Teaching & Learning History of Economic Thought (HET): Some Observations

The following is a short reflection and response to the lectures, questions, and conversations at the recently concluded 3-day HET workshop at MIDS, Chennai. In personal conversations, many people thought that HET is about economic ideas that originated in a particular context. 

That is, Smith’s economics is a response to his sociopolitical context. And therefore, the implication is that Smith’s political economy be placed in a museum—an archaeological site that we visit occasionally. Another implication to this appears to be that HET is not relevant to contemporary thought because our context is different from that of Smith’s. 

Such an approach to HET, to me, makes it a rather dead subject. Consequently, in the economics curriculum, it serves other core papers such as micro and macro by providing it with context/history and thereby improving student learning/understanding. Yes, this is important, but it makes HET an instrumental subject. However, that, per se, is not an issue because all knowledge in one way or the other are instrumental. 

I see 3 problems with such a view. 

One, it is a reductionist approach because it reduces ideas to the context, be it intellectual (i.e., texts, speeches) or sociopolitical (i.e., laws, wars, conflict). How do we then account for human ingenuity and creativity? Also, how do we understand classics—that have a timeless quality? Or, are we saying that there is nothing in economics that may be applicable across time and space? [On the question of applicability of economic theory, see the discussion in Chapter 6 of my macro book.] 

The second problem is that such a reductionist view of HET inevitably succumbs to the linear view of intellectual progress. Wherein the ideas of Solow are better than Smith objectively speaking and that the ideas of Solow are more relevant to us because, in terms of calendar time, Solow’s work is closer to us than Smith’s. 

The third problem is that we are okay about marginalized ideas remaining forgotten. Studying ideas—texts written by women (and folks whose texts were not popular)—remain invaluable for contemporary thought and action. This perhaps depends on how comfortable we are about ignoring the ideas of our ancestors. (I am currently reading The Penguin Book of Feminist Writing edited by Hannah Dawson; the first text belongs to 1405 and the last one to 2020.)

HET: Understanding Economics

HET allows us to organize past ideas in a meaningful manner. The simplest organizer is that of calendar time. But ideas are forgotten, revived, exhumed, bolstered, expelled, popularized for a variety of reasons and so a simple chronological account cannot provide a sufficient historical account of economic ideas. 

We need to have other ways of organizing so that we understand not only the past better but also the present. Another organizing principle among historians of economic thought is that of ‘school of thought’ or ‘paradigms’. For instance, HET books discuss ‘classical’ and ‘neoclassical’ general equilibrium (Harvey & Gram 1980); ‘neoclassical’, ‘Keynesian’ and ‘Marxian’ (Wolff & Resnick 2012); ‘classical political economy’ and ‘supply and demand theories’ (Bharadwaj 1986). 

Many historians of economic thought, including me, reject the ‘neoclassical’ label. This is because it suggests that there is continuity between ‘classical’ (associated with economists such as Quesnay, Smith, Ricardo) and ‘neoclassical’ (associated with economists such as Say, Walras, Marshall). The analytically satisfactory label is ‘marginalist’—because of their reliance on concepts such as marginal utility, marginal cost, etc. 

HET tells us that competing ideas have always existed; we often only learn about those that have been popular/dominant. For instance, Ricardo disagreed with Say that exchange value is determined by use value. And today’s microeconomics textbooks teach us that commodity prices are determined by cardinal/ordinal utilities. When Keynes and Sraffa were writing, the economic ideas of Marshall were dominant and those of Smith and Ricardo were forgotten. HET allows us to understand that the evolution of ideas has been anything but linear. 

And today as well, research happens in all schools of thought—contrary to what is implied in mainstream textbooks on micro, macro, econometrics, labour. 

The study of HET

We study the world by dividing it into different parts; for instance, the physical and social worlds. Or the natural sciences and human sciences. Or physics and economics. Economics may be further sub-divided into micro and macro. Or labour and ecological economics. 

