A Research Annual 9781846639050, 9781846639043

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RESEARCH IN THE HISTORY OF ECONOMIC THOUGHT AND METHODOLOGY A Research Annual

RESEARCH IN THE HISTORY OF ECONOMIC THOUGHT AND METHODOLOGY Series Editors: Warren J. Samuels, Jeff E. Biddle and Ross B. Emmett Recent Volumes: Volume 23A:

Research in the History of Economic Thought and Methodology: A Research Annual; Warren J. Samuels, Jeff E. Biddle and Ross B. Emmett; 2005

Volume 23B:

Research in the History of Economic Thought and Methodology: Documents from F. Taylor Ostrander; Warren J. Samuels; 2005

Volume 23C:

Research in the History of Economic Thought and Methodology: Further University of Wisconsin Materials and Further Documents of F. Taylor Ostrander; Warren J. Samuels; 2005

Volume 24A:

Research in the History of Economic Thought and Methodology: A Research Annual; Warren J. Samuels, Jeff E. Biddle and Ross B. Emmett; 2006

Volume 24B:

Research in the History of Economic Thought and Methodology: Further Documents from F. Taylor Ostrander; Warren J. Samuels; 2006

Volume 24C:

Research in the History of Economic Thought and Methodology: Documents From and On Economic Thought; Warren J. Samuels; 2006

Volume 25A:

Research in the History of Economic Thought and Methodology: A Research Annual; Warren J. Samuels, Jeff E. Biddle and Ross B. Emmett; 2007

Volume 25B:

Research in the History of Economic Thought and Methodology: Documents From The History of Economic Thought; Warren J. Samuels; 2007

Volume 25C:

Research in the History of Economic Thought and Methodology: Further Documents From The History of Economic Thought; Warren J. Samuels; 2007

RESEARCH IN THE HISTORY OF ECONOMIC THOUGHT AND METHODOLOGY VOLUME 26-A

RESEARCH IN THE HISTORY OF ECONOMIC THOUGHT AND METHODOLOGY A Research Annual EDITED BY

WARREN J. SAMUELS Department of Economics, Michigan State University, East Lansing, MI 48824, USA

JEFF E. BIDDLE Department of Economics, Michigan State University, East Lansing, MI 48824, USA

ROSS B. EMMETT James Madison College, Michigan State University, East Lansing, MI 48825, USA

United Kingdom – North America – Japan India – Malaysia – China

JAI Press is an imprint of Emerald Group Publishing Limited Howard House, Wagon Lane, Bingley BD16 1WA, UK First edition 2008 Copyright r 2008 Emerald Group Publishing Limited Reprints and permission service Contact: [email protected] No part of this book may be reproduced, stored in a retrieval system, transmitted in any form or by any means electronic, mechanical, photocopying, recording or otherwise without either the prior written permission of the publisher or a licence permitting restricted copying issued in the UK by The Copyright Licensing Agency and in the USA by The Copyright Clearance Center. No responsibility is accepted for the accuracy of information contained in the text, illustrations or advertisements. The opinions expressed in these chapters are not necessarily those of the Editor or the publisher. British Library Cataloguing in Publication Data A catalogue record for this book is available from the British Library ISBN: 978-1-84663-904-3 ISSN: 0743-4154 (Series)

Awarded in recognition of Emerald’s production department’s adherence to quality systems and processes when preparing scholarly journals for print

CONTENTS LIST OF CONTRIBUTORS

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EDITORIAL BOARD

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ACKNOWLEDGMENTS

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WESLEY CLAIR MITCHELL ON EUGENICS: A NOTE Luca Fiorito and Tiziana Foresti ECONOMIC SINGULARISM William Barnett, II and Walter Block

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REVIEW ESSAYS Van Overtveldt’s THE CHICAGO SCHOOL On the Theory of Economic Policy of the Chicago School of Economics Warren J. Samuels

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How Should We Think of the Success of the Chicago School of Economics? Ross B. Emmett

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Early and Often or Too Late and Not Enough? Robert Leeson

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Clark’s STATE AND STATUS The Complexity of Power Roger E. Backhouse

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CONTENTS

Social Status on the Road from Feudalism to the Age of Enlightenment Y. S. Brenner

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Unpacking Terminology, Reassessing Theory Evelyn L. Forget

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State Formation in Early Modern Europe Keith Tribe

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Skousen’s THE BIG THREE IN ECONOMICS Three Strikes and You’re Out Humberto Barreto

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The Final Triumph of Adam Smith? Udayan Roy

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Backhaus and Drechsler’s FRIEDRICH NIETZSCHE Did Nietzsche Say Anything to Economists or about Economics? John Linarelli

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Le Gall’s A HISTORY OF ECONOMETRICS IN FRANCE From Natural Order to Artificial Worlds Marcel Boumans

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Klein’s ECONOMICS CONFRONTS THE ECONOMY Confronting Economists Who are Confronting Economics David Colander 147

Contents

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Duncan Foley’s ADAM’S FALLACY Did Adam Smith Produce Fallacy or has Fallacy been Thrust upon Him? Warren J. Samuels 153

Montes and Schleisser’s NEW VOICES ON ADAM SMITH Adam Smith: One Author, Many Contexts Willie Henderson

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Peart and Levy’s THE ‘‘VANITY OF THE PHILOSOPHER’’ Sympathy Lost (and Regain’d?) Andrew Terjesen

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Schonhardt-Bailey’s FROM THE CORN LAWS TO FREE TRADE Complementary Forces Behind the Repeal of Britain’s Corn Laws Andrea Maneschi

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Augello and Guidi’s ECONOMISTS IN PARLIAMENT The Determinants of Thought Robin F. Neill

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Kornai’s BY FORCE OF THOUGHT We’re All Austrians Now: Ja´nos Kornai and the Austrian School of Economics Peter T. Leeson 209

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CONTENTS

Backhaus’ ENTREPRENEURSHIP, MONEY, AND COORDINATION Which Way Forward in Hayekian Social Theory: Evolution or Design? William N. Butos 221

Heertje’s SCHUMPETER ON THE ECONOMICS OF INNOVATION and Laperche, Galbraith, and Uzundis’s INNOVATION, EVOLUTION AND ECONOMIC CHANGE Technical Change and Economic Structure: Schumpeter and Galbraith David Reisman

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Parker’s JOHN KENNETH GALBRAITH The Conventional Wisdom and the Pretense of Knowledge Steven Horwitz 255

Donald Stabile’s FORERUNNERS OF MODERN FINANCIAL ECONOMICS Prior Knowledge: Financial Economics before Markowitz Neil T. Skaggs 263 NEW BOOKS RECEIVED

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LIST OF CONTRIBUTORS Roger E. Backhouse

Department of Economics, University of Birmingham, UK

William Barnett II

College of Business, Loyola University New Orleans, USA

Humberto Barreto

Department of Economics and Management, De Pauw University, USA

Walter Block

Department of Economics, Loyola University New Orleans, USA

Marcel Boumans

Department of Economics, University of Amsterdam, The Netherlands

Y. S. Brenner

Emeritus Utrecht University, The Netherlands

William N. Butos

Department of Economics, Trinity College, USA

David Colander

Department of Economics, Middlebury College, USA

Ross B. Emmett

James Madison College, Michigan State University, USA

Luca Fiorito

Department of Politics, Law and Society, University of Palermo, Italy

Tiziana Foresti

Department of Philosophy, University of Pisa, Italy

Evelyn L. Forget

Department of Community Health Services, University of Manitoba, Canada ix

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LIST OF CONTRIBUTORS

Willie Henderson

Alworth Institute for International Studies, University of Minnesota, Duluth

Steven Horwitz

Department of Economics, St. Lawrence University, USA

Peter T. Leeson

Department of Economics, George Mason University, USA

Robert Leeson

Department of Economics, Murdoch University, Australia

John Linarelli

College of Law, University of La Verne, USA

Andrea Maneschi

Department of Economics, Vanderbilt University, USA

Robin F. Neill

Department of Economics, University of Prince Edward Island, Canada

David Reisman

Economics Division, Nanyang Technological University, Singapore

Udayan Roy

Department of Economics, Long Island University, USA

Warren J. Samuels

Department of Economics, Michigan State University, USA

Neil T. Skaggs

Department of Economics, Illinois State University, USA

Andrew Terjesen

Department of Philosophy, Rhodes College, USA

Keith Tribe

Department of History, University of Sussex, UK

EDITORIAL BOARD Abraham Hirsch Brooklyn College, USA

William Breit Trinity University, USA

Alon Kadish Hebrew University of Jerusalem, Israel

Bruce J. Caldwell University of North Carolina, Greensboro, USA

S. Todd Lowry Washington and Lee University, USA

A. W. Coats University of Nottingham, UK and Duke University, USA

Howard Sherman University of California, Riverside, USA

John B. Davis Marquette University, USA and University of Amsterdam, The Netherlands

Andrew S. Skinner University of Glasgow, UK Vincent J. Tarascio University of North Carolina, Chapel Hill, USA

Craufurd D. Goodwin Duke University, USA Robert F. He´bert Auburn University, USA

John C. Wood Edith Cowan University, Australia

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ACKNOWLEDGMENTS The editors wish to express their gratitude for assistance in the review process and other consultation to the members of the editorial board and to the following persons: Spencer Banzaf Sheila Dow Andrew Farrant Dan Hammond Marianne Johnson Perry Mehrling Ryan Muldoon David Ruccio Malcolm Rutherford Neil Skaggs Edward Stringham Anthony Waterman

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WESLEY CLAIR MITCHELL ON EUGENICS: A NOTE Luca Fiorito and Tiziana Foresti The ‘‘progressive movement’’ swept the United States from roughly the first half of the 1890s through the early 1920s, generating a broad popular consensus on the role of government as the primary agent of social change. To that end, an entire generation of young crusaders in public service – inspired by their academic counterparts – seized and wielded sweeping new powers and enacted a stream of new legislation, including minimum wage and maximum hours laws, antitrust statutes, restrictions on the sale and consumption of alcohol, appropriations for hundreds of miles of roads and highways, assistance to new immigrants and the poor, women’s suffrage and electoral reform, among many other things. Yet, in spite of such a reformist impetus, the Progressive Era was also a time of vicious – and often state-sponsored – racism which pervaded all layers of American society (Bateman, 2003; Leonard, 2003, 2005; Levy & Peart, 2005). Intellectual and academic circles were no exception. With respect to economics, recent accounts have insightfully documented how eminent figures in the discipline adopted racial and deterministic arguments to explain, and to remedy, the root causes of economic problems of the day, in particular labor and immigration. Interestingly enough, economists’ racial attitudes did not follow differences that can be easily attributed to their theoretical or methodological inclinations. The ranks of enthusiastic supporters of racial discrimination and eugenics included early neoclassicals such as Irving Fisher as well as many sharp critics of marginalism. Among A Research Annual Research in the History of Economic Thought and Methodology, Volume 26-A, 1–13 Copyright r 2008 by Emerald Group Publishing Limited All rights of reproduction in any form reserved ISSN: 0743-4154/doi:10.1016/S0743-4154(08)26001-3

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the alleged founding fathers of institutionalism, for instance, both John Rogers Commons and Thorstein Veblen devoted extensive attention to racial themes and eugenics, and their positions on these issues have been analyzed in some detail.1 Wesley Clair Mitchell’s opinion, instead, has remained completely unexplored. This is due mainly to the fact that, unlike Commons and Veblen, Mitchell never dealt with these topics in his published writings. Archival research, however, has allowed us to shed some light on Mitchell’s attitude toward eugenics. In 1914, Mitchell published a long survey devoted to ‘‘Human behavior and economics’’ in the Quarterly Journal of Economics (Mitchell, 1914). This essay remains one of the most influential contributions to the heated debate on the relationship between economics and psychology which animated American academia from 1910 to the mid-1920s. The work of William McDougall (1908) on instinct had an especially significant influence on such debate (Asso & Fiorito, 2004; Hodgson, 2004). As noted by Robert Cherry (1976), McDougall – like other leading psychologists of the time – believed instinct and intelligence to be not only genetically determined but also dependent on racial diversity. Therefore, Cherry (1976, p. 157) argues, ‘‘it is not unwarranted to hypothesize that many economists were not only influenced by these psychologists in concluding how man acts (instinct) but also how his acts are determined (racially and genetically).’’2 Interestingly, Mitchell himself provides an enlightening example of this attitude in one of the closing passages of his 1914 article where he asserts: ‘‘Studies of tropisms, reflexes, instincts, and intelligence; of the relations between an individual’s original and acquired capacities; of the cultural roles played by racial endowments and social institutions are y significant for economics’’ (Mitchell, 1914, p. 47, emphasis added). In spite of such an explicit commitment to racial themes, however, Mitchell’s survey does not contain any discussion of race-specific behavior nor any reference to eugenics. What Mitchell provides, instead, is a careful and critical examination of the contributions of Maurice Parmelee, Edward Thorndike, Graham Wallas, Werner Sombart, Walter Lippmann, William Walling and Veblen in order to show how economics could benefit from current psychological research. Regarding Wallas,3 Mitchell questioned his attempt to reduce the various kinds of consciousness and behaviour to the single structural term ‘‘disposition.’’ More specifically, Mitchell was left unsatisfied by Wallas’ distinction between simple dispositions – ‘‘like the senses, memory, fatigue, etc.’’ – and complex dispositions – such as ‘‘instinct and intelligence’’ (Wallas, [1914], 1967, p. 53, quoted in Mitchell, 1914, p. 13). Mitchell was particularly critical of Wallas’ claim to have used the

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term disposition so as to exclude any element acquired through experience and social intercourse. According to such a view, human nature is considered as ‘‘an imaginary point, from which the effects of experience are assumed to start’’ (Wallas, [1914], 1967, p. 22, quoted in Mitchell, 1914, p. 13). As Mitchell rhetorically asks: Now this proposal, at least when made with reference to the complex dispositions seems to me to involve a serious error. How can patriotism, or ambition, which Mr. Wallas cites as among ‘‘the facts of human nature which are of the greatest importance to the social psychologist’’ (p. 32) be regarded as dispositions free from acquired elements? Indeed, can any complex disposition exist wholly of unlearned elements? (Mitchell, 1914, p. 14)

Wallas decided to reply to these criticisms in a letter he sent to Mitchell on January 4, 1915. He began with a few general considerations on the current status of research on the psychological basis of social science at London University and asked Mitchell about the situation at Columbia. Then, among other things, Wallas defended his use of the term ‘‘disposition’’ and agreed with Mitchell on the necessity of clearly distinguishing between original and acquired elements in human conduct. Interestingly, at the end of the letter, in a passage commenting on the demographic consequences of the war on the European countries – ‘‘where nearly all the best of the breeding women and few of the best of the breeding men will be left alive’’ – Wallas wonders about the possibility of ‘‘a sharp conflict between the eugenists and the Christians.’’ In this regard, it should be pointed out that in his book The great society, (1914) – on which Mitchell’s survey focused – Wallas had explicitly expressed his approval of eugenics. He states: And social psychology can never lead men to wise practical conclusions unless it keeps in view its relation to that science of human breeding which Sir Francis Galton named Eugenics.4 Every change in social organisation affects not only the harmony between the existing generation and its surroundings, but the conditions which affect the physical and mental inheritance of succeeding generations. (Wallas, [1914], 1967, pp. 55–56)5

Mitchell’s reply to Wallas – dated February 3, 1915 – was couched in elegant terms. The American economist avoided any polemical remark, providing a brief sketch of the relationship between the various disciplines at Columbia concerning the issues raised by Wallas and expressed his concerns about the international scenario, which the world conflict had created. As to Wallas’ comments on eugenics, Mitchell replied as follows: What you say about the possibility of a conflict between the eugenists and the Christians in the future suggests one of the brightest spots in the dismal outlook. I do not know

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LUCA FIORITO AND TIZIANA FORESTI how you feel about the matter, but personally I hope that the war may result at least in breaking down many of the old taboos which have hampered efforts to make social institutions serve the purposes of living men. I should hail it as a fine result if England suddenly made up her mind to replenish her wasted population from the best breeding stock that she has left, quite without reference to traditional ideas concerning the family as an institution, and with a single eye to the welfare of the mothers and the children [emphases added].

We are well aware that to interpret an author’s position from a single passage taken from his private correspondence is always a rather arduous intellectual exercise. Yet, from the above, Mitchell’s endorsement of eugenics appears to be quite explicit.6 There are two aspects which, in our opinion, deserve emphasis. First of all, it must be noted that Mitchell raises the issue of the ‘‘quality’’ of population: England should be repopulated drawing from its ‘‘best breeding stock.’’ Even though the eugenic movement was a global phenomenon, recent historiography has shown how it assumed peculiar traits in different national contexts. More specifically, in Italy, France, and South America, because of the influence of the Catholic Church, eugenics took the form of social preventive medicine, welfare services for mothers, and of demographic policies in favor of natality (Mantovani, 2004, pp. 11–34).7 In other countries, eugenics chiefly meant the improvement of the ‘‘quality’’ of individuals by means of practices such as abortion, sterilization, and birth control (Kevles, 1995). Mitchell’s statement about the ‘‘best breeding stock’’ is, thus, to be referred to the Anglo-American context of the debate on eugenics. Second, Mitchell observes how the welfare of mothers and children should prevail even in contrast with the ‘‘traditional ideas concerning the family.’’ As argued by Warren Samuels, here Mitchell may be referring to the problem of ‘‘illegitimate children’’ and their then serious ‘‘bastard’’ status.8 In other words, Mitchell may be suggesting that, in order to ‘‘repeople’’ Great Britain, law and custom should be reformed to take account of those whose birth is not in accordance with the law. If society takes care of illegitimate children, through education and health assistance, population will improve – both qualitatively and quantitatively. Apart from these general considerations, it is our contention that Mitchell’s approval of eugenics must be seen as a consequence of the ideological and scientific context of his time and not as an explicit commitment to racism. We may venture to say that for the Columbia economist, eugenics was merely one of several aspects involved in the application of scientific knowledge to social planning – one of Mitchell’s lifelong guiding principles (Biddle, 1998). It should, in fact, be pointed out

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that Mitchell accompanied his approval of eugenics with a few recommendations concerning the ‘‘family as an institution’’ and the need for ‘‘the old taboos which have hampered efforts to make social institutions serve the purposes of living men.’’ This appears to be consistent with the criticism of the traditional family expressed by Mitchell (1912) in his essay ‘‘The backward art of spending money.’’ According to Mitchell, because of the industrialization process, the traditional family is no longer an efficient productive unit, but it holds a central role as unit for spending money, causing the backwardness of such art. Mitchell, in fact, detects the reasons for the backwardness of the art of spending money in the organization of expenditure within the family and in the impossibility to apply business management methods to the housewife’s shopping for the family. In his own words: It is because we have not wanted to that we have not developed a larger and more efficient unit for spending money than the family. Our race-old instincts of love between the sexes and parental affection, long since standardized in the institution of monogamy, are a part of experience at once so precious and so respectable that we have looked askance at every relaxation of the family bond, whatever material advantages it has promised. (Mitchell, 1912, p. 5)

Therefore, in his perspective, traditional family as unit for spending money was no longer a very efficient arrangement. To conclude, it is our contention that for Mitchell institutional reform was an integral and essential component of the eugenic outlook. Our view would also seem to be supported by the fact that Mitchell, although leaning toward a Veblenian evolutionary approach, never followed Veblen in his speculations on racial diversity as a determinant of behavioral diversity. This is confirmed, as argued by Pier Francesco Asso and Luca Fiorito (2004), by Mitchell’s abandonment of instinct theory and enthusiastic embrace of behaviorism in the early 1920s. Behaviorism, especially in some of its formulations, placed an almost exclusive emphasis on environmental conditioning and rapidly led to the expunction of biological and racial consideration from social sciences (Hodgson, 2004). It is interesting that in his 1914 article, Mitchell advanced some form of mild criticism of Veblen’s conception of instinct, pointing out some ambiguities in his definition of the term ‘‘instinct.’’ In his discussion, Mitchell insisted on the strong cultural implications of Veblen’s conception of instinct. However, he continued There is one pointy at which we may fairly ask Mr. Veblen to modify his language. Just as Mr. Wallas seems mistaken in saying that complex dispositions (in his usage) are free from acquired elements, so Mr. Veblen seems mistaken in saying that instincts

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LUCA FIORITO AND TIZIANA FORESTI (in his usage) are ‘hereditary traits’y As parts of the original nature of man, instincts are inherited; but instincts ‘as they take effect in the give and take of cultural growth have important acquired elements in addition to the elements which are inherited. (Mitchell, 1914, p. 22)

Such an explicit ‘‘environmentalist’’ complaint – where the names of Veblen and Wallas appear together – clearly distances Mitchell from the most ardent advocates of racial superiority and biological determinism.

THE CORRESPONDENCE Graham Wallas to Wesley C. Mitchell London, January 4, 1915 Dear Mitchell, I have to thank you for the reprint of your article in the Quarterly Journal of Economics. It seems to me to be much the best thing that has been written on the subject. Curiously enough I had not read any of the books with which you deal, except [Walter] Lippmann’s and my own.9 I shall try to get a few days at the British Museum, so as to go through them. 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? To return to your review. I think that I could defend my definition of Disposition as convenient, though I would have to go through the whole

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book to see whether I have always been consistent in following it. Obviously some term is wanted for the different facts which go to make our original nature. You say, for instance, (p.15) ‘‘The fears, the loves, the acquisitiveness which are great social forces, which really do concern the social psychologist, are not these naked original propensities; but these propensities made over and standardizedy’’ and again (p. 15 infra) ‘‘before we start in schoolyour numberless unlearned capacities have growny’’ The whole present confusion in sociological literature shows the necessity of distinguishing between what you call ‘‘original propensities’’ and ‘‘unlearned capacities’’ (and I call ‘‘dispositions’’) and what you call ‘‘capacities’’ or ‘‘propensities’’ ‘‘made over.’’ I describe, e.g. on p. 155 et sgg. (of The great society) the way in which a strong ‘‘original propensity’’ to be moral by suffering in others is ‘‘made over’’ to produce the ‘‘public spirit’’ which we actually meet with in society; or in chapter X the way in which the ‘‘original propensity’’ towards Thought (in the sense of mere ‘‘reverie’’) which I had described on p. 51 is ‘‘made over’’ to become the developed Thought by which I hoped that society might more largely be controlled in the future. [William] McDougall’s mistake in the passage which I quote on p. 42 seems to me to follow from the fact that he has not clearly distinguished between (a) the ‘‘original propensity’’ (b) the process of ‘‘making over’’ and (c) the ‘‘made over’’ product in thought.10 Whether the word ‘‘disposition’’ is used for the ‘‘made over product’’ or (as I use it) for the ‘‘original propensity’’ seems to me to be unimportant, as long as the two are somehow clearly distinguished. But if my book reaches a second edition I will put in something trying to make my usage of the term clearer, and referring to your criticism.11 I am just now feeling with crushing force the contrast between the smallness of man and the vastness of the organization that he has made. To feel the full significance of the tragedy which is going on in Europe means, in my case at least, to become sleepless and inefficient. To inhibit one’s feelings and acquire the private soldiers’ cheerfulness, means that it is very difficult to grasp, and, in some tiny measure, perhaps ultimately help to control, the course of events. But I work and read and think, though with a consciousness of seriously diminished vigour. Perhaps if ever the time comes to appeal for a peace on ‘‘European’’ lines I shall feel invigorated by the sense that I shall be doing something. Meanwhile one has to hope and strive to avert the possibility of a victory over Western Europe of Prussia in her present temper. If the war lasts several years more, the problem of repeopling Europe, where nearly all the best of the breeding women and few of the best of the breeding men will be left alive, will cause a sharp conflict between the eugenists and the Christians.

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With all good wishes for Mrs. Mitchell and yourself. Sincerely yours Graham Wallas Wesley C. Mitchell to Graham Wallas New York, February 3, 1915 Dear Mr. Wallas: The question you ask about the theoretical basis on which the departments of psychology, philosophy, sociology, history, political science, law and economics work at Columbia has interested me extremely, but I find myself quite unable to prepare a memorandum upon the subject for your use. You know that we have no formal examination lists in this country such as enables you to get at the viewpoint of your colleagues as in London. The only method of attacking the problem that has occurred to me is the direct one of talking with my colleagues or reading their books. Talking with them is not altogether satisfactory, because they do not all understand the meaning of direct questions, and it takes a great deal of time to draw them out sufficiently by any line of talk that would make them reveal their viewpoints unconsciously. This much, however, I think I can say, that there is hardly any uniformity even among the men belonging to the same department. The theoretical bases upon which their investigations proceed, or which are tacitly implied by their conclusions (not always quite identical I fear) are not a subject on which they are commonly much interested. Most of them have read enough criticisms of hedonism to fight shy of that word and to think that they avoid using the hedonistic viewpoint. But not many of them see the nature of man as their fundamental problem. One avowed exception is Professor [Franklin] Giddings,12 whose main concern at present is to work out the character of social reactions to stimuli. He accepts as the basis of his inquiries the notions of human nature represented by Professor [Edward] Thorndike13 of the department of psychology. In the other social sciences most of us seem to be interested mainly in what our predecessors have believed or in what our contemporaries ought to do to be saved. We all feel the reflex influence of the war in much the same way as you, though I suppose with rather less intensity. It has in a shocking way diverted interest in this country from the constructive problems of trying to make civilization what we should like it and thrown us back into a muddle of feeling strongly about issues which we have not the capacity to think out clearly. As you doubtless know, public opinion is very strongly on the side

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of the Allies over here, though there are a few striking exceptions. What most of us wish for is the crushing of Prussian militarism and what we like to call the freeing of Germany, followed by a general disarmament; but there is a large and perhaps a growing party that believes this consummation is impossible, and that the war will leave the world not only weakened in men and resources but also burdened with an even heavier load of standing armies and navies than in the past, and these people are doing the best they can to commit the United States to a policy of preparation for war on a larger scale than in the past. Meanwhile there is a great deal of suffering from unemployment as a result of business depression, and it is very difficult to raise money for relief or to concentrate attention upon constructive programs for prevention of such social ills in the future. In the latter respect, however, the situation seems to be gradually improving, for as the war news from armies stuck in muddy trenches gets less exciting people are less obsessed by the horrible spectacle of what is going on in Europe. What you say about the possibility of a conflict between the eugenists and the Christians in the future suggests one of the brightest spots in the dismal outlook. I do not know how you feel about the matter, but personally I hope that the war may result at least in breaking down many of the old taboos which have hampered efforts to make social institutions serve the purposes of living men. I should hail it as a fine result if England suddenly made up her mind to replenish her wasted population from the best breeding stock that she has left, quite without reference to traditional ideas concerning the family as an institution, and with a single eye to the welfare of the mothers and the children. Mrs. Mitchell joins me in sending her cordial regards to Mrs. Wallas, your daughter and yourself. Yours faithfully, Wesley C. Mitchell

ACKNOWLEDGMENT The authors thank the Rare Books and Manuscript Library at Columbia University for permission to publish the two letters from the Wesley Clair Mitchell Papers, Warren Samuels for permission to use material from his correspondence with the authors, and Tim Leonard, Tiziano Raffaelli, and an anonymous referee for helpful suggestions.

