A Research Annual: Volume 23 Part 1

Adam Smith is revered as the father of modern economics. Analysis of his writings, however, reveals a profoundly medieval outlook. Smith is preoccupied with the need to preserve order in society. His scientific methodology emphasises reconciliation with the world we live in rather than investigation of it. He invokes a version of natural law in which the universe is a harmonious machine administered by a providential deity. Nobody is uncared for and, in real happiness, we are all substantially equal. No action is without its appropriate reward – in this life or the next. The social desirability of individual self-seeking activity is ensured by the “invisible hand,” that is, the hand of a god who has moulded us so to behave, that the quantity of happiness in the world is always maximised.

This paper gives an account of important aspects of Smith’s methods in An Inquiry Concerning the Nature and Causes of the Wealth of Nations (WN). I reinterpret Smith’s distinction between natural and market prices, by focusing on Smith’s account of the causes of the discrepancies of market prices from natural prices. I argue that Smith postulates a “natural course” of events in order to stimulate research into institutions that cause actual events to deviate from it. Smith’s employment of the fiction of a natural price should, thus, not be seen merely as an instance of general or partial equilibrium analysis, but, instead, as part of a theoretical framework that will enable observed deviations from expected regularities to improve his theory. For Smith theory is a research tool that allows for a potentially open-ended process of successive approximation. These are the Newtonian elements in Smith. I provide evidence from Smith’s posthumously published Essays on Philosophical Subjects (EPS, 1795), especially “The History of Astronomy” (“Astronomy”), that this accords with Smith’s views on methodology.¹ By way of illumination, Smith’s explanation of the introduction of commerce in Europe is contrasted with that of Hume as presented in “Of Commerce.” I argue that Smith’s treatment is methodologically superior.

Distribution concerns who gets what. But does “who” refer to the personal distribution of income among individuals or the functional distribution of income among suppliers of productive factors? For nearly 150 years, Anglophone distribution theory followed the Ricardian emphasis on functional distribution – the income shares of labor, land, and capital. Only beginning in the 1960s, and consolidated by a research outpouring in the early 1970s, does mainstream economics turn to the personal conception of distribution. This essay documents Anglophone (primarily American) economics’ move from functional to personal distribution, and tries to illuminate something of its causes and timing.

The first set of introductory notes to the graduate study of the history of economic thought, and the reasons for their use, was published in Volume 22-B (2004). Subsequently, while distributing the first set in my graduate courses, I initiated a largely new, second set of introductory topics, using a new outline for presentation in each course of lectures on further introductory ontological, epistemological and hermeneutic topics that went beyond the materials in the first set. For several years, I lectured using in part an outline of my 1991 essay (cited below). That outline is reproduced here as Set II.1. The notes published below as Sets II.2 and II.3 are composites, as to content and sequence of topics, of subsequent successions of lectures. Whereas the set of notes published in Volume 22-B was distributed to students with only casual accompanying remarks, these served for me as the basis of lectures and were not distributed. No set of notes published here indicates the comments I made, from course to course, when distributing the first set of notes on the first day of class. One difference between II.1 and II.2–3 is the increasing attention to historiographic topics vis-à-vis discourse-analysis topics with the passage of time. The common elements are, first, the social construction of reality, in two senses: the literal creation of society and the interpretations given that creation; second, the distinctions between truth and belief system, and between truth and validity; third, the continuing relevance therefore of epistemology and ontology alongside the rhetoric of economics; fourth, the relations of epistemology and language to policy; and fifth, the importance of limits. During this period of time conflict had erupted between advocates of the rhetorical and epistemological approaches to the history of economic thought. I was teaching that both approaches to the meaningfulness of ideas were important.

Geoffrey Hodgson would like to change all this with his Evolution of Institutional Economics: Agency, Structure, and Darwinism in American Institutionalism (2004). Hodgson writes as both an economic theorist and an historian of economic thought, and he argues that in the history of Institutional Economics in America resides a valuable legacy upon which contemporary theorists can build. In truth, Hodgson’s book must be read together with his recent How Economics Forgot History; The Problem of Historical Specificity in Social Science (2001), where he has argued for the importance of historical reasoning to economists.

