we follow has a great deal in common with the relativistposition. We wish, however, to avoid falling into certain ‘mesological’naıvities and simpliﬁcations, which often contribute to the production of ¨histories of economic thought by portraits, or treating the evolution of ideasas an appendix to the evolution of economic facts. We realize that the realitystudied by the economist is not ﬁxed like that of the natural sciences.Economic facts change through time and space: problems which appearcrucial in a certain period may be irrelevant in another, and those that areconsidered important in one country can be completely ignored in another.This peculiarity of the subject of investigation may help to explain part of thehistory of economic thought, for instance, the existence of certain nationalpeculiarities or the emergence of speciﬁc theories at certain historicalmoments. But this does not explain everything, and perhaps it does notexplain precisely what really deserves to be studied. More important than the peculiarities of the object under study are thoseof the subject itself. There is no doubt that the cultural background and the
introduction 9‘visions’ of the scientists have a strong effect on their research activities; andstill more determinant are the common ideas and values accepted by thescientiﬁc communities, as it is precisely these which select and give directionto the individuals. But, more generally, there is no doubt that it is theparticular society as a whole which determines the cultural climate in whichthe choices available to individual scientists and the scientiﬁc community areprovided and delimited. Society as a whole decrees the importance of theproblems to be studied, establishes the directions in which solutions shouldbe sought, and, ultimately, decides which theories are correct. None of this would merit our attention if society were a homogeneousentity. But it is not. In the ﬁeld of the social sciences, a theory is a form ofself-understanding and self-representation of a social subject. The subjectsare heterogeneous, however: there are differences of class, culture, andnationality. Moreover, the relationships in which these subjects ﬁnd them-selves may be conﬂictual. Thus society, while being a severe judge of sci-entiﬁc work, is not always impartial, nor does it always have clear ideas aboutwhat it wants. And if it is true that only society decides the relevance ofthe problems, it is also true that its decisions are often ambiguous andcontradictory. For example, some people consider an unemployment rate of5 per cent as worrying, while others believe a 10 per cent rate is normal, even‘natural’; and it is inevitable that these two different ways of thinking areconnected to two contrasting economic theories. Still more ﬂeeting andbiased are the criteria by which society decrees which theories are correct,because, in the end, as there is ‘only one truth’, the plurality of points of view,solutions, and directions of research which society itself generates must insome way be suppressed in favour of a single theory. Obviously, the work ofthe scientists has an important role in establishing which theory shouldprevail, as there are requirements of logical coherence, generality, andexplanatory power to which it is their duty to attend. They are not the kingsof the castle, however, and cannot do whatever they wish. On some subjects and fundamental problems, base orientations are formedwhich embody diverse and often contradictory points of view. Theseorientations give rise to strands of research which span the history of eco-nomic thought. They are like rivers on limestone which sometimes disappearunderground, giving the impression that they have dried up; but they cancontinue their underground life for a long time, banned from academia anddeprived of scientiﬁc respectability. Then they come to light again, whennobody expects it, and become more powerful and noisy until they silencetheir opponents. For example, consider the orientation underlying criticismof Say’s Law and its use to demonstrate the impossibility of ‘general gluts’.Who would have thought, considering the defeat of Malthus by Ricardo, orthe sad academic destiny of Marx or Hobson, that with Keynes, justicewould have been done? In regard to this problem, two base orientations havealways been in conﬂict, one leaning towards self-regulating markets, the other
10 introductiontoward effective demand, and neither has ever gained a complete victory.Another example comes from the theory of value, where the subjectivist andobjectivist orientations have clashed continuously. It seemed that Jevons hadﬁnally defeated Ricardo, but then, a century later, Sraffa put everything backinto discussion. We could go on to show the alternating destinies of thequantitative and endogenous orientations in regard to the money supply,or of the macroeconomic and microeconomic orientations concerning thedistribution of income, and so on. Matters are complicated by traditions, that is to say, by certain typesof cultural identiﬁcation which link economists of different generations.Traditions may depend on the existence of certain national cultural back-grounds, on the formation of academic schools of thought, on the strength ofcertain political conﬁgurations, or on yet other causes. Thus, it is possible tospeak, for example, of an English tradition in the ﬁeld of the construction ofcomprehensive grand theories, a tradition which links (despite their differenttheoretical positions) the magniﬁcent syncretism of Smith with those ofStuart Mill and Marshall. Or, observing the thin but strong connectingthread linking Davanzati, Montanari, Galiani, Ferrara, and Pareto, it ispossible to speak of an Italian tradition in relation to the subjectivist theoryof value. It is also possible to speak of a socialist tradition regarding valueand distribution, or of a Keynesian tradition concerning economic dynamics.Traditions have an important role in guiding the scientiﬁc activity of indi-viduals and research groups. Developments in traditions intertwine withthose of the base orientations, and contribute signiﬁcantly to the evolution ofeconomic thought. In certain historical periods, the orientations underlying some basictheoretical principles sometimes combine with a certain speciﬁc tradition tocontribute to the creation of a theoretical system, a general theory aspiring togive a coherent and complete answer to every problem that has arisen or canarise in a deﬁned ﬁeld of investigation. The ﬁrst requirement of a theoreticalsystem is the deﬁnition of the scope of investigation. Then, it is necessary todetermine the fundamental principles around which all existing and potentialknowledge can be organized, the methodological rules that establish theway in which the research is conducted and the results evaluated, and thelinguistic canons which allow the classiﬁcation, transmission, and commun-ication of knowledge. The deﬁnition of the scope of investigation is fundamental. It contains, ina nutshell, the whole development of the system, identiﬁes the problems tobe studied, establishes which economic factors act as parameters andwhich as variables, chooses the research directions to be followed andthose to be ignored, and, ﬁnally, instructs the scientists as to what they areprohibited from doing. The fundamental principles serve to hold togetherthe parts of the theoretical system, to create a coherent and organic core
introduction 11doctrine, and to make it something more than a syncretic sum of diversetheories. The methodological rules instruct the scientists on how to moveacross the unknown ground of the problems to solve and of the stillunproven truths. They, perhaps more than the other dimensions of atheoretical system, and in a way that often not all the researchers areperfectly aware of, make the scientists’ choices homogeneous and theresearch results coherent. At the same time, they allow for a division oflabour which may go beyond any possible planned structures of researchactivities. Finally, the recomposition of the results of such a division of labour ismade possible by well-determined linguistic canons. Perhaps these are theleast explicitly codiﬁed characteristics of a theoretical system, but they arenot the least important. Not only do they allow the communication ofknowledge and the education of younger generations of researchers, whichmeans the creation and reproduction of the scientiﬁc community, but,above all, they delimit the ﬁeld of discourse. A person who is not wellversed in the linguistic terminology used by the scientiﬁc communitysharing a particular theoretical system, that is, a person who is unable tofollow its more or less tacit rules of communication, simply does not havethe right to speak, especially when the system in question is the culturallydominant orthodoxy. The history of economic thought is full of brilliantbut unheeded self-taught men, living in the ‘underworlds’ of heretics andprecursors. In order to clarify what we mean by a ‘theoretical system’, it may be usefulto give an example. Let us consider the neoclassical system. This originatedtowards the middle of the nineteenth century and, through phases of crisesand successes, and even enduring the pressure and the centripetal forces ofthree or four great national traditions, it reached its ﬁrst signs of systematicorganization towards the end of the century. Finally, and aided by thecosmopolitan push of the American neoclassical economists, it attained itssupreme synthesis towards the middle of the twentieth century. Some baseorientations typical of this system manifested themselves in a subjectivisttheory of value, a microeconomic theory of distribution, and a static theoryof equilibrium. These and other base orientations were organized around theprinciple of constrained maximization of individual objectives; while thescope of investigation was reduced to the problem of the optimal allocationof scarce resources. The basic problem for the historian of thought is: how do such systemsform? Linked to this are other, equally important questions. What determ-ines the success of a system? What causes its break up? Why in certainperiods does a ‘dictatorship’ of a certain system arise while in others thereseems to be theoretical anarchy? In the remainder of this book we have tried,within the limits set by a simple outline of the history of economic thought,
