Research in the History of Economic Thought and Methodology: Including a Symposium on Sir James Steuart: The Political Economy of Money and Trade: Volume 38C

Though contemporaries, Adam Smith and Sir James Steuart are commonly portrayed as if they belonged to different eras. Whereas Smith went down in history as both founder of the science of political economy and patron saint of economic liberalism, Steuart became known as the last, outdated advocate for mercantilist policies in Britain. Smith himself was responsible for popularizing the notion of the “system of commerce” as an approach to political economy that dominated the early modern period. As a historiographical concept, the mercantile system became a misguided international trade theory grounded upon the Midas fallacy and the favorable balance of trade doctrine. Smith’s treatment of international trade in the Wealth of Nations, however, was criticized for its inconsistencies and lack of analytical clarity even by some among his own followers. Given Smith’s doubtful credentials as an international trade theorist, the chapter investigates the reasons that led him and Steuart to be placed on opposite sides of the mercantilist divide. The authors analyze the works of both authors in depth, showing that their disagreements had chiefly to do with different views on money and monetary policy. Additionally, the authors explore how early nineteenth-century writers such as Jean-Baptiste Say and J. R. McCulloch helped forge the intellectual profiles of both Steuart and Smith.

It is deservedly recognized that James Steuart advanced a monetary theory in which paper money played an important role. The successful establishment of Scottish banknote circulation and theoretical influences from his fellow countrymen such as John Law can be pointed out as backgrounds for his monetary theory. Little attention has been given however to the point that Steuart deduced theory on banks and banknotes quite differently from his predecessors. It is of great significance that Steuart’s theory on banks and banknotes in his first draft of The Principles of Political Oeconomy was, in the following years, drastically expanded and reconstructed. The theory in his first draft written in 1764 was based on the opinion that banknotes should be issued only on landed securities, in consideration of ideas from the Scottish banking system. He then expanded the theory into a dynamic three-stage banking theory where he concluded that as economies and credit grew, banks should issue notes not only on the basis of landed securities but also by discounting bills and giving public credit. By this expansion, banknotes gained a broad and central role in his monetary theory, and the expansion gave his monetary theory more ingenious evolutionary aspects.

In 1767, did Sir James Steuart predict the political and financial crises that started the French Revolution? Étienne de Sénovert, the editor and translator of Steuart’s work, seems to argue to this effect in the introduction to the first French edition of An Inquiry into the Principles of Political Economy in 1789. The visionary “prediction” set forth by Steuart was the following: if the king of France had introduced public credit, this would have changed the political balance in French political society, making it very unstable. The English and the French governments used different ways of borrowing money in 1760: the French king contracted debts with a network of financiers close to the government, while the English government borrowed on the credit markets through the intermediary of the Bank of England. The second of these methods constitutes public credit and has proved its efficiency. According to Steuart, implementing the English public credit system in France could have dangerous consequences. Landed interests and moneyed interests would compete for the control of the State. The author realized that the French nobility, the landowners, as a social and economic group would have no chance in facing such a powerful rival (the public creditors). In this chapter, the author analyzes Steuart’s “prediction” as a coherent part of his systematic and original approach to political economy. Steuart’s theories about the role of political economy and the role of “interest” are connected to his understanding of institutions. Introducing such a complex support for the value as public credit might have different consequences in France and England. Steuart thinks each country’s economy should be analyzed according to its own institutional and social context.

Steuart’s work was still relevant in 1789 for two reasons. Firstly, the author’s prediction of political antagonism between capitalists and nobility anticipated the political conflict about debt expressed by pamphleteers such as Sieyès, Mirabeau, and Clavière between 1787 and 1789. This is the context of Étienne de Sénovert’s claim: the political narrative built by the revolutionaries of 1789 (rescuing the “sacred” public debt from royal despotism) fitted Steuart’s prediction. This may have been the incentive for the translation and publication of his work in 1789 and 1790. Secondly, Steuart’s financial and monetary theory was at the heart of the project of financial reform that would lead to the assignats. Steuart’s (1767) theory of public finance and state power in 1789 provides a key to the understanding the events of the time, and to how actors tried to make sense of them. Steuart made another crucial observation about the deep effect of what he called “the modern economy” upon the power of the governments of Europe: even an absolute monarch could not damage public credit without destroying his own sovereignty.

