Bernard Mandeville and his Unorthodox Economics

mandevilleI first came across Bernard Mandeville (1670-1733) while reading Keynes’s General Theory as a student at the University of Hyderabad. Mandeville’s Fable of the Bess: or, Private Vices, Publick Benefits was published in two parts in different times. This work has its origins in an earlier work of his: The Crumbling Hive: or Knaves Turn’s Honest (1705). I recently read the Fable of the Bees edition published by Oxford University Press in 1924 with a commentary by F. B Kaye; interestingly, this work is an expanded version of Kaye’s PhD dissertation submitted at Yale University in 1917. On looking up the Yale University Library Catalogue, I found out his complete name and the years he lived – Frederick Benjamin Kaye (1892-1930).

Mandeville was born into a family of city governors, physicians, scholars, and naval officers. He studied medicine and philosophy. The other notable ‘physician-economists’, as Peter Groenewegen, the emeritus historian of economic thought at University of Sydney, labels them, are William Petty and François Quesnay (for a short account of the ‘natural’ origins of economics, read this). Mandeville also published a book entitled A Treatise of the Hypochondriack and Hysterick Passions (1711). Kaye informs us that his books sold very well.

The Root of evil Avarice,

That damn’d ill-natur’d baneful Vice,

Was Slave to Prodigality,

That Noble Sin; whilst Luxury.

Employ’d a Million of the Poor,

And odious Pride a Million more

Envy it self, and Vanity

Were Ministers of Industry;

Their darling Folly, Fickleness

In Diet, Furniture, and Dress,

That strange, ridic’lous Vice, was made

The very Wheel, that turn’d the Trade.

(p. 25; or see the online source)

In the above passage, Mandeville is arguing that prodigality, considered a virtue, is actually a public vice and luxury, considered a vice, is a public virtue. The importance of consumption in the growth of the economy is also to be found in Sismondi, Malthus, Marx, and Keynes. As Kaye puts it, this is Mandeville’s thesis: “vice is the foundation of national prosperity and happiness” (p. xlvii). In other words, public benefits are a consequence of private vices – ‘pride’ and ‘luxury’.

According to Mandeville, all actions were influenced in part by selfishness. If all people behaved selflessly, Mandeville argued that trade and crafts would be abandoned.

As Pride and Luxury decrease,

So by degrees they leave the Seas.

Not Merchants now, but Companies

Remove whole Manufactories.

All Arts and Crafts neglected lie;

Content, the Bane of Industry.

(p. 34; or see the online source)

How can vice become a virtue? This is the paradox, much like Keynes’s paradox of thrift where increase in saving, while good for the individual, is bad for the economy as a whole.

THUS every Part was full of Vice,

Yet the whole Mass a Paradise;

(p. 24; or see the online source)

Mandeville thus argues that private vices have public benefits. What is ‘good’ or ‘virtuous’ for an individual need not be beneficial to the public or society. In the General Theory, Keynes approvingly cites Mandeville’s The Fable of the Bees before articulating his fundamental point: “capital is not a self-subsistent entity existing apart from consumption” (p. 106). And, again on p. 371, he places Mandeville among “the brave army of heretics” alongside Malthus, Gesell and Hobson (see Keynes’s short commentary on Mandeville on pp. 359-362 in ch. 23).

It must be noted that Mandeville favoured virtuous vice and not vicious vice (such as crime and theft). Moreover, his thesis is not that all private vices have public benefits. The Fable of The Bees, Kayes cautions us, ought not to be taken literally. As Kaye elaborates, “it is not ascetic virtues, such as hoarding frugality, which make a nation prosperous” (p. lxviii).

Let me now summarise Mandeville’s position on luxury spending. First, he disagreed with the extant view that frugality is a virtue. Second, he disagreed with the dominant view that luxury is bad for the economy. We must also remember the context in which he is writing – luxury was condemned by Christianity. Indeed, Mandeville was challenging the extant religious and economic orthodoxy with his arguments favouring luxury.