12 introductionto sketch a reply to these problems. Here, we will brieﬂy explain some of theinterpretative lines on which we have based our attempt. 1. Economic problems are strictly linked, so that a new theory concen-trating on only one problem, or on a limited group of problems, is in a certainsense unstable. Either it makes reference to an already existing theoreticalsystem and tries to become integrated into it and possibly to generalize thesystem itself, or it proposes itself as a base for the organization of a newtheoretical system. A typical example is given by the Keynesian revolution,which began by claiming to be a general theory, but was later generalized bythe system it wished to attack. The operation was accomplished by theelimination of some of the base orientations that were present in Keynes,orientations that turned out to be incompatible with neoclassical theory. Onthe other hand, and precisely by virtue of these orientations, attempts weremade to construct, on the basis of the general theory, a post-Keynesiantheoretical system conceived as an alternative to the neoclassical system. 2. The success of a theoretical system implies the realization of twoconditions, one internal and one external. The former concerns logicalcoherence, both in terms of the analytical rigour of the speciﬁc theories ofwhich a system is formed and in terms of the relationships that link onetheory to another. The latter concerns the ability of the theoretical system torespond to a certain social need. Society in certain periods of its evolutionneeds a general theory to represent it. These are periods in which order andstability predominate. The theories which are chosen must, in some way, betheories of order, equilibrium, and harmony. Therefore, not all theoreticalsystems are predisposed to prevail, even if they are coherent. Some, eventhough they are reﬁned, rigorous, and heuristically powerful, are in any casedestined to remain at the margins of the academic world. There is anotherreason why the second condition is more important than the ﬁrst: it is alwaysnecessary, while the ﬁrst is not. When society needs an organic, orthodox,general theory, it ﬁnds one. If there are diverse theoretical systems availablethat satisfy the same needs, the one which best satisﬁes the conditions ofinternal coherence will presumably win. And when the market does not offera great deal, the best that exists is taken, even if the price of syncretism andanalytical weakness has to be paid. This was the case, for example, with theBastiat-type theories of ‘social harmony’ that prevailed in the 1850s and1860s. 3. When a society enters a period of crisis, the prestige of the dominanttheoretical system will be shaken. In a society facing a serious crisis, the needto represent the economy as an organic and ordered body is weakened; andthis occurs precisely when real problems emerge for which the generaltheories of order are unprepared. In these periods, the pressure of thescientiﬁc community on individual researchers weakens, while methodolog-ical and doctrinal ties on scientiﬁc research are loosened. In this way,
introduction 13creative energies are liberated. At the same time, the research interests of thescientists are attracted and shaped more by the problems emerging from thereal world than by those springing from theory. Theoretical revolutionsoccur in these periods. They are characterized by confusion of language;but in such a confusion the bases are laid down for the construction ofnew theoretical systems. However, it could also happen that old systems arerevitalised. A theoretical system which enters a period of crisis does not neces-sarily leave the scene. The crisis itself may even contribute to the system’sregeneration, a typical example being the resurgence of the neoclassicalsystem after the crisis of the 1920s and 1930s. 4. Although the history of economic thought cannot be interpreted simplyin terms of the growth of knowledge, there are, however, certain forms ofprogress. One type of evolution is that which occurs within a particular baseorientation. As an orientation refers to a speciﬁc problem, evolution consistsin the progressive reﬁnement of the theory accounting for the phenomenon.In this way, the objectivist theory of value progressed as it moved fromRicardo to Marx and thence to Sraffa. On the other hand, two differentorientations focusing on the same problem are not comparable, as they arederived from different pre-analytical premisses. In regard to the problem ofthe distribution of income, for example, there is an orientation, founded onthe presupposition that an economy is a set of exchange relationships amongindividuals, which tends to reduce the problem to that of the determination ofthe prices of the productive services. There is, however, another orientation,one based on the premiss that the economy is a system of functional and/orconﬂictual relations among social classes, which considers the distributiveproblem as that of dividing the national product among the classes. Now,whether one of these two orientations is able to explain a historical realitybetter than the other is not a question that can be resolved on the analyticallevel: the acceptance of one or other of the presuppositions on which theorientations are based implies a pre-analytical choice. For this reason, thetransfer of hegemony from a theory that proposes a certain orientation toone that proposes a different orientation cannot be evaluated in terms ofprogress. There is a second type of evolution, one which concerns theoreticalsystems. Here, in addition to the progress involving each of the individualcomponents of the system, there is also progress in the overall organizationof the components. In this case, progress occurs through the substitution of aspeciﬁc theory by another, if the new theory integrates better with the rest ofthe theories making up the system. Another type of progress of a systemconcerns the internal substitution of partial theories by general theories. Yetanother consists of the integration, in the system, of theories relating to newproblems. This can happen either because the empirical research activated bythe system itself leads to the discovery of new phenomena or because thesystem manages to focus on, and to provide solutions to, problems that haveemerged in an autonomous way. Thus, the progress of a system, even if it
14 introductionpasses through scientiﬁc revolutions, in the end always comes down to aprocess of analytical reﬁnement and/or theoretical generalization. However,we are only dealing with progress of a system. Also, in this case it isimpossible to compare different theoretical systems in terms of progress. Thisis both due to the incommensurability of the base orientations from whichthe different systems develop and because different systems deﬁne the veryscope of investigation, and the problems to which they are applied, in dif-ferent terms.From the above, it will be easy to understand the methodological position wehave adopted in this book. Our outline of the history of economic thought isneither a history of illustrious personalities nor one of economic themes.Rather, it takes a history-of-ideas approach, whose principal aims consist,on the one hand, of understanding the context in which the ideas are formedand, on the other, of explaining how the fundamental ideas lead to thecreation of particular theoretical systems. BibliographyOn the ‘absolutist’ approach: M. Blaug, Economic Theory in Retrospect (London,1964); ‘Was there a Marginal Revolution?’, in R. D. G. Black, C. D. W. Goodwin(eds.), The Marginal Revolution in Economics (Durham, 1973); J. E. Cairnes, Essayson Political Economy (London 1873, reprint New York, 1965); F. Ferrara, Esamestorico-critico di economisti e dottrine economiche, 4 vols., (Turin, 1889); D. F. Gordon,‘The Role of the History of Economic Thought in the Understanding of ModernEconomic Theory’, American Economic Review, Papers and Proceedings (1965);F. H. Knight, On the History and Method of Economics (Chicago, 1956);M. Pantaleoni, Scritti varii di economia (Milan, 1904); J.-B. Say, Cours completd’economie politique pratique (Paris, 1840); G. J. Stigler, ‘The Inﬂuence of Events and ´Policies on Economic Theory’, American Economic Review, Papers and Proceedings(1960). On the applications of Kuhn’s and Lakatos’s theories: M. Blaug, ‘Kuhn versusLakatos or Paradigms versus Research Programmes in the History of Economics’, inLatsis (1976); M. Bronfenbrenner, ‘The ‘‘Structure of Revolutions’’ in EconomicThought’, History of Political Economy (1971); A. W. Coats, ‘Is There a Structureof Scientiﬁc Revolutions in Economics?’, Kyklos, (1969); R. Fisher, The Logic ofEconomic Discovery, (Brighton, 1986); T. W. Hutchison, ‘On the History andPhilosophy of Science and Economics’, in Latsis (1976); L. Kunin, S.-F. Weaver, ‘Onthe Structure of Scientiﬁc Revolutions in Economics’, History of Political Economy,(1971); S. J. Latsis (ed.), Method and Appraisal in Economics (Cambridge, 1976);E. R. Weintraub, General Equilibrium Analysis (Cambridge, 1985). On the ‘relativist’ approaches: M. Bronfenbrenner, ‘Trends, Cycles, and Fads inEconomic Writing’, American Economic Review (1966); A. K. Dasgupta, Epochs of
introduction 15Economic Theory (Oxford, 1985); J. Hicks, ‘ ‘‘Revolutions’’ in Economics’, in Latsis(1976); S. Karsten, ‘Dialectics and the Evolution of Economic Thought’, Historyof Political Economy, (1973); J. E. King, Economic Exiles, (London, 1988);W. C. Mitchell, Types of Economic Theory (New York, 1969); G. Myrdal, ‘Crises andCycles in the Development of Economics’, The Political Quarterly (1973); L. Nabers,The Positive and Genetic Approaches, in S. R. Krupp (ed.), The Structure of EconomicScience (Englewood Cliffs, 1966); F. Neumark, ‘Zyklen in der Geschichteokonomischen Idee’, Kyklos (1975); L. Rogin, The Meaning and Validity of Economic¨Theory (New York, 1956); E. Roll, A History of Economic Thought, 2nd edn.(London, 1946); J. A. Schumpeter, History of Economic Analysis (New York, 1954);G. L. S. Shackle, The Years of High Theory (Cambridge, 1967); W. Stark, The Historyof Economics in its Relation to Social Development (London 1944); ‘The ‘‘ClassicalSituation’’ in Political Economy’, Kyklos (1959). Some recent contributions: R. Backhouse, A History of Modern Economic Analysis(Oxford, 1985); M. Beaud and G. Dostaler, Economic Thought Since Keynes:A History and Dictionary of Major Economists (London, 1995); N. Bellanca andM. Guidi, ‘Uchronics and the History of Economic Knowledge’, The EuropeanJournal of the History of Economic Thought (1997); R. Dehem, Histoire de la pensee ´economique (Quebec, 1984); P. Groenewegen and G. Vaggi, Il pensiero economico:´Dal mercantilismo al monetarismo (Rome, 2002); B. Ingrao and F. Ranchetti,Il mercato nel pensiero economico: Storia e analisi di un’idea dall’illuminismo alla teoriadei giochi (Milan, 1996); H. Landreth and D. C. Colander, History of EconomicThought (1996); F. Modigliani, ‘The Monetarist Controversy, or Should We ForsakeStabilisation Policy?’ American Economic Review (1977); E. Screpanti, ‘Cicli,rivoluzioni e situazioni classiche nello sviluppo delle idee economiche’, Economiapolitica, (1988); W. K. Tabb, Reconstructing Political Economy: The Great Divide inEconomic Thought (London, 1999); J. Tobin, ‘Is Friedman a Monetarist?’, in J. Stein(ed.), Monetarism (Amsterdam, 1976).
