A n Outline of the History of Economic

Thought

ERNESTO SCREPANTI and

STEFANO ZAMAGNI

Translated bv David Field

C L A R E N D O N PRESS

1993

• O X F O R D

CONTENTS

Introduction

1. T H E B I R T H O F P O L I T I C A L E C O N O M Y

ì . / . The End of the Middle Ages and the Beginnings of the Modern World 16

1.1.1. The end of the Middle Ages and scholasticism 16 1.1.2. 'Mercantile' capitalism 19 1.1.3. The Scientific Revolution and the birth of political economy 20

7.2. Mercantilism 23

ỉ.2.1. Bu I lion ism 23 1.2.2. Mercantilist commercial theories and policies 25 1.2.3. Demographic theories and policies 27 1.2.4. Monetary theories and policies 29 1.2.5. Hume's criticism 31 1.2.6. Theories of value 33

13. Some Forerunners of Classical Political Economy 34

1.3.1. The premisses of a theoretical revolution 34 1.3.2. William Petty and 'political arithmetic!^ 35 1.3.3. Locke, North, and Mandeville 38 1.3.4. Boisguillebert and Cantillon 39 Bibliography 42

2. T H E LAISSEZ-FAIRE R E V O L U T I O N A N D S M I T H I A N E C O N O M I C S

2.1. The Laissez-Faire Revolution 43

2.1.1. The preconditions of the Industrial Revolution 43 2.1.2. Quesnay and the physiocrats 44 2.1.3. Galiani and the Italians 48 2.1.4. Hume and Steuart 5 2

2.2. Adam Smith 54

2.2.1. The 'mechanical clock' and the invisible hand* 54 2.2.2. Accumulation and the distribution of income 56

2.2.3. Value :

ềÊÈiÊẼÊ%ỂÊẾÊlÊÊm > . 58 2.2.4. Market and competition 60 2.2.5. Smith's two souls 62

2.3. The Smith tan Orthodoxy 65

2.3.1. An era of optimism 65 2.3.2. Bentham and utilitarianism 66 2.3.3. The Smithian economists and Say 67 Bibliography 70

3. F R O M R I C A R D O T O M I L L

3.1. Ricardo and Malthus 72

3.1.1. Thirty years of crisis 72 3.1.2. The Corn Laws 73 3.1.3. The theory of rent 74 3.1.4. Profits and wages 77 3.1.5. Profits and over-production 78 3.1.6. Discussions on value 79

3.2. The Disintegration of Classical Political Economy in the Age of Ricardo 82

3.2.1. The Ricardians, Ricardianism, and the classical tradition 82 3.2.2. The anti-Ricardian reaction 84 3.2.3. Cournot and Dupuit 86 3.2.4. Gossen and von Thúnen 89 3.2.5. The Romantics and the Germạn Historical School 91

3.3. The Theories of Economic Harmony and Mill's Synthesis 93

3.3.1. The 'Age of Capital' and the theories of economic harmony 93 3.3.2. John Stuart M i l l % 3.3.3. Wages and the wages fund 9% 3.3.4. Capital and the wages fund 101

3.4. English Monetary Theories and Debates in the Age of Classical Economics

104 3.4.1. The Restriction Act 104 3.4.2. The Bank Charter Act 107 3.4.3. Henry Thornton 112 3.4.4. Mil l on money 114 Bibliography 116

4. S O C I A L I S T E C O N O M I C T H O U G H T A N D M A R X

4 J From Utopia to Socialism 119

4.1.1. The birth of the workers' movement 119

CONTENTS ix

4.1J2. The two faces of Utopia 120

4.1.3. Saint-Simon and Fourier 121

Socialist Economic Theories 124

4.2.1. Sismondi, Proudhon, Rod ben us 124 4.2.2. Godwin and Owen 125 4.23. The Ricardian socialists and related theorists 126