Mandeville argued for freer trade both domestically and internationally (pp. xcviii ff.). His argument was anticipated by mercantilists such as Charles D’Avenant, Dudley North, and Josiah Child. According to Kaye, it is in Mandeville’s work that “individualism became an economic philosophy” (p. ciii). In fact, F. A. Hayek labels Mandeville “an advocate of laissez-faire as Adam Smith” (p. 135) in his 1966 lecture at the British Academy (published in 1967; this lecture is publicly available). And, as is to be expected, he thinks that Keynes’s enthusiastic approval of Mandeville is unfounded (p. 133). Moreover, Hayek finds Mandeville’s “understanding of human nature” noteworthy but not his economics – of division of labour and luxury consumption (pp. 125-6). Karl Marx notes that Smith’s ideas on division of labour were strongly influenced by Mandeville’s work but that there is no mention of Mandeville in the Wealth of Nations. However, Smith discusses Mandeville’s views on vice and virtue in his Theory of Moral Sentiments.

Perhaps, it is befitting to conclude this essay by summarising Marx’s views regarding Mandeville. After all, Marx is one of the greatest unorthodox economist whose political economy is of enduring value.

Originally, Political Economy was studied by philosophers like Hobbes, Locke, Hume; by businessmen and statesmen, like Thomas More, Temple, Sully, De Witt, North, Law, Vanderlint, Cantillon, Franklin; and especially, and with the greatest success, by medical men like Petty, Barbon, Mandeville, Quesnay.

(Capital, vol. 1, Ch. 25: The General Law of Capitalist Accumulation)

Marx describes Mandeville as “an honest, clear-headed man” in volume 1 of Capital and writes in part 1 of Theories of Surplus-Value that “Only Mandeville was of course infinitely bolder and more honest than the philistine apologists of bourgeois society.”

 

 

 

A Foreword to Sraffa’s Production of Commodities by Means of Commodities

Piero Sraffa’s classic Production of Commodities by Means of Commodities (PCMC) was published in 1960. It runs into 87 pages of main text (inclusive of the content list), 6 pages of appendices, less than 3 pages of Preface and a 3-page index. As we pointed out in A Foreword to Keynes’s General Theory, by foreword, we mean the following: ‘The introduction to a literary work, usually stating its subject, purpose, scope, method, etc.’ (Oxford English Dictionary).

The book is subtitled ‘Prelude to a Critique of Political Economy’. This slim book is divided into 3 parts: (1) ‘single-product industries and circulating capital’; (2) ‘multi-product industries and fixed capital’; and an untitled third part containing a single chapter titled ‘Switch in Methods of Production’. In the Preface, Sraffa acknowledges Keynes, A. S. Besicovitch (‘for invaluable mathematical help’), Frank Ramsey and Alister Watson. Sraffa was friends with Gramsci and Wittgenstein. [Ramsey, a friend of Keynes, supervised the 40-year old Wittgenstein’s PhD thesis at the age of 26 (source).] Appendix D contains the ‘references to the literature’ wherein works by Quesnay, Smith, Ricardo, Torrens, Malthus and Marx are mentioned. As Sraffa writes in the appendix, ‘[t]he connection of this work with the theories of the old classical economists have been alluded to in the Preface. A few references to special points, the source of which may not be obvious, are added here’ (p. 93). The orthodox economists mentioned by Sraffa are Marshall and Wicksteed.

With respect to method, Sraffa adopts the standpoint of the old classical economists – the surplus approach to value and distribution. This is contrast to the orthodox marginalist scarcity approach to value and distribution. In the surplus approach, one distributive variable is exogenously determined. This is in fact a realistic assumption because the rate of interest is set by monetary authorities and the rate of profit can be conceptualised as a sum of the riskless rate of interest (on government securities) and a pure rate of return on capital.