1 The Birth of Political Economy 1.1. Opening of the Modern World1.1.1. The end of the Middle Ages and scholasticismThe feudal economy rose from the ashes of the slave economy of the RomanEmpire. The relationship between owner and slave, a relationship that is onlypossible if the slave can produce more than he consumes, was transformedinto one between owner and serf. The serf was tied to the land he cultivatedand received protection from the lord in return for certain economic andpolitical services. The ultimate control of economic activity was in the handsof the king, who could, in most cases, transfer the feuds from one lord toanother. Land and labour were transferred rather than bought and sold; andthis meant that there was no need for labour and land markets. Authority,faith, and tradition were enough to guarantee that the system worked well. The relative economic security created by the feudal institutions con-tributed to an improvement in the living conditions of the population, if forno other reason than that the social condition of the serf was higher than thatof the slave. At the same time, the formation of cities in densely populatedareas and the widespread diffusion of craft workshops laid the ground forthe beginnings of intense commercial activity. The figure of the independentmerchant appeared, initially, in the gaps in and at the edges of the traditionaleconomy and, later, in a new economic sphere: the free city and its markets;the seeds of the modern European city. The growth of the city economies and of the commercial and financialtraffic of the urban bourgeoisie began in the twelfth and thirteenth centuries.It was in this period that the first serious attempts at economic theorizingstarted. Before this there were just a few interesting ideas: Aristotle’s theoriesof ‘natural chrematistics’, that is, the art of becoming rich by producinggoods and services useful to life, and of ‘unnatural chrematistics’, whichconcerns enrichment from trade and usury; his distinction between the usevalue and the exchange value of goods, the former consisting of the ability ofa good to satisfy a specific need and the latter of the quantitative relationshipin which one good is exchanged for another; and his attempt to define the‘just price’ of goods on the basis of the equivalence of the values exchanged. The scholastic philosophy of the thirteenth century, whose principalexponent was Thomas Aquinas, was explicitly linked to Aristotelian philo-sophy and heavily marked by the attempt to assimilate it into Christianity.
20 the birth of political economyIts crucial assumption was that human intelligence is able to reach the truthby means of the speculative method. There are three orders of truth to whichspeculation should be turned: divine law, as manifested in the revelation;natural law ( jus naturalis), as embodied in the ‘universals’ which God hadgiven to the creatures; and positive law, produced by human choices andconventions and valid for all of mankind ( jus gentium) or for the subjects ofthe single states ( jus civilis). The majority of the economic propositions ofscholasticism come under positive law and only a few under natural law. Thetheory of the ‘just price’, reduced to the communis aestimatio (commonevaluation) of the normal price in the absence of monopoly, was derivedfrom Aristotle. There was also a theory of the ‘just wage’, which was defined,again according to the communis aestimatio principle, as the wage whichwould guarantee the worker a standard of living adequate to his socialcondition. In connection with this, there were also signs of a just price theorywhich, by virtue of the principle of ‘exchange of equivalents’, was connectedto the cost of production and, therefore, mainly to the cost of labour. A profitis included in the cost of production, but it must be fair and moderate, anhonestus quaestus, an honourable earning, just enough for the merchant tolook after his family and devote a little money to charity. Thus, taking intoaccount the fact that commerce was only considered legitimate if it wasuseful to the collectivity, it is difficult to see little more than the notion ofa wage for direction in the scholastic concept of profit. The just price is an intrinsic property of a good, as it expresses its intrinsicvalue (bonitas intrinseca), But how this value is determined is not clear. Theprevailing opinions oscillate between the theory of the efforts sustained inproduction and that of the capability of the good to satisfy a human need. Inboth cases, however, we are dealing with an objective property of the good.And it is not clear whether the propositions concerning the value of thegoods are of natural law, as suggested by the theory of the bonitas intrinseca,or should be reduced to the positive law, as the theory of communis aes-timatio seems to suggest. In fact, the scholasticists were not really interestedin understanding what value is or how it is determined. They believed thatthe just price must be such as to guarantee commutative justice, that is, equalexchange, in such a way that nobody can obtain more than he gives from theexchange of goods. If this price is ‘just’ because it corresponds to the naturallaw, it is also true—and, in a certain sense, even truer than the prices at whichthe goods are really exchanged on the market, which can be a little higher orlower than the ‘just’ price itself. This is probably the distant origin of theclassical theories of natural and market prices, which will be considered inChapter 2. Unlike real goods, which have an intrinsic value, money has a conventionalvalue (impositus), a value imposed by the prince, and there is no doubt thatthe doctrine of the value of money comes within positive rather than naturallaw. At any rate, a conventionalist theory of money predominates in
the birth of political economy 21scholastic thought, and especially in the work of Thomas Aquinas, whoconsidered money as a standard invented by man to measure the value ofgoods and facilitate trade. Money was also considered as a replaceable goodwhich is consumed in use. In fact, the main justification for the condem-nation of usury was derived from this. Non-fungible goods were those thatcould be used without being destroyed. They roughly corresponded to whatwe would now call ‘durable goods’. Fungible goods, on the other hand, wereobjects destroyed through use, as for example, wine. In the first case, use canbe separated from ownership so that one can be sold independently of theother. This is not so in the latter case. Money came into the fungible goodscategory: when used to buy goods it is lost. Anyone lending it is entitled to itsrestitution, but cannot expect to receive a price for its use, for that would beusury. The debtor should in fact return it intact. Even a low rate of interestwas taken as usury, since anything added to loaned capital was consideredsuch. Thomas Aquinas took up the Aristotelian condemnation of usury andadded to it a theory according to which money, as it is not a durable goodwhich produces services, like capital goods, cannot be rented out, so that itslending cannot give the right to the collection of interest. He was againstthose who maintained that interest, being proportional to the duration of theloan, is produced by time, an opinion that he attacked by arguing that time isa common good. It is God’s gift to mankind, and nobody has the right toappropriate it for himself or to appropriate its fruits. The ban on usury waspartly overcome by applying the damnum emergens doctrine, i.e. the viewthat interest compensates for the risk run by the lender of losing part of hiscapital ( periculum sortis). Compensation was generally granted for this riskwhen there was a delay in returning credit, precisely because the delay couldgive rise to losses. Default interest was therefore admitted. In these cases,compensation was considered to be ‘interest’, not ‘usury’. It was acceptableto expect a premium for damnum et interesse. Usury was prohibited, defaultinterest was not. Some authors also made allowances for missing profit; thisis what today is known as ‘opportunity cost’ in loan granting. Supporters ofthe legitimacy of compensation for ‘missing profit’ held that interest mustcompensate for the profits renounced by the lender, since his money is notemployed for alternative uses. Many canonists maintained however thatmoney put to alternative uses should not generate a profit anyway, and that itwas therefore right to condemn usury, nullifying remuneration of all mon-etary uses of capital. A loan should not entitle the lender to compensation formissing profit. Finally, Aquinas made an interesting attempt to justify private property,an attempt that seems to be the first link in the long chain which, as we willsee, connects scholastic thought to the seventeenth-century natural-lawphilosophy and to nineteenth-century socialism. God created the earth forthe whole of mankind, and nobody can claim a right which deprives othermen of the goods created. Private property, however, could be justified as
22 the birth of political economya stimulus to work and is not in contrast with natural law, even thoughit is not established by it. It can be seen as a form of concession that thecommunity gives to individuals, provided they use it as a service to thecommunity: it is not a right of using, enjoying, and abusing ( jus utendi,fruendi, et abutendi), but only a power of procuring and dispensing ( potestasprocurandi ac dispensandi). It is not difficult to understand the strong moralist tone of the scholastictheories and their normative function. This was a period in which the revivalof commerce threatened to break up a social order which was supposed to bebased on the divine will, while bringing wealth and welfare, if not to all thecommunity, certainly to some new classes and social groups. In this situationthere was a strongly felt need to keep under the community’s control,wherever possible, the economic instruments by which the new wealth wasaccumulated: commercial profits, prices, usury loans, and private property. The economic ideas of Aquinas, and of scholasticism in general, havemoral implications rather than scientific, and belong to the prehistory ofeconomic science. But they cannot be ignored in any history of this scienceas, after becoming part of the social doctrine of the Catholic Church, theyhave continued to influence economic thought for several centuries, even inwriters who did not agree with them. Economists who have elaboratedopposing doctrines have had to take them into consideration. An excellentexample is the abbe Galiani, who, as late as the eighteenth century, at the ´height of the Enlightenment, was not able to formulate his own moderntheory of interest without feeling the need to show its coherence with thedoctrine of ‘commutative’ justice and the precept that prohibits usury.1.1.2. Communes, humanism and the RenaissanceFrom the end of the twelfth century onwards, European society and eco-nomy underwent a process of transformation which continued until aroundthe middle of the sixteenth century. It began in Italy and already in thethirteenth century it had spread and became firmly established in otherregions, Flanders, England, northern Germany and southern France. A newform of social organization developed: town civilization. In a typical town ofthe late Middle Ages, or, better still, Renaissance period, citizens were free tomove around and meet up in different places: in churches, the governmentpalace, the merchant’s court, the guildhalls, the buildings of confraternitiesand those of the trainbands, the marketplace, the palaces of the wealthybourgeoisie; particularly in the streets which provided the backdrop fortrading and social conflict, and lastly, in the main square, the venue for thepeople’s political assembly, or ‘Parliament’, where public decisions weretaken, often resorting to the argument of weapons. This civil revival came as the result of a long economic and socialrevolution. At economic level, manufacturing, commercial and financial