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NOTES 1. On the racial theories of Commons see the insightful and well-documented work by Ramstad and Starkey (1995). Veblen’s position on racial issues is more controversial. As Tilman (1996, p. 57) properly argues, Veblen’s view – unlike Commons’s – is ‘‘racialist’’ rather than ‘‘racist.’’ In The instinct of workmanship (1914) – the work under examination in Mitchell’s (1914) survey – ‘‘race’’ differences are considered as possible sources of institutional change, since they affect the habits of thought of a community. Similar comments can be found in Veblen’s earlier works. In ‘‘The preconceptions of economic science,’’ Veblen asserts that race differences are to be taken as ‘‘remoter ground[s] of an institutional peculiarity,’’ although they ‘‘do not [y] coincide with national lines of demarcation as differences in the point of view from which things are habitually apprehended or differences in the standard according to which facts are rated’’ (Veblen, [1899b], 1961, p. 99). In The theory of the leisure class (1899) and in The theory of business enterprise (1904), Veblen’s analysis focuses on the relationship among temperament, race, and institutional change. More specifically, the dolichocephalic-blond ethnic type – which is, together with the brachycephalicbrunette and the Mediterranean, a basic European ethnic type – is characterized by a ‘‘predatory animus.’’ This proclivity is the basis of pecuniary institutions in modern industrial community (Veblen, [1899a], 1953, Chapter 9). Nevertheless, in The instinct of workmanship Veblen’s explanation of instincts is not essentially racialist. For an analysis of Veblen’s opinion on eugenics see Reinart (2004). 2. Regarding this point see also Cherry (1980). 3. Graham Wallas (1858–1932) was a British sociologist, political scientist, antirationalist, and proponent of a psychological approach to the study of politics. The son of a Sunderland clergyman, Graham Wallas endured a strict puritanical upbringing, and it was not without some relief that he left home to attend Shrewsbury School and Corpus Christi College, Oxford. Following his studies, he pursued a preparatory school teaching career but was constantly in trouble regarding matters of religious conformity. In 1886, Wallas joined the Fabian Society and became a member of its executive committee. He resigned from the society in 1895 partly because of political disagreement and partly because of boredom. Although he was primarily concerned with the almost universal lack of concern for psychology on the part of political scientists, he also dealt with general problems of epistemology and methodology. On Wallas see Hawkins (1997, pp. 162–165). 4. More specifically, Galton (1907) defined eugenics as ‘‘The study of those agencies which under social control may improve or impair the racial qualities of future generations, either physically or mentally.’’ 5. It should, however, be noted that Wallas saw environmental reform as a sine qua non for eugenic measures. As he wrote in commenting upon a passage by Gilbert Charles Bourne: ‘‘When Professor Bourne argues that ‘Hygiene, education, social institutions may improve the lot of the individual, but they cannot produce any permanent effect on the race,’ one finds oneself wondering whether he seriously expects that eugenic science will progress, or eugenic motives and methods be effective in a society unhygienic, uneducated, and unorganised’’ (Wallas, [1914], 1967, p. 56). On the relationship between British progressive thought and eugenics see Freeden (1979).

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6. Mitchell (1950, p. 297) refers to Galton in his introduction to What Veblen taught as ‘‘a figure of the first magnitude,’’ together with Pearson and Edgeworth, in the employment of statistical methods to biological and social sciences. An undated reading note about Galton’s Inquiries into human faculty and its development is among Mitchell’s papers. The note relates to the chapter on ‘‘Domestication of animals’’ devoted to the analysis of the conditions under which wild animals become domesticated (see the Wesley Clair Mitchell Papers, Box 36). 7. In 1930, the Catholic Church formalized its opposition to eugenics with the encyclical Casti Connubii. 8. Personal correspondence, Warren Samuels to the authors, January 31, 2007. 9. Wallas’s preface to The great society is a letter to Lippmann, in which he explains how the book develops the material of a ‘‘discussion-course’’ joined by Lippmann during his stay at Harvard University in the spring of 1910. Moreover, Wallas expresses ‘‘the hope that [the book] may be of some help when you write that sequel to your Preface to politics for which all your friends are looking’’ (Wallas, [1914], 1967, p. v). Walter Lippmann (1889–1974) was an American essayist and editor. He was associate editor of the New Republic in its early days (1914–1917), but at the outbreak of World War I he left to become Assistant Secretary of War, later helping to prepare data for the peace conference. From 1921 to 1931, he was on the editorial staff of the New York World, serving as editor the last two years. In 1931, he began writing a highly influential syndicated column for the New York Herald Tribune, which moved to the Washington Post in 1962. He ceased writing a regular newspaper column in 1967. Lippmann’s early books, written when he was a champion of liberalism, include A preface to politics (1913), Public opinion (1922), and A preface to morals (1929). An early supporter of Franklin D. Roosevelt and the New Deal, Lippmann became disillusioned and condemned collectivism in The good society (1937). His political stance became one of moderate detachment, and he won distinction as a farsighted and incisive analyst of foreign policy. A special Pulitzer Prize citation (1958) praised his powers of news analysis, which he demonstrated in U.S. war aims (1944), The cold war (1947), Isolation and alliances (1952), and Western unity and the common market (1962). 10. Unlike McDougall, Wallas holds that ‘‘we are born with a tendency, under appropriate conditions, to think, which is as original and independent as our tendency, under appropriate conditions, to run away’’ (Wallas, [1914], 1967, p. 39). Wallas is referring to the following passage (which he quotes) from William McDougall’s Introduction to social psychology (1908): ‘‘We may say, then, that, directly or indirectly, the instincts are the prime movers of all human activity; by the conative or impulsive force of some instinct (or of some habit derived from an instinct) every train of thought, however cold and passionless it may seem, is borne along towards its end, and every bodily activity is initiated and sustained. The instinctive impulses determine the end of all activities, and supply the driving power by which all mental activities are sustained; and all the complex intellectual apparatus of the most highly developed mind is but a means towards these ends, is but the instrument by which those impulses seek their satisfactions, while pleasure and pain do but serve to guide them in their choice of the means. Take away these instinctive dispositions with their powerful impulses, and the organism would become incapable of activity of any kind; it would lie inert and motionless like a

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wonderful clockwork whose mainspring had been removed, or a steam-engine whose fires had been drawn (McDougall, [1908], 1998, p. 44).’’ 11. Unfortunately, The great society did not reach a second edition. 12. Franklin H. Giddings (1855–1931) was the founder of sociology at Columbia University, and one of the ‘‘four founders’’ of American Sociological Society. Through his teachings and his students, he played a pivotal role in establishing mainstream quantitative sociology in the United States. Among his prominent students were W. F. Ogburn, Howard W. Odum, and F. Stewart Chapin (q.v.). Giddings wrote two of the first textbooks in quantitative sociology, Inductive sociology (1901) and The scientific study of human society (1924). In these texts he outlined an account of the relation of social theory and quantification which broke with the tradition of sociological commentary on tabular material that dominated the nineteenth century, and provided an alternative model which more closely resembles the model of statistical hypothesis testing that is characteristic of twentieth century social science. Giddings was also known as a theorist, who developed the idea of ‘‘consciousness of kind’’ as his central contribution, and applied models from early population genetics to the question of the development of social types. 13. Edward Lee Thorndike (b. Williamsburg, Mass., Aug. 31, 1874, d. Aug. 9, 1949), was a major figure in several fields of psychology: learning theory, applied psychology, and mental measurement. First influenced by William James at Harvard, he studied at Columbia University and taught there from 1909 to 1940. His learning theory, applied to animals and human beings, added the principle of effect (success, pleasure, satisfaction) to Hermann Ebbinghaus’s principle of exercise. Thorndike rid his theories of the mentalism of earlier psychologists and paved the way for the behaviorism of B. F. Skinner and John B. Watson. He published about 500 books and articles, including his thesis Animal intelligence (1898), Educational psychology (1903, later in three volumes), and Mental and social measurements (1904), and was president of the American Psychological Association.

REFERENCES Private Papers: Wesley Clair Mitchell Papers, Rare Books and Manuscript Library, Columbia University, New York. Asso, P. F., & Fiorito, L. (2004). Human nature and economic institutions: Instinct psychology, behaviorism and the development of American institutionalism. Journal of the History of Economic Thought, 26(4), 445–477. Bateman, B. (2003). Race, intellectual history and American economics. History of Political Economy, 35(4), 713–730. Biddle, J. E. (1998). Social science and the making of social policy: Wesley Mitchell’s vision. In: M. Rutherford (Ed.), The economic mind in America: Essays in the history of American economics (pp. 43–79). London: Routledge. Cherry, R. (1976). Racial thought and the early economics profession. Review of Social Economy, 34(2), 147–162.

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Cherry, R. (1980). Biology, sociology and economics – An historical analysis. Review of Social Economy, 38(2), 141–154. Freeden, M. (1979). Eugenics and progressive thought: A study in ideological affinity. Historical Journal, 22(3), 645–671. Galton, F. (1907). Inquiries into human faculty and its development. London: Dent & Dutton. Hawkins, M. (1997). Social Darwinism in European and American thought, 1860–1945: Nature as model and nature as threat. Cambridge: Cambridge University Press. Hodgson, G. M. (2004). The evolution of institutional economics: Agency, structure and Darwinism in American institutionalism. London: Routledge. Kevles, D. (1995). In the name of eugenics: Genetics and the uses of human heredity. Cambridge: Harvard University Press. Leonard, T. C. (2003). More merciful and not less effective: Eugenics and American economics in the progressive era. History of Political Economy, 35(4), 687–712. Leonard, T. C. (2005). Retrospectives: Eugenics and economics in the progressive era. Journal of Economic Perspectives, 19(4), 207–224. Levy, D. M., & Peart, S. J. (2005). The ‘‘Vanity of the philosopher’’: From equality to hierarchy in postclassical economics. Ann Arbor: University of Michigan Press. Mantovani, C. (2004). Rigenerare la societa`: L’eugenetica in Italia dalle origini ottocentesche agli anni trenta. Catanzaro: Rubbettino Editore. McDougall, W. ([1908], 1998). An introduction to social psychology. Bristol: Thoemmes Press. Mitchell, W. C. (Ed.) (1912). The backward art of spending money and other essays (pp. 3–19). New York, NY: Augustus M. Kelley. Mitchell, W. C. (1914). Human behavior and economics: A survey of recent literature. Quarterly Journal of Economics, 29(1), 1–47. Mitchell, W. C. (1950). Thorstein Veblen. In: The backward art of spending money and other essays (pp. 279–312), New York: Augustus M. Kelley. Ramstad, Y., & Starkey, J. L. (1995). The racial theories of John R. Commons. In: W. J. Samuels & J. E. Biddle (Eds), Research in the history of economic thought and methodology (Vol. 13, pp. 1–74). Greenwich: JAI Press. Reinart, S. A. (2004). Iconoclastic eugenics: Thorstein Veblen on racial diversity and cultural nomadism. Revue Internationale de Sociologie, 14(3), 513–534. Tilman, R. (1996). The intellectual legacy of Thorstein Veblen: Unresolved issues. Westport: Greenwood Press. Veblen, T. B. ([1899a], 1953). The theory of the leisure class. New York: The New American Library. Veblen, T. B. (Ed.) ([1899b], 1961). The place of science in modern civilisation (pp. 83–113). New York, NY: Russell & Russell. Wallas, G. ([1914], 1967). The great society: A psychological analysis. Lincoln: University of Nebraska Press.

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ECONOMIC SINGULARISM$ William Barnett, II and Walter Block There is something of an underground debate going on within Austrian economic circles over conferring the best synonym to this school of thought. Here, ‘‘best’’ is an attempt to uncover the most accurate description of the economic strain of analysis that stems from Menger (1871[1950]). That is the first purpose of the present paper, and our attempt to answer this is the burden of the first section. In the second section, we apply our choice for the appellation ‘‘singularism’’ to supply and demand, and in the third section to indifference. The fourth section is given over to a singularistic analysis of a challenge which has also led a subterranean existence, this time in the neoclassical division of the economics profession: the issue of why some people stand on escalators, allowing these contraptions to carry them upward or downward, while no one treats stairs in any such manner. Specifically, we maintain that it is illegitimate to even draw supply and demand curves, and that there are grave difficulties with indifference and the debate concerning walking up the escalator versus using the staircase.

$

The authors of the present paper acknowledge the editor and two unusually active and insightful referees. The comments made on an earlier version of this paper, and our changes in it as a result, have greatly improved both its substance and presentation. Any remaining errors of omission or commission are of course solely our responsibility.

A Research Annual Research in the History of Economic Thought and Methodology, Volume 26-A, 15–30 Copyright r 2008 by Emerald Group Publishing Limited All rights of reproduction in any form reserved ISSN: 0743-4154/doi:10.1016/S0743-4154(08)26002-5

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BEST NAME 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. So, what label should the Austrian School adopt? What term gets the closest to what it is all about? What one word or phrase comes closest to characterizing its essence? There are several obvious candidates. A prime example would be ‘‘The Praxeological School of Thought.’’ Support for this option stems from the importance Austrians have placed on praxeology (Mises, 1998; Rothbard, 1951, 1962; Hoppe, 1988, 1992; Selgin, 1988, Fox, 1992). Another possibility is ‘‘The Market Process School of Thought.’’1 Praxeologists have given a central role to the fact that the market is never in equilibrium, but always, and even necessarily, engaged in continual change; and change requires an examination of process (Kirzner, 1982; Lachmann, 1976, 1977; Boettke & Prychitko, 1994). We could hardly ignore ‘‘The Human Action School of Thought,’’ which was, after all, the title of arguably Mises’ most important book (1998). Other possibilities arise, for Austrianism is a many-splendored edifice that makes numerous contributions to the profession: for example, ‘‘The Subjectivist School of Thought’’ (Hayek, 1979; Mises, 1998)2 or the Methodological School of Thought’’ (Bostaph, 1976; Block, 1980; Hoppe, 1995; Kirzner, 1982; Lachmann, 1969; Machlup, 1978; Nozick, 1977; Rothbard, 1997), since Austrians place much more emphasis on methodology than any of its competitors. Other possibilities include ‘‘The Property Rights School of Thought’’ (Hoppe, 2004), ‘‘The Spontaneous Order School of Thought’’ (Klein, 2006), and the ‘‘The Information or Knowledge School of Thought’’ (Hayek, 1948;

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Kirzner, 1973; Hoppe, 2004). If we consider the contribution of an important article written by Hulsmann (2000), we can characterize Austrianism as ‘‘The Counterfactual Alternative School of Thought,’’ or perhaps ‘‘The Either Success or Error School of Thought.’’3 As far as the ‘‘Property Rights School of Thought’’ title is considered, consider the following exchange (Hoppe, 2004): Akkurt (To Hoppe): In some of your work, you emphasize that Hayek stresses the role of knowledge and ignores or neglects private property. Do you think Hayek deliberately ignored, and underemphasized the crucial place of private property? Would you describe your view of property and knowledge in an entrepreneurial economy briefly to our readers? Hoppe: Hayek was indeed always, from his student years on, interested in psychology. He wrote an interesting book on it (The sensory order). This may explain his special emphasis on knowledge and his relative neglect of property. For instance, Hayek wrote a famous article on the ‘‘Use of Knowledge in Society.’’ Mises never would have written an article with that title. His title would have been the ‘‘Use of Property in Society.’’

The present article may be viewed as an attempt to make the case, in this sweepstakes, for Austrianism, in addition to all these other candidates, as ‘‘The Singularism School of Thought.’’ This is not to say we consider the other candidates improper, or inferior to our own. Rather, it is to emphasize the importance of this way of looking at economics, alongside the others. In our view, a crucially important aspect of Austrian economics is its emphasis on the fact that human action can and must be bifurcated into that which is chosen, and all of those other opportunities thereby foregone. ‘‘Singularism’’ is the phrase employed by Mises (1998, p. 44).4 But perhaps a more accurate word describing what we are about would be ‘‘individuation.’’ In an earlier version of this paper, we employed the term ‘‘binary economics,’’ which is even more apt. However, it came to our attention that Louis Kelso had already employed this term in a completely different manner; thus, to avoid confusion we had to eschew it.5 Further complicating matters, ‘‘binary’’ is used much as in the manner in which it was previously employed by other writers and us. The dismantling of ‘‘binarisms’’ – conceptual polarities that underlie our thinking on so many subjects – has been a salient effort of postmodern writersy. We regard such enigmatic passages as symptomatic of the confusion that results when writers conflate concepts that should be kept distinct. Some ‘‘binarisms’’ seem necessary for rational thought. (Copeland & Parsons, 2004, p. 9)

This has several important implications, which we will explore below.

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SUPPLY AND DEMAND The market process involves buyers and sellers. Most supply and demand theory begins by developing individual’s demand curves for X and aggregating them to arrive at the market demand for X. Then the individual firm’s supply curve is developed, and depending on the analysis, if necessary, these may be aggregated to obtain the market supply. It is a well-established mainstream theory that, save for a perfect competitor, no firm and, a fortiori, no industry, has a supply curve, but rather only supply points, each of which depends on the demand. That is, supply is not independent of demand, nor for that matter is demand independent of supply. In a simple, one resource (labor) model, in which a firm sells its output and buys its resource in non-perfectly competitive markets, and in which P is the inverse demand function for output and W the inverse demand function for labor, P ¼ W((1þ(1/e))/(1þ(1/E))/MPL and W ¼ P((1þ(1/E))/(1þ(1/e))MPL, where E is the price elasticity of demand for the output and e is the price (wage) elasticity of demand for the resource (labor), and MPL is the marginal product of labor. Assuming that there are such things as supply and demand functions, save in the imaginary world of perfect competition, they are interdependent. No sooner have we said this than are we compelled to take it all back: there is no such thing as a supply or a demand function. Rather, a demand curve, for example, is the maximum price someone will pay for a given quantity. But this implies an equal to or greater than relationship, not a function. The latter, in contrast, implies strict equality, as in Y ¼ f (X). In contrast, YXf (X) is not a function. This point is obvious as soon as we consider ‘‘false’’ trades; that is, trades that occur at non-marketclearing prices and non-price rationing. In any case, once the market demand and relevant supply curves are developed, the analysis of people’s and firms’6 actions is conducted in terms of the interactions of supply and demand (S & D). Supply and demand are ‘‘mere’’ pedagogical devices. Economic reality consists only in the human actor preferring (in the revealed preference sense) A over some specific not-A, say B, or B over A. Supply and demand depend essentially on the ceteris paribus assumption, but individuals know that the very act of choosing puts paid to ceteris paribus. Although this pedagogy is very useful, it is only a pedagogical device. In the real world, economic action consists solely in preferring A to B or B to A. There are no such things as supply and demand curves, or supply and demand, for that matter. These are merely pedagogical tools/devices intended to help us grasp the underlying reality.

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There are two ways to interpret standard S & D analysis, one ‘‘objective’’ and one ‘‘subjective.’’ Consider, first, the latter. In this case, the demand curve represents the different quantities of the relevant good that the buyers would be willing and able to purchase at various prices, ceteris paribus, as known by a (an omniscient) third party. The supply curve represents the different quantities of the relevant good that the sellers’ would be willing and able to offer at various prices, ceteris paribus, also as known by a (an omniscient) third party. No matter how helpful in other regards, such analysis is also the source of important error because it results in treating certain costs to sellers as if they are not real costs at all. These costs are the implicit revenues sellers forego when they have to reduce the prices of their goods in order to sell a larger quantity, and the explicit costs sellers incur if they have to increase the prices of their resources in order to acquire a larger quantity. These costs appear, to the omniscient, not as costs because they ‘‘merely’’ represent a transfer of income from vendors to purchasers; that is, they are not viewed as costs of using resources. Taking this perspective leads many economists to treat these costs, which are real to sellers, as if they should be irrelevant to them.7 Therefore, when the sellers themselves do not treat them as irrelevant, but rather take them into account in resource allocation decisions, such economists refer to the decisions so taken as comprising ‘‘market failure’’ in the form of suboptimal resource allocations. Such thinking leads to the conclusion that governmental intervention into markets cannot be ruled out on principle, in virtually any case. That is, whenever either the demand curve for the good slopes downward, or the supply curve of one or more relevant resources slopes upward, or both, there is a potential candidate for governmental intervention, subject only, given that intervention itself is not costless, to cost-benefit analysis of the intervention itself. The underlying rationale is the same as that which allows mainstream economists in discussing ‘‘deadweight loss’’ from monopoly (that is, downward sloping demand curves in cases where the price exceeds the average total cost over at least part of the domain of quantity) to treat the loss of profit and concomitant increase in consumers’ surplus as a wash. An analogy is a case where a robber steals $10 from a business and gives $15 to a customer by adding $5 of his own. The mainstream would treat this as a net gain of $5 to the business and customer taken as a group. However, as soon as we consider the positions of the individuals, as we must as economists, we see that they are treating the $10 of the $15 increase in consumers’ surplus that came at the expense of the business as a wash, and, of course, it is not so. Another way of seeing this is to consider the familiar

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equation for marginal revenue arrived at by taking the derivative of total revenue, PQ, with respect to Q, assuming a downward sloping demand curve, that is, MR ¼ PþQdP/dQ. Rewriting this as P ¼ MR–QdP/dQ, noting that dP/dQo0 .QdP/dQW0, we see that the vertical distance between the demand curve is divided into two parts, MR and QdP/dQ. We may think of these parts, respectively, as that portion of P that the firm gets as a result of selling one additional unit at P, and the portion of P that the firm must give up in the form of receiving a lower P for the inframarginal units because it had to lower P in order to sell the additional unit. The second analysis, the subjective, is asymmetrical. Although standard supply and demand analysis has the appearance of being symmetrical in that it takes into account both the (planned) behavior of the buyers (demand) and the sellers (supply), upon reflection there is an asymmetry. In fact, whether it is with respect to the buyers’ or the sellers’ behavior, the perspective is that of the seller. The demand curve represents the sellers’ anticipation/expectation of the different quantities of the relevant good the buyers would be willing and able to purchase at various prices, ceteris paribus. The supply curve represents the different quantities of the relevant good that the sellers would be willing and able to offer at various prices, ceteris paribus. That is, unlike the demand curve that represents sellers’ anticipations/expectations regarding buyer behavior, the supply curve does not represent the buyers’ anticipations/expectations regarding sellers’ behavior. Consequently, the perspective from which both curves are viewed is that of the seller, and is, therefore, asymmetrical. This ‘‘market failure’’ consequent on monopsony in resource markets is analogous to that consequent on monopoly in output markets. Symmetry requires, in addition to the standard supply and demand analysis of the market for a good, an additional non-standard supply and demand analysis of the same market, along the lines sketched out above. In this latter case, the supply curve would represent the buyers’ anticipations/ expectations of the different quantities of the relevant good that the seller would be willing and able to offer at various prices, ceteris paribus. And, the demand curve would represent the different quantities of the relevant good that the buyers would be willing and able, that is, plan, to buy at various prices, ceteris paribus. In contrast, the monopsonistic ‘‘market failure’’ argument is very much alive, though not widely used, in mainstream economics. Here, we are criticizing the use of standard supply and demand as being either from God’s perspective or that of the firm, and ignoring that of the individual buyer of outputs or seller of resources, without realizing that is what is being done. Neoclassical economists sometimes try using

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these analytical tools to describe the case of bilateral monopoly in the labor market, when a union is considered to be the monopolistic seller of labor to a monopsonistic firm as buyer of labor.