Within HET, scholars sometimes distinguish between ‘history of economic analysis’ and ‘history of economic thought’ where the former is a subset of the latter. We can find economic thought in Arthashastra but there is no evidence of any theorizing/analysis. 

Another division in HET is that between the internalists and externalists although I think that most of us operate somewhere in that spectrum. The internalists study economic ideas by focusing on previous economic ideas and on the logical framework of that ideas. For example, when studying Ricardo, we read his texts and the texts he was influenced by such as Smith’s Wealth of Nations. My 2021 article ‘On “effectual demand” and the “extent of the market” in Adam Smith and David Ricardo’ is an example of this. When an externalist studies Ricardo, they include his social and political context and interpret his ideas as responses to them. A good example of this is Timothy Davis’s Ricardo’s Macroeconomics: Money, Trade Cycles, and Growth (2005). A good biography warrants a synthesis of the externalist and internalist approaches. 

Summing-up

HET allows us to understand the ebb and flow in dominant paradigms. It makes us aware that history is replete with debates across as well as within paradigms. Indeed, debates spur knowledge production. While most economics textbooks suggest consensus, economics journals (both orthodox and heterodox) suggest dissensus. There are conceptual debates, refinements, revivals and contextual critiques, challenges, applications. Furthermore, adopting an HET perspective in the teaching of microeconomics and econometrics will provide the learner with a critical grounding in history, politics and philosophy. 

I thank Thair Ahmed for helpful comments.

Is there anything natural about prices?

This blog post is motivated by Ashish Kulkarni’s post, which is a response to Samrudha Surana’s substack entry, which in turn is a response to a question I had posed at the recently concluded HET conference organized at Azim Premji University, Bengaluru. And perhaps the process of reading and writing for this post will motivate me enough to get back to systematic blogging. 

According to the Oxford Dictionary, ‘natural’ means “not made or caused by humans”. Viewed this way, there is nothing natural about markets or governments. Both have been created/designed by humans. Consequently, the prices set in markets and the prices set by governments are in no way natural. Yet, marginalist economists (and adherents of the Austrian school) suggest that there is something natural or spontaneous about the prices that emerge in markets vis-à-vis those that are set or administered by governments. This is the mainstream view—propagated via introductory textbooks. 

This post critically engages with James Buchanan’s 1964 article ‘What Should Economists Do?’ published in the Southern Economic Journal as this forms the basis of the posts by Samrudha and Ashish.  The critical appraisal of Buchanan’s article is restricted to his misunderstanding of Adam Smith.

Buchanan’s misunderstanding of Smith

In the very first page of his article, Buchanan calls our attention “to a much-neglected principle enunciated by Adam Smith” (p. 213). The “principle which gives rise to the division of labor” is, quoting Smith, “the propensity to truck, barter, and exchange one thing for another”. And that its significance “has been overlooked in most of the exegetical treatments of Smith’s work.” 

Buchanan wants economics to be “the theory of markets” and not the “theory of resource allocation” (p. 214). As he writes,

Man’s behavior in the market relationship, reflecting the propensity to truck and to barter, and the manifold variations in structure that this relationship can take; these are the proper subjects for the economist’s study. 

Later in the essay, there is an inaccurate reference to Smith’s invisible hand (p. 217; see my moneycontrol article on Smith here). What Buchanan perhaps ignores or is unaware of is that Smith’s economics is one that emphasizes production, economic growth and development. Contrast Buchanan’s definition of economics provided above with that of Smith. 

Political oeconomy, considered as a branch of the science of a statesman or legislator, proposes two distinct objects: first, to provide a plentiful revenue or subsistence for the people, or more properly to enable them to provide such a revenue or subsistence for themselves; and secondly, to supply the state or commonwealth with a revenue sufficient for the public services. It proposes to enrich both the people and the sovereign. (Smith 1776, IV.1)

And to make sense of economic development, a theory of price is essential (for an elaborate account, see Section 2 of my chapter in The Anthem Companion to David Ricardo—available here).