the birth of political economy 23capitalism developed. In the textiles sector, in particular, where importanttechnological innovations, such as the wide loom, had been introduced,production grew to such an extent that extensive ‘workshops’ were built forthe great number of wage-workers which often ran into hundreds. Moreover,the invention of the mechanical clock enabled time to be measured accur-ately and consequently wage-workers to be used more efficiently. Trading,on continental scale, embraced the whole of Europe and the Mediterranean.Finance and international banking developed to such an extent that bankersfrequently conditioned diplomacy and wars between great powers. Duringthis period several important economic innovations were introduced: the billof exchange, double entry accounting, securitazation of the public debt,insurance, the merchants’ forum, the bank, the stock exchange and thecommenda—the forerunner of today’s joint stock company. At social level, the rise of the bourgeoisie during a long revolutionaryprocess led to the armed ‘people’ undermining the power of the old aristo-cratic classes, while Communes were set up as autonomous states, inde-pendent of imperial rule. Already around the end of the thirteenth century,serfdom had been abolished in many of the Italian republics to smite thearistocracy’s economic power and release labour to import to the city, butalso in deference to a new concept of human freedom. It was during thisperiod that the modern idea of freedom developed, intended as ‘freedom ofthe people’, that is, autonomy of the people set up as a Commune against theprerogatives of imperial power, on the one hand, and ‘individual freedom’,that is, the right to take autonomous decisions about one’s life in economic,political, and moral fields, on the other. But most important of all was perhaps the cultural revolution, which saw arevival of the arts, architecture, literature, philosophy, and law. Humanismrepresented the unifying spirit of the entire process. The rediscovery of Greekand Roman literary and philosophical works enabled the intellectuals of thetimes to take a step back ahead of the Middle Ages and lay the foundationsfor a jump forward to modern times, to what has been called ‘civil human-ism’. The rediscovery of ancient juridical works, on the other hand, led to theconstitution of Corpus iuris civilis and the birth of studies in Roman law,creating the premisses for overriding feudal and canon law and the birth ofan advanced law more in keeping with capitalist development. And whilein public law, the concept of a constitutional state with popular sovereigntybegan to take shape under the guidance of Marsilio da Padova, in privatelaw a form of regulation of the employment relationship emerged, which byrestoring the concept of locatio operarum, led to the end of feudal disciple-ship and the birth of the modern employment contract. The hero of humanism is an active subject, open to innovation, a lover offreedom who is proud of his civil virtues: in short a merchant-manufacturer.This new Hercules combined action and reflection, art and accountancy,religion and politics, theory and practice, in the immense effort to create
24 the birth of political economyhis own world and in that world, a space for his own freedom. The economicand political reality in which an individual is immersed is no longer adatum; the old unchangeable order recounted in Menenio Agrippa’s apo-logue and prescribed by divine design no longer exists. The new order isongoing and is created by the valorous and prudent man, who no longerconfines himself to taking what he needs to live from nature but, indeed, liveshis life in the immense superhuman endeavour to create what nature isunable to offer him: that surplus of artistic beauty, political power andeconomic wealth which represents the spice of good bourgeoisie living.Freedom is an essential condition for this hero’s existence, but even moreessential is the set of human and institutional relations which makes thatfreedom possible. For economic freedom is impossible without politicalfreedom. Only in a free republic can an active man exercise his creativeaction, a republic that defends its citizens from the threat of tyranny. But arepublic is none other than a group of citizens gathered together in a close-knit Commune. Notwithstanding the many differences that undoubtedly exist among thevarious humanist thinkers, the insistence on the essential relationality of theperson is common to all and is an extremely important concept of economictheory. From it derives the belief that interpersonal relations are the trueeconomic resource. As M. Palmieri wrote in Della vita civile (On civil life): ‘ofall beings, man is the most useful to man. The goods he needs he can obtainonly from his fellow creatures’ (p. 29). Civil humanism continued into theRenaissance, and in the sixteenth century, that of Niccolo Machiavelli, `Thomas More, and Erasmus of Rotterdam, it became the essence ofmodernity. It was Machiavelli who best expressed the significance of this revolution inpolitical and social thought. The philosopher of The Prince was certainly notone to deceive himself over man’s natural goodness. His country’s declinewas there before his very eyes; he could see that the Italian people’s republicswere by now far from being true democracies—indeed, they were places ofwar against all and everyone, of the fight between social classes, of the tri-umph of tyranny. He put the cause for this situation down to moral dec-adence. He did not, however, deduce that human nature is evil, that theoriginal sin turns homo into homini lupus. In Discorso sopra la prima deca diTito Livio he let loose his Utopian inclinations, showing a certain predilec-tion for a republican government; making it clear, however, that that politicalsystem presupposes a public-spirited man with a love of freedom. In otherwords, Machiavelli broke away from the fundamental contradiction ofmedieval thought and its continual oscillation between Aristotelian optimismand Judaic-Christian pessimism, by refusing to define human nature inmetaphysical terms. Machiavelli saw man not as an Aristotelian ‘politicalanimal’, nor as son of the original sin. There is nothing natural about humannature, which is in reality affected by the historical context in which man
the birth of political economy 25operates. It is socially determined, or, as we would say today, it is endo-genous. But the sociopolitical context is, in turn, determined by man’s col-lective action. The form of social organization changes with man’s moralinclinations and vice versa. A republican government presupposes citizenswith a public spirit and love of freedom; but that same government, throughits institutions, induces citizens to develop those very moral qualities. Thedespotism of the Prince, on the other hand, is made necessary by thedecadence and moral corruption of the people, which it contributes to fuel. From this derived a sort of historical and institutional relativism which hasremained alive in all Italian political and economic thought: GiambattistaVico brought it to its logical historicist consequences. This conception is notin contrast with its humanistic origins, it is indeed their supreme realization.In formulating his first law of the evolution of society, Vico wrote thatdecadence begins when men no longer find within themselves a reason torelate their lives to that of others and not when material resources run short. The cultural reform brought about by humanism contributed to fuelinnovation also in the field of economic thought. Of the many ideas thatemerged in the field of economics, we shall confine ourselves to recalling justtwo that abound with modern implications: Francesco da Empoli’s theory ofinterest and Antonio Pierozzi’s use-value theory, both of which wereelaborated in Florentine monastic Studia. In the fourteenth and fifteenth centuries Florence was one of the mostimportant financial and industrial centres in Europe. It issued ‘the only trueinternational currency of the times’, the gold florin, and exported all over thecontinent and the Mediterranean area the refined woollen and silk clothit produced in hundreds of workshops, the largest of which employed over200 factory wage workers and scores of spinstresses, weavers, and otherhome workers. The Florence Commune also set up an advanced system ofrepublican institutions and a sophisticated economic administration thatmade widespread use of public debt management policies. A flourishing secondary market for government securities grew up whichencouraged extensive and refined speculation (so refined as to practicestellage operations). To curb the tendency, the government was obliged tointroduce a sort of ‘Tobin tax’ ante litteram: a 2 per cent gabelle on alltransactions. The speculation phenomenon gave rise to bitter disputesaround the middle of the fourteenth century, which in turn led to a vastnumber of theories on the new forms of usury and the problem of the morallegitimacy of profits made on the finance market. Canonists and preachers ofthe times raged violently against these speculative practices, re-proposingand brushing up Thomistic theories on usury. One voice raised against the mainstream was that of the Franciscanpreacher, Francesco da Empoli, who argued that government securityspeculators were not usurers, first, because securities were exchanged on themarket on the basis of a sale contract and not a loan contract. It should be
26 the birth of political economynoted that according to canon law and scholastic doctrine, only loans—andno other uses of money—could give rise to usury. Those who bought gov-ernment securities on the market did not lend money to the Commune thatissued them or to the citizen who re-sold them. Therefore, any earningsobtained could not be considered remuneration for the loan of money.Second, it was a right rather than a commodity that was bought onthe market, to be exact, the right to collect an income and, in the event, acapital. Nevertheless, in the third place, the value of this right was uncertain.There was, in fact, no guarantee that the Commune would actually repayits debts, which had become unredeemable around the mid fourteenthcentury. The speculator could redeem his capital by selling the securities toother private investors. But since the market price was subject to sharpfluctuations, the value of the investment was always ‘doubtful’. Moreover,the Commune paid interest at a fixed nominal rate (sometimes as high as15 per cent), so that, because of the instability of the market price ofsecurities, the actual interest rate too was always doubtful. In otherwords, an exchange of securities on the market took the form of a venditiosub dubio, which is tantamount to saying that the buyer made a riskypurchase. The element of risk inherent in the transaction induced da Empoli toassimilate this type of contract to insurance. Thus, in the same way that anunderwriter covered a merchant’s risk for which he obtained a premium inexchange, the buyer of a government bond on the secondary market coveredthe seller’s risk, by making a secure cash payment. As a premium, heobtained in exchange the right to receive payment from the Commune atsome future date. Since the actual value of these payments was uncertain,the buyer assumed a risk. Accordingly, any profit he might make was notconsidered usury, but a premium for the risk undertaken. It should be bornein mind that Church doctrine condemned all forms of usury, but consideredinsurance premiums acceptable. Francesco da Empoli’s argumentationcannot properly be referred to that of periculum sortis, i.e. the capital risk.Taking his analysis outside the context of a loan contract, the Franciscanmonk reduced the risk to one of income. In his opinion, it was not thelender’s risk that was compensated, but the service offered by the buyer incovering an income risk. Passing now to the theory of value, we wish to recall a practice widely usedin Florentine wholesale trading, known as ‘tagging’. The most important cityguilds, the Woollen, Silk Cloth, and Merchants Guilds, invited their mem-bers to apply a tacca (tag) to sold goods; this was a wooden or parchmentlabel which set out details of cost: primi costi (i.e. the cost of raw materials),labour costs, transport costs, warehousing costs, indirect taxation, exciseduty. In this way, information on the cost of production was made public.The sale price was then fixed by adding a gross mark-up warranting an‘honourable profit’.