INDIFFERENCE Indifference curves are ubiquitous in economics. It is probably no exaggeration to say that without them, one of the most important elements of the neoclassical armory would go missing. And, yet, sad to say, were singularism economics accorded its rightful place in the profession, they would all have to be eliminated, root and branch. For indifference is logically incompatible with singularism economics. The vision emanating from the latter source is that when choosing, the actor must pick one thing, and set to the side all other alternatives. There is simply no room for any third option, such as indifference. Nor is there any way to demonstrate or reveal (Rothbard, 1997) any such concept. Austrian economics consists essentially of deducing the consequences of the apodictic truth that individuals act purposefully; that each choice consists of preferring means A to means not-A, say means B, and this is true whether the actor views A and B as means to the same end, X, or as means to different ends, X and Y, respectively. Regardless of which end the actor is pursuing, it cannot be denied that he may be wrong; for example, he may choose A over B as a means to X and he may come to think that it was a mistake – he should have chosen B, or perhaps some entirely other means, say C, or perhaps he should have chosen some other end, say Z, and the means he thinks would have been best suited to achieving that end, say D. Moreover, two individuals may both try to achieve X, yet choose different means because of differing evaluations of the efficacy thereof. Or, they may choose different means, although they agree on the relative efficacy of different means regarding differing ends, yet they prefer different ends. But just because error is always possible in human action, it does not warrant recognition of indifference in technical economics. The two are entirely separate. Let us try putting this in other terms. If A gives B an X for B’s Z, and B gives A a Z for B’s X, then as outside commentators, economists as it were, we are entitled to infer that A and B ranked the two goods, X and Z, in inverse order.8 When would we be able to make any such conclusion with regard to indifference? Never, that is when. Well, if we can never

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deduce indifference from human action, it is as if, for economics at least, it does not exist. Surely, there can be no mainstream intermediate microeconomics text that not only fails to mention this concept, but also does not make it a central organizing tool of its entire analysis. With all the use the neoclassical economists make of this supposed tool of economic analysis, it is somewhat surprising to see so little in terms of a defense of it, or rejoinders to critiques of it. Yes, there are entire forests of trees that have been felled to explain indifference curves, and to apply them to all sorts of problems, but rare indeed is an intellectual defense of them against the criticisms. The only such case we have been able to uncover written by an economist is Caplan (1999, 2001, 2003). This is neither the time nor the place to rehearse Austrian objections to the work of this particular economist.9 At present, we are concerned only with the critique of indifference based on singularism. And that consists of the fact that according to singularism, all of human action consists of choosing one option and setting aside all others. (Of course, the cost of the actor’s choice is the value the actor thinks he is foregoing, in the form of the value he places on the next best alternative that he thinks he would have chosen in the absence of the actual choice). But indifference in effect sets itself up as a counter example to this necessary and essential part of the human experience. It claims that there can be two goods, A and B, such that the person involved in choosing between them neither prefers A to B, nor B to A. Instead, he is ‘‘indifferent’’ between them. But he has no way of demonstrating any such preference. If he selects A and ignores B, then he demonstrates a preference for A. If he selects B and ignores A, then he indicates in the only manner he can that he prefers B. What could he do to reveal an equal preference for both, other, perhaps, than ‘‘starve to death’’ a` la Buridan’s ass? He cannot select both, as by the terms of the experiment he can choose only one; in any case he can only do one thing at a time. If he ignores both, he again fails to signal an unambiguous equal preference. Rather, he indicates he places greater importance on selecting neither of them to either one.

THE ESCALATOR Consider the following from an article in the online magazine Slate by a leading economist in a major research university economics department. Steve Landsburg and his colleagues at the University of Rochester found

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themselves obsessed with the question: ‘‘If people stand still on escalators, then why don’t they stand still on stairs?’’ It was observed early on that if you stand still on stairs, you’ll never get anywhere. But for reasons I can no longer entirely reconstruct, that explanation was dismissed as overly simplistic. [y] In other words, a step either is or is not worth the effort, and whatever calculation tells you to walk (or not) on the escalator should tell you to do exactly the same thing on the stairs. And so one of the world’s top economics departments entered a state of near paralysis. Theories were presented, considered, and rejected; I will spare their inventors (including myself ) the embarrassment of having those theories recounted here. Suffice it to say that each theory centered around one or another cockamamie reason why ‘‘marginal analysis’’—the weighing of costs and benefits associated with taking a single step—might not apply in this situation. [y] My colleague Mark Bils figured out a way to rephrase this so that even an economist can understand it. Every producer knows that workers should spend less time with inferior machinery. Compared to an escalator, a staircase is an inferior machine, so the ‘‘workers’’—that is, the people who use the stairs—should try to minimize their time there. The way to limit your time on a staircase is to keep walking until you get to the end. The same argument proves, incidentally, that even if you choose to walk on the escalator, you should always walk even faster on the stairs. If you’re planning to write and tell me that in fact you walk at the same speed in both venues, I’d really rather not hear about it right now. So what’s the moral of the story? To me, the moral is that we should take seriously what we tell our students: Marginal analysis really works. If it seems not to be working, the right question is not, ‘‘Why doesn’t the marginal analysis work?’’ Instead, the right question is, ‘‘How am I failing to understand the marginal analysis?’’ or, more succinctly, ‘‘In what way am I being stupid?’’ (Landsburg, 2002)

In fact, the whole issue is tailor-made for a singularism analysis. Landsburg and his colleagues framed the problem incorrectly.10 There are two totally unrelated cases: being on the stairs, and being on an escalator. In the former case, one has to make a choice between two alternatives, walking on the stairs and reaching one’s destination or standing still on the stairs and never getting to one’s destination. Let us go out on a limb here and assume that the purpose of being on the stairs in the first place is to reach one’s

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destination. Therefore, as the only way to accomplish one’s purpose on the stairs is to exert the effort to walk, one always exerts the effort and walks on the stairs. In the latter case, one has to make a choice between not one but two alternatives, walking on the escalator and, assuming, as it seems reasonable, that if one walks on an escalator one walks in the direction that the escalator is carrying one, and reaching one’s destination more quickly, or standing still on the escalator and reaching one’s destination less quickly. Therefore, one will walk on the escalator only in those particular situations in which he values the time saved by walking more than the effort saved by not walking. In either case, he gets where he is going, which is naturally assumed to be the primary objective. Therefore, we see that people ‘‘always’’ walk on stairs, else they won’t arrive at their destinations, whereas people on an escalator always arrive at their destinations whether or not they walk, so that they only walk if and when the effort is worth it for them in order to arrive at their destination sooner. And all it took was a correct understanding and application of the concept of opportunity cost. How does singularism come into the analysis? It contributes in several ways. First, this concept focuses our attention on the fact that human action can be reduced to a binary choice: either we do x, or we do y (that is, non-x), and if y is the next best opportunity foregone to x, why then y is the opportunity cost of x, and x is our preferred choice. As can be readily seen when employing these concepts, when on a flight of steps, the only alternative to walking is to stand and to get nowhere. (We abstract from cases where this is a goal. For example, someone is resting on the steps, or two people are having a conversation on the stairs because this is the only place they can have privacy.) In sharp contrast, while ensconced on the moving steps of an escalator, a man again has the choice of two options, walking or standing still, but in this case both of which will move him to the next level. To extrapolate to an entirely different mode of vertical travel, consider the elevator. Why do people push the buttons to a different floor when they enter into this conveyance?11 To get to the desired floor, of course. They too have a second choice: to stand in the elevator and do nothing. (Again, in saying this, we ignore several possible counterexamples, concerning contemplation in the elevators, catching one’s breath there, seizing a moment of privacy, as on the stairs, and, also, peculiar to the elevator, the possibility that someone else will press a button, or that the elevator is programmed to go back down to the ground floor when not otherwise engaged.) Why do the denizens of elevators typically not act

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Table 1. 1 2 3 4 5

2 Stairs Escalator Elevator

To Walk or Not to Walk?

3 Walk Attain desired end Attain desired end more quickly Attain desired end equally quickly

4 Don’t walk Do not attain desired end Attain desired end less quickly Attain desired end equally quickly

so passively, but rather assertively push a button? Because it is their goal to ascend or descend to a different floor. This is precisely the story of the staircase. Had Landsburg and his colleagues compared and considered action in an elevator with that on an escalator and stairs, perhaps they might have asked why one does not sometimes walk in elevators. This might have forced them to think in terms of singularism and arrive at the correct result. In Table 1, the initial choice is among the rows 3–5 in column 1 and the subsequent choice is among the columns 3–4 in row 2.12 Certainly, this conclusion would have been obvious had they framed the issue correctly. Before one has chosen the mode of ascending, there are two levels of choice: the mode and whether to stand still or not on/in the chosen mode. The first act/choice is to choose one mode of ascending and set the other aside. The second consists in walking or not walking. Had they concentrated on the actual individual choices/actions, they would not have compared walking or not walking on stairs with walking or not walking on escalators. They would have seen that from the point of view of economics such a comparison is ambiguous. Second, the solution to the stairs versus escalator problem is not marginalism, as per Landsburg. It is rather, wait for it, singularism. Now, no Austrian can fail to appreciate marginalism. It was after all, a praxeological economist, Menger (1871[1950]), who is widely credited, along with non-Austrians Walras (1874) and Jevons (1871[1965]), for solving the diamonds–water paradox, or the paradox of value that had eluded everyone13 before that time including the likes of Smith (1776[1979]). They did so with the insights of marginalism, a valuable tool in the armament of economics, to be sure. But marginalism need not and cannot solve every problem. In the present case, the solution is to recognize that when on a staircase, immobility of the feet will not accomplish the desired transportation, while when on an escalator, it will. It is only in the latter of these two cases that this alternative or opportunity cost even arises.

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Having dealt with the major fallacy of Landsburg and his cohorts, let us now focus on some of their peripheral mistakes. The stairs are not an inferior machine to the escalator; ‘‘superiority’’ and ‘‘inferiority’’ depend, crucially, on the subjective preferences of those who use them. Possibly, this is the ranking that most people, but not all, would place on these two items. Just as there are those who eschew the elevator for the stairs in order to burn calories, there are others who would make a similar determination when it comes to the stairs versus the escalator. There is a second reason for rejecting this ‘‘solution.’’ As we have seen, it is the stairs and the elevator on the one hand, that present the Landsburg ‘‘problem,’’ and the escalator, on the other hand, that does not. Remember, this economist is trying to account for why people on stairs always walk on them, while those on escalators sometimes do and sometimes do not. Well, no one can deny that the elevator is at least the advanced technical marvel that the escalator is. Let us put this into other words, so that there can be no confusion about the issue. Landsburg attempts to explain different behavior on the two modes of vertical transportation on the ground that ‘‘Compared to an escalator, a staircase is an inferior machine.’’ This account fails, in our view, because the elevator, easily the technological equivalent of the escalator, also presents this identical ‘‘problem.’’ Yes, the escalator was invented later than the elevator, but it is by no means commonly considered an ‘‘inferior machine.’’ If all escalators suddenly disappeared and for some reason could not be replaced, this would be an inconvenience. We would either have to climb stairs, or take elevators for short vertical trips. In sharp contrast, if all elevators were banished, high-rise buildings, almost all of them, would become unusable. This would have dire impacts on settlement patterns, real estate values, and, indeed, on our overall economy. It is simply not true that ‘‘whatever calculation tells you to walk (or not) on the escalator should tell you to do exactly the same thing on the stairs.’’ On the escalator, you are presented with a binary choice; the singularistic insight tells us you are limited to one or the other of these: standing and arriving at your destination more slowly, or walking and reaching it more quickly. On the stairs also, you are presented with a binary choice; the singularistic insight tells us you are limited to one or the other of these. But here, the options are very different: walking and achieving your goal, or digging in your heels and not doing so. The specter of numerous economists at what are considered top-flight, research-university economics departments not being able to grasp these rather basic concepts underlying the choices available on staircases and escalators underscores even more the importance of common sense or

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Austrian economics, and on an important aspect of this school of thought, namely, singularism.

CONCLUSION Singularism economics may not be a household word even within the Austrian camp, but we have demonstrated the importance of looking at matters through this perspective. We claim it sheds light on supply and demand, indifference, and the escalator versus staircase issues in a manner not available to us without this viewpoint. But there is more to it. Our argument is that this insight permeates economics, all of economics. It is a primordial fact that at any given time, the individual can only do A, or not A (for example, B). Those are his only choices. If he engages in any one activity, he necessarily eschews his next best opportunity, B, and, a fortiori, all others. We maintain that were economists to more fully incorporate this into their analytical framework, it would become a much-improved one. As important as we think is this concept, we do not claim more for singularism than it warrants. We claim only that it is a neglected part of our discipline that deserves greater attention than has so far been given to it, and that it can indeed shed light on issues such as the three discussed above.

NOTES 1. Some Austrians thought this element so central to their concerns that they launched a journal, unfortunately no longer published, entitled Journal of Market Process. 2. ‘‘And it is probably no exaggeration to say that every important advance in economic theory during the last hundred years was a further step in the consistent application of subjectivism’’ (Hayek, 1979, pp. 52–53). 3. Alternative characterizations of Austrian economics in this vein include ‘‘The Either/or School of Thought,’’ ‘‘The No Third Choice School of Thought,’’ and ‘‘The (0,1) School of Thought.’’ States Hulsmann (2000, p. 3): ‘‘We will argue that human choice involves a dichotomyy.’’ We are not serious about any of these alternative characterizations of Austrian nomenclature. However, these alternatives do seem to us to encapsulate the ‘‘spirit’’ of what praxeology is all about. 4. One referee asked whether singularism was ‘‘a-historical’’ and whether there were ‘‘others who have observed this (singularist) feature of economic theory in the past?’’ Our answer is that a literature search turns up very little in this regard. Mises mentions the concept on several occasions; to the best of our knowledge, the only others are Gordon (2003) and Heinrich (2004).

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5. See Ashford and Shakespeare (1999) for a review of Kelso’s ‘‘binary economics’’ paradigm and its subsequent development. 6. Of course, only individuals can act. Here we use the colloquialism, when we mean that some individual member of the firm acts. 7. A referee has asked us to acknowledge a reference to an economist who makes this claim, so although we argue that it applies to all of mainstream or neoclassical economics, based on the use it makes of the familiar diagram explaining the ‘‘market failure’’ of ‘‘monopoly,’’ we offer the following: Bork (1978, p. 107). 8. For Hoppe (1995), this is a matter of praxeological necessity. 9. For Austrian replies to Caplan, attacking the concept of indifference, and the misbegotten curves they have given rise to, see Hulsmann, (1999), Block (1999, 2003), and van Dun (2003). There is one other case that deserves mention in this regard. The philosopher Robert Nozick (1977) also weighs in on the side of indifference. For a rejoinder to him, see Block (1980). 10. A literature review search of this issue fails to reveal any scholarly peerreviewed economics journal that has addressed this issue. Rather, the discussion has been dominated by physiometricians and physiologists concerned about caloric usage in the two modes of transportation (See the Google search on the topic available at http://tinyurl.com/2arh6g). 11. Remember, we are not the first ones to ask this question: Landsburg initiated the discussion. We are only trying to pick up the pieces. 12. The concept of action is often interpreted as preferring A to B in a situation where C, or C, Dy are also viable possibilities. While making a choice, we prefer A to B and A to C, and A to D, etc. However, the cost of choosing A is ‘‘only’’ the value of B, assuming that we value B more than any of the other alternatives to A. That is, singularism has to do with cost, and only indirectly, through cost, with choice. 13. The late scholastics of the School of Salamanca are an exception to this claim; see Woods (2005) and Chafuen (1986).

REFERENCES Ashford, R., & Shakespeare, R. (1999). Binary economics: The new paradigm. Lanham, MD: University Press of America. Block, W. (1980). On Robert Nozick’s ‘‘On Austrian methodology’’. Inquiry, 23(4), 397–444. Block, W. (1999). Austrian theorizing, recalling the foundations: Reply to Caplan. Quarterly Journal of Austrian Economics, 2(4), 21–39. Block, W. (2003). Realism: Austrian vs. neoclassical economics, reply to Caplan. Quarterly Journal of Austrian Economics, 6(3), 63–76. Boettke, P. J., & Prychitko, D. L. (Eds). (1994). The market process: Essays in contemporary Austrian economics. Brookfield, VT: Edward Elgar. Bork, R. (1978). The antitrust paradox. New York: Basic Books. Bostaph, S. (1976). Epistemological foundations of methodological conflict in economics: The case of the nineteenth century methodenstreit. Ph.D. dissertation, Southern Illinois University, Carbondale.

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Caplan, B. (1999). The Austrian search for realistic foundations. Southern Economic Journal, 65(4), 823–838. Caplan, B. (2001). Probability, common sense, and realism: A reply to Huelsmann and Block. Quarterly Journal of Austrian Economics, 2(4), 69–86. Caplan, B. (2003). Probability and the synthetic a priori: A reply to Block. Quarterly Journal of Austrian Economics, 6(3), 77–83. Chafuen, A. A. (1986). Christians for freedom: Late scholastic economics. San Francisco, CA: Ignatius Press. Copeland, P., & Parsons, K. (2004). Toward a postmodern paleontology? Academic Questions, 17(2), 6–17. Fox, G. (1992). The pricing of environmental goods: A praxeological critique of contingent valuation. Cultural Dynamics, 5(3), 245–259. Gordon, D. (2003). Epistemological problems of economics. Audio recording. Ludwig von Mises Institute. Available at www.mises.org/resources/4bb50a65-b5c8-4800-bd4fb117d51adb38 Hayek, F.A. (1948). The use of knowledge in society. In: Individualism and economic order (pp. 77–91). Chicago, IL: University of Chicago Press. Hayek, F. A. (1979). The counter-revolution of science: Studies on the abuse of reason (2nd ed.). Indianapolis, IN: Liberty Press. Heinrich, D.J. (2004). Notes on ‘‘Epistemological problems of economics,’’ by David Gordon. Available at: blog.mises.org/blog/archives/2004_06.asp Hoppe, H.-H. (1988). Praxeology and economic science. Auburn, AL: Mises Institute. Hoppe, H.-H. (1992). On praxeology and the praxeological foundation of epistemology and ethics. In: J. Herbener (Ed.), The meaning of Ludwig von Mises. Boston, MA: Dordrecht. Hoppe, H.-H. (1995). Economic science and the Austrian method. Auburn, AL: Mises Institute. Hoppe, H.-H. (2004). Economics, philosophy and politics. Interview with E. Akkurt. Available at www.mises.org/fullstory.asp?control ¼ 1455 Hulsmann, J. G. (1999). Economic science and neoclassicism. Quarterly Journal of Austrian Economics, 2(4), 3–20. Hulsmann, J. G. (2000). A realist approach to equilibrium analysis. Quarterly Journal of Austrian Economics, 3(4), 3–51. Jevons, W. S. (1871[1965]). The theory of political economy (3rd ed.). London: Macmillan. Kirzner, I. M. (1973). Competition and entrepreneurship. Chicago, IL: University of Chicago Press. Kirzner, I. M. (Ed.) (1982). Method, process, and Austrian economics: Essays in honor of Ludwig von Mises. Lexington, MA: Lexington Books. Klein, D.B. (2006). A plea to retire the term ‘‘Austrian’’ and replace it with ‘‘Spontaneous Order.’’ Presented at the Workshop in Philosophy, Politics and Economics, February 20. Available at economics.gmu.edu/pboettke/workshop/Spring_06/Plea_to_Retire_ Austrian.doc Lachmann, L. M. (1969). Methodological individualism and the market economy. In: E. Striessler (Ed.), Roads to freedom: Essays in honour of Friedrich A. von Hayek (pp. 88–104). London: Routledge & Kegan Paul. Lachmann, L. M. (1976). On the central concept of Austrian economics: The market process. In: E. G. Dolan (Ed.), Foundations of modern Austrian economics (pp. 126–132). Kansas City, KN: Sheed & Ward.

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Lachmann, L. M. (1977). Capital, expectations and the market process. Kansas City, KN: Sheed, Andrews and McMeel. Landsburg, S.E. (2002). One small step for man y and one giant step for economists: how we figured out why people climb up stairs but not up escalators. Slate, August 28. Available at: www.slate.com/id/2070182/ Machlup, F. (1978). Methodology of economics and other social sciences. New York, NY: Academic Press. Menger, C. (1871[1950]). Principles of economics. In: J. Dingwall & B. F. Hoselitz (Eds & Trans.). Glencoe, IL: Free Press. Mises, L. (1998). Human action. Auburn, AL: Mises Institute. Nozick, R. (1977). On Austrian methodology. Synthese, 36(3), 353–392. Rothbard, M. N. (1951). Praxeology: Reply to Mr. Schuller. American Economic Review, 41(5), 943–946. Rothbard, M. N. (1962). Man, economy, and state: A treatise on economic principles. Los Angeles, CA: Nash Publishing. Rothbard, M. N. (1997). The logic of action one: Method, money, and the Austrian school. Glos, UK: Edward Elgar. Rothbard, M. N. (1997). Toward a reconstruction of utility and welfare economics. In: The logic of action (Vol. 1, pp. 225–227). Lyme, NH: Edward Elgar. Selgin, G. A. (1988). Praxeology and understanding: An analysis of the controversy in Austrian economics. Review of Austrian Economics, 2(1), 19–58. Smith, A. (1776[1979]). An inquiry into the nature and causes of the wealth of nations. Indianapolis, IN: Liberty Fund. Van Dun, F. (2003). Bayesianism and Austrian apriorism. October. Available at allserv. rug.ac.be/Bfrvandun/Texts/Articles/Bayesianism-Austrian.pdf Walras, L. (1874). Principe d’une the´orie mathe´matique de l’e´change. Se´ances et travaux de l’Acade´mie des Sciences morales et politiques (new series), 101(1), 97–116. Woods, T. E., Jr. (2005). The church and the market: A catholic defense of the free economy. Lanham, MD: Rowman and Littlefield.

REVIEW ESSAYS

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Van Overtveldt’s THE CHICAGO SCHOOL ON THE THEORY OF ECONOMIC POLICY OF THE CHICAGO SCHOOL OF ECONOMICS Warren J. Samuels A review essay on Johan Van Overtveldt’s The Chicago School: How the University of Chicago Assembled the Thinkers Who Revolutionized Economics and Business. Chicago: Agate, 2007. 432 pp. ISBN 9781932841145. 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. Johan Van Overtveldt has given us a heavily researched, vivid account of how the Chicago School in Economics came to be so successful, principally as a university department but also in regard to public policy. He makes a useful distinction between the Chicago Tradition and the Chicago School. The former deals with sociological character; the latter, with belief system. Throughout the volume there is much factual material to which reasonable interpretations are devoted. The book is very informative about the A Research Annual Research in the History of Economic Thought and Methodology, Volume 26-A, 33–46 Copyright r 2008 by Emerald Group Publishing Limited All rights of reproduction in any form reserved ISSN: 0743-4154/doi:10.1016/S0743-4154(08)26003-7

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influences on and careers of Chicago economists, and is especially useful about their innovative work. Van Overtveldt very wisely treats Frank Knight as the true scholar and intellect, followed closely by Jacob Viner. Nonetheless, the account is almost entirely devoid of criticism, even that giving effect to the venerable doctrine of opportunity cost. In a book such as this, one would not expect much if any detailed serious criticism by others of the major publications of individual Chicago economists. But surely some attention should be given to a critique of the general theoretical and policy positions of the Chicago School, especially the coherence, conditions, and limits of Chicago’s doctrines. Chicago economists tend to be eager to engage in criticism of scholars with different approaches or theories compared with those emanating from Chicago. Cass Sunstein is the only principal critic that Overtveldt discusses (pp. 318–319). He is a fine scholar but one is not enough. Accordingly this review will raise questions about the coherence, conditions, and limits of Chicago doctrines. Almost all of my critique will deal with positive and not normative issues. The basic characteristics of the Chicago Tradition are exposited thrice. Two of the three lists each have five characteristics and one has six: 1. a strong work ethic/a fanatical work attitude; 2. an unshakeable belief in economics as a true science/a firm belief in economics as a true science of the highest relevance for daily life; 3. academic excellence as the sole criterion for advancement/emphasis on scholastic and academic achievements; 4. an intense debating culture focused on sharpening the critical mind/ preparedness to put everything continuously into question (relentless questioning of accepted truths) (p. 32); 5. the University of Chicago’s two-dimensional isolation (p. 11)/the apparently inspiring isolation of the University of Chicago (p. 22); and 6. constantly backing up theoretical work with empirical evidence (p. 358). My view of these characteristics is as follows: (1) There is no question that Chicagoans live economics and work at it extraordinarily diligently. Their motivation and fanatical work ethic is outstanding and legendary. (2) They believe in economics as a science and they advertise it often. This matter is not as neat as it may appear. First, since the time of Alfred Marshall, economists have been desirous for economics to be seen as a science and for them to have an identity as scientists. For many years I have been teaching that three motivations of neoclassical economists from

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Marshall on have been: (1) the desire to achieve for economics the status of a science; (2) to have something to say about policy both because it would be expected of them by others and because they wanted to do so themselves, i.e., to make themselves important; and (3) to be safe, doing, or saying nothing that might disturb their honorific status. Second, the meaning of ‘‘science’’ in economics, in the other disciplines, and in philosophy, varies very much. The literature on the scope and method of economics, various methodological controversies, and numerous pronouncements make this abundantly clear. Third, the positive versus normative problem, the controversies over value judgments and ideology, and so on, indicate that not all economists (and others) have thought economics is or could be or should be a science, however that term is defined. Status emulation in practice is quite clear. (3) Chicagoans believe and advertise their belief in academic and scholarly achievement. Achievement is a subjective matter and depends on one’s criteria, including advancement of belief system, reputation, and awards. Chicagoans are masterful promoters of their status—and they have much to promote. (4) The two claims are complementary: an intense debating culture focused on sharpening the critical mind, and preparedness to put everything continuously into question, i.e., the relentless questioning of accepted truths (p. 32). The fact of the intense debating culture is unequivocal. Whether the rationale is sharpening the critical mind or a culture in which brilliant individuals are given opportunity and/or are compelled to show their lively brilliance, is uncertain. As for the relentless questioning of accepted truths, this can take place in two contexts, with a substantial gray area between them. One context is the critique and development of the elements of its dominant paradigm; the other is serious confrontation of their paradigm with rival ones. Of the former there is no question; of the latter, not much to speak of is known. I know of three situations: in one, the Chicago leader had to be embarrassed into issuing an invitation; in another, no invitation was issued; in third, criticism led to a public announcement that the critic would not succeed in economics; he did not, and indirect evidence exists that he was prevented from doing so. (5) The isolation element is probably true to a point, though there is considerable evidence that Chicagoans have not isolated themselves from Washington, DC (national) and state politics (see p. 323 and passim). Certainly theirs is the vocabulary or language of politics and the kind of rhetoric that serves an endeavor to persuade. (6) The many relationships of theory and data pursued by Chicago economists probably do not differ from the conventional practice of

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economists. If anything, the Chicagoans are more imaginative, more brilliant, and more driven. Turning to the belief system of Chicago, Van Overtveldt gives the five distinguishing characteristics of the Chicago School, following H. L. Miller, Jr. (1962), more than once: 1. the polar position among economists as advocates of an individualistic market economy; 2. emphasis put on the usefulness and relevance of neoclassical economic theory; 3. the way the actual market is equated to the ideal market; 4. the way the economist sees and applies economics in and to every nook and cranny of life; and 5. the emphasis placed on hypothesis testing as a neglected element in the development of positive economics (p. 5). (1) The most important point to be made with regard to the Chicago School is what makes it a School: its belief system, which is to say, its advocacy of an ostensibly individualistic market economy. The Chicago School is, by its own claims, the intellectual cheerleader of the market economy. This is not science; it is a sentiment, an ideology, and a political action. The ideological use of classic individualism obfuscates and misstates the actual economy insofar as it is dominated by corporate giants and legitimized by the managerialist strand of business ideology. Activity promoting the case for the free-market economy, whatever its structure, is tantamount not only to cheerleading but to being an ideologist. A case can be made that Milton Friedman’s major technical contributions were driven by his felt need to counter Keynesianism and other aspects then dominant in economics. (2) The emphasis on neoclassical economic theory is neither random nor surprising. Neoclassical economic theory from its beginning has been, in part, an ideological statement and defense of the market economy. The positivist use of the theory explicates the economy; the normative use applauds the economy. (3) To say that the actual market is equated to the ideal market is to say, first, that the economist can do either empirical work on the actual economy or conceptual work on the ideal economy, and in either case reach the same or similar conclusions. (4) Affirmation of the ubiquitous application of neoclassical price theory and of that theory alone at the pinnacle of analysis, presumptuously connotes that only one such principle is required to study all of life.