The conception of the ‘system of production and consumption as a circular process’, Sraffa notes in Appendix D, is to be found in Quesnay which ‘stands in striking contrast to the view presented by modern theory [marginalist], of a one-way avenue that leads from “Factors of production” to “Consumption goods”’ (p. 93) [cf. Kurz & Salvadori 2005]. The subject matter of PCMC is the theory of value and distribution – how are relative prices and distributive variables determined? More specifically, in an economy where the production of commodities is undertaken by means of commodities, how are prices and distributive variables determined? Sraffa’s correct solution is that ‘the distribution of the surplus must be determined through the same mechanism and at the same time as are the prices of commodities’ (p. 6). What are the data or givens? (1) size and composition of output; (2) methods of production; and (3) one distributive variable (either the wage rate or profit rate). The first two givens are mentioned in the Preface when Sraffa writes that his ‘investigation is concerned exclusively with such properties of an economic system as do not depend on changes in the scale of production or in the proportions of “factors”’ (p. v). The rationale for the third given is as follows: ‘…the practice, followed from outset, of treating the wage rather than the rate of profits as the independent variable or “given” quantity’ has been reversed because the ‘rate of profits, as a ratio, has a significance which is independent of any prices, and can well be “given” before the prices are fixed … in particular by the level of the money rates of interest’ (p. 33).

While the scope of PCMC is limited to the subject matter, its implications on general economic theory are far reaching; for instance, his work has implications for the theory of value and distribution (capital theory forms an important part of this). Therefore, his work has positively contributed to the theorising of economic growth and environmental economics. Also, Sraffa’s work is to be a ‘basis for a critique of’ ‘the marginal theory of value and distribution’ (p. vi). Sraffa’s work is a coherent articulation of the theory of value and distribution the classical economists attempted to solve. At the same time, it also forms the basis for a critique of the marginalist theory of value and distribution by underscoring the logical fallacy in treating capital as a quantity independent of prices.

In a sense, the purpose of Sraffa’s work depends on the use that is made of it and there is a growing body of literature emanating from PCMC (a useful survey is Aspromourgos’s 2004 paper titled ‘Sraffian Research Programmes and Unorthodox Economics’). The classical approach to economics has been made more articulate and coherent. By marrying the classical or ‘surplus’ approach to value and distribution with the principle of effective demand, an alternative explanation for the determination of activity levels and economic growth has been developed. Work is also going on in the areas of environmental economics, public debt, monetary economics and history of economic thought, all of which draws upon and/or are inspired by Sraffa’s work.

The Indian readers would be interested to know that an Indian edition of PCMC was published by Vora & Co. Publishers, Bombay (available online).  However, PCMC is out of print since 1996 according to Cambridge University Press.

Those of us who are dissatisfied with mainstream neoclassical economics will find valuable insights and an economically superior but modest basis in Sraffa’s work to develop a coherent alternative to the mainstream approach to economic thinking. Particularly fruitful is this research programme when combined with the rich insights of the classical economists and Marx as well as the principle of effective demand of Kalecki and Keynes.

A Very Brief Introduction to Adam Smith’s Wealth of Nations

The Inquiry into the Nature and Causes of the Wealth of Nations (WoN hereafter) was published on 9th March, 1776. It was advertised in the concluding paragraph of Theory of Moral Sentiments (1759). This blog post is a very brief introduction to Adam Smith’s theory of political economy as presented in the WoN. According to John Rae, the biographer of Smith, the WoN ‘took twelve years to write, and was in contemplation for probably twelve years before that.’ Smith never engaged in any commercial activity unlike his predecessor, Richard Cantillon or his successor, David Ricardo, yet his insights into the working of the competitive economy is intellectually deep and of enduring relevance. His intellectual acquaintances include David Hume, Francois Quesnay, Jacques Turgot and Voltaire.

WoN is divided into 5 books: Book I presents a detailed examination of how labour becomes productive, and contains a theory of supply (of output). On what factors does the annual supply of commodities depend? Book II builds on this and contains a theory of accumulation (of capital stock). The growth policies undertaken by various nations form the content of Book III. The existing theories of political economy are critically appraised in Book IV; this book also includes the policy effects of these theories. Finally, in Book V, a theory of public finance – the theory of the revenue, expenditure and borrowing of the government – is outlined. Given the recurring themes of economic growth and development in this blog, the title of books I and II deserve to be quoted in full.