the birth of political economy 27 This prescription aimed to encourage market transparency and the prac-tice of fair trading and was justified by the doctrine of just price. The jus-tification was, however, misleading because, according to doctrine, a justprice should be determined by excluding monopolistic practices. An hon-ourable profit should be earned, made up of two components: remunerationof managerial work, quasi stipendium laboris, and a fund for charity activ-ities, a danaio di Dio, God’s money (although some guilds classified thedanaio di Dio among the cost items). In actual fact, the major FlorentineGuilds of the fourteenth and fifteenth centuries operated as authenticindustrial syndicates, by controlling outlet and supply markets, regulatingthe labour market and wages and limiting competition among its membersthrough fixing production quotas. The ‘just’ price they fixed tended to be amonopolistic price collectively determined by representatives of the verysubjects to whom it was prescribed. In view of the enormous profits itguaranteed, no one believed that it was just in the commonly accepted senseof the word nor that it guaranteed only an honourable gain. While the practice of tagging appeared to give rise to a theory of value asproduction price, in reality it brought to light the role of market controlpractices in fixing prices and, consequently caused a rift in the objectivisttheory of value. Undoubtedly, it drew attention to the weight of demand indetermining prices and consequently on subjective factors. The theoreticalelaboration of Antonio Pierozzi, better known as Sant’ Antonino da Firenze,Dominican prior, Bishop of the city and Doctor of the Church, contributedto widen this rift. He argued that the formation of a price is undoubtedlybased on objective factors, in particular on raritas and difficultas, the scarcityand cost of production. But there is also a subjective factor, complacibilitas,the individual assessment of the value of a good. This is not yet a utilitytheory of value, but closely resembles one. One important thesis of Pierozziis that complacibilitas contributes to form a communis aestimatio but also todiverge from it. In fact, Antonino maintained that a product is exchangedwhen a buyer who values a good as worth more than the money it costsencounters a seller who values it less; he therefore considered a sale at otherthan the current price as also acceptable, as long as both contracting partieswere in agreement.1.1.3. The expansion of ‘Mercantile’ capitalismA slow but inexorable process of economic, social, political, and culturaltransformation began around the middle of the sixteenth century and was tolast beyond the middle of the eighteenth, when all the preconditions for thebirth of modern industrial capitalism had been laid down. The economicleadership of Europe moved northward. One of the main factors in this transformation process was the flow ofgold from the Americas. The prices in Europe tripled from 1500 to 1650.
28 the birth of political economyThe social consequences were enormous. On the one hand, there was agradual impoverishment of those classes, aristocratic and clerical, who livedon incomes which, being fixed by custom, adjusted extremely slowly to thefall in the value of money. On the other hand, there was an unprecedentedenrichment of the mercantile class, who lived on ‘profits upon alienation’,namely, incomes derived from the difference between the buying and sellingprices of goods, a type of profit that naturally increases with inflation. Thisgrowth of the monetary wealth of the middle classes and the correspond-ing gradual expropriation of the old dominant classes was one of thefundamental factors in the process of primitive accumulation. The expansion of trade, especially long-distance commerce, led to theformation of commercial and industrial centres and, gradually, to the newfigure of the merchant-manufacturer, thus inducing profound changes inproductive activity. The need for an increasing quantity of manufacturedproducts and, above all, the need for greater stability in their supply led themerchants to extend their control over the production activity. The ‘putting-out’ system spread in England and France towards the end of the sixteenthcentury—that same system which had been experimented in Italy and theFlanders in the fourteenth century. At first, the merchant supplied the rawmaterials and commissioned the craftsman to transform them into finishedproducts, while the work continued to be done in independent workshops. Inthe succeeding phase, the ownership of the tools of production, and often theworkshops themselves, passed to the merchant, who was then able to employworkers himself. Workers no longer sold the finished product to the mer-chant but instead sold their own working capacity. The textile industry wasone of the first sectors in which this new method of production took place. Thus occurred the slow formation of a modern working class on a nationscale, a social class whose members are deprived of control over the produc-tion process and for whom the sale of their own working capacity representsthe only way of making a living. In the countryside this process was favouredby the diffusion of the putting-out system, the enclosure movement (especiallyin England), and the increase in the population. Furthermore, the increase inprices in the towns drastically impoverished those categories of semi-skilledcraft workers who made up the lowest strata of the old guilds, and who earned,at least in part, incomes which were fixed by tradition. Such incomes wereheavily cut by inflation. This social group merged with the farmers expelledfrom the countryside and the poor craftsmen whose goods were no longercompetitive because of lack of commercial outlets. Another important change that occurred in these three centuries, startingafter the Westphalia peace, was the affirmation of the modern nation states.The transformation ended in the dissolution of the Holy Roman Empire,thus giving life to various national unification processes which were com-pleted towards the end of the fifteenth century, at least in England, France,and Spain. In the following three centuries, European wars were wars among
the birth of political economy 29nation-states, where the reason of the state prevailed over every other, evenwhen, as with religious wars, the ideological element was very strong.1.1.4. The Scientific Revolution and the birth of political economyWith humanism and the Renaissance, man had been placed at the centre ofthe universe and philosophy had emancipated from Aristotle and Thomism.And while politics, with Machiavelli, had ceased to be a branch of moralphilosophy and became a science, with the Protestant Reformation the faithitself, or the spiritual base of the free act, had emancipated from traditionand authority. To say it with Nietzsche—the Reformation made eachindividual a priest of himself, which is a form of libertinage. Machiavelli’sThe Prince was written in 1513; Luther began preaching against the sale ofindulgences in 1517. The Renaissance also witnessed the beginning of that great process ofintellectual emancipation known as the Scientific Revolution. In the six-teenth and seventeenth centuries there was a second wave in the expansion ofEuropean universities. The first wave had taken place in the late Middle Agesunder the protection of the Church. Later, in the fourteenth and fifteenthcenturies, the university system collapsed, mainly because of the attempt bythe freer and more creative intellectuals to escape from the spiritual controlof the Church and to look for employment in the royal courts and in the layacademies. During the revival of the universities in the sixteenth andseventeenth centuries, the State tended to take the place of the Church in thecontrol of intellectual activity. In this period, the traditionally higher-rankedfaculties of theology, law, and medicine, where the spiritual control fed bythe wars of religion was still important, lost prestige and importance. At thesame time the faculties of philosophy, relegated to an ancillary role in theMiddle Ages, acquired increasing prominence. Modern philosophy was born in the new universities, and with it science.And it was not by chance that the greatest philosophers of the period werealso great scientists, or at least showed great interest in scientific research.The Scientific Revolution began with Copernicus in the first half ofthe sixteenth century, continued with Keplero, Galileo, Bacon, Leibnitz,Descartes, and was completed by Newton in the eighteenth century. It was in this climate of cultural revolution that the basis of moderneconomic thought was laid down. While the natural sciences were freeingthemselves from belief in various forms of magic, economics wished toemancipate itself from ethics and political philosophy. The process had beenunder way for some time when Antoyne de Montchretien announced the ´programme in the title of his main work, Traite de l’ oeconomie politique ´(1615), in which he sustained that economics, the ‘science of acquisition’, wasan important part of politics, and that it should concern itself, not only withthe household, but also with the State. The birth of economic science passed
30 the birth of political economythrough two emancipation processes. The first led to the abandonment of theAristotelian and Thomistic idea that economics should deal exclusively withthe behaviour of individual economic agents and households, while the otherresulted in the abandonment of scholastic metaphysics and gnosiology. Wewill consider them separately. In classical Greek thought, economics was considered as the art of familymanagement. It is true that, as early as in the first century bc, the termpolitike oikonomıa was already used by some Epicurean philosophers in the ` `modern sense. However, owing to the influence of Aristotle on scholasticthought, the Latin word oeconomia passed to medieval philosophy with itsmicro-economic meaning. For Thomas Aquinas, this discipline dealt withthe ‘government of the house’. It should be focused on the private sphere ofhuman action. In this role it was subordinate to ethics and political philo-sophy, the philosophical disciplines which study the public activities of man.Politics was concerned with the behaviour of collective agents such as socialclasses, the State, and its organs, whereas economics should study thebehaviour of the individual social agents, the families. The aim of the ‘sci-ence’ of political philosophy was the study of the political society. In relationto this, families represent something which was considered inessential. On the other hand, political philosophy and ethics produced knowledge,whereas economics only had practical ends. For Aristotle, as for his fol-lowers in the late Middle Ages, especially Aquinas, ‘science’, that is to say,speculative knowledge, consisted of the application of a rational deductiveprocedure to an object of study, on the basis of which propositions could beformulated and conclusions reached that would be both universal andnecessary. The universality of political propositions was derived from thefact that God’s will was manifested in the popular consent given to thelegislative power of the governors; while the universality of ethical pro-positions derived from the fact that the ends of human action coincided withthe ends which God had modelled for all creatures. The economic activitiesof a household could not be studied in this way. All the actions of the singlesocial cells would come under either ethics or politics, and those which couldnot thus be classified were not worth ‘scientific’ study. In other words,economics was not a ‘science’ because it was neither ethics nor politics.Indeed, Schumpeter is right when, in his History, he observes that Aquinaswas not interested in economic questions in themselves, and that ‘it is onlywhere economic phenomena raise questions of moral theology that he tou-ched upon them at all’ (p. 90). He is also correct when he observes that, inscholasticism, economics as a whole was never treated as a subject in itself.Aquinas considered individual commercial action as despicable. What uni-versal propositions could be formulated on it? How could a ‘science’ dealwith it? Now, pretending to be public, civil, national, or political economy, the newdiscipline defined itself as a science precisely because it had located its own
