A Research Annual: Volume 26 Part 1

Just now we are having an interesting discussion among the Boards of Study (on Economics, Psychology, Philosophy, Sociology, and History) of London University on the existing confusion and overlapping in their theoretical basis (arising from a claim by the sociologists for a separate degree). If Law were not so strongly professionalized in England the Law Faculty would also be concerned. I prepared a memorandum, based on the examination questions during the last five years, showing that the conception of human nature now given, or assumed, in Economic teaching is quite different from that given in Sociological teaching, and that all the other groups of study differed in that respect among themselves. The sociologists, e.g. emphasise “Imitation” and ignore Hedonism. The economists assume Hedonism and ignore Imitation. The Psychologists reject both Hedonism and Imitation. Law is either purely empirical or Benthamite. Even the distribution of concrete subject matter leaves great gaps. No one, for instance, treats of the newspaper Press, or the Churches, or advertisement. At Oxford the confusion, overlap and insufficiency is more marked. Could you not make a memorandum showing how things stand at Columbia?

Why all the fuss over labeling? Certainly it is a matter of relative unimportance what we call things; the substance of the matter is far more important. When matters are put forward in this manner, this claim can hardly be denied. However, nomenclature too is important, particularly if it speaks to the essence of the categorization of an enterprise. For example, while it is undoubtedly an exaggeration to say that biology consists of nothing but naming things and categorizing them, this is not exactly so.A great deal of biological science indeed focuses on nothing other than this. It is a matter of crucial importance whether a species is part of this or the other genera, class, or phylum, for example. Also, chemistry is no different: many of its insights depend intimately on the placement of a given substance in the periodic table of elements. These are “mere” matters of nomenclature, labeling, and categorization, but they are not to be dismissed by careful scientists. A similar point can also be made in economics. In the dismal science, too, scholars speak past each other if they mean different things by such terms as “capital,” “interest,” and “profit,” etc.

Chicago economists have pursued and applied the logic of price theory in any direction and as far it will go. This is their hallmark and their genius. The adoption of any principle, however, implies the selection of a correlative opportunity cost, a rule as fundamental as any other in price theory. The opportunity cost consists, in part, of the alternative accounts of the operation of the economy and economic policy-making, and in part, the coherence, conditions, and limits of Chicago's doctrines of theory and policy.

But before I turn a critical eye on The Chicago School, let me identify the five things that I think the author gets right, and which thereby contribute to the stock of scholarship on Chicago economics.

Van Overtveldt's “c” is no worse than other books at that stage – his fault lies in not having pursued the research technique he so obviously admires. As a result, his book was rejected by more than one academic publishing house (Van Overtveldt apparently did not use the critical comments provided to him by those referees to construct a worthwhile project).

The period from the sixteenth to the eighteenth century is commonly associated both with the rise of the European nation state and with the beginning of economics. Samuel Clark's concern is only with the rise of the nation state, but is potentially important for understanding the early work on economics as this has often been linked with the rise of nation states. He approaches the problem through a comparative study of the British Isles and France during this period, though with frequent reference to earlier centuries. Even with such a restricted geographical spread, he argues that there was significant diversity in the process.

The author examines the rise of the centralized state and its effect on the power of aristocracy during the sixteenth, seventeenth, and eighteenth centuries in the British Isles and in France and its eastern periphery. He defines states as entities with political power over a delimited territory, and he chooses to give most attention to the centralization (p. 11) and the differentiation of power (p. 23).

Samuel Clark offers a theoretically informed and evidence-based examination of the rise of the centralized state and its implications for the power of the aristocracy in Western Europe during the sixteenth, seventeenth, and eighteenth centuries. Making use of extensive empirical evidence and recent developments in comparative historical sociology, he tracks a path midway between the myth making and story telling of traditional narrative histories and the rich complexity of narrower studies. In so doing, he overturns the stereotypical portraits of the aristocracies in France and in England, and challenges us to look again at the fundamental question that dominated classical sociology: how did modern society come into being? The social transformation that occurred in Western Europe in the eighteenth and nineteenth centuries preoccupied thinkers from Karl Marx to Herbert Spencer to Max Weber, and even Emile Durkheim, dismissive as he was of “historicist” reasoning, was primarily interested in how modern society came to be what it is. Samuel Clark documents the resurgence of interest in these big questions by historical sociologists armed with new tools.