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(5) The emphasis put on hypothesis testing as a neglected element in the development of positive economics reflects both actual neglect and the use of a methodological canon to affirm both the belief system and its practice in ostensibly positivist terms. Milton Friedman’s shorter list of what, in policy discussions, Chicago stands for, is as follows: 1. belief in the efficacy of the free market as a means of organizing resources; 2. skepticism about government intervention into economic affairs; and 3. emphasis on the quantity of money as a key factor in producing inflation (p. 6). Both belief in the free market and skepticism of government are just that, beliefs, which give effect to sentiments and/or normative preferences. Friedman indicates that he knows the economy operates within a system of social control and under more than one standard of value. Friedman is recorded to have told a class that he will be concerned with the use of the price mechanism in our society [to perform certain functions] despite the fact that household, state and other authority often performs these functions in certain parts of our economy, i.e., we’ll study the free enterprise exchange system sequence of our economy. (Samuels & Johnson, 2008)

Friedman goes on in class to say that the standard of value of the price mechanism—given the conditions under which the price mechanism operates—is not the only standard of value. Institutions other than the market—specified as household, state, and other authority—have their own standards of value. So far, the analysis is positive. It turns normative when the money price of the market price mechanism is made the principal valuation domain of the economy and is elevated above the other valuation domains, as in Friedman’s defense of capitalism. What is a cost, for example, under one standard of value may be reckoned more or less a cost under another standard of value, perhaps not a cost at all. Friedman here indicates that he knows that the economy operates within a system of social control and under more than one standard of value. We are told that ‘‘the backbone of the Chicago School is a belief in the analytical power and predictive capabilities of neoclassical price theory’’ (p. 109). Indeed, Friedman sees and defines (equates) price theory as economic theory (p. 107). We are told that, ‘‘The basic assumption of neoclassical economic theory is the proposition that in a competitive market environment, individuals and corporations pursuing their own self-interest

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necessarily promote the best interest of society as a whole. This invisiblehand theorem y’’ (p. 52). Given the proposition that the pursuit of self-interest necessarily promotes the best interest of society, several important questions follow: Is the proposition an assumption or a conclusion? On what basis is it either? If it is an assumption, its epistemological standing is quite different than it would be if it were a conclusion. Do individuals pursue their self-interests? What are, and how do we know, the ‘‘best interest’’ of society? What is the significance of Sherwin Rosen having ‘‘used his theories of quasi-rational economics and behavioral finance to challenge the efficient-market hypothesis’’ (p. 131)? Or of Becker (1996) in Accounting for Tastes making the points that the hypothesis of stable preferences was no longer tenable and as to how the economic analysis of preference formation and change could proceed (p. 141)? Or of Clark’s statement that, ‘‘consistent economic man has long been known to be a sheer abstraction’’ (p. 55)? Skepticism about government intervention into economic affairs is thoroughly ideological in several respects. It obfuscates the empirical conclusions that government is both ubiquitous and important; that ‘‘intervention’’ is not the intrusion of government into areas in which it hitherto has been absent, which means that government action is changing the interests to which government gives its support; and that the denigration of intervention is selective, and is not applied to the protection of interests supported by the School. Emphasis on the quantity of money as a key factor in producing inflation commits the School not only to the quantity theory but also to one formulation of its application. There are, however, other theories of inflation and other versions of the quantity theory. Emphasis on the quantity theory has the effect of elevating price-level concerns over unemployment concerns plus a basis on which to minimize, they believe, the economic role of government. Monetarists often emphasize the quantity of money as a key factor. They also stress that it is the only factor (compare ‘‘money matters’’ with ‘‘only money matters’’). There is no justification for believing that only one reading of the quantity theory––say, P is a function of M––is warranted at all times in all economies. In short, the Tradition has its own sociology and the School is essentially a system of belief. In his History of astronomy, Smith (1980) argues that mankind desires propositions that are true but in their absence mankind will settle for propositions that will soothe the imagination and set minds at rest

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(see Samuels, 2008). The Chicago School is an example of that argument in practice and also an example of a further principle, namely, that interested groups will try to formulate propositions that other people will accept, especially with regard to the economic role of government. Moreover, the interest group will market the rationale that is deemed likely to be most effective, but possibly more than one rationale. (One difference between the pro-laissez-faire view c. 1900 and c. 2000 is that earlier and later apologists likely asserted different arguments, due to a change in the dominant belief system. More recently, conservative advocates of ‘‘fiscal responsibility’’ criticized Democratic deficits but became silent when Republican administrations enormously increased the national debt (through accumulated deficits). The goal is not to disseminate bare facts but to mobilize and manipulate political psychology by deploying propositions which will catch hold with the electorate.) Van Overtveldt writes that, ‘‘A Chicago economist who boasted a critical attitude toward any kind of dogma or accepted truth—one of the essential characteristics of the Chicago Tradition—to an almost pathological degree was Frank H. Knight’’ (p. 58). He quotes the Chicago Tribune shortly after Knight’s death: that Knight carried his skepticism over into other fields, especially medicine and the clergy, both ‘‘a form of quackery,’’ both of whom ‘‘Knight considered, pretended to know things that couldn’t be known’’ (p. 58). Van Overtveldt correctly says that typical of Knight’s anticlericalism is the statement that ‘‘In Christianity, surely, we find the supreme ‘irony in history’: that an original teaching centered ethically in humility, meekness, self-denial, and self-sacrifice became organized into corporations whose dignitaries have hardly been matched for arrogant grasping, using and flaunting of power and wealth and for insistence on prerogative to the borderline of worship’’ (p. 59). Van Overtveldt also quotes Jim Buchanan that, ‘‘To Frank Knight, nothing was sacrosanct, not the dogmas of religion, not the laws and institutions of social order, not the prevailing moral norms, nor the accepted interpretations of sacred or profane texts. Anything and everything was a potential subject for critical scrutiny’’ (p. 59). Van Overtveldt himself writes that, ‘‘to many, Friedman is more a political activist with a right-wing agenda than an excellent academic economist.’’ Immediately thereafter he quotes George Stigler to the effect that Friedman is the ‘‘leading friend of private enterprise’’ (p. 91). Van Overtveldt also says that Viner admired Keynes as a ‘‘heroic figure,’’ but he saw him more as a prophet and a politician, saying that ‘‘I am troubled y when economists adopt the role and the tactics of the prophet

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or the politician’’ (p. 86). No wonder that Friedman’s ‘‘y Capitalism and Freedom y Knight regarded as an ultrasimplistic work that ignored many subtle problems’’ (p. 61). Much of what Van Overtveldt records as the publication record of the Chicago Department of Economics is technical economic analysis of varying types, usually applying neoclassical price theory. But almost all of it manifests three problems. First, the technical work, if it is to be considered science, lacks the epistemological requirement of science. Empirical work, say the testing of a hypothesis, requires precise specifications of the hypothesis, social space, data, and decision rule for rejection or acceptance. Moreover, one successful test is insufficient, as the next test may fail; even with a long string of successful tests, the hypothesis cannot be viewed as unequivocal truth. Second, Chicago economists often make claims that transcend ordinary science and enter the realm of economic theology or metaphysics. Van Overtveldt relates that James Lawrence Laughlin put the classical economic theory of value and distribution on a par with the Christian faith; fundamental economic principles are but statements of the form in which Christian ideas take shape (p. 48). Third, inasmuch as Friedman recognizes multiple sources of social control, including the state, conclusions, and policy implications from research projects cannot properly be asserted without comparison with the conclusions and policy implications of other sources of social control. Without satisfying the requirements established by the three problems just noted, the claims become only absolutist assertions. The ‘‘major element of Chicago economics’’ is ‘‘the efficiency of markets that are allowed to operate without government intervention’’ (p. 195). This proposition seems to be making a very strong point but, alas, it is both positively and normatively almost empty. Given that there is a law covering every aspect of market activity, without which (in some form or another) no market could exist, this body of law functions, in Lionel Robbins’s terminology, to provide the necessary legal framework. There is, however, no single, unique legal framework; accordingly, government can (should is another matter) change the legal framework. As for ‘‘government intervention,’’ given the necessary (with optional content) legal framework, the proposition is limited to particularistic interventions. The problem then becomes one of identifying government action as framework filling or a particularistic intervention. As for the ‘‘efficiency’’ component of the phrasing, there is no single efficient or Pareto Optimal solution.

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Van Overtveldt presents Colin D. Campbell’s list of three policy positions important to Chicago: 1. competitive markets are the best way to organize economic activity; 2. a highly critical attitude toward most types of government regulation of the economy; and 3. the belief that the type of monetary system a country has is important (p. 8). The third is necessarily the case, though it need not reduce to a narrowly formulated quantity theory. The first proposition is at best a presumption for policy purposes but has several defects. One effect is the failure to specify the precise meaning of ‘‘competition.’’ A second is a typical tendency to assume that the actual economy comports with that contemplated by the proposition. The second proposition addresses government regulation. It neglects at least three things: the ubiquity and importance of government; that regulation typically signifies a change in the interest to which government is used to give protection; and that economic theory is unable to determine which competing interest is to be promoted and which interest is to be rendered unprotected and exposed. Finally, although critics of regulation in general often assert that regulation replaces the market, the more accurate view is that regulation is one of the forces that change the (structure of the) market. Only by assuming that the market prior to its change by law is ontologically the market can one even approach the claim of replacement, and there is no such thing as one structure being the market. Interestingly, one of the few areas of difference in approach and conclusions among Chicago economists is that of regulation (Chapter 6). A great deal of ambiguity in contemporary language is made evident, though not intentionally, by Van Overtveldt. Take the term ‘‘efficiency of markets’’ (p. 195 and passim). Does this term refer to the efficient results that markets (especially competitive markets; what of the Chicago doctrine that markets are per se competitive?) are believed to produce, or to the way in which the market operates in the process of yielding such results? On what basis is it held that markets are per se competitive or that every action by a firm is per se optimal? Dennis Mueller wrote that, The vogue in academic discussions of market behavior in the last decade or two has been to see competition everywhere, and to postulate an efficiency gain from every action corporations undertake. y This thinking now dominates both the halls of academe and the corridors in Washington. (Mueller, 1988, p. 1219)

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The change in attitude and policy, notably but not solely in regard to antitrust, appears to no small extent to be due to the Chicago School. On what ‘‘scientific’’ basis did the School advance its ideas? In my view, the drive was ideological. In my review of Two Lucky People, I called attention to how many of Friedman’s terms are ideological, not analytical constructs, and to the evidence provided therein for the conclusion that his ideological agenda drove his technical ‘‘scientific’’ work (Samuels, 2000). This view is supported by Van Overtveldt’s characterization of the University of Chicago ‘‘As the leading university in opposition to statist and interventionist development economics y’’ (p. 348) and statements like, ‘‘Over the decades, Chicago economists have shown great consistency in defending the free-market approach (p. 357). Van Overtveldt also presents Philip Mirowski’s three Chicago ‘‘commandments:’’ 1. the market always ‘‘works,’’ i.e., its unimpeded operation maximizes welfare; 2. government is always part of the problem, rather than part of the solution; and 3. the demand curve is the most fundamental entity in price theory, and attempts to ‘‘go behind’’ the demand curve were primarily a waste of time (pp. 9–10). Mirowski is not a Chicagoan; the propositions are beliefs of the Chicago School. The first commandment is noteworthy for what it says and for what it does not say. The former is that maximum welfare is defined in terms of Pareto optimality, through exchange. The latter excludes the ubiquitous situation in which the structure of the market and consequently the results of the market are a function of the structure of power which forms and operates through the market. The proposition can speak of ‘‘unimpeded operation’’ only if the market in view is a purely conceptual one. That is, a market whose legal and other foundations, including strategic maneuvering by business firms, have already been worked out. In the real world moral and legal rules change and businesses’ strategic policies can bring about changes which otherwise can be produced by changes in legislation. In any rate, the market will work on the basis of any set of Pareto optimal results each a function of power structure, results that are non-comparable insofar as they are Pareto optimal. The second commandment is highly ambiguous and question-begging, depending on problem definition, at least partly a normative matter determined from a particular point of view, and encompassing a change of

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government policy, which both makes it part of the solution and changes the interest to which government will give its protection, and thus subject to the critique of ‘‘regulation’’ already undertaken above. The third commandment has several problems, too: demand is important but it interacts with other variables; demand is the instrument, or entity, through which consumer preferences, or the consumer per se, is enabled to enter economic analysis. Failure to or disinterest in establishing the etiology of the demand curve amounts to ignoring the determination of the substance of preferences, hardly how the ‘‘most fundamental entity in price theory’’ should be treated. With no analysis of the formation of preferences, there is no explanation of the content of this fundamental entity. The omission of any explanation of the formation of demand suggests that economists do not want to take up in public some sensitive features of the economy. Aside from ‘‘efficiency,’’ which has its own array of analytical difficulties, the foremost value claimed by members of the Chicago School is freedom. Several difficulties immediately arise: numerous facets of freedom exist, are often in conflict, and are unequivocally subjective. Freedom can be freedom from or freedom to; for one person to have freedom from means that another person cannot have freedom to, and vice versa. Freedom always takes place within the system of social control which defines it; the question is always the existing system of social control or another. The existing system of social control likely will be specified differently by different persons depending on where they are located in the structures identified above. If one does not like the existing system of social control because of the arbitrary choices being made by politicians whom one disparages, then the system of social control can be changed largely by the same or other politicians about whom one feels the same way. One’s choice will have to be either the existing system of social control, the status quo, or a changed one. There will still be social control, only it will be a different system. The status quo, moreover, can be defined and specified in numerous different ways; each involves a different set of freedoms. Everyone who dislikes the status quo (however specified) will want to change it; the act of change constitutes the exercise of freedom, except for those who do not want the status quo (however specified) changed in any respect, i.e., those who feel that changing the structure of freedom in the status quo (somehow defined) will be adverse to their freedom. Most people will have their own agendas for changing the status quo. The foregoing are elements of any theory of freedom. The anarchist or libertarian who wants no infringement of their freedom, for example, will

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nonetheless assert the changes they would make in the structure of freedom/ control, i.e., their preferred system of social control. The ability of those with freedom from or freedom to, with which to interact with others, will depend on the form taken by the bases of their freedom and of immunity from or exposure to the freedom of others. This is power, denoting participation in a decision-making process. Knight was understandably troubled by the problem of dealing with power vis-a`-vis freedom, but it arises inexorably. In a market economy, the market is a critical (but not the only) sphere in which freedom takes on meaning. There is, however, no one standard form of markets. Markets are a function of the actions of law (or legal rules), moral and customary rules, and firms, the last taking the form of strategic moves by the managers of firms directed at changing legal and/or moral rules, the structure of the market directly and/or indirectly. In other words, an economy, polity, and society will have several decision-making or social control processes which interact. The day before I began writing this review essay, television news reported that many firms oppose serious legislation requiring country-of-origin information on labels. One argument they used was something like, ‘‘Let the market solve the problem.’’ Relevant to this discussion are two markets, A and B, which are alike except that in A no country-of-origin requirement will be adopted and in B such a requirement will be adopted and enforced. In each case, one interest is protected and the other left exposed; the difference is that each is the reciprocal of the other. Allusion to ‘‘the market’’ or ‘‘the market works’’ involves assertions that transcend ordinary science and have meaning not as truth but as political propositions. The significance of such Smithian propositions or terms resides in Vilfredo Pareto’s general model of society in which power players endeavor to use pseudo-knowledge to mobilize political psychology, ultimately to influence the distribution and exercise of power and the making of policy. Some members of the Chicago School do not like the status quo. Some oppose change of status quo. All seem to have their own agenda for changing it, i.e., for government to effectuate. So much for noninterventionism. Van Overtveldt has produced an exceedingly readable and informative account of Chicago economics. His design is splendid, revealing much about individuals and their relationships and intellectual output. In every aspect, Chicago has attracted or grown in-house some brilliant scholars. But by largely omitting the criticisms of Chicago doctrines, the reader is left in the lurch when it comes to questions of larger context and the

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effective content and significance of the Chicago School. As already noted, the best, because it is the only serious, example of reporting on criticism of the School and its doctrines, is the one and one-quarter page summary of Cass Sunstein’s ideas on Chicago law and economics (pp. 318–319). It would possibly, for example, have been very instructive if Van Overtveldt had asked in a series of questions what individual Chicagoans mean by ‘‘free market,’’ ‘‘laissez faire,’’ and ‘‘non-intervention,’’ i.e., precisely what activities of government are included and excluded, in their view, by each term—and not settle for fully defining property rights, protecting property, and enforcing contracts. What is that significance (noted in the beginning of the preceding paragraph)? First, the ‘‘law and economics movement’’ is tantamount to the invasion and capture of the field of law and therefore of its part of the process of governance. Second, consider any legal problem. Each problem has several aspects, facets, axes of conflict, sets of conflicting interests, and so on. Now take one of them and elevate it to a position of primacy by designating some treatment of it as ‘‘efficient.’’ The kaleidoscopic concept of ‘‘efficiency’’ is the Trojan horse mode of invasion and capture. There is, in principle, nothing novel about all that. Legal decisions are a function of whose antecedent premises as to what and who should count that are acted upon by judges. George Stigler is quoted by Van Overtveldt in the following way: Toward the end of his life, Stigler voiced disagreement with Posner’s view that the common law always seeks economic efficiency. Stigler argued that ‘‘y ruling political groups produce and retain the doctrines of common law that serve them best.’’ (p. 328)

Thus, does the man (and woman) of knowledge campaign to become the man (or woman) of governing power. When my daughters were very young, and one of them (or someone else) tried to order one of them around, a response likely would be, ‘‘Who made you the sheriff ?’’ Well, who made the Chicago School the sheriff ? Are there no other defenses of liberal society? Is Chicago really defending liberal society?

REFERENCES Becker, G. S. (1996). Accounting for tastes. Cambridge, MA: Harvard University Press. Miller, H. L., Jr. (1962). On the Chicago school of economics, Journal of Political Economy, 70, 64–69.

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Mueller, D. C. (1988). Review of Warren Samuels and Arthur Miller’s corporations and society. Journal of Economic Literature, 26(3), 1218–1220. Samuels, W. J. (2000). Review of Milton Friedman and Rose Director Friedman’s two lucky people. Research in the History of Economic Thought and Methodology, 18-A, 241–252. Samuels, W. J. (2008). Adam Smith’s history of astronomy argument: How broadly does it apply and where do propositions which ‘sooth the imagination’ come from. History of Economic Ideas. Samuels, W. J. & Johnson, M. (Eds.). (2008). Glenn Johnson’s notes from Milton Friedman’s course in economic theory, economics 300A, University of Chicago, Winter Quarter, 1947. Research in the History of Economic Thought and Methodology (Vol. 26-C). Smith, A. (1980). The history of astronomy. In: W. P. D. Wightman & J. C. Bryce (Eds), Essays on philosophical subjects (pp. 33–105). Oxford: Oxford University Press.

HOW SHOULD WE THINK OF THE SUCCESS OF THE CHICAGO SCHOOL OF ECONOMICS?$ Ross B. Emmett A review essay on Johan Van Overtveldt’s The Chicago School: How the University of Chicago Assembled the Thinkers Who Revolutionized Economics and Business. Chicago: Agate, 2007. 432 pp. ISBN 9781932841145. The subtitle of van Overtveldt’s book on the Chicago School of Economics is: how the University of Chicago assembled the thinkers who revolutionized economics and business. I emphasize the word ‘‘thinkers’’ because this is a book about thinkers and their thoughts. In that regard, it can be viewed as successful: The Chicago School provides a very good introduction to the lives and thoughts of various Chicago economists. On the other hand, a book about ‘‘thinkers’’ and their thoughts can become a book about ‘‘great men and their deeds’’: stories strung together with little historical or critical perspective. Van Overtveldt’s book too often falls into that camp.

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Permission to use unpublished material from the records of the Department of Economics at The University of Chicago has been granted by the University of Chicago Library’s Special Collections Research Center. The paper was used as the basis for comments at a Roundtable on Van Overtveldt’s book at the ‘‘Re-visiting the Chicago School’’ conference at Notre Dame University, September 2007.

A Research Annual Research in the History of Economic Thought and Methodology, Volume 26-A, 47–57 Copyright r 2008 by Emerald Group Publishing Limited All rights of reproduction in any form reserved ISSN: 0743-4154/doi:10.1016/S0743-4154(08)26004-9

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WHAT VAN OVERTVELDT GETS RIGHT 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. First, Van Overtveldt understands that the term ‘‘school’’ is really only applicable to Chicago in the post-war, and perhaps even the post-1950, period. While Frank Knight and Jacob Viner did play an important role in establishing the Marshallian price theory tradition at Chicago, and Henry Schultz and Paul Douglas did the same for the establishment of a strong empirical emphasis, it is a mistake to try to stretch the term ‘‘school’’ to cover the period during which they occupied the offices on the second (or in Schultz’ case, fourth) floor of the Social Science Research Building. Secondly, Van Overtveldt is correct to emphasize the fact that the Chicago School is as much about empirical investigation as it is about price theory. Van Overtveldt does not ignore Chicago’s price theory tradition, but rightly balances that focus with equal treatment of Chicago’s empirical economists. Friedman, of course, occupies a central position, but he includes discussions of Gregg Lewis, T.W. Schultz, D. Gale Johnson, Zvi Griliches, Harry Johnson, etc. And he quotes his Chicago sources repeatedly when they say that they challenged traditional views because they just couldn’t find the evidence. Thirdly, Van Overtveldt helps us understand the recent history of the School by focusing as many pages on the post-Friedman era of Chicago as he does on the pre-Friedman era. His material on Sherwin Rosen, Merton Miller, and others provides a helpful addition to the usual treatment of the School in the history of economic thought—a treatment that I have probably contributed to by my own focus on Knight and the pre-1980 department! Fourthly, Van Overtveldt’s archival and oral history work on this project should be commended. Historians of Chicago are indebted to him for his efforts to interview students and faculty and to examine the archival record. His journalistic eye has aided his historical interests here. Finally, Van Overtveldt’s book addresses a central historical question: what accounts for the success of the Chicago School? Others will be interested in particular aspects of Chicago economics; its ideas, its methodology, its impact. My own interest is in the same question that Van Overtveldt asks: what accounts for its success? Of course, that question is a great point to lead off our critique of Van Overtveldt, because we can ask: what kind of success are you interested in

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accounting for? Are you interested in accounting for Chicago’s success as a science? As a policy science? In the political arena? Is the revolution that Van Overtveldt’s subtitle refers to a scientific one? A policy one? An ideological one? All these questions require different kinds of answers. Unfortunately, my impression from reading the book is that Van Overtveldt thinks that there is one answer to all of them. That is, he writes on the assumption that accounting for Chicago’s revolution in economic science is sufficient to account for its revolution in economic policy and politics. His answer in short is this: for several reasons (which I will recount in a moment), the economists assembled at Chicago were able to change the world by their great thoughts. In this sense, then, Van Overtveldt agrees with Keynes: it is ideas that rule the world.