In the tradition of Petty, Cantillon and Quesnay, Smith distinguishes between “natural prices” and “market prices”. In Cantillon, the corresponding terms are “intrinsic value” and “market prices”. It is important to keep in mind that both “natural prices” and “market prices” are theoretical in nature, with the former at a higher level of abstraction than the latter. If market prices were empirical in nature, there would not be a single market price but a spectrum of prices that vary according to the nature and quality of the commodity as well as the time and location of the market. 

Be it the market or the government, both have been created and designed by humans and will continue to be re-created and re-designed. This, Buchanan recognizes. As he writes, “A market becomes competitive, and competitive rules come to be established as institutions emerge to place limits on individual behavior patterns” (p. 218; emphases in the original). For him, the market is “the institutional embodiment of the voluntary exchange processes that are entered into by individuals in their several capacities. This is all that there is to it” (p. 219). This is where Buchanan goes astray. 

I ask: how voluntary is the process of exchange under capitalism? How voluntary is the process of exchange under patriarchy? How voluntary is the process of exchange under the caste system? Smith is very cognizant of the fact that employers have more power than workers in capitalist societies. Smith is aware that big corporations (with/without support from the government) have more power than small entrepreneurs. Buchanan is unable to view power as a structural feature of our economic system—unlike Smith. One reason for the inability could be his adherence to an extreme version of methodological individualism. 

Conclusion

To conclude, the spaces wherein exchanges are truly voluntary for all parties, I think, are very less. Household? Firm? Village? City? International trade?

Political economy, in the work of Adam Smith, recognizes social classes and social power. And it is this recognition that will enable us to design better markets and governments. And this means better designs for pricing commodities, determining wages, setting interest rates, improving employment levels, and recharging our environment.  

Revisiting J. H. Clapham’s ‘Empty Economic Boxes’

This blog post revisits the economic historian J. H. Clapham’s1922 classic paper ‘Of Empty Economic Boxes‘ published in The Economic Journal, and raises some critical questions about the continued use of constant returns to scale (CRS hereafter) assumption in marginalist (or neoclassical) microeconomics and macroeconomics. In 1926, Piero Sraffa took Clapham’s 1922 paper as a starting point to mount a more devastating logical critique of Marshallian notions of increasing returns and the representative firm; this was published as part of a symposium in the Economic Journal.

What is returns to scale’ According to marginalist economics, the technique of producing a commodity may be represented by a functional relationship between inputs (say, k’and l) and output (say, y): y’= f(k,l). If all the inputs are multiplied by a positive scalar m, and the resultant output is expressed as mr’y, then r’represents the magnitude of the returns to scale. If r = 1, the technique exhibits CRS, if r < 1, it exhibits diminishing returns to scale (DRS), and if r’> 1, it exhibits increasing returns to scale (IRS).

Despite the ‘advances’ in mainstream economics research, the marginalist theory of value and distribution still requires the CRS assumption (and the diminishing returns to a factor assumption) to make several key claims. The aggregate production function employed in the Solow growth model is assumed to exhibit CRS. And the Solow growth model forms the core of supply-sidegrowth accounting exercises which are used to make policy prescriptions (for a critique of one such exercise for the Indian economy, see Joshi & Thomas 2013).

The central argument in Clapham’s article is that the categories of diminishing returns, constant returns, and increasing returns industries are ’empty economic boxes’. In other words, from the standpoint of actual economies, these categories lack empirical and historical content. Consequently, industries cannot be classified into one or the other box a priori.