A review essay on E. K. Hunt, History of Economic Thought: A Critical Perspective, updated second edition. Armonk, NY and London: M. E. Sharpe, 2002. xxii+543 pp. ISBN 0-7656-0606-2 (hard cover); 0-7656-0607-0 (paper). As Kay Hunt writes in the preface, “This book…is very different from any other history of thought now in print” (p. xvii). It is written from an explicitly Marxian viewpoint and is consistently – and vehemently – anti-utilitarian. Hunt begins with a definition of capitalism (pp. 3–8) and ends with “comments on the social perspective underlying the present book” (pp. 514–520), in which he denounces utilitarian psychology and ethics as a conservative ideology for capitalism. No social theory, he argues, can possibly be value-free. His own ethical position is derived from Veblen, Marx and Maslow. There exists a hierarchy of human needs, and they are rarely satisfied under capitalism, which encourages us to treat other people as means, not ends, and thereby promotes alienation and social fragmentation. “I believe,” Hunt concludes, “with Veblen and Marx, that capitalism is not the highest stage of human development and that if human beings ever assert their collective humanity against the irrationality of capitalism, they will open a vista of passionate possibilities hardly dreamed of during the reign of capitalism” (p. 520).

In the 19th century, John Stuart Mill argued that economics could not be an inductive science because it lacks that which is the essence of inductive science, viz. the experiment. Since there is no experiment, economic claims cannot be established inductively but must instead be justified deductively on the basis of antecedently accepted theoretical claims about human behaviour.

A review essay on Ivo Maes, Economic Thought and the Making of European Monetary Union: Selected Essays of Ivo Maes, with forewords by Guy Quaden and A. W. Coats, Cheltenham, U.K., and Northampton, MA: Edward Elgar Publishing. ISBN 1 84064 800 7, hardcover, 2002. European economic integration, leading to the Single Market and at the start of 1999 to the replacement of eleven national currencies by the euro, remains tumultuous, with France and Germany exempting themselves in November 2003 from the budget deficit limits of the Economic Growth and Stability Pact (the Maastricht Treaty), which had been binding on less politically powerful countries such as Portugal. Ivo Maes is ideally suited to provide insight and perspective on the economic thought underlying these developments. As Deputy Head of the Research Department of the National Bank of Belgium and formerly an administrator (that is, a generalist rather than a specialist economist) with the Commission of the European Communities, he is a central bank insider whose book carries a foreword by Guy Quaden, Governor of the National Bank of Belgium, and concludes with a long essay written with Jan Smets, Director of the Research Department of the National Bank of Belgium and Commissioner-General for the Euro, and Jan Michielsen, formerly Head of the Foreign and Financial Market Departments of the National Bank of Belgium. In Part 3, Maes, Smets, and Michielsen argue that Belgium played a leading role in shaping the Economic and Monetary Union (EMU) and especially in promoting Franco-German agreement. At the same time, Maes can view the monetary authorities as an academic outsider, a professor at the University of Leuven and at the ICHEC business school in Brussels, a sometime visiting professor at Texas Lutheran College and Duke University, and a respected historian of economics. His Brussels vantage point, in a city and country particularly closely engaged in the evolution of the European Community but not in one of the major powers within the Community, also contributes to an enlightening perspective. There has been a torrent of books on the politics and economics of the euro (e.g. Padoa-Schioppa, 1994), as well as specialist periodicals such as the Journal of Common Market Studies, but Maes stands out by considering the process as an historian of economics.

A Review essay on Tatsuya Sakamoto and Hideo Tanaka (Eds), The Rise of Political Economy in the Scottish Enlightenment, London: Routledge, 2003 pp. xii+215. ISBN 041529648X £60.00. This volume is composed of thirteen short but concentrated essays and an introduction on the rise of political economy in the Scottish Enlightenment, each written by a distinguished Japanese scholar. Although the contributors are engaged in international scholarly activities, the volume devotes one chapter to “Adam Smith in Japan” and elsewhere draws attention to scholarly interpretations of Smith in the “West.” Both suggest that the perspective, whilst linked directly to international scholarly discussion through modern works consulted and themes identified in earlier literature (the edited volume by Hont and Ignatieff (1983) being cited, amongst others, as historically significant for the development of the approach set out in the collection), carries insights that arise out of earlier but sustained Japanese interest in the notion of social and cultural modernization and reform. It is perhaps also in this context that they hit on the centrality of the issue of “manners,” shorthand for morals, values, political behaviour, economic motivation and so on. Tatsuya Sakamoto makes this notion of “manners” explicit in his interesting chapter on Hume (p. 92) and Shoji Tanaka makes central the formation of free individuals liberated from feudalism and “religious delusions” (p. 134).