The most generally accessible and entertaining history of Britain remains Sellar and Yeatman's 1066 and all that which, notwithstanding the title, begins in 55 B.C. with the landing of Julius Caesar in Britain, and not with the assumption of the English throne in 1066 by William, the Conqueror (Sellar & Yeatman, 1930, ch. 1). But even though there are only two dates in the book, it is the later date which is, as they rightly say, “memorable.” This used to be part of a shorthand history of Britain which every schoolboy knew: the seaborne invasion of England, the death of Harold with an arrow in the eye at the Battle of Hastings, the addition of French to the mixture of Saxon, Norse and Latin that already made up the local language. When last summer I visited the French town of Bayeux so that I might at last view the tapestry about which I had read as a small boy, but in which the graphic evidence of Harold's demise is now the subject of some dispute, I discovered something my teachers had never told me. There in the record of the Tapestry is Harold swearing allegiance to William; so that when, two years later, Edward the Confessor died childless, William set sail to claim his inheritance. Or at any rate, that is what the French story is, based on existing Norman sources, of which the Bayeux Tapestry is an important component.

It turns out that there is a bigger, better version of The big three. Skousen should be aware of it since he wrote it himself. The making of modern economics: The lives and ideas of the great thinkers (Skousen, 2001; hereafter Making of economics) is the source of The big three. The latter is essentially a condensed version of the former.

Those who teach undergraduate courses on the history of economic thought are on a constant and alert lookout for a suitable textbook—more so than those who teach other courses. Such a book must introduce readers to the chief dramatis personae in a full and accurate manner and—no less important—have the sense to leave out the minor characters. Such a book must describe clearly the breakthrough ideas—and their evolution over time—and also have the confidence to sidestep the duds. It must be deep enough to not trivialize the magnificence of the major works, and it must also be able to hold the interest of the Nintendo generations in the classroom.

It is impossible to provide anything other than a glimpse of such a complex figure as Nietzsche in the span of a review of a book on his influence (if any) on economics. Here I provide a summary of his life and major works. I have had to omit some works from the discussion, and also suppress a good deal of biographical detail. Some Nietzsche scholarship, especially that outside the analytical philosophical tradition, consider events in Nietzsche's life as important to understanding his philosophy, and look for explanations of his philosophy in his life, such as the lack of a father figure and the search for male role models in Wagner and Schopenhauer, and the effect of his chronic illness on his philosophy. If I consider these interpretive issues, I do so only tangentially.

Science discovering a divinely designed world is fundamentally different from science investigating a “dappled world” (Cartwright, 1999). The first world is written in elegant mathematics which describes the simple laws that rule them, the other world is too complex and messy – a “patchwork of laws” – for any unified treatment. While the first world is lighted by itself and principally transparent, the second world is much darker, so we need lanterns to have a look at it:The effort of the economist is to see, to picture the interplay of economic elements. The more clearly cut these elements appear in vision, the better; the more elements he can grasp and hold in mind at once, the better. The economic world is a misty region. The first explorers used unaided vision. Mathematics is the lantern by which what before was dimply visible now looms up in firm, bold outlines. The old phantasmagoria disappear. We see better. We see also further. (Fisher, 1925, p. 119)Today, these mathematical pictures are called models.

The book consists of an introduction and eight chapters. Chapter 1 “The Unchanging Focus of Modern Economics” considers economists’ attitude toward the invisible hand. It begins with quotations from standard microeconomic textbooks (Mas-Colell, Whinston and Green, Pashigian, and Ruffin) that show how that invisible hand is treated by modern economics as a technical issue, in which voluntary trades improve agents’ position. Markets allow trade, and thus, subject to the well-known standard conditions, make people better off. The texts train students in models that demonstrate the same. The chapter explores how the invisible hand metaphor has significantly deviated from Adam Smith's first use of the term. Klein argues that Smith's contextualization has been lost in technical proofs. Chapter 2, “Making Progress with Theory: Do We Get What We Want or Want What We Get?” considers macroeconomic issues; it points out that there is little communication among different schools of economics, and that researchers play by their own rules. In it Klein discusses Robert Lucas's positive view of W. C. Mitchell, and Lucas’ negative view of Keynes. Klein concludes the chapter with a discussion of how, today, macro is far less about policy, and far more about “playing games.”