Book I: Of the Causes of Improvement in the productive Powers of Labour, and of the Order according to which its Produce is naturally distributed among the different Ranks of the People

Book II: Of the Nature, Accumulation, and Employment of Stock

In other words, the first book contains a theory of income distribution and the second contains a theory of economic growth. Recent research has noted the similarities between Smith’s theory of economic growth and neoclassical ‘new economic growth theory’ of Romer; in fact, Smith’s theory clearly emerges as a superior one.

The ‘necessaries and conveniences of life’, according to Smith, are produced by labour. That is, labour produces the annual aggregate supply of commodities and services. The nation is considered better supplied if the proportion between the annual aggregate supply and annual population is high. To expand this definition and adopting modern terminology, we can say that this idea of Smith corresponds to that of output per capita (for example, a high GDP per capita is favoured over a low GDP per capita). Further, Smith asks: what determines the output per capita? According to Smith, there are two factors which determine this proportion. (1) The productivity of labour, and (2) the ratio of workers employed in physical and human capital generation to other workers. Smith uses a different terminology: the ratio of productive to unproductive labour. The number of workers employed in physical and human capital formation is necessarily in proportion to the capital advanced in these sectors. And, labour productivity depends on the capital advanced. But, what is there in Smith’s theory of economic growth which ensures that the growth in aggregate supply is validated by an equivalent growth in aggregate demand?

Smith’s WoN, particularly the first 2 books, is of much contemporary relevance in understanding the socio-cultural idea of ‘subsistence wage’. Also, it contains a rich exposition of productivity unlike the ‘blackbox’ of productivity commonly found in the Solow-type growth theory. Smith’s WoN contains both logical rigour as well as rich prose, and together they vastly enrich our understanding of economic phenomena.

Understanding India’s Economic Growth and Development

This post is a review of the recent book by Jean Drèze and Amartya Sen titled An Uncertain Glory: India and Its Contradictions. An earlier post in this blog has dealt with the vexed relation between economic growth and development and elsewhere, I have discussed the need to focus on the structure of economic growth. Drèze and Sen’s book contains 10 chapters including the introduction (‘A New India?’) and the conclusion (‘The Need for Impatience’); the main text spreads across 287 pages. Their argument is buttressed with comparative exercises between Indian states, international comparisons, historical facts, surveys, published data sources and contemporary events apart from ample secondary literature. However, this review does not engage with their empirical findings.

For Drèze and Sen, the aim of any society should be the expansion of human capabilities. And, institutions such as markets and democracy are a means to that end. Similarly, economic growth ‘generates resources’ which can be used to improve human capabilities. As they write in the preface, ‘the achievement of high growth must ultimately be judged in terms of the impact of that economic growth on the lives and freedoms of the people’ (p. viii). Human capabilities, as is to be expected, refer to a spectrum of endowments and the ability to access all of them. For instance, it includes, in no particular order, nutrition (pp. 157-162), education (see ch. 5), health (see ch. 6), clean environment (pp. 41-44), access to energy (pp. 84-87), transportation, communication and banking infrastructure. The ability to access them, however, is severely constrained by caste (pp. 218-223). And some of them are also constrained by gender (pp. 224-239) besides other power relations.

Given India’s high growth rate, the authors pose one major question: why has the ‘pace of change … been excruciatingly slow’ for majority of the Indian populace (p. 29)? According to Drèze and Sen, the major cause for this is the abysmal situation of public education and health in India. (There are some Indian states which have done relatively better.) This is because of issues relating to accountability and also due to insufficient public spending. Moreover, the authors harshly criticize the Indian media for their ‘excessive focus on a relatively small part of the population whose lives and problems are much discussed’ (p. 261; see also pp. 262-267). This wide gap in public discourse provides their motivation in writing the book. Hence, they point out the ‘importance of enlightened public reasoning’ as ‘a central part of the general thesis of this book’ (p. 239). Furthermore, they state that ‘this book is aimed much more as an attempted contribution to public reasoning, including discussion in the media, than at giving professional advice to the government in office’ (p. 253).