Marx's Economic Theory 128

4.3.1. Marx and the classical economists 128 4.3.2. Exploitation and value 131 4.3.3. The transformation of values into prices 134 4.3.4. Equilibrium, Say's Law, and crises 137 4.3.5. Wages, the trade cycle, and the 'laws of movement' of

the capitalist economy 138 4.3.6. Monetary aspects of the cycle and the crisis 141 Bibliography 144

5. T H E T R I U M P H OF U T I L I T A R I A N I S M AND T H E M A R G I N A LIST R E V O L U T I O N

1. The Marẹinalisĩ Revolution 145

5.1.1. The 'climax' of the 1870s and 1880s 145 5.1.2. The neoclassical theoretical system 147 5.1.3. Was it a real revolution? 149 5.1.4. The reasons for success 152

2. William Stanley Jevons 155

5.2.1. Logical calculus in economics 155 5.2.2. Wages and labour, interest and capital 158 5.2.3. English historical economics 161

3. Léon Walras 1 6 2

5.3.1. Walras's vision of the working of the economic system 162 5.3.2. General economic equilibrium !65 5.3.3. Walras and pure economic science ."

r

" wỊ

A. Carl Menger 1 7 0

5.4.1. The Birth of the Austrian School and the MrihỆỊỊSỊỆÍÊÊÌ 170 5.4.2. The centrality of the theory of marginal utility in Menger Bibliography 174

6. T H E C O N S T R U C T I O N OF N E O C L A S S I C A L O R T H O D O X Y

J. The Belle Époque 176

O N T E N T S

6 J. Marshall and the English neoclassical economists

6.2.1. Alfred Marshall 6 2 2. Competition and equilibrium in Marshall 6.2.3. Marshall's social philosophy 6 24. Pigou and welfare economics 6 2 5 Wicksteed and 'the exhaustion of the product' 6.2.6. Edgeworth and bargaining negotiation

6.3. Neoclassical Theory in America

6.3.1. Clark and the marginal-productivity theory

6 3.2. Fisher: Inter-temporal choice and the quantity theory of money

6.4. Neoclassical Theory in Austria and Sweden

6.4.1. The Austrian School and subjectivism 6.4.2. The Austrian School joins the mainstream 6.4.3. Wicksell and the origins of the Swedish School

6.5. Pareto and the Italian Neoclassical Economists

6.5.1. From cardinal utility to ordinalism 6.5.2. Pareto's criterion and the new welfare economics 6.5.3. Barone, Pantaleoni, and the 'Paretaio' Bibliography

178 180 182 183 185 187

189

189 192

194

194 196 198

203

203 206 207 210

7. T H E Y E A R S O F H I G H T H E O R Y : I

7.1. Problems of Economic Dynamics 212

7.1.1. Economic hard times . . . 212 7.1.2. Money in disequilibrium 214 7.1.3. The Stockholm School 216 7.1.4. Production and expenditure 219 7.1.5. The multiplier and the accelerator 221 7.1.6. The Harrod-Domar model 223

7.2. John Maynard Keynes 226

7.2.1. English debates on economic policy 226 7.2.2. How Keynes became Keynesian 229 7.2.3. The General Theory: effective demand and employment 231 7.2.4. The General Theory: liquidity preference 234

73. Michal Kalecki 238

7.3.1. The level of income and its distribution 238 7.3.2. The trade cycle 77i

C O N T E N T S

7A, Joseph Alois Schumpeter

7.4.1. Equilibrium and development 7.4.2. The trade cycle and money Bibliography

8. T H E Y E A R S O F H I G H T H E O R Y : II

8 J. The Theory of Market Forms

8.1.1. The first signs of dissent 8.1.2. Sraffa's criticism of the Marshallian theoretical system 8.1.3. Chamberlin's theory of monopolistic competition 8.1.4. Joan Robinson's theory of imperfect competition 8.1.5. The decline of the theory of market forms