Duncan Foley, a leading heterodox economist, criticizes Adam Smith for narrowness in three respects: his definition of the economy, his notion of the central problem of economics, and his conception of correct policy making. For the most part, this is a misreading of Smith; the charge of fallacy should be attributed to mankind as a whole and especially the economists who followed him, not Smith himself. Yet, although Smith evidently did not feel that matters would work out as they did, he identified and emphasized both the causal mechanism for the narrowness and the motive behind it. The causal mechanism is the division of labor and the motive is status emulation—the quest for social recognition and moral approval, if not also power—achieved through the belief that more goods are better than fewer goods—all induced by the great deception that wealth is important, thereby leading people to frenetically better their condition. The genius of Smith was to have articulated the material and conceptual baggage accompanying the newly arrived commercial stage of Western civilization. Still, it is rather difficult to ascertain what of Smith's account is provided by his study of the stage itself and what is due to his own imagination.

This is an interesting collection by scholars who defended their theses between 2002 and 2004. It is focused on Adam Smith and treats Smith in a number of interesting though, perforce, loosely organized contexts. Part one gathers together three essays, by Hanley, on “Smith and Aristotle,” Kuiper, on Smith's “feminist contemporaries,” and Mitchell, on eighteenth century notions of “systems,” under the heading “Adam Smith, his sources and influence.” Part two contains five essays: Forman-Barzilai, on “connexion”; Von Villiez on a comparison of Smith and Rawls; Frierson on “Smithian environmental virtue ethics”; Brubaker on the “wisdom of nature”; and, lastly, Flanders, on “moral luck,” all under the heading “Adam Smith and Moral Theory.” Part three organized under “Adam Smith and economics” contains three essays, one each by Hurtado-Prieto, on Smith and Mandeville, Montes (one of the joint editors) on “Smith and Newtonianism,” and Paganelli, on “vanity” and “paper money.” The last section, part four, contains three essays one each by Smith, on “progress,” Trincado, on “Smith's criticism of the doctrine of utility,” and Schliesser (the other joint editor), on Smith's “conception of philosophy.” The range of the contributions illustrates both the revival of serious intellectual interest in Smith as a philosophe and in the context of eighteenth century studies or of the enlightenment more generally. The Routledge series “Studies in the History of Economics” has always been prepared to be innovative and the re-contextualization of Smith's work in the variety of contexts presented here maintains the series’ reputation for changing frameworks within which to view the intellectual history of economics.

Sandra Peart and David Levy's “The Vanity of the Philosopher” is an enlightening look into a potentially embarrassing (and certainly neglected by modern economists) period in the history of economic thought. It provides a plausible argument that classical economics was transformed in the mid-Nineteenth Century from a discipline that took for granted the equal capacity for judgment of every individual actor to one that placed a premium on the judgment of economic experts. They identify the turning point as when economists began to reject sympathy as something that should factor into our judgments. The loss of sympathy makes the move to hierarchicalism much easier to achieve. In the Twentieth Century, hierarchicalism was overturned by the new egalitarian free market ideology of the Austrian and Chicago Schools, but the authors point out that sympathy did not come back with it. The result is that people now treat economic inequalities as a consequence of the market, but not as something that they need to worry about (since the assumption is that everyone has the power to change the market, if they so desire). The book ends on a hopeful note: now that the elements missing from current economic theory have been identified, it is possible that they can be revived in order to create an economic theory that is more attentive to the demands of social justice and offer mechanisms that might better motivate people to respond to those demands.