A review essay on Diana Wood, Medieval Economic Thought, Cambridge: Cambridge University Press. 2002. pp. xii+274. £45.00. ISBN 0521452600 and £14.99. 0521458935. The economic thinking of the Medieval period is not always treated in histories of economic thought. Its inclusion or omission depends on the decisions of authors with respect to the purposes and audiences that their histories intend to serve. Where the focus is the evolution of modern-day economics in terms of the development of economic analysis, it may be reasonable to predict that early economics or as some would have it “proto-economics” or Schumpeter’s “rudimentary economic analysis” (Schumpeter, 1986, p. 53) would have no place in history texts. In as much as there is no identification of “the economy” separate from households, it is possible to hold that there is no genuine economic theory. Such a tidy solution is not found, however, in the development of actual histories of economic thought. John Kells Ingram started with “Ancient Times” and then moved to “The Middle Ages” (Ingram, 1910). Erich Roll also starts early and works forward from there (Roll, 1939). Gide and Rist started with “The Physiocrats” (Gide & Rist, 1909), and Mercantilism in the early modern period is another possible starting point. Some fairly robust and well-established texts, concerned with substantive issues in the development of thought and analysis, include ancient and Medieval economic thinking. Gordon’s work on Economic Analysis before Adam Smith (1975) includes very early sources. Long-established texts such as those of Schumpeter (which views Aristotle as having enough systematic knowledge to qualify as economically interesting) and of Ekelund and Hébert, for example, include “Scholastic Economic Analysis” (Ekelund & Hébert, 1997, p. 25). But there are caveats: Writers like Plato, Aristotle and St. Thomas Aquinas lived in nonmarket societies in which individual economic decisions were taken by tradition and command rather than by individual, unconstrained economic agents. Consequently the lasting influence on western social thought of these early writers lies not so much in their insights into the operation of market forces, but rather in their preconceptions regarding the nature of social laws (Ekelund & Hébert, 1997, p. 9).Such generalisations, useful as starting points, are likely to need both hedging and nuancing since Medieval economic life did change. Wood insists on the changing nature of economic life and the intellectual adjustments that change requires. Wood, for example, places her discussion of “property” in a “growing sense of individual rights and possession” and on “conflicting legal ideas on property” (p. 19). The transition from poverty as something to be chosen as recommended by St. Francis to the notion that “a copious body of misers is the essential foundation of the State,” held by a fifteenth-century merchant Prince, also nicely highlights the transitions (p. 207).

A review essay on Charles Robert McCann, Jr., Ed. The Elgar Dictionary of Economic Quotations, Northampton, MA: Edward Elgar, 2003, pp. xi, 315. $150.00. Charles McCann believes that a Dictionary of Quotations is a repository of statements on which writers and debaters can rely for accuracy: Not only to avoid misstatement and erroneous attribution, but also misperception of original context. (What is an alternative motivation? To show the brilliance of economists? Or their facility with words?) Of course, one could search original sources but it is more efficient, time wise, to have a sourcebook of passages, perhaps especially one arranged overall alphabetically by author and for each author by topic.

Busch focuses on what he regards as the three broad causes of immorality in the modern world: scientism, statism, and marketism. He views these three “isms” pejoratively and originating respectively with Francis Bacon, Thomas Hobbes and Adam Smith. Each is treated as a “leviathan” spewing immorality from its multiple heads in the form of undue faith in the three different kinds of social order they generate.

Thomas Reid (1710–1796) was the originator of the Scottish philosophy of common sense, an approach that claims reality is objective and knowable, made up of material objects, and understandable by ordinary men. Common sense philosophy developed in opposition to the pervasive skepticism of the period, best exemplified by David Hume. A professor of philosophy at King’s College, Aberdeen, Reid was chosen to be the successor to Adam Smith as the chair of Moral Philosophy at the University of Glasgow. From that position, Reid played an important role in the Scottish Enlightenment as professor, scholar, and correspondent. While Reid was not an economist, he did write on important theoretical and philosophical issues in moral philosophy, the natural sciences and mathematics. Reid may prove additionally interesting to economists for his insightful critique of Smith’s Theory of Moral Sentiments.

A review essay on Social Science and Policy Making: A Search for Relevance in the Twentieth Century, David L. Featherman and Maris A. Vinovskis, Eds. University of Michigan Press, 2001, pp. ix, 228. This volume contains eight papers occasioned by the celebration of the fiftieth anniversary of the Institute of Social Research at the University of Michigan. Most of the essays can be bracketed into two distinct groups. The first surveys the interactions between academic social scientists and decision-makers on public policies as they have evolved in the United States. The second is built around case studies of the influence (or lack thereof) of social scientists in the shaping of policies for Head Start, the various attempts to “fix” welfare programs, and potential programs to assist the elderly in an aging society. The thread connecting these contributions is signaled in the sub-title. Whether the insights of social sciences have lost relevance in public decision-making and, if so, how they might regain it, pose questions that are very much worth asking.

William Breit’s brilliant idea was to commission a Nobel Economists Lecture Series at Trinity University that induced recipients to write autobiographical essays on their individual evolution as an economist. This fourth edition presents eighteen such essays. Breit had two intellectual purposes in mind. One objective was to identify common themes in the laureates’ description of their development as economists. The second objective was to use the materials provided in the essays to examine the question of the role of biography in the development of modern economics as a contribution to a theory of scientific discovery.