This chapter examines James Steuart’s explanation of the relationship between banking system and economic development. Unlike other Scottish thinkers of the time, Steuart argues that the origin of commercial nations was not, in his view, a consequence of human nature and a long period of historical evolution. The establishment of the system of trade and commerce that gives rise to a “commercial nation” is conditioned by a series of elements that can render its appearance impossible. This chapter examines how the establishment of the system of trade and commerce that gives rise to a commercial nation is conditioned, according to Steuart, by the development of the banking system. It also broaches Steuart’s explanation of how the banking system functions within a non-commercial nation, which the Scottish author called “the infancy of banking.”

The chapter first emphasizes the aspects which Steuart (1767), Thornton (1802), Tooke (1844, 1838–1857), and Keynes (1923) have in common about the relation between the exchange rate and the short-term rate of interest: they all considered a temporary unfavorable foreign balance caused by an asymmetrical exogenous shock, which called for a discretionary policy favoring international short-term capital inflows to overcome the consequences of the deficit. These aspects draw an unorthodox genealogy on this issue between the four authors, contrary to the tradition originating in Hume and developed later by the British monetary orthodoxy. Secondly, the chapter shows that there was an analytical progress from Steuart (1767) to Keynes (1923), which however faced a limit: if it reinforced an unorthodox genealogy, it did not integrate the modern idea according to which international short-term capital movements may themselves be a source of external disequilibrium. The origin of this limit was probably in the question raised, which was the adjustment to an exogenous asymmetrical shock.

This chapter explores a number of relatively unknown aspects of the controversy over Milton Friedman’s March 1975 visit to Chile through the analytical framework provided by James M. Buchanan’s late 1950s assessment of the economist-physician analogy. The chapter draws upon a range of archival and neglected primary sources to show that the topics which generally rear their head in any contemporary discussion of Friedman’s visit to Chile – for example, whether it is appropriate to provide policy advice to a dictator – were aired in a largely private mid-1970s exchange between Friedman and a number of professional associates. In particular, the controversy over Friedman and Chile began several months before Friedman arrived in Santiago.

The author examines the argument elaborated by Pigou in his Employment and Equilibrium. A Theoretical Discussion which was the first comprehensive answer Pigou gave to the analysis put forward by Keynes in his General Theory. The chapter consists of seven sections. In the first, the motivation of the chapter is outlined. In the second, third, and fourth sections, the author will concentrate on how Pigou elucidates the conditions necessary for an economic system to attain a short period flow equilibrium. In this context, the author elaborates an “open” macro model which can be “closed” in two different ways. The chapter will also present a diagrammatic analysis of Pigou’s theory in the two cases elucidating the structure and the working of the model. Differences with the author’s previous book (TU) related to (real/monetary) wage inflexibility and the importance of monetary factors are also described and discussed. Pigou however does not limit himself to deal with the short period but engages in an interesting discussion of the long period centered on the notion of stationary state that is the object of section five. In this way, he admits that Keynes’s theory is not limited, to the short run. In arguing along these lines, he comes close to describe what will be recognized later as the Pigou effect. A short comparison with the renewed stagnationist theory is sketched. The sixth section includes a brief discussion of the comparative statics and dynamic analyzes elaborated by Pigou. A final section including a few conclusions completes the chapter.

This chapter documents an exchange between Leonard Savage, founder of the subjective probability approach to decision-making, and Karl Popper, advocate of the so-called propensity approach to probability, of which there is no knowledge in the literature on probability theory. Early in 1958, just after being informally tested by Daniel Ellsberg with a test of consistency in decision-making processes that originated the so-called Ellsberg Paradox, Savage was made aware that a similar argument had been put forward by Popper. Popper found it paradoxical that two apparently similar events should be attributed the same subjective probability even though evidence supporting judgment in one case was different than in the other case. On this ground, Popper rejected the subjective probability approach. Inspection of the Savage Papers archived at Yale University Library makes it possible to document Savage’s reaction to Popper, of which there is no evidence in his published writings. Savage wrote to Popper denying that his criticism had paradoxical content and a brief exchange followed. The chapter shows that while Savage was unconvinced by Popper’s argument he was not hostile to an axiomatically founded generalization of his theory.