the birth of political economy 31subject of study within the sphere of public activity. With this it affirmed,among other things, its own autonomy from the new political science, whichwas developing at the same time. They were two independent disciplineswhich studied different aspects of collective action: one was concerned withthe accumulation and management of wealth, the other with the accumu-lation and management of power. Both studied the behaviour of collectiveagents: still the State and its organs, but now subordinately to another socialsubject, the nation. From the latter the State tended to receive legitimacy,especially as the legitimacy of the Papacy or the Empire had been stronglyweakened. Public welfare was becoming one of the legitimating factors bywhich a new sphere of State activity was to be defined. Political economy wasborn, together with theories of economic policy, in order to give sense andefficacy to this activity. In order to outline the second aspect of the process of emancipation ofeconomics from Thomism, it is important to note that the birth of politicaleconomy occurred at the same time as the concept of science underwent asecularization process. Only when human action is no longer motivated byspiritual ends does it make sense to study it without aspiring to reach uni-versal propositions. And it is precisely when public choices are no longerlegitimated by God, but only by the ends of men and the nation, that it ispossible to study them scientifically. This secularization process, as far as political economy is concerned, wascompleted in the seventeenth century, when the new science was fertilized bynatural-law philosophy, English empiricism, and Cartesian rationalism. Butit had begun much earlier, at the time of the philosophical debates about‘universals’. The ‘universals’ are the essential properties of things. Accordingto Aquinas, before existing in the mind of man, who is able to understandthem by means of abstraction, universals exist in the mind of God. They alsoreside in things themselves, behind and at the roots of their empirical reality.It is for this reason that speculation leads to ‘science’: the human mind, withits speculative ability, operates on an ontological structure of the world towhich it corresponds. A different theory of knowledge was put forward by the nominalistphilosophers, who denied the real existence of the universals. These, from thenominalist point of view, were purely conventional signs: the names of thingsand not their real essence. The principal supporters of this conception wereRoger Bacon and William Ockham, to whom we owe the distant origin ofmodern scientific thought. The nominalist philosophers looked for know-ledge in the study of the individual and empirical aspects of the things, ratherthan in their universal essences. Karl Pribram has pointed out that it was some of the nominalist thinkers,above all students and followers of Ockham, who, in the late fourteenth andearly fifteenth centuries, made the first attempts at scientific reasoning ineconomics. Jean Buridan, who tried to explain the values of goods, not as what
32 the birth of political economythey should be, but as what they really are; and not as substance but asrelational phenomena, expressions of human needs. Nicholas Oresme, whodistanced himself from Thomism by attributing a real rather than a con-ventional value to money, a value linked to that of the precious metals fromwhich money was made. Oresme was also one of the first scholars to have aclear idea of ‘Gresham’s Law’, which we will consider in the next section. Stillanother one was the already mentioned Antonio Pierozzi, who tried to turnthe doctrine of communis aestimatio to serve a subjectivist theory of value. 1.2. Mercantilism1.2.1. BullionismWe should immediately point out that a school of thought that defined itselfas ‘mercantilist’ has never existed—even as a current of opinion aware of itsown theoretical homogeneity. However, there is no doubt that Adam Smithwas to a degree correct in placing in the category of ‘trade or mercantilesystem’ the group of economic ideas that dominated European political andcommercial circles in the sixteenth and seventeenth centuries and most of theeighteenth. A common theoretical core did exist, and this not only permitteddebates and dialogues but also gave a certain homogeneity to the variousnational economic policies. What is difficult is to identify a ‘system’ in thoseideas. It would be at least necessary to admit some important differencesconnected with national characteristics, and also to admit a minimum ofhistorical evolution. We have insufficient space here to consider the nationaldifferences, except for a few points which will be mentioned when necessary;however, historical evolution cannot be ignored. For simplicity’s sake, we will follow Cannan’s suggestion and distinguishbullionism from mercantilism in its strict sense, even though we are wellaware that this classification is a little forced. Bullionism had dominated the opinions circulating in the European courtsup to the end of the sixteenth century. It was characterized by the convictionthat money, or gold, was the wealth. Now, there is obviously no doubt thatmoney is wealth. The mistake, according to Smith, was the belief that it wasthe only form of wealth. However, it is doubtful that there have ever beeneconomists who really thought in this way. Rather, there was a widespreadopinion that treasure was the only type of wealth worth accumulating—anopinion which had more than a grain of truth from the point of view of theState, in an era in which wars were won with gold. This idea also accordedwell with the merchant’s point of view, for whom money was capital and,actually, the only type of capital capable of increasing in value. In fact, it wasclear to almost every economist of the period that money was a means ofincreasing wealth and power. What many of the bullionists did not admit
the birth of political economy 33was the idea that that means should be used to increase the welfare ofpeople, the wealth of nations, as Smith claimed. But why should the Stateand the merchants have had to pursue such an objective? In fact, thefirst bullionist economists, when they were not merchants, were adminis-trators of the sovereign’s private finances rather than civil servants; in otherwords, they were still concerned with a household economy. This wascertainly true of the German cameralists, who worked at the Kammer, ortreasury, of the sovereign; and the same was true for many of the Spanishbullionists. They had good reasons, therefore, to work towards rulers’private goals. The real mistake made by these economists, however, and the onewhich distinguishes them from the mercantilists of the following century, wasin the methods they suggested for achieving these objectives. A wide circu-lation of money within the national borders was considered to guarantee anextensive tax base; therefore, the outflow of precious metals had to beprevented. The simplest way to do this was to prohibit the export of gold andsilver, a method that was applied rigorously, sometimes even ferociously, inmany countries. Another measure often adopted was that of raisingthe purchasing power of the foreign currencies by law within the nationalterritory, so as to induce an inflow of money from abroad. Besides this,there were also attempts to force national companies to pay for importswith goods instead of money. Finally, a measure that was used above all inSpain was that of the ‘balance of contracts’: buying from each foreigncountry an amount of goods which did not exceed the amount exported tothat country. Another bullionist ‘mistake’ was the tendency to seek the causes of asystematic outflow of precious metals solely in monetary factors, namely, inthe deviations of exchange rates from the parity determined by the metalliccontent. Such deviations were attributed to illegal behaviour, forgery, andmanipulations by bankers and merchants. But the Crown also, often andwillingly, resorted to illegal monetary techniques, such as ‘clipping’, i.e.reducing the metallic content of the currency in relation to face values, or‘raising’, i.e. increasing, by means of a proclamation, the official value of thecurrency in relation to its metallic content. There were many learnedinvestigations in this field, some of which led to the formulation of animportant economic law, ‘Gresham’s Law’, according to which bad moneydrives out good. If, in a country, two types of currency circulate which havethe same nominal value but different intrinsic values (because one of the twohas a lower content of precious metal, because it is a forgery or worn), thepublic will tend to use the bad money for internal payments. The good willbe hoarded, melted down, or used for international payments, and willtherefore disappear from circulation. In regard to the naming of this law, it is worth pointing out that in 1857 itsdiscovery was attributed to Thomas Gresham by Henry McLeod, who later