Is their account of economic growth and development entirely satisfactory? Their second chapter is about ‘Integrating Growth with Development’. First, what determines economic growth? According to mainstream (neoclassical) economics, a growth in physical capital, human capital (educated and healthy workforce) and technological progress causes economic growth. This is known as the supply-side view of economic growth. If we accept this growth account, then clearly an improvement in the quality of life directly contributes to faster economic growth. Drèze and Sen do not have theoretical dissatisfactions with mainstream economics, as is made very clear in the following passage written in the context of a discussion on markets.

Relying solely on the market has become a strongly advocated theme in India on the basis on highly exaggerated expectations, often based on a misreading of the conclusions of mainstream economics, which includes much scepticism of the performance of markets in the presence of externalities, public goods, asymmetric information and distributional disparities. We do not have to look for any “alternative economic paradigm” to see what the market cannot do, in addition to what it can do – and do very well. (p. 184; emphasis added)

They also approvingly cite Joel Mokyr and Elhanan Helpman who emphasize the importance of ‘accumulation of knowledge’ and ‘total-factor productivity’ through education in economic growth respectively (p. 35). This is the supply-side production function approach in understanding the growth determinants. No one denies their significance. However, if one is convinced by such a theory/view of economic growth, the popular version of it being the Cobb-Douglas production function in various clothes, then, theoretically, physical capital can be substituted with human capital. And, this would entail a very different method of attaining economic development from that mentioned in the book. Moreover, aggregate demand does not play a role in this growth account; as the authors write in the preface, the ‘expansion of human capability, in turn, allows a faster expansion of resources and production, on which economic growth ultimately depends’ (p. x). That is, economic growth is entirely determined by the growth of aggregate supply, without considering the problems which can arise from aggregate demand deficiency (such as a fall in wage income or decrease in government spending). Without getting into the details of the argument, it appears that their conception of economic growth and development sits more comfortably with the economics of the classical economists (such as Adam Smith, David Ricardo and Karl Marx) combined with the effective demand theories of Michal Kalecki and John Maynard Keynes.

The surplus generated from economic growth can be utilized for societal needs which is further determined through socio-political movements and economic considerations of the entrepreneurs as well as the state. To put it differently, ‘the fruits of growth’ need to be allocated intelligently – based on our physical, economic, environmental, social and cultural needs (p. 9; cf. p. 14, p. 18, p. 38). There are two very different kinds of distribution that takes place – income distribution between wage-earners and profit-earners and the expenditure of the government from the revenue they collect as taxes and duties. They also observe,

The impact of economic growth on the lives of the people is partly a matter of income distribution, but it also depends greatly on the use that is made of the public revenue generated by economic expansion. (p. 37)

They mention the importance of collective bargaining (p. 141) and point out that the NREGA ‘strengthened the bargaining power of rural workers’ (p. 201). But their focus in the book is how to utilize public revenue in improving the quality of life (p. 269). Since this public revenue can be utilized in a variety of ways, Drèze and Sen assert ‘the constructive role of the state for growth and development’ (p. 39; italics in original). Hence, the organs of the state need to be made more accountable (ch. 4).

Since democracy offers ‘significant opportunities’ for improving the quality of life as well as its pace, the authors are ‘contingently optimistic’ (p. xii). In fact, the issues addressed by the authors are intended to be a contribution to a wider debate on how to construct a better society. Thus, the book aims to provide ‘reasoned solutions to the problems’ (p. 3). They also write that ‘economic reforms, even when appropriate, require informed public debate’ (p. 28). In sum, there ought to be a ‘greater use of informed reasoning in the practice of democracy’ (p. 181). As they observe, and correctly, I think, that daily troubles are ‘less spectacular and less immediate – [and hence] provide a much harder challenge’ to politicize (p. 14). The book is primarily about these issues and since they cover a vast terrain, there have been some omissions. Two very varied issues come to my mind: the influence of public debt on economic growth is only addressed briefly (p. 18) and the gap between English and non-English speakers get barely one paragraph (pp. 215-6). In addition, there is no mention of freedoms relating to sexuality. To conclude, the book is an excellent contribution in so far as it provides an accessible introduction to several social concerns such as armed conflicts, child mortality, corporate power, corruption, land ownership, minimum wages, nutrition, open defecation, pollution and sanitation.