NOT IDEAS, BUT INSTITUTIONS: CREATING THE INCENTIVE STRUCTURE FOR CHICAGO’S SUCCESS What are the reasons that Van Overtveldt gives to defend his claim? There are five: ‘‘a strong work ethic, an unshakable belief in economics as a true science, academic excellence as the sole criterion for advancement, an intense debating culture focused on sharpening the critical mind, and the University of Chicago’s two-dimensional [i.e., geographic and academic] isolation’’ (p. 11). For the purposes of our discussion, we can group these reasons in three categories: cultural (work ethic, belief in science, debating culture), administrative (criteria for advancement), and situational (isolation). We will begin with the administrative category. That the University of Chicago has long made academic excellence the sole criterion for advancement is debatable, but also widely accepted. The claim is debatable because one finds it hard to believe that Chicago is somehow exempt from the divergence of interests between the university and its administrators that plague any organization. Any student of Stigler’s (or Adam Smith’s) would be bound to point out the potential for the faculty to ‘‘capture’’ the administrative processes to their benefit (Stigler, 1971). If the quest for truth is the sole objective of the university, then academic excellence should be the prime criterion. But other organizations have to balance their primary objective with others, and so might the University of Chicago. At the same time, anecdotal evidence reinforces Van Overtveldt’s claim. During my interview with Al Harberger, he commented, ‘‘There is no university like Chicago. You’re not supposed to think small when you’re at

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Chicago—it’s just not right’’ (Harberger, 2002). And Richard Muth told me the story of seeing a young couple walking hand-in-hand and as they walked by him, the young man whispered something in his sweetheart’s ear: ‘‘it was something like y ‘let f be a real-valued function defined in the positive.’ Well, obviously they were students of mathematics and even though they were walking hand-in-hand on a beautiful spring day, they were talking mathematics’’(Muth, 2002). That’s Chicago. But it’s probably also MIT, Stanford, Princeton, and a few other places. Let’s agree that Chicago and several other places have succeeded in maintaining academic excellence as one of the primary criteria for advancement, and get on with the task of deciding what made Chicago succeed (again, that word), perhaps more than the others during a particular period of its history. The situational argument—Chicago’s geographic and academic isolation—has often been used to explain aspects of the University’s history. Aspects of its history that are said to have benefited from its isolation include: the emergence of a number of important schools of thought, the intellectual vitality that came from faculty and student living in close proximity to each other and the University in Hyde Park, the University’s connection to the rise of the city of Chicago over the twentieth century, its ability to attract Jewish scholars and European e´migre´s, and the attention paid to the University’s activities simply because it was so distant from the established universities of the East Coast. Of course, some of these aspects are equally, if not more so, dependent upon the fact that the University of Chicago is a new university, founded in 1892 as a research university, and funded sufficiently to open with a full complement of faculty, many of whom had formerly occupied positions at established universities on the East Coast. All of American higher education was watching Chicago, because the University stood—dare I say—like a ‘‘city set on a hill’’ for the prospects of university life in the twentieth century. To complicate the situational argument, almost every major university benefits from some aspect of its location: Harvard with its splendid centrality to higher education in New England; Stanford, even more isolated geographically than Chicago, and reaping the benefit of the rise of the West Coast; Johns Hopkins with its closeness to Washington; we could go on. But in all cases, over time the unique features of a university’s situation account more for its history than they determine its future. By the 1960s, Chicago was hardly isolated: its graduates were located around North America; Friedman and others were associated with the NBER; the agricultural and public finance economists had long-standing research programs and university affiliations in Latin America; students came to Chicago from

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across the US, and from Canada, Chile, Argentina, and Israel. If the Chicago School really is a phenomenon of the post-1950 era, then the University’s two-dimensional isolation cannot be a determining factor in its success. Which brings us to Van Overtveldt’s trio of cultural factors: ‘‘a strong work ethic’’; an ‘‘unshakable belief in economics as a true science’’; and Chicago’s ‘‘intense debating culture.’’ The notion that Chicago somehow managed to recruit economists with a stronger personal work ethic than those economists at other universities not only seems preposterous but also contradicts Chicago’s own explanatory framework—the de gustibus non est disputandum methodological principle set out in Stigler and Becker’s famous article (Stigler & Becker, 1977). The two Nobel laureates argue that scientific explanations of human conduct should not appeal in the first place to different tastes or values (e.g., a stronger personal work ethic), but rather look at the constraint sets that individuals face to see if there are significant incentives or costs which might account for the differences in conduct (Van Overtveldt in fact recognizes the importance of the Stigler/Becker principle in his chapter on ‘‘Beckerizing’’ Chicago). Chicago did create an institutional infrastructure—the workshop system—that incentivized a particular type of economic work—the application of Marshallian price theory to applied public policy problems, with an increasingly more sophisticated use of econometric techniques. The workshops adopted during the late 1940s and early 1950s within the department created an integrated system of teaching and research that reinforced the Chicago approach on a daily basis for its faculty and numerous graduate students (Emmett, 1998, 2007). Van Overtveldt makes passing reference to the workshops (in the epilogue) but misses their importance in institutionalizing the ‘‘cultural factors’’ to which he attributes the Chicago School’s success. Indeed, he goes on to attribute Chicago’s success not only to their work ethic, but also to its ‘‘intense debating culture’’—the direct product of the workshop system. While the examination of institutional incentives is more common in the ‘‘new institutional economics’’ associated with Chicago-related programs on the West Coast (UCLA, Washington and Stanford), Van Overtveldt missed the opportunity to apply a Chicago-style explanation to Chicago economics, opting instead for exactly the type of explanation that Stigler and Becker challenged social scientists to avoid. Of course, the same argument extends to Van Overtveldt’s use of common beliefs. The Chicago workshop system created the institutional means of enforcing a particular conception of a public policy science: the Chicago approach characterized the combination of Friedman’s principle of

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‘‘positive’’ economics and the Stigler and Becker’s de gustibus principle already mentioned. Whatever one’s beliefs about science or social science, or about justice and morality in a social system for that matter, you succeeded at Chicago if you responded to the request of workshop participants to defend your argument by providing a particular kind of proof—one that utilized the Chicago economist’s tools of analysis. Van Overtveldt, therefore, relies too heavily on the notion that Chicago’s ‘‘culture’’ was simply different. Accounting for that difference is possible: an institutional infrastructure was created in the 1950s that reinforced a particular kind of economic work and a particular understanding of economics as a science. Debate could be intense precisely because the workshop ‘‘rules’’ were clear. When I asked Harold Demsetz to define what ‘‘Chicago economics’’ stood for, he replied, ‘‘Prove it’’ (Demsetz, 2002).

A BRIEF HISTORY OF THE WORKSHOP SYSTEM I said one of Van Overtveldt’s strengths was his willingness to identify the Chicago School with the 1950s. Coincidentally (I don’t really think so!), the workshop system was created at the start of that decade. Unfortunately, Van Overtveldt immediately turns around and takes us back to 1892 and the founding of the university, making the claim that J. Lawrence Laughlin was the first founder of the Chicago School. I don’t buy this argument any more. If one wants to write a history of the department, it is fine. But if one stands at 1928 or at 1940, and looks at the department at Chicago, there is little or nothing that prepares you for what is to come. Let us take a look at it in 1940. The department has seven tenured economists: Jacob Viner, Knight, Oskar Lange, Paul Douglas, John Nef, Chester Wright, and Simeon Leland. Douglas was about to go off to war; Lange was about to leave for Poland; Wright was about to retire; Viner was frequently away on government service; John Nef was more of an historian than an economist; Leland was Chair but about to depart for Northwestern; and Knight was beginning to come out from under his decade-long funk, but was also about to stop writing about economics. Hardly a portent of great things to come! Even 15 years later, the department was still in crisis mode. Changes in the University senior administration had not always been favorable to the department; the departure of the Cowles Commission was a serious blow to the department’s reputation as a research center; the department was concerned that it did not have access within the University to undergraduates who wanted to study economics; the departures of Viner, Lange,

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Douglas, Frederick Harbison, and Theodore Yntema between the late 1940s and mid-1950s were still affecting department operations; Knight was retired; Nef was essentially no longer in the department because he was the head of the Committee on Social Thought and also about to start the Committee on Human Understanding; salaries had lagged behind those of other leading centers; recruitment had been made difficult not only by the crisis, but also by the perceived difficulties of the University’s location in the Hyde Park neighborhood; and competition within economics had increased with new or revitalized centers across the country (Schultz, 1956). But in 1956, T. W. Schultz wrote to his colleagues that the turning point had come, and that things now stood in Chicago’s favor. Schultz’ optimism about the future was built on four things: (a) the ‘‘unique organization in combining real research with graduate instruction’’ provided by the Chicago workshop system and the Economics Research Center which provided administrative and computing support for the system; (b) the aggressive recruitment of ‘‘outstanding younger economists’’ made possible by the workshops and the financial support of the university administration; (c) the ‘‘Chilean enterprise’’ which provided a ‘‘laboratory’’ to test Chicago’s ideas about economic development; and (d) foundation support for the workshop system to the tune of $1.2 million (Schultz, 1956). While Schultz’s memo emphasizes the importance of the workshop system to Chicago’s rebuilding, and suggests its importance to the School’s ultimate success, he underemphasizes the way it integrated teaching and research in the department. A memo he wrote the next year provides a better glimpse of the workshops as a system that integrated teaching and research. At the start of the 1957–1958 academic year, Schultz wrote again to the faculty, outlining the department’s activities in the next year. Ostensibly, the memo is simply an indication of which faculty members will be teaching which courses in the coming year. But Schultz’s organization of the responsibilities reveals his understanding of the integrated structure of program. The list begins with the standard courses in price and money theory, and in statistics. These courses are grouped together under the heading ‘‘tools of analysis.’’ The second heading is ‘‘real research by faculty and students.’’ The second category is subdivided into two sections: workshops and ‘‘informal.’’ There are no other categories for course assignments. In other words, the department of economics was engaged in two activities that comprise a single enterprise: teaching the tools of analysis, and using them in research. In the early 1950s, just as the workshops were commencing, the department also changed its curricular structure. Since 1892, the education of graduate students in economics at Chicago had required students to gain

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a broad appreciation for the field, followed by preliminary examinations in three areas, which had to include price and money theory, before becoming a candidate for a doctorate. The change in the early 1950s fundamentally altered this curricular structure. Starting in the early 1950s, students were required to pass a single set of preliminary examinations in price and money theory (statistics and econometrics was added to this core examination later) at the end of their first year—commonly referred to as the ‘‘core’’ exams, followed a year or two later by a preliminary examination in their subfield of choice. Following their core exams—which only a small percentage of students in the first year program passed the first time around—students would enroll in several courses in their chosen subfield, and eventually request permission to attend the subfield’s workshop meetings. When they completed their subfield preliminary exam, they would register for the workshop, which would then become the setting in which they developed and tested their doctoral thesis alongside other researchers who were simultaneously developing and testing their ideas. The Chicago workshop system, then, created a unified means for preparing economic researchers from teaching them the basic tools, to learning how those tools were used in a particular subfield, to testing the use of those tools as an apprentice in the workshop, to proving their mastery of the tools’ use in the subfield in their thesis (Emmett, 2007). When I examine the internal conditions for Chicago’s success, then, my focus has become the way in which the workshop system provided the institutional means for making Chicago’s approach to the applied policy science of economics into ‘‘normal science’’—to borrow Kuhn’s term, thereby allowing its rapid spread across the discipline over the next two decades.

EXTERNAL FACTORS IN CHICAGO’S SUCCESS So far, my argument with Van Overtveldt’s book is simply that he provides a cultural argument about Chicago’s success, and that his cultural factors are actually explainable by the institutional structure which the economics department created for its scientific enterprise. Pedro Tiexiera has remarked that T.W. Schultz did not think that research and human capital development were simply the product of coincidence; in his research, he emphasized the way in which scientific research and development was organized and structured (Teixeira, 2008). From my investigation of the Chicago workshop system, I would say that Schultz not only studied the

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organization of scientific research elsewhere; he oversaw as department head from the mid-1940s to the mid-1970s the creation of a superbly effective research infrastructure. But Chicago’s success is not simply the product of its internal scientific organization, as effective as that proved to be. External factors also need to be considered. Van Overtfeldt pays only passing attention to these factors, discounting them in favor of his arguments about the brilliance of Chicago’s theorists and the School’s culture. I am only beginning to think about these factors in detail (Emmett, 2008), and so will simply provide a brief introduction to the kinds of issues that I hope to develop in further research. The external factors that are commonly referred to in research on the Chicago School are the search for a scientific means of defending an ideological commitment to capitalism during the Cold War, the dispute over Keynesian policies (sometimes seen as an extension of the ideological commitment to capitalism and sometimes as a quest for political leverage in Washington), and the Chicago Boys’ role in reshaping the Chilean economy under General Pinochet (among the many studies, see Amadae, 2003; van Horn, 2007; Samuels, 1976; Valde´s, 1995). For each of these factors, a significant amount of historical reconstruction remains to be done. While historical reconstruction will probably not dampen ideological dispute over the Chicago School, it can inform the debate, and help to focus it on the significant points of dispute. In some cases, historical reconstruction can help set the controversial issues in a wider light. For example, much work remains to be done in connecting the Chilean experience with Chicago’s role in both economic development and the education of students across Latin America (Argentina, Mexico, Ecuador, and elsewhere). We also need to look further at the relation of Chicago’s Latin American experience to the foundations which funded it (Rockefeller and Ford, primarily) and US foreign policy (US ICA and AID, for example, funded Chicago’s activities). And all of this needs to be related to the emergence of human capital theory, Chicago’s agricultural economic research, and even the development of econometric tools. And if we zoom out several levels farther, we could set the Latin American experience in the context of (a) the significant contingents of international students from other parts of the world in the Chicago program—for instance, why has no one examined the Chicago–Israel connection? and (b) the experience of Chicago students in government service around the world—for instance, Al Harberger (2002) indicates that over 20 of his former students have been ministers of finance or central bank

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governors around the world. We—academic historians of economics—are familiar with the importance of Chicago’s students in transforming the academic discipline of economics by their infusion into departments around the world. But we have paid less attention to their importance in transforming the way government policy is handled by the countless Chicago graduates serving in governmental (and non-governmental) offices and agencies around the world. It is an exciting time to be studying the history of Chicago economics. Van Overtveldt’s book makes a significant contribution to our understanding of the Chicago School’s success, but much more remains to be done. Much of that work will examine issues that The Chicago School touches on only lightly, both inside and outside the University of Chicago.

REFERENCES Amadae, S. M. (2003). Rationalizing capitalist democracy: The cold war origins of rational choice liberalism. Chicago, IL: University of Chicago Press. Demsetz, H. (2002). Interview with Ross B. Emmett. Chicago Economics Oral History Project. University of California, Los Angeles, CA, February. Emmett, R. B. (1998). Entrenching disciplinary competence: The role of general education and graduate study in Chicago Economics. In: M. S. Morgan & M. Rutherford (Eds), From interwar pluralism to postwar neoclassicism. History of Political Economy, 34(Suppl.), 134–150. Emmett, R. B. (2007). Sharpening tools in the workshop: The workshop system and the Chicago school’s success. Presented at the conference on the Chicago School of Economics, Notre Dame University. September. Available at papers.ssrn.com/sol3/ papers.cfm?abstract_id ¼ 1014015. Emmett, R. B. (2008). New perspectives on Chicago school. In: The new Palgrave: A dictionary of economics. London: Macmillan. Harberger, A. C. (2002). Interview with Ross B. Emmett. Chicago Economics Oral History Project, Los Angeles, CA, February. Muth, R. (2002). Interview with Ross B. Emmett. Chicago Economics Oral History Project. Atlanta, GA, January. Samuels, W. J. (Ed.) (1976). The Chicago school of political economy. East Lansing, MI: Association for Evolutionary Economics and Division of Research, Graduate School of Business Administration, Michigan State University. Schultz, T. W. (1956). A program of rebuilding the department of economics. Department of Economics, University of Chicago Records, 1912–1961. Chicago: Special Collections Research Center, University of Chicago. Stigler, G. J. (1971). The theory of economic regulation. Bell Journal of Economics and Management Science, 2(1), 3–21. Stigler, G. J., & Becker, G. S. (1977). De gustibus non est disputandum. American Economic Review, 67(2), 76–90.

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Teixeira, P. (2008). Theodore William Schultz. In: R. B. Emmett (Ed.), The Elgar companion to the Chicago School of Economics. Cheltenham, UK: Edward Elgar. Valde´s, J. G. (1995). Pinochet’s economists: The Chicago school of Economics in Chile. Cambridge: Cambridge University Press. van Horn, R. (2007). The origins and rise of Chicago law and economics. Department of Economics, Notre Dame University, South Bend, IN.

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EARLY AND OFTEN OR TOO LATE AND NOT ENOUGH? Robert Leeson A review essay on Johan Van Overtveldt’s The Chicago School: How the University of Chicago Assembled the Thinkers Who Revolutionized Economics and Business. Chicago: Agate, 2007. 432 pp. ISBN 9781932841145. Economists at the University of Chicago are famous for their assembly line which consists of commenting ‘‘early and often’’ on each others papers and books: a þ b þ ... þ y ¼ z where a is the first draft; b y y, the critical but constructive comments; and z, the final product (intermediate consumption for the rest of the profession). Van Overtveldt’s book (which claims to be about ‘‘How the University of Chicago Assembled’’ these ‘‘thinkers’’ – although there is very little about the assembling) has adopted a non-Chicago assembly line apparently consisting of: aþb¼c where c is a disappointment; a, interviews with 100 Chicagoans over 10 weeks; and b, a relatively small number of weeks combining these interview tidbits with ‘‘born, bred, and dead’’ details plus copious (and uncritical) quotations from the secondary literature. A Research Annual Research in the History of Economic Thought and Methodology, Volume 26-A, 59–61 Copyright r 2008 by Emerald Group Publishing Limited All rights of reproduction in any form reserved ISSN: 0743-4154/doi:10.1016/S0743-4154(08)26005-0

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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). Who will this book appeal to? It will certainly irritate a wide spectrum of readers: 1. economists (p. 106: what is the ‘‘nonaccelerating, or natural rate of unemployment’’?). In the NAIRU terminology, it is the inflation rate that is supposedly nonaccelerating at the natural rate of unemployment (although, of course, it is the price level that is nonaccelerating, while the inflation rate is nonincreasing); 2. methodologists (p. 164: did Friedman empirically ‘‘verify’’ the quantity theory?; p. 172: did Friedman ‘‘confirm’’ the neutrality of money in the long run?). Friedman’s methodology is, of course, in the Popperian falsification tradition; 3. those who are aware that Friedman was not taught by Henry Simons (p. 161); 4. those who have heard of rational expectations (p. 170: why is new classical macroeconomics described without reference to rational expectations?); 5. those who know a little about European and intellectual history (p. 288: Thomas Hobbes (1588–1679) is described as an 18th or 19th century writer); 6. those who know a little about American history (p. 242: where is the evidence that ‘‘socialist thinking was rather fashionable’’ in the US in 1944?); 7. those who know a little about British history (pp. 268–269: ‘‘By the end of the 1960s, Friedman was firmly convinced that the British welfare state had become untenable and would inevitably lead to a devaluation of the pound.’’ Is the end of the 1960s after the 1967 devaluation?); 8. those who know a little about Robert Solow (p. 16: Why is Solow ‘‘no longer at the University of Chicago’’?); 9. those who know a little about Armen Alchian (pp. 300–301: Alchian counts as a Chicagoan despite never having worked or studied there?); 10. those who know a little about Allyn Young and Alwyn Young (p. 392: Did Allyn Young posthumously change his name to Alwyn Young and continue publishing 60 years after his death?);

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11. those who know that Tjalling Koopmans (not Frank Knight) wrote Three essays on the state of economic science (p. 377); 12. those who like to have terms defined and explained (e.g., p. 98: Cw ¼ cYw); 13. those who prefer some explanations about apparently random associations with philosophical schools (p. 179: John Neff is abruptly described as a ‘‘neo-Thomist’’); 14. those who object to pretentious prose (p. 211: what is a ‘‘deep wound in Stigler’s soul’’?); 15. those who are irritated by authors who publish inadequately proof read their material (p. 1: How many laureates – 58 or 57 – both are mentioned?); 16. those who expect some insights about future Chicagoan laureates (no mention of Roger Myerson, the 2007 Chicago recipient). The central message – that Chicago is different – is, by definition, a comparative assertion requiring a comparative analysis (none is provided). Also needed is a clear definition of ‘‘primarily associated with the University of Chicago.’’ Equally, an alternative causation must at least be considered: that the Nobel Prize committee had an ideological preference for Chicagostyle prejudices (Why did not Joan Robinson win the Prize, for example?). This book works as a Chicago scrapbook (most scholars like to be flattered and have their anecdotes recorded) but fails as a work of scholarship. It fails, too, as a polemical piece (if it were aimed at the pundit pendulum, from the Colbert Report to the O’Reilly Factor). If Van Overtveldt were to start again and undertake the collaborative journey from ‘‘c’’ to ‘‘z’’ this could become an excellent contribution to the literature. For example, it would be very useful to have an appendix listing all Chicagoconnected economists, with dates, publications, plus ‘‘born, bred, and dead’’ details. Perhaps a small group of young scholars can be tempted to finish the job that Van Overtveldt has begun and produce a much needed seminal study of this highly influential institution.

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Clark’s STATE AND STATUS THE COMPLEXITY OF POWER Roger E. Backhouse A review essay on Samuel Clark’s State and Status: The Rise of the State and Aristocratic Power in Western Europe. Montreal: McGill-Queen’s University Press, 1995. xiiiþ502 pp. ISBN 0773512268. 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 main contrast drawn by Clark is between land-based and water-based states, though he sees this as a spectrum along which different countries should be placed, rather than as sharply distinguished categories. Landbased states, of which Savoy is the clearest example, tend to be centralised because of the need for high military spending and the resulting high level of taxation. In contrast, water-based states, such as parts of the Low Countries, can be less militaristic. Navies require less manpower than land-based armies and, because they can raise money by expanding their commercial activities abroad, water-based states have less need for territories from which revenues can be extracted. France and England are

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both away from the ends of the spectrum, though England being closer to the water-based end. Using this framework, Clark explores interactions between centers and peripheries. In the case of France, this involves paying close attention to Lotharingia, the term used to denote the middle portion of the Carolingian empire, inherited by Lothaire I in the Treaty of Verdun in 843. This stretched from what is now the Netherlands to Tuscany, and on Lothaire’s death was divided into several states, in which more powerful rulers on either side (eventually France and Austria) had an interest. It included the Low Countries and Savoy, providing Clark with his most important case studies because of the many contrasts between them. In the British Isles, on the other hand, center–periphery interaction is studied by looking at English relations with Wales, Scotland, and Ireland. The story of the rise and decline of different states is told in terms of the capacity of the center to use force to keep control over the periphery, together with the perceived importance of various areas. It is complex, undermining many possible generalizations such as the idea that commercialization must have been linked to the emergence of influential assemblies or parliaments (one thinks of urban commercial classes using such bodies to assert themselves against powerful rulers). Even the notion of power is complex, Clark distinguishing between ‘‘despotic’’ power, in which rulers can take decisions without routinely having to negotiate with other bodies, and ‘‘infrastructural’’ power involving the ability to mobilize resources. In the first respect, France was more powerful than England; in the other, England was more powerful than France. Having explored these themes, concerning what might be considered the geography of power and the complex fortunes of different states, Clark then turns, in Part II, specifically to the nature of power within each society. He looks, in successive chapters, at the decline of ‘‘Lordship’, status power, economic power, political power, and cultural power. Throughout, the underlying theme is of differentiation and the absence of clear evolutionary trends. To a reviewer who comes to this literature as an outsider, the most interesting aspect of this was the emphasis on status. Economic and political powers are familiar, and their importance recognized, as is cultural power. However, placing status in a separate category and putting it at the outset is perhaps less common. His point is that ‘‘nobility’’ was an important concept that gave people rights and privileges independently of their political or economic power. Nobility could retain their noble status even though they might be in dire economic straits, living lives that were economically indistinguishable from many of their non-noble counterparts (one finds in

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nineteenth and early twentieth century Britain an echo of this in the idea of ‘‘genteel poverty’’). Yet, nobility had a different history and meant different things in different places. It was not even associated simply with the ruler. For example, Knights were not always considered part of the nobility, though in some times and places they were. There was also an evolution from societies where Knights could be created by other Knights to one where the sovereign had a monopoly over the process (a movement from what we might call private enterprise to a more centralized system). Furthermore, as the regulation of aristocratic status became centralized, so the way it was understood changed. Even in the British Isles, relations between lords and subjects varied greatly, the relation between the King and his Irish and Welsh nobles being significantly different from that with their English counterparts. Two examples illustrate the heterogeneity that emerges. The first concerns politics. In England, nobility came to be identified with the peerage, the group of men who acquired the right to be consulted by the King on important decisions. The British peerage thus remained relatively small compared with many of its continental counterparts and had a secure place in the political process. In France, in contrast, Louis XIV and other kings made a point of appointing as ministers men who were not part of the nobility (though they might thereby acquire noble status), meaning that the nobles’ links to power were weaker. There also arose in France a distinction, not so marked in Britain, between noblesse de robe, comprising many who achieved noble status through state office, and noblesse de l’epe´e, the ‘‘old’’ nobility, measured in terms of generations as much as by formal rank, for whom nobility went along with military service. Of course, the two were intertwined, but despite this the distinction remained. The second example concerns economics. There were many reasons why commercialization could undermine Lordship, formal hierarchical relations between lords and those beneath them governed by traditional non-market obligations and which restricted the latter’s rights to hold property. Peasant wealth increased which meant that peasants could buy out obligations such as mainmorte, the inability to bequeath property because the lord was deemed to be the legal heir; lords were more willing to sell charters and commute obligations for cash payments; towns became more attractive; and also lordship itself became to be based more on economic relations than on status and political power. For all these reasons, lordship weakened in the highly commercialized southern Low Countries (roughly Belgium) whilst the low level of commercialization in Savoy meant that lordship remained strong: even though the Dukes of Savoy tried to reduce lordship, peasants

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did not have enough resources to buy themselves out of their obligations. Yet, commercialization did not necessarily weaken lordship. In eastern Europe, and even in parts of France and the British Isles, some lords managed to prosper through commercialization. It might be the lords who would choose to convert traditional forms of peasant landholding to commercial leases. A major factor was that the fate of lordship depended not simply on commercialization within the region, but also on developments in the local center. Thus, Wales, though relatively uncommercialized, was influenced by the much more commercialized England. I leave it to others to judge both the correctness of Clark’s historical interpretation and the implications of his findings for the socio-economic theories of Karl Marx, Emile Durkheim, Max Weber, and others. Instead, I will consider the potential significance of these ideas for likely readers of this annual, whom I presume to be interested mainly in the history of economics and its context. Why should such readers care whether Clark’s arguments are right or wrong? An interesting way to approach Clark’s history is through comparison with explanations of history and economic growth that focus on markets and exchange, such as the new institutionalism of Douglass North and others. Competition and rational maximization are not ruled out by Clark, but they are not his focus. Military power emerges as the main factor underlying the rise and decline of states, and while economic factors are a significant element (ability to raise funds and tax is a key part of the story) so much more is involved that it would seem hazardous to explain too much in terms of them. A second element concerns human motivation. Even if it is accepted that behavior is maximizing some notion of individual welfare (call it utility), it is not necessary to go on to translate that into maximizing consumption. That is well understood but there has remained a tendency, since the classical economists, to treat factors that cannot be measured in money as secondary – as a Millian disturbing cause. Yet, it is highly plausible that status is an important element in well-being, if not the most important element (this would be consistent with much of the recent literature on happiness). In the early modern world, there were limits to the extent to which status and wealth could be substituted for each other. Sometimes state offices, and hence status, could be bought, but there were elements of status that could only be inherited. Conversely, status might be transferable into wealth (as when nobles used their status to get state offices for their sons or relatives), but the existence of nobles living in poverty shows that the two were far from perfect substitutes. In such a world, where wealth can be

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transformed only imperfectly into status, it is not clear that wealth should be maximized. Status may be dominant. Clark’s book has the virtue of exploring the complexities of status and the power that it provides, raising serious questions about how far, during this period, it was interchangeable with wealth: the answer would appear to be that they were never complete substitutes and that to a great extent they were substantially different. The heterogeneity Clark finds in the historical record implies that great caution should be exercised (to put it mildly) in using broad terms such as ‘‘mercantilism’’ or ‘‘feudalism.’’ Caution is even in order when using terms such as ‘‘nation state,’’ or relations between institutions such as ‘‘contract’’ and ‘‘the market.’’ Mercantilism does not appear in the book even though this is precisely the period when it was reputed to be at its height, and even though historians of economics often link it to the rise of the nation state, which is one of Clark’s main concerns. Eli Heckscher and others have since long linked mercantilism with power and state-building. Perhaps the reason for this absence is that the use of a term such as ‘‘mercantilism’’ is incompatible with the heterogeneity that is Clark’s main message. Quite apart from the long-familiar distinction between the ‘‘mercantilism’’ of independent merchants such as Thomas Mun and the ‘‘mercantilism’’ of state-builders such as Colbert, Clark’s evidence suggests that nation states may be too heterogeneous to permit significant generalizations to be made. Power relations were constantly evolving and were never uniform, even within France or Britain. When we look back at the past, there is a tendency, especially among economists, to see the past through economic lenses. A society based on contract may be seen as implying equality (at least in the sense of legal status) and hence favorable to democracy; status can easily be equated with wealth and the pursuit of self-interest with the pursuit of wealth. That was the classical perception. Clark’s book should perhaps make us much more skeptical about accepting classical readings of eighteenth-century and earlier writings, for even where writers were adopting such a position, they were doing so against a context that included much else. It would be stating the obvious to say that this is anything but a new point – the literature is vast – but Clark’s book states it very forcefully. For example, it might be interesting to re-read Adam Ferguson or Adam Smith on ‘‘ranks’’ in the context of Clark’s history. Perhaps as important, Clark’s disentangling of the multiple dimensions of power and his showing that, if one is to tell a detailed historical story, they have to be treated as different, raises questions about whether we are as different from the medieval world as we might like to think. Clearly, the modern world has moved away from many, if not

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most, of the institutions through which power was exercised in the middle ages, and the prevailing ideology today is to equate status with economic success. However, that ideology should not cause us to lose sight of other aspects of power. It may even make it more important to distinguish between and to explore the many dimensions through which power is exercised other than the economic, and hence to develop a more complex picture of the state and the power relations implicit in its relations both with those inside its boundaries and with other states.