One of the most momentous events in Britain's nineteenth-century economic history was the repeal of the Corn Laws and its move toward free trade in 1846. The reasons for this event have fascinated students both of the history of economic thought and of international economics for many generations. Introductory textbooks in both these fields of economics discuss the Corn Laws in connection with David Ricardo's principle of comparative advantage and his plea for free trade, particularly in the commodities consumed by the working class such as “corn” (a commodity that in classical times denoted all types of grain such as wheat, barley, and rye). The puzzling feature of this repeal, that intrigued scholars such as Schonhardt-Bailey and impelled them to search for plausible explanations, is that it appeared to run counter to the economic interests of the class of landowners that controlled Parliament and passed this legislation. Numerous explanations for this apparently paradoxical behavior have been advanced by historians, economists, and political scientists, and this book is the latest in this long and diverse series of accounts.

In their introductory chapter, Augello and Guidi pose a number of questions related to the institutionalization of economics in what they have called “The Liberal Age.” The questions (p. 5) may be generalized to the following two. First, what were the forces of history leading to the rise of economics in the informational environment of a particular set of Western nations, and what resulting form did its institutionalization take in those nations? Second, what were the consequences for the content of economics of its being institutionalized in this way? That is, did institutionalization itself generate a recursive force of history competing with other external forces shaping economics?

János Kornai was born as János Kornhauser, on January 21, 1928. The son of a prominent Hungarian business attorney, Kornai grew up with three siblings, though he says that he was clearly his mother's “favorite among” the four children (p. 5). His impressive intellect was evident from an early age and seemed to benefit from the tremendous independence his busy parents gave him from the beginning.

Entrepreneurship, Money, and Coordination begins with a single page introduction by the editor, Jurgen Backhaus, a well known economist now at the University of Erfurt, in which we learn that the contribution by Horst Feldmann (Hayek's theory of cultural evolution: A critique of the critiques) provided the impetus for the book's remaining six chapters, a mélange of papers by Brian J. Loasby,¹ Jurgen G. Backhaus, Christian Schubert, Alexander Ebner, Martin T. Bohl and Jens Holscher, and Walter W. Heering. Unfortunately, the papers assembled here do not cohere well and in some instances are not altogether “reader-friendly.” The papers by Bohl and Holscher (a six-page overview and econometric analysis of Hayek's theory of competing currencies) and Heering (on monetary theory) seem rather disconnected from the main theme of the book. Surprisingly, Backhaus’ “Introduction” does not provide a useful integrating overview of the book's subject matter and papers, something readers surely would have appreciated from so eminent a scholar.

Arnold Heertje's short book on Schumpeter is made up of 11 essays. Three of them are published here for the first time while others date back to 1977. Heertje says that he first discovered the relevance of Schumpeter's economics as a student of Pieter Hennipman at the University of Amsterdam in the early 1950s. Understanding Schumpeter's work has for him been a lifetime quest.

Approaching a biography of a life as long, complex, and intertwined with the history of the 20th century as was John Kenneth Galbraith's is an intimidating prospect for any reader, particularly so when one knows that Galbraith's vision of economics and the world is so fundamentally different from one's own. Richard Parker's recent biography, however, is well worth reading despite any such intimidation as he turns Galbraith's life into a remarkably well-written and deeply researched tale of one of the most influential economists of the century. As should any excellent biography, it not only traces the life of the subject but also situates that life in the broader context of events which unfolded during his lifetime. In the case of Galbraith, he was very much a part of those major historical events. The result is a rich and detailed economic and political history of the United States in the 20th century, with Galbraith at the center of it. In addition, Parker offers a history of economics as a discipline, as seen through the eyes of a subject who was at once both the most famous economist of his time and someone whose ideas were frequently deemed not worthy of serious consideration by many in the discipline. Parker brings all of these threads together more or less seamlessly in telling Galbraith's story from the very beginning to pretty much the very end.

As I write these words, hordes of financial analysts in lower Manhattan and dozens of other locations are hard at work estimating the value and risk of financial derivatives so exotic that, a few decades ago, literally no one could have conceived of them. Many – probably most – of these analysts are “rocket scientists” with graduate degrees in physics, mathematics, or statistics. Using what might have been called “supercomputers” not so long ago, they seek to create composite assets that react in particular, predictable ways to changes in the prices of equity and debt contracts. These attempts to conquer the risk-return tradeoff and to ensure a healthy return in any and all market conditions have yet to succeed completely (as a recent Federal Reserve bailout testifies), but the rocket scientists are still hard at it, seeking to maximize returns while minimizing risk.