34 the birth of political economychanged his mind and called it the ‘Oresme–Copernicus–Gresham Law’.Gresham provided a precise formulation of the law in a letter to QueenElizabeth I. Today it is known that the first formulation goes back to1519 and is owed to Nicholas Copernicus, even if some hints of it can befound in Nicolas Oresme.1.2.2. Mercantilist commercial theories and policiesBullionist doctrines were still professed in the seventeenth century. Forexample, Gerald de Malynes sought the basic causes of a disequilibrium inthe balance of trade in the alterations in the exchange rate. The mostinteresting part of Malynes’s arguments, however, is not bullionist, and canbe summarized in the following way. An exchange rate which is higher thanthe metal parity leads to an outflow of precious metals which diminishes theamount of money in circulation in the country under consideration. Thisreduces prices and worsens the terms of trade. Consequently, the trade deficitincreases. There are two interesting aspects to this way of thinking: the use(albeit in an approximate way) of the quantity theory of money, andthe implicit hypothesis of a low price elasticity of imports and/or exports. Wewill consider this later. Less interesting is the solution proposed: the inter-vention of the ‘royal exchanger’ against illegal practices and monetarymanipulations, which had, according to Malynes, the sole responsibility forthe fluctuations of the rate of exchange. Counter-arguments were advanced by two learned merchant adventurerswho disdained neither science nor politics: Edward Misselden and ThomasMun. Misselden overturned the theories of Malynes: it is the surplus or thedeficit on the balance of trade which makes the rate of exchange vary, andnot the other way round. Rather than worry about the exchange rate, theState should encourage exports and discourage imports. This is the gist ofthe mercantilist doctrine, a doctrine which was expressed perhaps moresystematically by Mun than by any other contemporary economist. WhileMalynes placed great emphasis on the particular trade balances of onecountry with each other country, taken singly, Mun showed that what reallymattered was the overall balance of trade. The inflow and outflow of golddepends on the general balance of trade, and the State should pay directattention to this. Thus it was permissible to maintain a commercial deficitwith some countries, such as those from which raw materials were imported,if this was conducive to the increase of the national production of industrialgoods. Many of these goods could be sold abroad at high prices, because ofthe monopolistic advantages associated with the superior technologyrequired to produce them. From the point of view of the birth of political economy, the identificationof the interests of one particular social class, the merchant class, with those
the birth of political economy 35of the collectivity, was extremely important. In this way, economics ceased tobe ‘domestic economy’ and became ‘political’. The profits of that class,profits upon alienation, were obtained from an excess of the value of salesover purchases. This gap gave rise to the accumulation of money. The entirenation was considered as a great commercial company. Its net inflow of goldcorresponded to the excess of its foreign sales over and above its foreignpurchases. And, as with the merchant, the nation would also have to avoidkeeping its stock of money idle. It had to reinvest it in the form of stock, inorder to buy (import) the goods necessary to produce new goods; with theseit would be able to increase sales (exports) and profits (trade surplus).Although production, and therefore the transformation of the imported rawmaterials, played an important role in this way of thinking, it was still onlythe excess of sales over purchases which was seen as the source of profits, forthe collectivity as well as for the individual. The theory of economic policy that sprang from this doctrine wassimple. Commercial policy had to be protectionist. Export duties had to beabolished and import duties raised. Moreover, exports should be encouragedby incentives and imports hindered as far as possible and even forbidden incertain cases. These principles were rigidly followed by the French customstariffs instituted by Colbert in 1644. England moved in this direction espe-cially towards the end of the seventeenth century. However, certain veryimportant exceptions were made: the import of raw materials, which wereconsidered useful to the national industries, was not to be obstructed, whilethe export of important raw materials such as wool should be forbidden. Mercantilist commercial policy also favoured national shipping; and manymeasures were taken aimed at reinforcing the merchant navy. The 1651English Navigation Act, for example, prohibited the importation of goodson non-British ships. This cultural attitude also influenced colonial expan-sion policy, in relation especially to the demand for the mother country’sproducts and for the supply of low-cost raw materials that were expectedto come from the colonies. Finally, it is important to mention the policy ofconceding privileges and monopoly rights to the great national commercialcompanies. The British East India Company was founded in 1600, and theDutch in 1602. The mercantilist industrial policy aimed at encouraging productiveactivity within the national territories by the concession of monopolisticprivileges, State subsidies, and tax exemptions to national enterprises, as wellas by the importation of advanced technology, the acquisition of manu-facturing secrets, and the encouragement of the immigration of skilledworkers. The industrial policy even included the creation of State factories.In this field French mercantilism again excelled: Colbert brought industrialpolicy to obsessive levels, to the point of administrative prescription ofmeasures relating to production and quality control.
36 the birth of political economy1.2.3. Demographic theories and policiesMercantilist theories and policies were also worked out in regard to demo-graphy. The problem was how to ensure an abundant labour supply tosatisfy the expansion needs of the emerging industries; the policy aimed atincreasing the population (we are still a long way from the Malthusianobsessions of the nineteenth century). This policy was put into practice withparticular effectiveness in Germany, with the abolition of pre-existing pro-hibitions on some types of marriage and the awarding of prizes for largefamilies. It is possible to speak of a mercantilist psychosis in regard to populationscarcity. Even in countries like Italy, in which there was no real scarcity ofpopulation, the demographic mania spread—so much so that the first hintsof the ‘population principle’, later to be called ‘Malthusian’, did not cause agreat deal of concern. For example, Giovanni Botero outlined the tendencyof the ‘generative power’ of mankind to grow more rapidly than the‘nutritive power’ of the nations, but concluded that this was just one morereason to develop production; in the worst case, emigration could be used asan escape valve. This obsession with demographic growth can be explained only partiallyby the continual and thirsty demand for soldiers in a period of permanentwarfare. There was also an economic motivation which had a certain the-oretical importance. The mercantilists had a rather peculiar wage theory,according to which maximum labour supply occurs at subsistence wage-level. If wages increase above this level, the supply will diminish rather thanincrease. The most ingenious justification of this theory was given in terms of‘morals’: workers were considered to be depraved people, attracted by viceand excesses in eating and drinking: if they were paid more than subsistencewages, this would encourage depravity and laziness and thus reduce thelabour supply. A less ideological explanation of the phenomenon should be based on anunderstanding of the working conditions in the emerging industries and thedifference in living conditions between the countryside and the town. Thefirst point can be simply dealt with. Only a problem of physical survivalwould induce the workers to accept working 13–14 hours per day. In theseconditions it was understandable that an increase in the daily wage couldcause an increase in the demand for leisure, and perhaps for alcohol. Whatcould be a worse crime against Christian morality? This is the first cause ofthe strange shape of the labour-supply curve which the mercantilist eco-nomists had in mind. The second cause was that the rural–urban migrationwas of a ‘push’ type (caused, for example, by the enclosures) rather than‘pull’ (due to the attraction of the towns), for the living conditions in thetowns were worse than in the countryside. Therefore, a slight increase inindustrial wages would not encourage any significant increase in the
the birth of political economy 37 wr S S D D wr – S P Q wr D D – – 0 N N N NFig. 1industrial-labour supply. This second factor could account for the lowelasticity in the labour supply. But the supply curve would even becomenegatively sloped owing to the former factor. The theory can be illustrated by making use of a supply curve such as SS in Fig. 1. wr is the real wage, wr the subsistence wage, N the quantity of labour, and N the full employment level. The labour supply curve isinfinitely elastic at the subsistence wage-level: at that wage, all the availablelabour power will offer itself in order to guarantee survival. A lower wage isnot possible, simply because it would not ensure survival. Once fullemployment has been reached, each increase in wages would allow theworkers to take some time off, and the supply curve would become negat-ively sloped. Let us begin from point P, a full-employment situation at the subsistencewage-level and with a demand curve such as DD. An increase of accumu-lation would cause the demand curve to move to D0 D0 . The wages wouldincrease to w0r and the labour supply would be reduced to N0 . In conclusion,if the enrichment of the nation is not to be slowed down by the depravity ofthe workers, it is necessary to ensure that the population grows at least as fastas the stock (of capital). If the supply curve shifts to SS0 , employment rises to N 0 , and the wages return to wr ; the new equilibrium point will be Q. The problem of the labour market, in the period of primitive capitalaccumulation, was not so much that of high wages, as the manufacturedproducts were mostly sold in imperfectly competitive markets, and thereforeat remunerative prices, but rather that of a labour supply that had difficultyin keeping pace with the expansion of industry and trade. For example,Josiah Child was extremely worried about the demographical problem,as were all the mercantilists, but he was not so concerned about the problem