SOCIAL STATUS ON THE ROAD FROM FEUDALISM TO THE AGE OF ENLIGHTENMENT Y. S. Brenner A review essay on Samuel Clark’s State and Status: The Rise of the State and Aristocratic Power in Western Europe. Montreal: McGill-Queen’s University Press, 1995. xiiiþ502 pp. ISBN 0773512268. 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). The difficulty with the definition of state, when one deals with both the Middle Ages and modern times, is that prior to the sixteenth century the term state did not designate an independent political community. Individuals were part of systems imposing duties and rights which were closely related to fealty, land tenure and custom. It was only in the late Middle Ages, with the revival of the influence of Roman law on political thought, that the distinction between the holders of imperium who represent the entire people, and those who only held feudal rights assumed importance. However, as barons held fiefs from different kings, there were not yet clearly territorially defined states. The change, as Samuel Clark correctly observed, came with A Research Annual Research in the History of Economic Thought and Methodology, Volume 26-A, 69–84 Copyright r 2008 by Emerald Group Publishing Limited All rights of reproduction in any form reserved ISSN: 0743-4154/doi:10.1016/S0743-4154(08)26007-4

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the consolidation of the monarchies in England and France (one may add Spain), when classical elements influenced the Renaissance. But it was in the seventeenth century, when political thought shifted to the relationship between the state and individual rights, that the term state gradually acquired its modern meaning (Sabine, 1953, p. 328). The term status is more problematic. Professor Clark defines status as a type of power which denotes positive or negative social evaluation, and the power to elicit respect (p. 5). In other words, status is one dimension of stratification, synonymous with prestige or esteem, derived from the possession or presumed possession of characteristics that people admire, or are told they should admire. Max Radin (1953, p. 373) refers to status as essentially a legal term which connotes the sum of legal capacities of an individual, his power to enforce legal rights and obligations either for himself or others. But he adds that the term has its fullest meaning in societies in which law has been more or less differentiated from religion, morals, politics and economic organization. However, since such differentiation has never been complete, the status of a member of a community is never wholly distinguishable from other group relations, such as citizen, paterfamilias, patrician, villein, and clerk, which are often used to describe both legal status and political, religious, or domestic positions. Professor Clark appears to be unhappy with sociologists paying more heed to class than status (p. 15). He also complains that only few sociologists have carefully analyzed the status-to-class transition, although many have made brief references to it, describing it as a transition from a society of ‘‘estates’’ to one of classes (p. 16). Whether these criticisms are entirely justified or not, it still seems reasonable to relate status to class. After all, it is difficult to deny that even in the pre-capitalist societies the controlling factor was economic, namely, the possession of certain types of property such as herds, slaves, and land. It is true that economic classes do not necessarily directly reflect status, and that when wealth was acquired by former members of the lower orders, the higher ones protected themselves by establishing new tests, like ‘‘good birth’’ and modes of conduct, to differentiate themselves from the newcomers. But the relationship between wealth and social status and many other human desires (such as the desire for power, the craving for acclaim, the impulse to serve the common good, and the simple urge to action) were and continue by virtue of an inner necessity to become subordinate to economic success, because, with very few exceptions, without economic success none of them can be attained (Mombert, 1953). The exceptions were of course the special position of the clergy and of persons rendering personal or military services to rulers.

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Professor Clark appears to be most unhappy with the many Marxists who ‘‘have come to treat capitalism as a system with its own logic or functional requirements’’ (p. 6). And yet, to regard capitalism as a system with its own logic may be less farfetched than Professor Clark believes. The anarchosyndicalist Corne´lissen (1900), who was influenced by Marx but did not share his deterministic belief in ‘‘historical necessity,’’ formulated this idea rather convincingly. In his view, the capitalist system is held together by a universal pursuit of gain which permeates society to the last individual, because it provides each individual with an illusion of security of life and property, which turns him into the system’s unconscious protector. In Corne´lissen’s opinion, competitive pursuit of gain in the capitalist society is a necessity for survival, and the wish to survive gives rise to the pursuit of gain – a vicious circle with an inescapable internal logic that makes the system unassailable from within, and permits it to last for a long time. The problem of status is very complex indeed. Individuals’ actions are influenced by, and influence, their social and cultural environment. People desire the approbation of society, and their efforts are affected by the reigning value systems. These value systems are imparted to the young by their parents and teachers, which means that they are influenced by the preceding generations’ values. Therefore, they tend to reflect the aspired reality and real needs and values of an earlier period. This gives society a necessary degree of stability and continuity, but hinders a rapid adaptation to material changes occurring in the society’s environment and the creation of suitable conceptions of a changed reality. The rise of the states, and the developments affecting the aristocracy which Professor Clark ably describes, are however only parts of a much wider process worth recording. The point is that until the late Middle Ages, for more than a millennium, people conceived of the universe as a system of regularity, a hierarchy in a persistent striving towards order – a regularity that could be observed, traced, described, even predicted, but not explained.1 Its very unity and regularity were evidence of God’s design which defies all explanation. A design in which people are born into their specific status in the social hierarchy, without knowing, or ever being able to know, why, but in which they are persistently admonished to know their place and to behave accordingly. This was a world built upon authority in which social status sprang less from the free disposal of property than from the free disposal of human forces; where ‘‘superior’’ individuals granted protection and diverse material advantages that directly or indirectly assured a subsistence to dependents in return for their pledge to render various payments or services and a general obligation to aid, though these relations were not always .

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freely assumed or even ceased to contain a great number of constraints, violations, and abuses. This was the world into which the decline of ancient Rome had introduced so much instability and uncertainty that the gap between dire reality and better prospects became too wide to provide and make discernible rational means to bridge it so that the supernatural displaced the practical ideas which had served a guide to life in earlier times. When, by the end of the Roman Empire, men lost the habit of expecting protection from a too distant and emasculated sovereign, and the market economy collapsed, people transferred their obedience to closer rulers and developed with them new ties of dependence appropriate to a self-sufficient rural mode of production. This was a system singularly incompatible with rational incentives for economic improvement. Custom remained a powerful guardian of tenants’ rights and immunities, but only as long as too little material advantages could be gained from its violation. In the course of the twelfth and the thirteenth century, when real advantages began to be obtainable from the eviction of tenants, and from alterations in the customary agreements of tenancy, the power of custom gradually eroded (Tawney, 1912). But before this, resignation has been a state of mind well founded in the era’s economic reality. It was not something that had to be implanted into people’s minds by the teachings of the Church (though such teachings may well have helped to sustain it), but it was the true reflection of the material situation. The reflection of a world in which change through functional human effort was unthinkable, but in which life was made bearable by hope of salvation, by hope springing from a belief in a merciful God who can be reached by prayer in humility. The need to rely for both physical security and the material means of subsistence on the locally powerful people produced forms of social interdependence that were very different from the social ties common today. Modern social identification tends to gravitate toward horizontal links, medieval tended towards vertical bonds. Horizontal identification is related to class stratification; it is based upon real contradictions of interest. Workers unite in unions or parties in order to protect their living standards and gain a greater share of the fruits of production. However, the efforts to obtain a greater share of the fruits of production separate workers from employers and make them increasingly dependent upon other workers, in other working places, even in other towns or countries. Similarly, selfemployed people are drawn together in a bond of solidarity to resist pressures of big business from ‘‘above’’ and labor from ‘‘below.’’ Employers too follow the same trend. When profitability dictates it, they will react in union and not hesitate to shift their investments from one place or country

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to another with little concern for the workers left behind. This trend toward horizontal social coherence does not necessarily exclude other nonhorizontal forms of adhesion; after all, both workers and employers will suffer adversity from a general economic depression, and all classes of society may support the local football team. But the main characteristics of social alignment clearly distinguish medieval societies from later ones. Medieval social coherence was vertical, based upon personal congruities of interests. A powerful master or landlord was better able to protect his tenants than a weak one, and an affluent tenant was better able to contribute to his master’s power to protect him than a poor tenant. When the landlord refused his master a claim, for example a contribution for a military venture, he did so for himself, but objectively he also did so for his dependents, for in the last resort they had to raise the money or victuals for the campaign, and they had to make available the men to accompany the master into battle. Most significant for the relative sublimation of the horizontal contradictions in medieval society, however, was the degree to which this society was subjected to uncontrollable forces of nature that affected all people alike. In technologically more advanced societies, many processes of production are almost entirely or even wholly independent of the vagaries of weather. Adversity in such societies is therefore far less the result of forces that are obviously beyond human control than in technologically less-developed societies, and far more ascribable to human mismanagement of the economy. The fate of the medieval husbandman, save for the occasional transgressions of rapacious landlords, was always in the hands of nature. God alone was seen to have the power to determine whether man should suffer a dearth or enjoy abundance, and when He did so, the results were felt by the high and the mighty and the low and weak alike. It was not so in later society, for when man was separated from the land, not nature, or God, but other men, those who controlled the new means of production, became the arbiters of fate. When they, the controllers of the new means of production, misjudged the market for their products and for fear of losses decided to restrict production, they were the immediate cause for the misery of the unemployed. The deeds of men, not the will of God, became the visible sources of the newfangled miseries. Gone was the ‘‘harmony’’ that held together the feudal hierarchy by ties of mutual advantages. Seen in this light, Professor Clark complains against the sociologists who describe the transition from feudalism as a change from stratification by estates to stratification by classes is not really justified.

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There is little to add to Professor Clark’s careful description of the rise of nation states which he, like Michael Mann, regards as states ‘‘that centrally control territories within which economic exchange, culture, law, classes, and the like are increasingly uniform and are bounded by the state’s borders’’ (p. 11), and to his description of aristocratic power, but one may wish to learn more about the general background and wider aspects of these processes. The point is that the medieval vision of the universe as a system of regularity, a hierarchy striving towards order, closely reflected the era’s social reality. It was the reflection of a society in which each member depended on those socially above and below him for his physical and economic security and in which forces beyond human control determined all members’ fate for better and for worse. It was this vision of the universe that determined and provided meaning to people’s social values and social status. It was this that set the conceptions of the desirable that was influencing selective behavior, and provided criteria for selection in action, judgment, preference, and choice for more than a thousand years. It was this value system that the Middle Ages bequeathed to subsequent generations in a body of stated and implicit social theory. Its formal teaching was derived from ‘‘the Bible, the works of the Fathers and schoolmen, the canon law and its commentators, and had been popularized in sermons and religious manuals’’ (Tawney, 1912). Its informal assumptions were implicit in law, custom, and social institutions. Unconsciously and consciously, this value system guiding the lives of medieval men was transmitted from one generation to the next well into modern times. Though gradually adapting to changing circumstances and losing in compulsion, its main tenets proved very tenacious indeed. Unconsciously, it was communicated by emotional and verbal contamination to successive generations of children by elders who imparted their wishes in a moralizing setting of rules variously rationalized, and, as these emotions became overladen with habitual rules, the rules themselves appeared to be intuitive and inevitable. Consciously, it was transmitted by the pervasive sanction of religion, involving supernatural rewards and punishment. So, the combination of stated doctrine and the opinions transmitted from one generation to the next gave concrete meaning, not only to such concepts as good, right, and true, but also to high or low status. And this was to have a tremendous impact on social behavior long after the waning of the medieval circumstances from where it sprang, and when men’s economic environment was already changing. When the realistic opportunity for material advancement arose, reverence for law and custom (though

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sometimes better observed by transgression than compliance) together with the unshakable Christian affirmation that goodness and power are united into one, bequeathed to western Europe a social climate that for centuries circumscribed utilitarian notions within limits consistent with rational economic behavior. Until late in the twentieth century, it tempered the ‘‘love of gain’’ with a sufficient measure of ‘‘ancient virtues’’ to prevent the rise of the newfangled egoism that accompanied the emergence of the new material opportunities from ‘‘killing the geese that were to lay the golden eggs.’’ It imposed legality, rationality, as well as a degree of humanity, upon the quest for riches, so that it confined rapacity and exploitation within legal boundaries in which ingenuity rather than brute force became a source of wealth. Self-love was circumscribed by social conventions and by the notion that one can never be sure whether or not there is retribution for injustice in a life hereafter. From a social collective point of view, economic ambitions were thus kept from degenerating into self-destructive rapacity by two types of restraints, namely, the need for social approbation (‘‘The rich man glories in his riches, because he feels that they naturally draw upon him the attention of the world y.’’; Smith, 1976, pp. 50–51) and the fear of heavenly retribution. While reason was gradually taking the place of revelation and religion was ceasing to be the master-interest of mankind, faith continued for a very long time to be a department of life with boundaries which it was extravagant to overstep (Tawney, 1912). The same is true for the lingering relics of social status. For as long as the old social divisions did not really come in conflict with the newly developing economic power structures, classes and traditional estates could exist side by side. Only where and when the ancient structures began to impede the economic and social advancement of the new strata of society that the old social divisions came under attack. But this was equally true for the upper strata as for the lower strata of society. From the eleventh century, perhaps due to the concatenation of population pressure with the restoration of contacts with the East (which had by this time become Muslim) (Lewis, 1951; Pirenne, 1945; Postan, 1952), the growth of towns made traders and craftsmen increasingly wealthy. But for a very long time they did not, even in their own eyes, gain the social esteem that was traditionally accorded to people who obtained their wealth from land ownership and caste privileges. It was only when the urban rising class began interpreting its quest for wealth as inseparably related to the traditional virtues, thrift and industry, and presented economic success as a sign of divine favor, did the age old moral and religious disapprobation of

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wealth without status begin to wane, and wealth began to compete with status and to substitute the aristocratic ideal of a life of leisure and ostentation by one of industry and parsimony. There were, however, also legal arrangements which reinforced the social– religious influences that formed the outlook of the middle class in latemedieval and early-modern Europe. Early in the eleventh century, merchants were beginning to organize themselves for mutual assistance, and by the middle of the century some had already permanent Guild halls and funds for aiding the sick and the poor. In the following century they were in many parts of Europe gaining official status with feudal lords and city authorities, and, of course, trading monopolies. At about the same time, craftsmen were also organizing themselves into brotherhood or guilds of mixed religious and economic character. Increasingly, city authorities subjected them to supervision in order to exact dues and protect the population against fraudulent exploitation. In the thirteenth century, artisans were organized in regulated professional associations in most western European towns. The origins of such associations must therefore be regarded as the result of a mixture of voluntary alliances and legal authority. At the same time, they were already claiming self-government and participation in municipal affairs. Initially only unconsciously, they continued the medieval collective rural way of life in a professional city setting and carried it over into early modern society. When their monopolies helped them to gain riches, and with it social position in the towns, their members soon gained a degree of cultural hegemony over the rest of the town-people who also began to emulate their way of life and accept their value system. This was not difficult, for it did not essentially depart from the value system to which medieval men were accustomed. Toward the end of the Middle Ages, the emergence of new groups of business and craftsmen, who being forced outside the old trades, began developing new mores, where expediency was gradually pushing aside traditional conduct. After the fourteenth century, in many cities, guild membership tended to become increasingly restricted to the families of existing masters. The ‘‘class’’ of masters grew more and more exclusive (for examples illustrating the exclusiveness of guilds, see Lespinasse, 1886–1897; Hauser, 1931; Kramer, 1905; Pirenne, Perroy, Re-Naudet, Handelsman, & Halphen, 1931), but the position of journeymen deteriorated to the level of wage workers. In some places, it even became customary for journeymen and apprentices to swear to their masters never to set up as craftsmen on their own without permission (For the abolition of making journeymen swear not to engage in their trade on their own, outlawed in the 1530s, see

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Chapter III in Dobb, 1937). Together with the urban class differentiation, a compromise also developed between the urban privileged elites and traditional feudal society. Economically, this compromise took the form of land purchases by rich merchants and masters, business partnerships with the aristocracy, and the welcoming of local gentry and their sons to guild membership. Socially, it took the form of a desire for intermarriage, and the pursuit of titles and feudal court offices and the emulation of some aristocratic modes of conduct which did not necessarily clash with the new elite’s economic needs (Dobb, 1937). In one respect, the new class was of course unable to assimilate to the traditional elite, its members could not look upon work as a demeaning effort, but they could stress the quality of workmanship rather than the pecuniary aspect of their labor and make this the hallmark of their status, into a source of pride, a status symbol of their own separating them from all other working people. Money-making continued to be regarded ‘‘vulgar’’ by people in privileged positions. But this provided the early bourgeoisie with its new ethics that was to bridge the gap between the ancient medieval conception of lineage, and the new middle class conception of personal endeavor and attainment as the decisive determinant of status. It found its ideological reflection in Calvinism. Lutheranism was still rural in character and theologically medieval. Luther himself, and also his English contemporaries, never really departed from the conception of the traditional stratification of rural society. Not so Calvinism. Calvinism was active and radical. It was an urban movement that spread among men engaged in commerce, finance, and manufacturing. It did not reject the old tenets of religion, not even its claim to moralize on economic matters. It only broke with the predominantly rural aspects of belief, especially with those that reflected the medieval objective inability of individuals to improve their material conditions.2 What was true of Calvinism was, in no small measure, also true of other Protestant movements. Lutherans and Anglicans wished to reform the church, not abolish it. They were never intentionally radical, yet they gradually brought ideas, patterns of behavior, and social structures closer to human interests, to reality and life. Before long, Catholicism did in practice, though not theologically, undergo a similar transformation in the parts of Europe where the bourgeoisie gained political power as the Protestantism did. It too reached a kind of compromise with the new material reality. The geographical, social, and historical coincidence of the religious and economic movements is too obvious not to indicate a relationship in which both the economic and the religious factors may be regarded as the

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dominant and creative forces.3 They were somehow causally connected and mutually stimulating (Niebuhr, 1953). Altogether then, since the twelfth century, a concatenation of circumstances gave rise to, and sustained in parts of Europe, economic conditions that created opportunities also for individuals who did not belong to the traditionally privileged classes to improve their material position and consequently their social status. Science too began revising its static conception of the universe, replacing it by a new world-image pervaded by the vision of mobility. The socially almost static society of the Middle Ages was accompanied by a static image of the universe, in which Galileo’s conception of a moving earth could not be accommodated. The new era of social mobility was accompanied by the vision of a harmoniously but moving universe. In a medieval world, where man was born into his social status and when social mobility and economic advancement were practically unthinkable, static stability and immutability was man’s conception of the order of the world. The rising bourgeoisie brought with it the image of social mobility, of change, and the old conceptions in the natural sciences lost ground to a new principle of ‘‘uniformitarian change.’’ The bourgeoisie not only viewed change as the very nature of existence but also attributed it a direction. ‘‘A world in which a man could rise from humble origins must have seemed, to him at least, a good world. Change per se was moral quality,’’ – was progress. But if ordered change was nature, the question of its causes needed to be answered. The concept of cause and effect was reinterpreted to mean mechanisms responsible for things ordered and events following a steady sequence – a conception which did not remain confined to its social origins. As long as people could believe that the earth was at rest in the middle of the universe, and all could plainly see that this was so, the old conception of the universe was too obvious to call for explanations. But what about an earth in motion? An earth spinning round the sun could no longer be confirmed by man’s everyday experience. The world of movement stripped off the innate natures, and placed reality beyond man’s immediate sensory perception. It could only be observed from the ‘‘outside’’: events ceased to be self-evident, they had to be explained by reason, and their explanations had to be proven true to reason. To reason, not to authority, for the new perceptions of reality cast a shadow on the time-honored authorities. The world was still orderly; indeed, its regularity could be better expressed in mathematical terms than that of a world at rest, but this regularity was regularity in motion.