8.2. The Theory of General Economic Equilibrium

8.2.1. The first existence theorems and von Neumann's model 8.2.2. The English reception of the Walrasian approach 8.2.3. Value and demand in Hicks 8.2.4. General economic equilibrium in Hicks

8.2.5. The IS-LM model

8.3. The New Welfare Economics

8.3.1. Robbins's epistemological systematization 8.3.2. The Pareto principle and compensation tests

8.4. The Debate on Economic Calculation under Socialism

8.4.1. The dance begins 8.4.2. The Lange-Lerner solution 8.43. Von Hayek's criticism

8.5. Alternative Approaches

8.5.1. Allyn Young and increasing returns 8.5.2. Thorstein Veblen 8.5.3. Institutionalist thought in the inter-war years 8.5.4. From Dmitriev to Leontief 8.5.5. The reawakening of Marxist economic theory Bibliography

9. C O N T E M P O R A R Y E C O N O M I C T H E O R Y

9.1. From the Golden Age to Stagflation

9.2. The Neoclassical Synthesis

9.2.1. Generalizations: the IS-LM model again

xu C O N T E N T S

9.ỉ.

9.2.2. Refinements: the consumption function 923 Corrections: money and inflation 92A. Simplifications: growth and distribution

The Monetarist Counter-Revolution 307

300 302 305

307 309

9 3 1. Act I: Money matters 9 3 2 Act II: %

You can't fool all the people all the time' 9 3 3. Act III: The students go beyond the master 312 9.3.4. Was it real glory?

3 1 5

9.4. From disequilibrium to non-Walrasian equilibrium 318

9 4 1 Disequilibrium and the microfoundations of macroeconomics 318 9.4.2. The non-Walrasian equilibrium models 320

9.5. Post-Key nesian and New Keynesian Approaches 323

9.5.1. Anti-neoclassical rcintcrpretations of Keynes 323 9.5.2. Distribution and growth 326 9.5.3. Money and the instability of the capitalist economy 330 9.5.4. The new Keynesian approaches 333 Bibliography 338

10. C O N T E M P O R A R Y E C O N O M I C T H E O R Y : II

W.J. The Neo-Walrasian Approach to General Economic Equilibrium 340

10.1.1. The conquest of the existence theorem 340 10.1.2. Defeat on the grounds of uniqueness and stability 344 10.1.3. The end of a world? 348 10.1.4. Temporary equilibrium and money in general equilibrium theory 353

10.2. Developments in the New Welfare Economics and the Economic Theories of Justice 355

10.2.1. The two fundamental theorems of welfare economics 355 10.2.2. The debate about market failures and Coase's theorem 359 10.2.3. The theory of social choice: Arrow's impossibility theorem 363 10.2.4. Sen and the critique of utilitarianism 366 10.2.5. Economic theories of justice 368

10.3. The Controversy on Marginalism in the Theory of the Firm and Markets 371

10.3.1 Critiques of the neoclassical theory of the firm 371 10.3.2. Post-Keynesian theories of the firm 373 10.3.3. Managerial and behavioural theories 376 103 4. The neoclassical reaction and the new theories of the firm 378 Bibliography z ~

C O N T E N T S xi i i

H i C O N T E M P O R A R Y E C O N O M I C T H E O R Y : III

ILL The 'New Political Economy' and Related Contributions 383

11.1.1. The subject of debate 383 11.1.2. Neo-institutionalism 384 11.1.3. The Neo-Austrian School and the subjectivist statute 389 11.1.4. Game theory 391

ỉ 1.2. The Theory of Production as a Circular Process 396

11.2.1. Activity analysis and the non-substitution theorem 396 11.2.2. The debate on the theory of capital 400 11.2.3. Production of commodities by means of commodities 404

/7.5. Radical Political Economy and Similar Approaches 408

11.3.1. Marxist economic thought before 1968 408 11.3.2. Neo-Marxist and post-Marxist approaches 411 11.3.3. Four unconventional economists 417 Bibliography 4 2 3

• f e f e - ' 425 Index