38 the birth of political economyof wages. Although he was not against a low-wage policy, Child alsomaintained that high wages were not generally a bad thing; or, rather, thatthey should be seen as a consequence of the high level of wealth of a country,while low wages would be indicative of poverty.1.2.4. Monetary theories and policiesLet us now consider monetary theory. The mercantilists made the first for-mulations of the quantity theory of money. The price revolution whichoccurred in Europe after the discovery of America, and which caused acentury-long inflationary process, could not pass unnoticed. The relation-ship between the increase in prices and the increase in the amount of gold incirculation had already been noticed by the early Spanish mercantilists. Thefirst hints at this relationship were made by some students of the SalamancaSchool, to whom we will return in section 1.2.6. A cognisant formulation of the quantity theory was proposed by JeanBodin. It was stimulated by a thesis of Jehan Cherruyt de Malestroict, whohad asserted that the increase in prices which had occurred in France wasonly apparent. Prices, according to him, had increased in terms of themonetary unit, because of ‘clipping’; but, as the precious-metal content ofthe coinage had diminished, prices had not increased at all in terms of gold.Bodin pointed out that this argument only partially explained the infla-tionary process: prices had increased in terms both of the monetary unit andof precious metal, and the latter factor was more important. He demon-strated, with the aid of quantitative data, that the main cause of the increasein prices was to be found in the increase in the amount of gold in circulation.After Bodin the quantity theory was adopted by many other mercantilists.There are clear expressions of it in John Hales, Bernardo Davanzati, andAntonio Serra. However, from the middle of the seventeenth century there was animportant theoretical change. The quantity theory was still widely acceptedby the mercantilists; yet it was no longer interpreted as an explanation ofprice levels, but rather as a theory of the level of transactions. This beliefbecame so common that the few economists who did not accept it andremained faithful to the old quantity theory were considered almost asrevolutionaries. We will treat this point in the next section, when we outlinethe theories of some of the forerunners of classical economics. This change in point of view was probably connected to the end, between1620 and 1640, of the century-long inflationary process that had begun withthe discovery of America. The trend of increasing prices, which had startedat the beginning of the sixteenth century, levelled out in the seventeenth andremained so until after the middle of the eighteenth. The second half of theseventeenth and the first half of the eighteenth century also represented aperiod of depression. The flow of gold and silver from the Americas was
the birth of political economy 39drastically reduced, and the struggle among the European countries toobtain precious metals almost became a ‘zero sum’ game. Economists and merchants were no longer worried about inflation butabout the lack of the availability of money to finance trade. A widespreadidea was that ‘money stimulates trade’. The increase in the inflow of preciousmetals caused by a surplus in the balance of trade, in a period in which it wasonly possible to increase internal monetary circulation by a reduction inexternal spending, was seen above all as the necessary condition for anincrease in production and, therefore, in wealth—to the extent that protec-tionist policies were often linked to the advice, specifically directed to thesovereign, not to hoard money: to increase the State treasury would donothing but take money out of circulation. Two mechanisms were indicated by means of which the increase in themoney supply would have stimulated the levels of activity. The first is adirect mechanism, consisting of the rise in incomes and consumption causedby the increase in the money supply. This argument was supported, forexample, by Jacob Vanderlint and by John Law. The latter clearly identifiedthe hypothesis on which that argument was based, which was that prices donot vary in a substantial way with variations in demand (although Lawlimited the validity of this hypothesis to non-durable goods). In other words,the supply curve was assumed to be almost horizontal. With this, inflation,if it exists, is creeping, while its effects are in any case positive, because theincrease in profits encourages further production and capital accumulation. The other mechanism was indirect, and consisted of the reduction of theinterest rate caused by the increase in the quantity of money. Some mer-cantilists had (as Keynes has pointed out) a monetary theory of productionand interest: money is used to stimulate production and trade; interest is theprice that is paid to obtain this use. It is also worth noting that the old termfor ‘interest’ is ‘use’, a term which John Locke, at that time, still adopted as asynonym for ‘interest’. This price depends on the supply and demand ofmoney. Thus ‘the abundance of money reduces usury’, argued Malynes.Misselden, his main critic, did not disagree with him on this point when hesuggested that ‘the remedy for usury may be the abundance of money’.Cantillon observed, in his Essai sur la nature du commerce en general, that ‘it ´ ´is a common idea, received of all those who have written on Trade, that theincreased quantity of currency in a State brings down the price of interest,because when Money is plentiful it is more easy to find some to borrow’(p. 213). Thus, an increase in the quantity of money, ceteris paribus, allows for areduction in the price of credit and therefore in the cost of financinginvestments, in this way encouraging economic expansion. The level of interest was, understandably, another of the mercantilists’obsessions, due to their strong identification with the merchant’s point ofview. Any policy aimed at reducing the level of interest was positively
40 the birth of political economyevaluated, while any theory able to justify this was considered useful—somuch so that many mercantilists, while adopting monetary theories ofinterest, did not hesitate to accept points of view from scholastic thought inorder to justify measures against usury and to request state interventionaimed at lowering the rate of interest by law. Keynes found value in thismixture of theories. If value there is, it is perhaps to be found in the fact thatsuch theories form the embryo of a monetary–institutional theory whichwas to be elaborated by Marx and to which the theory of Keynes himself canbe traced back. If interest depends on monetary forces, its long-term trend isnot an equilibrium value determined by real variables but simply an averageof short-term values, an average which basically depends on institutionalfactors.1.2.5. Hume’s criticismOne of the principal criticisms of mercantilist thought was put forward byDavid Hume in the Political Discourses (1752). Hume’s idea was that anincrease in the circulation of money in a country with a trade surplus wouldincrease prices (while it would reduce them in countries with a deficit). Theconsequent loss of competitiveness would rebalance, sooner or later, thebalance of payments and halt the outflow of gold. Therefore, mercantilistcommercial policies would have been, in the best of cases, short-lived. In thelong run they would have been useless. From the theoretical point of view,they seemed to ignore the quantity theory of money. The adjustment mechanism of the balance of payments theorized byHume, and known as the price–specie-flow mechanism, was also describedwith a certain precision by Joseph Harris. Later, it was accepted by theclassical economists and even by Marx, not only as a criticism of mercant-ilism but also as a description of a general economic law. All this is ratherstrange, as the mercantilists were aware of the problem raised by Hume.Cantillon, for example, had clearly defined the problem thirty years before,even if, and significantly, he had limited the loss of competitiveness causedby internal inflation to the industrial sector. Moreover, he had pointed outthat the increase in the imports of consumer goods directly caused by anincrease in monetary incomes could also contribute to reduce a trade surplus. Mercantilist thought, however, contained all the elements necessary torebut Hume’s criticism; they had been clearly formulated even by Cantillonhimself. First, the mercantilist economists were aware of the relationship thatlinks the quantity of money to the value of transactions. As we have men-tioned above, in most cases, especially in the seventeenth and eighteenthcenturies, they interpreted it, not as a theory of the level of prices, but ratheras a theory of the level of output. Second—and this is the argument putforward by Cantillon but already present in the work of Malynes and manyother mercantilist writers—even if an increase in the quantity of money in
the birth of political economy 41a country with a trade surplus causes, at least partially, an increase in thelevel of prices, this could cause, owing to an improvement in the terms oftrade, a further increase in the trade surplus rather than a rebalancing effect.The implicit hypothesis in this way of thinking is that of a low price elasticityof imports and exports. Under such conditions, an increase in internal priceswith respect to international prices would cause an increase in the value ofexports rather than causing changes in the quantities of imports and exports.Thus, an improvement in the terms of trade would reflect positively on thebalance of payments. Therefore, the mercantilist theories were robust from the logical point ofview, although the realism of the hypotheses on which they were basedshould be verified. Obviously, this is not the right place to undertake such ananalysis. However, there is reason to believe that behind the theoretical jumpmade by Hume there was a real historical change. Probably, in the pre-industrial period the elasticity of exports was not very high, given the markedproductive specialization of the various countries. In particular, the elasticityof imports of the imperialist countries must have been low, as imports mainlyconsisted of food supplies, raw materials, and luxury goods, which were notproduced internally. However, it is probable that, as manufacturing pro-duction developed in the main capitalist countries, a certain amount of pricecompetition gathered steam, at least for that type of production; and thiscould have increased the elasticity of exports and imports. It is significantthat Cantillon, in 1730, limited the effects of the monetary price–specie-flowmechanism to manufacturing production. Perhaps at the time of Hume and,later, of Smith, this effect had become dominant.1.2.6. Theories of valueThe mercantilists also had, to a certain degree, a common point of view onthe subject of value, at least in the sense that almost all the authors concernedwith this problem in the sixteenth and the first half of the seventeenth centurylooked for the solution in the same direction: namely, towards utility. It wasonly at the end of the seventeenth century that some scholars with partiallymercantilist backgrounds, such as Petty and Locke, decidedly distancedthemselves from the dominant view on value and looked for the solution ofthe problem in the costs of production. We will say more about this later. It is not surprising that the mercantilists looked mainly to exchange as thereal source of wealth and profit. In fact, the merchant earns profits, notbecause he controls the productive process (a control which, at least in thefirst phase of industrial development, was still in the hands of the craftsman),but rather because of the power he manages to exercise on the market. Themerchant’s profit originates from the difference between the selling andbuying prices of goods. He believes, therefore, that it originates from thetrading process. Thus, a knowledge of the determinants of market prices is