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How then did all this affect the value system of society? Although it raised many questions about the formal aspects of tradition and dogmas of religion, it hardly touched the basic tenets of morality; it rather cleansed them of some of their formalistic distortions. Far from shattering people’s beliefs, it reinforced them with new arguments more congruent with the new social–economic reality. Far from discrediting the belief in God’s design upon earth, Newton’s law of inverse squares – his mathematical model of the world’s uniform order – confirmed it. What better proof could there be of a divine hand having designed a so perfectly systematic universe than the discovery of the universality of the law of gravitation? (Or later, of Adam Smith’s ‘‘Invisible Hand’’?) What the new outlook did accomplish was that it liberated the old values from their static ‘‘backward-looking’’ disposition, from their quest for legitimization in old authorities. It gave them a dynamic view that for several generations stimulated their gradual modification in the light of reason. The rise of the bourgeoisie was accompanied by the gradual realization that the understanding of nature bestows powers to control its forces. However, several centuries were still to elapse before the gap separating the scientist explaining the natural phenomena from the technician dealing with the practical ends of society was to be closed. Where the power of the guilds diminished before the rise of new industries, and their insistence upon quality and general modes of conduct waned, their place was taken by the state, which by this time was becoming increasingly concerned with the safeguarding of the country’s economic ascendancy for political purposes. The disintegration of the unified Christian Commonwealth and its replacement by nation states as prime sources of earthly power, deprived Rome of her traditional position as interpreter of heavenly social values and substituted the latter by values based on human reason. Before very long this reason began identifying knowledge with good. Nature had been shown to be rational; consequently, all rational things could be conceived of as nature and therefore good. Theology began to be permeated by reason, and rationalism and Deism taking the place of traditional religion.4 All this was also reflected in the economic philosophies of the sixteenth and seventeenth century. The various measures which together made up the system that later came to be known as Mercantilism were, at least to begin with, little more than efforts to augment the economic power of the emergent nation states for political purposes. The state, not the welfare of individuals, was therefore the subject of mercantilist policies. In this sense, mercantilism remained well within the medieval tradition of the essentially harmonious society, i.e., of the society in which the vertical links

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of allegiance and identity-of-interest prevail over the horizontal (class) identities, which were in fact just then beginning to assume their modern shape (Defoe, 1728).5 What was new in the mercantilist conception was that it extended the feudal affinities to embrace the much wider social formation of the state. Where in earlier periods mainly the personal nexuses had been predominant, mercantilism was concerned with aggregates, not individuals, and it judged the status and rights of individuals by the collective criterion of contribution to the political power of the state. Where the pursuit of individuals’ private advantages was thought to advance the political power of the state, it was encouraged, where not, it was prohibited. With the public good synonymous with strengthening the political power of the state vis-a-vis all other states, the entrepreneurs’ ‘‘love of gain’’ became his merit for it increased trade, and trade, so it was thought, made the difference between rich and poor nations. Not so with working-men’s demands for better wages, for workers’ higher incomes diminished the volume of exportable goods, and reduced the compulsion to work hard and long for sustenance and deprived the nation of the labor of women and children who might then not be forced to seek employment to supplement the men’s insufficient incomes. Hence, that which was desirable in one stratum of society, the ‘‘love of gain,’’ was evil, nay sinful, in another. There was little new in this dichotomy; it retained the main elements of the medieval notion of hierarchy and status, i.e., the division of duties between the various layers of society, and the medieval failure to recognize the money value of labor services. Far from seeking a confrontation with tradition, the rising bourgeoisie sought and found a place fitting its newly acquired economic power within it. The nation state that was replacing the feudal lord as the focus of social identity afforded it the opportunity to do so. By the substitution of the new collective concept – the nation state, for the old feudal idea of association, and the circumscription of the limits of individuals’ rapacity to what was deemed to be desirable from the new collective’s point of view – the public good, the acquisition of wealth was rapidly becoming a symbol of social distinction. It introduced the bourgeoisie into the old hierarchy at a level below the aristocracy but well above the ‘‘labouring classes.’’6 Yet, with the social hegemony still firmly in the hands of the aristocracy, the bourgeoisie could hardly avoid being influenced by certain aspects of the aristocratic value system. Thus, it felt the need to justify its actions in terms that gave them at least an appearance of traditional respectability. The rapacious exploits of the merchants venturing to distant heathen lands, and the most terrible atrocities performed upon the natives there, were therefore invariably explained and justified at home in

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terms of service in the public cause, or ‘‘crusades,’’ i.e., holy missions, to spread Christianity throughout the world. The modern European reader accustomed to egalitarian ideas may find it difficult to reconcile the contradiction in the behavior of the middle class which on the one hand wished to emulate an idealized aristocratic life style, and on the other found little reprehensible in the merciless ravaging of foreign people and the ruthless exploitation of their own country’s working class. Yet, for contemporaries in the sixteenth and seventeenth century, there was nothing to reconcile; they were simply unaware of any contradiction, for the contradiction arises out of a belief in the equality of man which had never really been part of the western European cultural heritage, at least where ‘‘life on earth’’ was concerned. Having extricated themselves from a way of life imposed by poverty, the bourgeoisie was ill disposed to change the order of the world. Their affluence was proof that socioeconomic advancement was possible. The ‘‘best’’ people took advantage of this opportunity. Those who did not take advantage did not deserve to be numbered among the best people. So, society continued to be divided between the people who ‘‘mattered’’ and the people who did not matter: The former were expected to live by a set of rules, both inherited and self-imposed, that met the needs of a trading community. The latter continued to live by the rules of religion and medieval custom. The former were encouraged to undertake economic activity by the promise of good profits and the latter by the cold fear of starvation; the former saved and invested and thereby created the material basis for the industrial society which was to follow, and the latter paid the bill for it by their enforced low standard of living (Heckscher, 1935). The aristocrat who served well, raising the power of the state, was able to maintain his status. The one who did not, had to compete for it with the new rich. By the middle of the eighteenth century, mercantilist ideas concerning labor were changing appreciably. Partly this was probably directly due to the relative labor shortage in the first half of the eighteenth century that made for at least some types of work at low wages impracticable, and partly it was due to the technological progress, which may well have also been stimulated by the same labor shortage and that required a somewhat better educated type of labor. In fact, the first technological improvements of the early eighteenth century already divided the labor force into skilled and unskilled workers, and thus left a profound mark on society’s attitudes toward labour. The greater the number of skilled jobs, and the greater the shortage of skilled labor, the more they began to ‘‘matter,’’ both as

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consumers and as members of society. On the one hand, this stimulated important changes in the structure of production; i.e., it stimulated the production of cheap consumer goods for the domestic market, and on the other hand it reinforced the tendency inherited from the guilds that skill and productive excellence give social status (see Brenner, 1969, pp. 21–31 for the growth of towns and the rise of domestic markets). Mercantilists did of course try to mitigate the effects of the shortage in skilled workers by attracting skilled immigrants from other countries and by training the ‘‘poor’’ in the new types of employment where this was possible, i.e., in the new trades which were not controlled by the guilds, but on the whole this was of little effect. Skilled labor had, at least in some periods, to be well remunerated. But although this retrospectively called mercantilist theory seems to be no more than a collection of ideas derived from changing social circumstances, it reflected the emerging new perception of a world in motion – the mechanistic world view. Perhaps the best example for this was the way it combined the virtue of thrift with the quest for profit in a kind of economic dynamics in which money played a central role and affected social status. Altogether then, by the middle of the eighteenth century, reason had taken the place of revelation, and expediency was gradually beginning to replace religious and traditional morality as the criterion by which the deeds of men were judged, and the wealthy began to find it easier to join the ranks, and rise in the ranks, of the aristocracy. Professor Clark has provided a fine description of the rise of the state in parts of western Europe, and of the differentiation of aristocratic power. However, some readers may have wished that his description were more widely embedded in the developments behind the processes described by him.

NOTES 1. Ptolemy. Copernicus, Tycho Brahe and Kepler plotted the paths of the planets but never explained their movements. Explanation simply did not enter people’s mind, it did not exist. Things happen the way they do because it is their nature to do so. 2. For example lending money for profit was thought morally objectionable— usury, because of its exploitative character. This did not apply to loans granted to kings and other mighty personages because the moral objection was not directed against the very act of lending but against the despoiling of the needy. All the rest was mystification, legalism and formalism devoid of any real moral contents. Such conflict had however little to do with the borrowing of city-merchants. They were

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neither in dire poverty nor at the lenders’ mercy. They borrowed funds to increase their fortunes not to survive when floods or drought destroyed their harvest. But then, why should the lender not have his share in the wealth to which his loan has contributed. No more could it be considered reprehensible for lenders in the city to be rewarded by traders and craft-masters for the use of their funds than for the lords of the land to be rewarded by the peasant for the use of the land. The true moral values did not change—to take advantage of the poor remained as censurable as it had been before, but the formalistic aspects of religion were modified. 3. For example compare the attitudes of Max Weber and Karl Marx to the sequence of events leading to the rise of Capitalism. 4. A good example for the permeation of religion by reason by way of an appeal to the rationality of nature can be seen in Dr Bentley’s invitation to Newton to lecture on the laws of gravitation as the ‘‘final example of God’s design.’’ 5. Daniel Defoe wrote in 1728, ‘‘Trade is the Wealth of the World; Trade makes the difference as to Rich and Poor, between one Nation and another; Trade nourishes Industry, Industry begets Trade; Trade dispenses the natural Wealth of the World, and Trade raises new Species of Wealth, which Nature knew nothing of; Trade has two Daughters, whose fruitful Progeny in Arts may be said to employ Mankind; namely Manufacture and Navigation’’ (Defoe, 1728). 6. The term labouring classes, is used here in the contemporary sense for people who ‘‘soil their hands by labour’’ as distinct from those who set them to work and ‘‘those who fight’’ and ‘‘those who pray.’’

REFERENCES Brenner, Y. S. (1969). A short history of economic progress. London: Frank Cass. Corne´lissen, C. (1900). En marche vers la socie´te´ nouvelle. Paris: P.-V. Stock. Defoe, D. (1728). A plan of the English commerce. (See London the most flourishing city in the universe). Dobb, M. (1937). Studies in the development of capitalism. London: Routledge. Hauser, H. (1931). Les de´buts du capitalisme. Paris: F. Alcan. Heckscher, E. F. (1935). Mercantilism. London: G. Allen & Unwin. Kramer, S. (1905). The English craft gilds and the government. New York, NY: Columbia University Press. Lespinasse, R. (Ed.) (1886–1897). Les Me´tiers et Corporations de la ville de Paris (3 Vols.). Paris: Imprimerie Nationale. Lewis, A. R. (1951). Naval power and trade in the Mediterranean, AD 500–1100. Princeton, NJ: Princeton University Press. Mombert, P. (1953). Class. In: Encyclopaedia of the social sciences (Vol. 3). New York: Macmillan. Niebuhr, H. R. (1953). Protestantism. In: Encyclopedia of the social sciences. New York: Macmillan. Pirenne, H. (1945). Sozial- und Wirtschaftsgeschichte Europas im Mittelalter. Francke A. G. Verlag: Bern. Pirenne, H., Perroy, E., Re-Naudet, A., Handelsman, M., & Halphen, L. (1931). La Fin du Moyen Age. Paris: F. Alcan.

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Postan, M. M. (1952). The Cambridge economic history of Europe. Cambridge: Cambridge University Press. Radin, M. (1953). Status. In: Encyclopedia of the social sciences (Vol. 14). New York: Macmillan. Sabine, G.H. (1953). State. In: Encyclopedia of the Social Sciences (Vol. 14). New York: Macmillan. Smith, A. (1976). The theory of moral sentiments. New York, NY: Oxford University Press. Tawney, R. H. (1912). The agrarian problem in the sixteenth century. London: Longmans, Green.

UNPACKING TERMINOLOGY, REASSESSING THEORY Evelyn L. Forget A review essay on Samuel Clark’s State and Status: The Rise of the State and Aristocratic Power in Western Europe. Montreal: McGill-Queen’s University Press, 1995. xiiiþ502 pp. ISBN 0773512268. 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. Clark’s book will be of interest to historians of economics for at least three reasons. First, he leads by example. If even the most abstract A Research Annual Research in the History of Economic Thought and Methodology, Volume 26-A, 85–91 Copyright r 2008 by Emerald Group Publishing Limited All rights of reproduction in any form reserved ISSN: 0743-4154/doi:10.1016/S0743-4154(08)26008-6

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sociological theory has been so heavily influenced by the time and place in which it developed, as Clark so convincingly demonstrates, can any part of economic theory claim a scientific status independent of time and place? Most of us will welcome this demonstration of what we know to be true; context matters. Second, the portrait Clark draws of Western Europe in the eighteenth century will help us better understand the societies in which Adam Smith, Jean-Baptiste Say, Thomas Robert Malthus, and the other classical economists lived and wrote. To me, however, the most profound insight of this book lays less in content than in inspiration. Samuel Clark demonstrates the richness that can result from a formal comparative historical analysis. After we read Clark’s book, we know much more about Western Europe than we did before we read it, and our knowledge is enhanced by more than mere historical detail. Rather, we better understand how all these large historical processes manifest and how they interact with one another. Can we use comparative historical sociology in the history of ideas? Instead of relegating different national traditions in the history of economics to specialists in those fields, or alternatively considering these disparate traditions only insofar as they interact with the dominant schools, is there a way to broaden our histories of economics by developing formal comparative analyses of past schools, ideas, and economists that will allow us to better understand the ways in which different traditions developed over time and interacted with one another? At the risk of oversimplifying, there are two basic ways of conducting comparative historical sociology. The first is the method with which most of us are familiar from our undergraduate sociology classes. One tries to determine relationships among variables by comparing differences among regions on one variable and correlating these with differences in other variables. The result is the sort of typology that dominates much comparative sociology, where groups of countries or regions are given a label and a portrait is constructed of a typical case. There are, of course, risks associated with this kind of analysis. Data are often uneven, both in quantity and in comparability, which may lead to misrepresentation or oversimplification. The unit of analysis is sometimes arbitrary; should we focus on political entities such as countries, on geographical regions, or distinguish between cases along some other dimension? More importantly, ‘‘cases’’ – countries, regions, jurisdictions – are often not independent. There are large historical processes that transcend political or geographic boundaries, and these processes sometimes manifest themselves differently in different regions. The second method is both more old-fashioned, rooted as it is in classical sociology, and more contemporary. Partly as a reaction to the limitations of

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the ‘‘correlation analysis’’ described above, some sociologists have begun to focus once again on large historical processes. Charles Tilley, in his aptly named Big structures, large processes, huge comparisons (1984) and Philip McMichael (1990) are pioneers of sorts. These sociologists are returning to the questions that animated their ancestors, though, with a better understanding of the limitations of classical sociological interpretations. The most obvious is the implicit or explicit Whiggism that dominated many early efforts. Herbert Butterfield may have warned us of the dangers of The Whig interpretation of history in 1931, but we all know how hard it is to root out the vestiges of an approach that sees the present as the inevitable culmination of a more-or-less monotonic progress. This fallacy is particularly attractive to anyone trying to identify major transformations. The transformations we see as important are, after all, those most ‘‘relevant’’ from a contemporary perspective. We do live in the present. A second tendency identified by Clark is that of assuming that all of the regions of interest experienced a particular process or transformation, and that the experience of that transformation must have been similar between regions. As he makes very clear in this book, whether a particular process occurred in a particular region, and how it may have manifested itself, is precisely the issue of concern. That is what must be demonstrated by the historian. Perhaps the most important limitation of classical sociological investigations, however, is that which is most apparent to disciplinary outsiders. As Clark recognizes, many sociologists have ‘‘a fondness for formulating overloaded concepts’’ (p. 5). Overloaded concepts are single terms that contain within them many related and even unrelated processes – ‘‘capitalism,’’ ‘‘world systems,’’ ‘‘laws of motion,’’ ‘‘class,’’ ‘‘universalism,’’ ‘‘organic,’’ and so on. Of course, all theoretical disciplines share the same tendency towards these kinds of holistic concepts that are often offered as alternatives to explanation. But they become apparent to disciplinary outsiders often because the concepts clash with a competing set of equally large and untenable concepts. And unpacking these concepts is where Clark’s particular strength rests. The purpose of this book is to examine the effects of the rise of the state on the power of the aristocracy in Western Europe, and vice versa. Traditionally, that has meant a comparison of England and France. Clark, true to form, problematizes each of these concepts. He argues that ‘‘states’’ emerged in Western Europe as political-geographic centers rather than nation-states or national states, each powerful center having more or less political, economic, and cultural control over its associated peripheries. He rightly points out that comparing England and France rather conveniently

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omits all of the poorer parts of the British Isles while including the poor regions of France and excluding the center of continental industrialization which was massed in the French-speaking regions of the Low Countries. Is it any wonder that stereotypic portraits of England and France in the eighteenth century exaggerate the economic superiority of the former? Clark’s response is to delineate as many processes of what we would associate with the rise of the state as necessary, and to trace the differential development of each process in two much larger geographic regions – the British Isles including Wales, Scotland, and Ireland, and France including Savoy, Belgium, and Luxembourg. Hence, he focuses on the centralization of political power over a delimited territory, the growth in size of the state in terms of personnel and budget, the expansion of the functions of the state, differentiation of the institutions and functions of the state, the expansion of state force and social control, the growing ability of the state to mobilize resources in part through the manipulation of nationalism, and the growing uniformity of jurisdiction within states. It then becomes possible to write about the rise of the state without relying on such problematic issues as shared culture, language, and heritage. Of all these processes, Clark chooses to emphasize centralization and differentiation as key features of the rise of the state. The ‘‘power’’ of the ‘‘aristocracy’’ is an equally problematic concept. First of all, which members of the aristocracy count depends on how one defines regions. Clark de-emphasizes the concept of class, which he sees as associated with later economic changes, focusing instead on ‘‘status.’’ But status is distinct from power. In his use, status does not mean rank on one or more dimensions of social stratification, but rather is synonymous with prestige or esteem. It is one form of power – the power to elicit respect, which enables one to obtain special treatment. But Clark rejects the analyses of those who envision pre-industrial Europe as a society of status groups institutionalized as estates or orders (see Mousnier, 1973, 1976). That conception, he argues, forces one to focus on the question of when a ‘‘status society’’ was transformed into a ‘‘class society’’ as a result of economic change, and neglects the more productive strategy of analyzing variations of status in different regions according to four variables: 1. the extent to which status is distinguished from other forms of power including military, cultural, political, and economic; 2. the criteria which are afforded status (e.g., education, wealth, military accomplishment); 3. whether status is earned or hereditary; and,

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4. the extent to which status is institutionalized, in the sense that stable norms govern the allocation of status and the rights and responsibilities associated with it. The result of Clark’s focus on the separable variables associated with status is that he develops a much more nuanced analysis of the relative importance of status in various regions of Western Europe, rather than moving immediately to the conclusion that status was more important in France in the eighteenth century, while class emerged earlier in England. Clark’s disciplined use of theory can lead one to insights not apparent without it. His conclusions, tested against the empirical data generated by many small-scaled investigations into various aspects of the rise of the state or the nature of the aristocracy in particular times and places, overturn many of the truisms of Western European development. We are all familiar with the stereotypes; perceived differences between England and France have been used to explain economic development, state formation, and the propensity for political revolution. Traditionally, English superiority in matters military, political, social, and economic has been emphasized. ‘‘Status’’ had given way to classes and contract in England, while France was still mired in outdated systems of honor. There was less class conflict and more religious toleration in England. The English military was superior, but at the same time more disciplined. The administration of state finance and taxation was superior. Capitalism was more advanced. Even the English aristocracy was more civilized. They were more open and more focused on industrialization, less privileged and more competent. They spent more time on their landed estates, and opposed autocracy (Spring, 1977; Thompson, 1965). By contrast, highly placed nobles in France were ‘‘cooped up in a perpetual house-party at Versailles,’’ while those in less favor were isolated on country estates ‘‘without any sort of political influence’’ (Mitford, 1958). The French aristocracy was Pareto’s classic example of a degenerating elite, too selfish and exploitative to give up any of their authority over the debased peasantry and unwilling to cooperate with or yield any power to a growing and strengthening bourgeoisie; the French Revolution almost seemed inevitable (Pareto, 1968). Of course not all academics share these simplistic notions. Robert Forster demonstrated that the eighteenth-century aristocrats of Toulouse were neither spendthrifts nor ignorant, but rather disciplined administrators of agricultural estates (Forster, 1960). Other writers began to call into question aristocratic privilege in France (Behrens, 1967; Meyer, 1966; and Taylor, 1967). Perhaps the most extreme of the revisionists, Guy Chaussinand-Nogaret (1976) argued that the French aristocracy

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adopted bourgeois values during the eighteenth century and effectively behaved as a true capitalist class, a claim that Jonathan Dewald (1993) has further developed. A similar reassessment of the English aristocracy has also been underway, undermining some of the claims of difference and superiority (see Bush, 1984). The aristocracy of the British Isles, if the revisionists are to be believed, is simply one manifestation of a European phenomenon. Nonetheless, the stereotypical portrait still has great force, and it is against this that Clark aims his study. Clark’s conclusions are carefully drawn and dramatically different from the simple portraits of the eighteenth century that have long dominated scholarly debate. He argues that aristocratic power was more differentiated on the Continent than in Britain during the eighteenth century. In France, political power and status could be divorced because the French aristocracy was divided between the nobility of the sword (members of which held high status, but exercised little political power) and the nobility of the robe (who held comparatively lesser status, but often much more political clout). Similarly, he argues that economic power was more easily maintained and centralized by the landholding aristocracy in Britain than on the continent, where high status was sometimes held by quite impoverished families. By contrast, cultural power was more strongly linked to status in France, through Versailles and the Parisian salons, than it was in Britain. The differentiation of the state was similarly multidimensional, according to Clark. In some ways, the French state was more differentiated: it had a larger bureaucracy and aristocratic power, as we have seen, was more differentiated. Yet in other ways, the British state was more differentiated: it had a well-developed parliament, and the monarchy was less identified with the state. The agrarian economy in England, with its landholders, tenant farmers, and laborers, was more differentiated than continental agriculture with its peasant proprietors. Yet, Irish cottiers and Scottish crofters had much in common with their continental counterparts. Moreover, some parts of the continent were much more urbanized than Britain. Clark concludes that the trend towards differentiation of power observed in early modern Europe had multiple causes, some of which were linked to the rise of the state but none the necessary result of the rise of the state. He suggests that if one wants to understand the social transformation of Western Europe in the early modern period, one must pay attention to the particularities of history; development is a highly contingent and unpredictable process. Clark concludes by recognizing that the study of large processes in historical sociology must be combined with an appreciation both of the variation within a society and of the different ways in which the same forces

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might express themselves in different societies. Historical contingency – accident – is a much more significant force than the functionalists and the evolutionary theorists of the past have been prepared to accept. Notwithstanding the limitations of past theory, including the perhaps inevitable Whiggism that accompanies the study of large processes of social transformation, the issues that preoccupied these thinkers are good and important questions. Refusing to address these questions because one cannot accept all of the theoretical apparatus that has been used to tackle them simply makes historical sociology less interesting and less useful than it might be otherwise. I think this book, if read by historians of economics, will challenge us to examine our historiography and to develop a much more formal comparative historical analysis applicable to the history of economic thought.

REFERENCES Behrens, B. (1967). The Ancien Re´gime. London: Thames and Hudson. Bush, M. L. (1984). The English aristocracy: A comparative synthesis. Manchester: Manchester University Press. Butterfield, H. (1931). The Whig interpretation of history. London: Bell. Chaussinand-Nogaret, G. (1976). La noblesse au XVIIIe sie`cle: De la fe´odalite´ aux lumie`res. Paris: Hachette. Dewald, J. (1993). Aristocratic experience and the origins of modern culture: France 1570–1715. Berkeley: University of California Press. Forster, R. (1960). The nobility of Toulouse in the eighteenth century: A social and economic study. Baltimore: Johns Hopkins University Press. McMichael, P. (1990). Incorporating comparison within a world-historical perspective: An alternative comparative method. American Sociological Review, 55(3), 385–397. Meyer, J. (1966). La noblesse bretonne au XVIIe sie`cle (Vol. 2). Paris: Ecole pratiques des hautes etudes. Mitford, N. (1958). Madame de Pompadour. Harmondsworth: Penguin. Mousnier, R. (1973). Social hierarchies: 1450 to the present. New York: Schocken. Mousnier, R. (1976). Recherches sur la stratification sociale a` Paris aux XVIIe et XVIIIe sie`cles. Paris: Pedone. Pareto, V. (1968). The rise and fall of the elites: An application of theoretical sociology. Totowa: Bedminster. Spring, D. (1977). Landed estates compared. In: D. Spring (Ed.), European landed elites in the nineteenth century. Baltimore: Johns Hopkins University Press. Taylor, G. V. (1967). Non-capitalist wealth and the origin of the French revolution. American Historical Review, 72(2), 469–496. Thompson, E. P. (1965). The peculiarities of the English. The Socialist Register, 2, 311–362. Tilley, C. (1984). Big structures, large processes, huge comparisons. New York: Russell Sage Foundation.

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STATE FORMATION IN EARLY MODERN EUROPE Keith Tribe A review essay on Samuel Clark’s State and Status: The Rise of the State and Aristocratic Power in Western Europe. Montreal: McGill-Queen’s University Press, 1995. xiiiþ502 pp. ISBN 0773512268. 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. A Research Annual Research in the History of Economic Thought and Methodology, Volume 26-A, 93–97 Copyright r 2008 by Emerald Group Publishing Limited All rights of reproduction in any form reserved ISSN: 0743-4154/doi:10.1016/S0743-4154(08)26009-8

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It does not end there, of course; the most recent Royal Shakespeare Company production of ‘‘Henry V’’ represented Henry’s voyage to Harfleur with imagery that was a cross between the Falklands War (1983) and the D Day landings (1944) – which themselves took place on the beaches to the west of Dives, whence William had set sail in 1066. Henry’s own return match in 1415 was likewise to lay claim to what he considered his rightful possessions; although of course, while he was king in succession to his father, Henry IV, the latter had himself become king by imprisoning the incumbent, Richard II, who was his cousin (Barker, 2005). Henry Bolingbroke’s hold on power was conveniently assured by Richard’s ‘‘mysterious’’ death. These thoughts were prompted by reading in Clark’s book that William forged a powerful monarchy in England by two means: by coercion, sometimes savage coercion, and by exercising rights that he claimed he inherited from the AngloSaxon monarchy. y In 1066–67, William acquired control over little more than the southeast. There was resistance to further expansion, but in the years 1068–75, William severely crushed rebellions in the southwest, the Midlands, and the north, where he confiscated lands and reinforced royal authority. (p. 83)

The narrative continues on to Wales, and some discussion of the techniques used to pacify the regions. But this is a singularly bland account of a very complex process in which authority is created through lineage, and legitimacy through the exercise of force, as my opening remarks seek to point out. Clark does not even mention the invasion or the motivation for it, nor that Harold had hurried south to confront William having defeated another claimant to the throne, Harald Hardrada. If there is a story about the creation of the modern state in Europe, then it is a story of family feuding, claim and counterclaim on a continental scale that lasted for centuries, on through the eighteenth century wars of succession until family no longer mattered for international relations – as late as 1914, a war triggered by the assassination of the heir to the Habsburg throne but in which the fact that the royal families of Britain and Germany were close relatives was no longer thought to be of any great significance. The modern state had, at long last, secured to itself the legitimacy and monopoly of force about which Max Weber, at exactly this time, wrote. That I approach a work on comparative sociology explicitly addressed to ‘‘the effect of the rise of the state on the power of the aristocracy in Western Europe’’ (p. 3) with William Shakespeare’s history plays in mind is mostly a measure of the success of the recent Royal Shakespeare Company staging of the complete cycle in Stratford. But the feuding that plays out on an often

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bloody stage forcibly reminds modern audiences of a time when the power of lineage had to be forcibly asserted, and when legitimacy rested above all on force, and not consent. This is the world to which Clark addresses himself, but which becomes a curiously neutral story of ‘‘the aristocracy’’ on the one hand, and ‘‘the state’’ on the other. One only needs to read the family histories of Henry IV or Harold Godwinson to get a sense that the roots of this ‘‘English aristocracy’’ are at best chaotic, more exactly subject to a very great deal of retrospective rearrangement. How we can contemplate a category such as ‘‘the aristocracy in Western Europe’’ as if it meant anything in particular, becomes in this context quite baffling. Comparative historical sociology is written for other sociologists – historians pay scant attention, since such texts are generally created from a secondary literature of commentary that they have anyways already read as students. Moreover, in the hands of the comparative sociologist, this secondary literature is pressed into a pre-cast framework of great generality; and the success of the enterprise is measured not by how much is thereby explained, but how good the fit is. Indeed, this framework, while rigid, has to be sufficiently loose and generalised so that it can encompass the historical material; and this evidence serves to explicate the framework, rather than the other way around. Clark’s reference points here are the work of Wallerstein, Elias, Tilly and others who have advanced general theses concerning state-building, status and power in Western Europe, all of whom share a commitment to a set of basic theses of great generality and which are therefore applicable to entire eras of European history. This is not, I should add, necessarily an argument for history against sociological ‘‘theory’’ – there is after all no such thing as ‘‘sociological theory’’ in the way that an economist would understand the term, as, for instance, the ‘‘theory of comparative advantage’’ or Hotelling’s work on location. The general (sociological) theories that Clark calls upon are those ascribed to ‘‘neo-functionalists’’ or ‘‘Marxists’’ (pp. 11–15), generalisations and hypotheses which lack the kind of articulation that renders any theory testable, refutable or, most important of all, plausible. The kind of history that is missing here is one that assumes that even the recent past is in some important way inaccessible to us, and that our understanding of historical events depends upon the inter-relation of evidence and argument in a work of reconstruction. What might count as evidence here is not preordained, nor what arguments might be deemed acceptable and which not. This is because the work of historical reconstruction is guided by a problem which itself controls the nature of admissible evidence and argument; and there is no problem in this book apart from a demonstration that there are variant

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routes to the modern state and the nature of ‘‘status,’’ or more precisely, social rank. Clark has written a work of very great scope, and has clearly read widely in historical literature. But the narrative organises the real complexities of lineage, power and the legitimacy that generates effective allegiance into general description. This is not so much his fault, but that of the genre in which he writes. ‘‘Large processes’’ frame the book – commercialisation, centralisation, differentiation and the evolution of status (p. 7). These are applied primarily to the cases of ‘‘France’’ – which became what we know as France today rather late in the day – and to England, which has more or less meant the same thing from the time of the Romans. Problems of territorial integrity and the consequent problems of rulership and income have never been especially important in England, if one leaves territories on the south side of the English Channel out of account. In North America, by contrast, territory remained a problem into the eighteenth century (for what became Canada) and to the very late nineteenth century for the USA, taking into account the Louisiana Purchase, the post-bellum westward expansion and the associated delimiting of the border to the south. Consequently, what ‘‘centralisation’’ might mean in these three cases varied quite markedly, or how status might take shape. That ‘‘centralisation’’ would differ goes without saying; what is of interest is the differential effect of such variations, and precisely how and why this worked its way out in world history. For example, the preliminary review of similarities and differences between the English and the French aristocracies that Clark provides (p. 203) distinguishes three axes, all of which turn out to be the same thing: degree of internal differentiation. Perhaps it would be more illuminating to begin at the other end and ask the question: what made a historical individual influential, and what means did he employ to build his influence? What kind of structures existed to further ambition, and what blocked and thwarted ambition? This is of course a sociological question, but not one inspired by Marxism, structuralfunctionalism or systems theory – it paraphrases a remark made by Max Weber in his 1917 essay on ‘‘Value Freedom’’ (Hennis, 2000, p. 49). As Hennis goes on to demonstrate, although this was how Weber put the problem, the Shils and Finch English translation of this essay garbled the sense and converted Weber’s comment on the interaction of character and social structure into a question of social mobility. This is the red thread that runs through Weber’s writings from his doctoral dissertation on medieval trading companies to his last lecture course from 1920, on ‘‘General economic history,’’ which is an account of the genesis of capitalism to which

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his 1904–05 essays on the Protestant ethic were directed, but which at the time remained unelaborated. Weber was adamant that understanding of social structures was only accessible through an understanding of the motivations to human action. Although comparative historical sociology might seem loosely inspired by Max Weber’s histories of religions, of the city and of ancient societies, such modern writing merely appropriates a ‘‘method’’ and robs the enterprise of any point.