Clapham asks: what does AC Pigou (in his Economics of Welfare) mean when he writes ‘when conditions of diminishing returns prevail’ (p. 305)’ According to Clapham ‘constant returns…must always remain a mathematical point, their box an empty one’ (p. 310). He acknowledges that different kinds of returns have a ‘logical’ and ‘pedagogic value’ which ‘goes so prettily into graphs and equations’ (p. 312). How can we then use this framework to draw policy conclusions given the inability to classify industries a priori into constant, diminishing, and increasing returns’

The following observation by Clapham is insightful and worth thinking about further. He writes that diminishing returns must be balanced with increasing returns to arrive at constant returns (p. 309). Surely, this makes no conceptual sense and neither does it have any basis in empirical reality. As Clapham puts it, with CRS ‘the conception of the balance of forces, man’s organization versusNature’s reluctance, was worked out’ (p. 309). In other words, is CRS an expression of the balancing of the symmetrical forces of IRS (‘man’s organization’) and DRS (‘Nature’s reluctance’)’ For a visual representation, see the images below. If so, it would add to the symmetrical concepts found in the marginalist toolbox, most notably that of supply and demand. However, beyond the ease of exposition symmetry provides us, is it really how the actual world works’

Source: meritnation.com

CRS, DRS, and IRS posit an a priori functional relationship between labour (L) and capital (K), the ‘factors of production’ and output (Y) for an individual firm and for an economy: Y=f(L,K). While the idea underlying the production function, whether industry-level or aggregate-level, that outputs are produced by inputs is commonsensical and intuitive, its expression as a mathematical function isn’t as benign. Since marginalist economics requires continuous functions (often, of a monotonic nature) to ensure the existence of equilibrium, the ‘f’ is able to map infinitesimal combinations of Land Kto a unique Y. This ‘one-way street’, to use Sraffa’s phrase in his 1960 classic Production of Commodities by Means of Commodities(see my blog post Sraffa), between ‘factors of production’ and output is conceptually unsatisfactory because it misses a fundamental aspect about modern economies: the structural interdependence between inputs and outputs. In addition, it assumes that capital goods (K) are infinitely divisible, a very difficult assumption to uphold.

John Eatwell (2008; first published in 1987), in his entry on ‘returns to scale’ published in The New Palgrave Dictionary of Economics, also notes the apparent symmetry between IRS and DRS but points out its spuriousness. While there is no evidence of functional relationships in Adam Smith and David Ricardo, Smith’s discussion of division of labour, capital accumulation, and economic growth indicates that he recognised scale-enabled technological progress and Ricardo recognised diminishing returns to land, a non-reproducible input in production. Subsequently, Alfred Marshall, in his Principles of Economics, ‘attempted to formulate a unified, symmetric, analysis of returns to scale which would provide the rationale for the construction of the supply curve of a competitive industry, derived in turn from the equilibria of the firms within the industry’ (Eatwell 2008, p. 140). This point was initially noted by Sraffa 1926, and later much more thoroughly investigated also by Krishna Bharadwaj (1978).

It is well understood that the question of returns to scale is important in the construction of the supply curves which are integral for the marginalist price theory. Therefore, a thorough critical study of mainstream price theory and a renewal in the interest in rival price theories (found in Ricardo, Marx, Sraffa, and Kalecki, among others) are warranted. This is crucial because it is value or price theory which provides us with the economic possibilities a competitive economy generates. If it generates unemployment and worsens inequality, we know that intervention of a particular kind is necessary. However, if it generates full employment and reduces inequality, then it supports the idea of making markets more competitive and reducing government intervention.

REFERENCES

Clapham, J. H. (1922), “Of Empty Economic Boxes.”‘The Economic Journal,’vol. 32, no. 127, pp. 305-14.

Eatwell, John (2008), ‘Returns to Scale’. In: Durlauf S.N., Blume L.E. (eds.) The New Palgrave Dictionary of Economics. London: Palgrave Macmillan.

Sraffa, Piero (1926), “The Laws of Returns under Competitive Conditions.”‘The Economic Journal,’vol. 36, no. 144, pp. 535-50.

Acknowledgement

I thank Mohib Ali for his helpful comments.

 

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 Fran’ois 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.’