REFERENCES Barker, J. (2005). Agincourt: The king; the campaign; the battle. London: Little, Brown. Hennis, W. (2000). Max Weber’s central question (2nd ed.). Newbury: Threshold Press. Sellar, W. C., & Yeatman, R. J. (1930). 1066 and all that. London: Methuen.

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Skousen’s THE BIG THREE IN ECONOMICS THREE STRIKES AND YOU’RE OUT Humberto Barreto A review essay of Mark Skousen’s The Big Three in Economics: Adam Smith, Karl Marx, and John Maynard Keynes. Armonk, NY: M. E. Sharpe, 2007. xiþ243 pp. ISBN 0765616947. Mark Skousen gives a lot away in his title, The big three in economics: Adam Smith, Karl Marx, and John Maynard Keynes (hereafter The big three), yet this book managed to surprise me. Although I am in substantial agreement on core issues, I found myself bewildered at times. It was like reading a stream of consciousness from a Yogi Berra who was expert in the history of economics rather than baseball. The layout of the book is straightforward. In the preface, Skousen explains that the primary goal of the book is to present the totem pole approach to the history of economics: the Big Three should be ranked with Smith at the top, Keynes second, and Marx at the bottom. Skousen takes this totem pole idea seriously—he is pictured with the Totem Pole of Economics (commissioned from a woodcarver) on the back cover. Skousen strikes a conciliatory tone in a footnote, ‘‘Those radical economists who take issue with my ranking of Marx as ‘low man’ on the totem pole may take comfort in the argument made by some experts in Indian folklore who claim that the figure on the bottom may in fact be the founder or most significant chief in the history of the tribe’’ (p. xi). After reading the chapter on Marx, one wonders why Skousen would bother to offer the peace pipe—his A Research Annual Research in the History of Economic Thought and Methodology, Volume 26-A, 99–107 Copyright r 2008 by Emerald Group Publishing Limited All rights of reproduction in any form reserved ISSN: 0743-4154/doi:10.1016/S0743-4154(08)26010-4

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Table 1.

Content in The Big Three.

1. Adam Smith Declares an Economic Revolution in 1776 Includes an appendix on Smithian precursors 2. From Smith to Marx: The Rise and Fall of Classical Economics Say, Malthus, Ricardo, and Mill 3. Karl Marx Leads a Revolt Against Capitalism 4. From Marx to Keynes: Scientific Economics Comes of Age Bohm-Bawerk, Marshall, Jevons, Clark, George, Veblen, Weber, Fisher Mises, Wicksell, and Hayek 5. John Maynard Keynes: Capitalism Faces its Greatest Challenge 6. A Turning Point in Twentieth-Century Economics Samuelson and Hansen 7. Conclusion: Has Adam Smith Triumphed Over Marx and Keynes? Friedman, Mankiw, and Higgs

blistering portrayal of Marx as a person and unwavering attack on Marxism is sure to turn off anyone with even the slightest leftist sympathies. Table 1 shows the table of contents, including a list of the economists that are highlighted in the chapters that bridge each of the Big Three. Although one could argue about the choices of the lesser lights, the book’s primary focus on Smith, Marx, and Keynes is unobjectionable. How Skousen handles the Big Three, however, is problematic. This review will highlight three criticisms. Each strike is led off with a quotation by Yogi Berra.

STRIKE 1: ‘‘THIS IS LIKE DE´JA` VU ALL OVER AGAIN.’’ 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. I am not at all clear on how the market is to be divvied up between The big three and Making of economics. The big three’s organization, style, and words are identical to its big brother. It is roughly half as long because sections, photographs, and entire chapters have been removed. The remaining text is virtually unchanged. I see little reason to reproduce sentences like this one: ‘‘After taking twelve long years to write his big book, Smith was convinced he had discovered the right kind of economics to

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create ‘universal opulence’’’ (p. 7 in The big three and p. 17 in Making of economics). The overabundant section headings (usually two or three per page) can be quite painful, e.g., ‘‘Adam Smith Makes a Famous Remark,’’ and ‘‘Keynes Makes a Mischievous Assumption.’’ Perhaps one advantage of creating an abridged version is that mistakes can be corrected. David Gordon, senior fellow of the Mises Institute, reviewed Making of economics: Though the book reads well, I find myself compelled to issue a warning. The book is a disaster. Skousen has virtually no feel for history. He misunderstands important issues; and, like Disraeli’s wife, he cannot remember which came first, the Greeks or the Romansy Ever alert for the colorful detail, Mr. Skousen notes that Thomas Carlyle said of Adam Smith, ‘‘He was the most absent man I ever knew’’ (p. 32). I hope Skousen will not think me unduly critical if I question whether Thomas Carlyle said this. Smith died in 1790, and Carlyle was not born until 1795. Skousen provides both of these dates elsewhere in the book, but he does not notice the problem they create for his anecdote. Perhaps Skousen can at least partially shift the blame for this error away from himself. He cites as his source a book by E.G. West, an eminent authority on Smith. But if one looks up the reference, one will find the remark attributed to ‘‘Dr. Carlyle.’’ I suppose that for Skousen, one Carlyle is the same as another. (Gordon, 2001)

In The big three, Skousen fixes the mistake—sort of. He changes the text to say, ‘‘‘He was the most absent man I ever knew,’ declared a contemporary (in West 1976, p. 176)’’ (p. 15). Skousen could have got it exactly right. The autobiography of the Rev. Dr Alexander Carlyle is available online (Carlyle, 2001). Here is the full quotation to which West was referring: Adam Smith, though perhaps only second to David [Hume] in learning and ingenuity, was far inferior to him in conversational talents. In that of public speaking they were equal—David never tried it, and I never heard Adam but once, which was at the first meeting of the Select Society, when he opened up the design of the meeting. His voice was harsh and enunciation thick, approaching to stammering. His conversation was not colloquial, but like lecturing, in which I have been told he was not deficient, especially when he grew warm. He was the most absent man in company that I ever saw, moving his lips, and talking to himself, and smiling, in the midst of large companies. If you awaked him from his reverie and made him attend to the subject of conversation, he immediately began a harangue, and never stopped till he told you all he knew about it, with the utmost philosophical ingenuity. He knew nothing of characters, and yet was ready to draw them on the slightest invitation. But when you checked him or doubted, he retracted with the utmost ease, and contradicted all he had been saying. (Carlyle, 1861, p. 279)

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Smith’s eccentric personality has been well documented, but most people find it interesting. Using the incorrect quotation, ‘‘He was the most absent man I ever knew,’’ is a poor substitute for the full passage. The big three has a rushed, manic feel. It needs longer quotations (like the quotation above and the examples provided below) to give the reader a better sense of what the Big Three were all about. In his review of Making of economics, Gordon catches several other errors including this one, ‘‘One must, though, give Skousen credit for discovering a hitherto unknown economist: one ‘Senior Nassau’ (p. 24; also p. 24, n. 4). Elsewhere he refers, correctly, to Nassau Senior (p. 187). Both names have entries in the index.’’ Unlike the Carlyle mistake, this one goes unchanged. In The big three, Skousen again refers to ‘‘Senior Nassau’’ in the text and in a footnote (p. 28).

STRIKE 2: ‘‘I MADE A WRONG MISTAKE.’’ Of course, Gordon cannot be counted on to catch all of the mistakes. Some are obviously typographical errors, such as Leon ‘‘Walrus’’ (p. 107) (correctly spelled and with an accent in Making of economics), but others are more puzzling. Under the section heading, ‘‘Marx’s Personality Quirks,’’ we learn that: Keynes was fascinated by people’s hands, Marx by people’s skullsy.Not everyone survived Marx’s skullduggery. Ferdinand Lassalle, a German social democrat and labor organizer, was viciously attacked by Marx, who called him ‘‘the Jewish nigger’’ and a ‘‘greasy Jew.’’ ‘‘It is now perfectly clear to me,’’ Marx wrote Engels in 1862, ‘‘that, as the shape of his head and the growth of his hair indicates, he is descended from the Negroes who joined in Moses’ flight from Egypt (unless his mother or grandmother on the father’s side was crossed with a nigger).’’ (p. 77)

While many readers would be focused on the salacious wording, some might know that skullduggery means trickery or underhanded dealing. It has nothing to do with phrenology or skulls. Skousen lists Queen Victoria, Walt Whitman, and Edgar Allen Poe as believers in phrenology, but the main point is to ridicule Marx for being ‘‘taken in by the pseudoscience of phrenology’’ (p. 78). This is a bit unfair because phrenology at that time was actually quite widespread and accepted. In Phrenology Fad and Science, John D. Davies (1955) offers a fascinating review of the migration of phrenology from Europe to the United States. It had a wide base and popular appeal: ‘‘most prominent

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Americans felt that to have an examination was the conventional thing to do—to pay hard cash to learn ‘what they are, and what they can be, as well as how to make themselves what they should become’’’ (Davies, 1955, p. 38). Davies mentions that Marx ‘‘always judged the mental qualities of a stranger from the shape of his head,’’ then adds, ‘‘as did Baudelaire, Balzac and George Eliot. Henry George was accomplished enough to make an examination of himself. A random catalogue of 19th-century figures who accepted the rule-of-thumb aspect of phrenology could be expanded almost indefinitely’’ (Davies, 1955, p. 39). Given Skousen’s zeal in exposing the flaws in Marx, I was disappointed by his treatment of Irving Fisher: ‘‘From James Tobin to Milton Friedman, top economists have hailed Fisher as the forefather of monetary macroeconomics and one of the great theorists in their field. y He became a crusader for many causes, from healthy living to price stability’’ (p. 125). No mention at all of eugenics. Skousen repeatedly suggests that a blueprint of some kind is needed to organize society. ‘‘Smith’s biggest hurdle would be convincing others to accept his system, especially legislators’’ (p. 7). ‘‘The genius of Adam Smith was his development of an economic system of ‘natural liberty’ that could bring about a peaceful, equitable, and universal opulence’’ (p. 46). The implication is that Smith designed the market system, and then convinced societies to adopt it. After the chapter on Marx, Skousen claims, ‘‘If capitalism was to survive and prosper, it would require a new epistemology, a breakthrough in economic theory’’ (p. 106). By this logic, Newton invented gravity and enabled apples to fall from trees.

STRIKE 3: ‘‘I KNEW I WAS GOING TO TAKE THE WRONG TRAIN, SO I LEFT EARLY.’’ The biggest mistake of all is Skousen’s maddening habit of jamming everyone into tight little boxes. There is no nuance in The big three. For Skousen, Ricardo is one of the bad guys because he sees conflict and antagonism in capitalism (unlike Smith’s harmonious view). Thus, Skousen describes Ricardo’s corn model as ‘‘a fatalistic system, wages tend toward subsistence levels, profits decline long-term, and landlords keep adding to their share of unjust returns’’ (p. 59). This completely misses the point. Ricardo used the model to show that the Corn Laws should be repealed

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because they would increase wages and rents, squeezing profits and choking off economic growth. Skousen is so focused on Ricardo’s ‘‘dark side’’ (p. 54) that he fails to explain that Ricardo supported free trade as a way to extend the market and postpone the stationary state. Skousen’s totem pole approach is derived from his black and white view of the history of economics. According to Skousen, there has been a cosmic battle between defenders and opponents of capitalism. Smith, the white knight, destroyed the evil Marx and Keynes. There are several weaknesses inherent in this inflexible hierarchy of the Big Three. Since Smith can do no wrong, Skousen cannot convey the elementary lesson that Adam Smith was a free market economist only relative to his own contemporaries. For example, there is no discussion of Smith’s support of usury laws as a way to prevent prodigals from wasting society’s scarce capital. On the other hand, nothing Marx says can be right, so Skousen cannot recognize that Marx, like Smith, was awed by the productive power unleashed by capitalism. The bourgeoisie, during its rule of scarce one hundred years, has created more massive and more colossal productive forces than have all preceding generations together. Subjection of Nature’s forces to man, machinery, application of chemistry to industry and agriculture, steam-navigation, railways, electric telegraphs, clearing of whole continents for cultivation, canalisation of rivers, whole populations conjured out of the ground — what earlier century had even a presentiment that such productive forces slumbered in the lap of social labour? (Marx & Engels, 1848)

Surely, this quotation, or one like it, should be included in a book that purports to tell the story of the Big Three. According to Skousen, Marx was ‘‘terribly wrong’’ (p. 92). He predicted capitalism would collapse but it has not. It is clearly true that capitalism is alive and kicking, but is it really the same capitalism? Perhaps Marx was right after all. The type of capitalism he saw would not and did not last. The brutal working conditions of the 19th century described by Marx were quite real. That particular flavor of capitalism no longer exists in England. Perhaps Marx erred, not in his prediction, but in failing to recognize the malleability of capitalism and the impact of technological change. I am not convinced this argument is right, but Skousen’s Marx-is-always-wrong approach precludes serious consideration of the case. Another problem created by Skousen’s rigid hierarchy is that one cannot rearrange the Big Three based on their answers to different questions. For example, one could partner Smith and Keynes based on their desire to

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harness individual self-interest. Keynes made this point clearly in the concluding chapter of the General theory: There are valuable human activities which require the motive of money-making and the environment of private wealth-ownership for their full fruition. Moreover, dangerous human proclivities can be canalised into comparatively harmless channels by the existence of opportunities for money-making and private wealth, which, if they cannot be satisfied in this way, may find their outlet in cruelty, the reckless pursuit of personal power and authority, and other forms of self-aggrandisement. It is better that a man should tyrannise over his bank balance than over his fellow-citizens; and whilst the former is sometimes denounced as being but a means to the latter, sometimes at least it is an alternative. But it is not necessary for the stimulation of these activities and the satisfaction of these proclivities that the game should be played for such high stakes as at present. Much lower stakes will serve the purpose equally well, as soon as the players are accustomed to them. The task of transmuting human nature must not be confused with the task of managing it. Though in the ideal commonwealth men may have been taught or inspired or bred to take no interest in the stakes, it may still be wise and prudent statesmanship to allow the game to be played, subject to rules and limitations, so long as the average man, or even a significant section of the community, is in fact strongly addicted to the money-making passion. (Keynes, 1936)

Marx, of course, was unwilling to trade phenomenal increases in output for what he saw as the dehumanizing effects of capitalism. He was convinced capitalism created avarice and a sick, pervasive commercialism. Suppose, to get a merit badge, an Eagle scout helped the proverbial little old lady cross the street. Smith and Keynes would focus on the result—the little old lady is safely on the other side. Marx would complain that the motivation was crass and materialistic. Marx wanted people to do good things for the right, noble reason. Choose another issue and you might get a different pairing of the Big Three. There may be questions that were not addressed explicitly. Consider, for example, their positions on nature versus nurture. For Marx, it was all about the environment. Private property created greed and its absence would allow for the perfectibility of man, but where would we place Smith and Keynes? Does Smith believe that self-interest is hardwired? The quotation by Keynes above speaks of the ‘‘task of transmuting human nature’’—if this is possible, how would Keynes do it? My fundamental criticism of The big three lies with the totem pole approach itself. I do not see the value of ranking the Big Three. Instead of comparing their views and ideas on several dimensions, Skousen forces us into a straitjacket where Smith is the best and Marx is the worst. What is the point of this?

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CONCLUSION The big three delivers on its promise to highlight Smith, Marx, and Keynes, but the reader had better be prepared for an extremely opinionated presentation. It is a book that makes strange claims:  ‘‘That economics qualifies as a Nobel Prize category is proof enough that it is the ‘queen of the social sciences’’’ (p. 113).  Walras ‘‘was able to demonstrate that, without central authority, a trialand-error market system could still achieve maximum social satisfaction or general equilibrium’’ (p. 116).  ‘‘In truth, both components of income—consumption and savings—are spent. Thus, the multiplier (k) is infinite!’’ (p. 180). If you are a market believer, you will like this book. Even then, however, the book will frustrate you. Consider Skousen’s treatment of Schumpeter, who is mentioned four times (but only indexed in the first three): 1. Schumpeter criticizes Ricardo’s simplifying assumptions (p. 60). 2. Schumpeter supports Sweezy for tenure at Harvard (p. 101). 3. ‘‘Austrian economist and Harvard professor Joseph Schumpeter chided Mises and Hayek by concluding, ‘‘Can socialism work? Of course it can,’’ adding even more damagingly, ‘‘The capitalist order tends to destroy itself and centralist socialism is . . . a likely heir apparent’’ (p. 200). 4. ‘‘Under the influence of Schumpeter and Adolph Lowe, among others, Heilbroner joined the rest of the profession and concluded that Mises was wrong and socialism could work’’ (p. 202). So, if an introductory economics student, having never heard of Schumpeter before, reads The big three, he or she will hold a seriously confused understanding of the man who championed the entrepreneur and defended monopolies. No such misunderstanding is produced by The making of economics. In a full chapter on Schumpeter, Skousen provides an appropriately spicy biography and discusses Schumpeterian growth theory. I remain puzzled by the marketing strategy behind The big three. Unlike The making of economics, which could be described as quirky, but entertaining (especially the many photographs sprinkled throughout), Skousen’s decision to lop off huge chunks of text leaves us with a crippled, disjointed little book. If you want Skousen’s view of the history of economics, skip The big three and read The making of economics. I found myself thinking of Robert Heilbroner’s Worldly philosophers as I read The big three and was pleasantly surprised to see it mentioned in the

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concluding chapter. Skousen describes Heilbroner as ‘‘a socialist who toyed with Marxism in his early years. He would later write The worldly philosophers (1999 [1953]), a popular history of economics’’ (p. 202). According to Skousen, the ‘‘century old debate over comparative economic systems’’ is over and he cites Heilbroner’s acknowledgment that ‘‘It turns out, of course, that Mises was right’’ (p. 203). This makes me want to conclude this review with a final quote from that great baseball philosopher, Yogi Berra. Regarding the demise of socialism, ‘‘It ain’t over till it’s over.’’ I am afraid eternal vigilance is needed.

REFERENCES Carlyle, A. (1861). Autobiography of the Rev. Dr Alexander Carlyle: Containing memorials of the men and events of his time. Edinburgh: W. Blackwood. Davies, J. D. (1955). Phrenology fad and science: A 19th-century American crusade. New Haven, CT: Yale University Press. Gordon, D. (2001). The making of a mess (review of Mark Skousen’s The making of modern economics). The Mises Review, Summer. Available at www.mises.org/misesreview_ detail.asp?control ¼ 178 Keynes, J. M. (1936). General theory of employment, interest and money (Available at etext.library.adelaide.edu.au/k/keynes/john_maynard/k44g/chapter24.html). London: Macmillan. Marx, K., & Engels, F. (1848). The communist manifesto, 1848. Available at www.marx.org Skousen, M. (2001). The making of modern economics: The lives and ideas of the great thinkers. New York, NY: M.E. Sharpe.

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THE FINAL TRIUMPH OF ADAM SMITH? Udayan Roy A review essay of Mark Skousen’s The Big Three in Economics: Adam Smith, Karl Marx, and John Maynard Keynes. Armonk, NY: M. E. Sharpe, 2007. xiþ243 pp. ISBN 0765616947. 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. Professor Mark Skousen’s book has, simply by refusing to be a clone of some existing textbook, significantly broadened the choices available to today’s teachers. Skousen’s book should not be compared to typical college textbooks such as, say, Brue and Grant (2006), Ekelund and Hebert (2004), or Landreth and Colander (2002). It more closely resembles New ideas from dead economists by Todd Buchholz (1989) and The worldly philosophers by Robert Heilbroner (1999), two mass-market trade paperbacks that are widely used in colleges. Skousen’s book is a very concise, non-technical, and easy-to-read narrative of the history of economic ideas from the ancient A Research Annual Research in the History of Economic Thought and Methodology, Volume 26-A, 109–116 Copyright r 2008 by Emerald Group Publishing Limited All rights of reproduction in any form reserved ISSN: 0743-4154/doi:10.1016/S0743-4154(08)26011-6

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Greeks to the present day—or, in terms of personalities, from Plato to Stiglitz—with most of its attention going to the Big Three: Smith, Marx, and Keynes. Compared to Buchholz or Heilbroner, Skousen puts a stronger relative emphasis on the life stories of the Big Three, and a weaker relative emphasis on their economic theories. Another distinguishing feature of Skousen’s book is his love for polemics. This leads to a stronger relative emphasis on the policy prescriptions of various economists and, once again, to a weaker relative emphasis on the theoretical ideas behind the policy prescriptions. And Skousen’s evaluations of those policy prescriptions are based almost entirely on whether they: (a) celebrate the free market unreservedly, and (b) assert an optimistic future for all free-market economies. Any mulishness on those two counts will get you an F from Prof. Skousen, as is the fate of David Ricardo, Thomas Malthus, John Stuart Mill, Paul Samuelson, Karl Marx, and John Maynard Keynes in this book. The use of generous helpings of biographical detail is a two-edged sword, as is the raising of the ideological temperature. One the one hand, Skousen’s approach livens things up: we all like gossip and we all like fights. On the other hand, the life stories recounted by Skousen are mostly (though not always) a distraction, and Skousen’s emphasis on policy debates can take the spotlight away from the theoretical innovations that we need to celebrate. Moreover, fights of the intellectual sort are no fun without some resort to caricature, some redefinition of the participants into stick figures. This can distract readers from the complexities and multi-dimensionalities of the people they are reading about. Skousen’s focus on policy at the expense of theory can occasionally be frustrating. It is not enough to be told that Quesnay opposed mercantilism (p. 42). Did his opposition have a theoretical basis? Condillac may have supported free trade (p. 43), but what reasoning led him to do so? Yes, Hume opposed mercantilism (p. 44), but with what arguments?1 Skousen states that Smith rejected the quantity theory of money (p. 36), which is a crucial component of classical economics, but has no further comment on this. Skousen notes that Smith favored the gold standard, but shows no interest in explaining Smith’s underlying logic. Instead of providing clear explanations of Ricardo’s seminal theory of rent and his theory of comparative advantage and letting the reader draw his or her own conclusions about the usefulness of Ricardo’s deductive method, Skousen spends three pages criticizing Ricardo’s penchant for abstract theory (pp. 54–56). As a result, the reader has nothing to relate Skousen’s methodological objections to.

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The exposition of the theories discussed in Chapter 4 is especially unclear. Key ideas of the marginalist revolution—such as, the equality of the real wage and the marginal product of labor (p. 109)—are mentioned but not explained to the uninitiated reader. The true heroes of the marginalist revolution such as Cournot, Dupuit, Gossen, and von Thunen are mentioned only in passing (p. 107) on the grounds that marginalist ideas received acclaim only through the writings of Menger, Walras, and Jevons. But this justification is not good enough. True pioneers must be given their due, especially when their achievements are ignored for no fault of theirs. The monetary theories of Mises and Hayek are discussed at length (pp. 128–130) but without rigor and precision. The discussion of ‘‘Hayekian triangles’’ is especially frustrating.2 In his chapter on Keynes, Skousen refers to the IS-LM and AD-AS representations of Keynes’s ideas and even provides the AD-AS diagram (Figure 5.1 of Chapter 5), but does not provide one word of explanation that would make the diagram intelligible to readers, making one wonder who is Skousen’s intended reader.3 Skousen’s chapter on Smith is exciting to read and his high regard for his subject comes through loud and clear. But someone who has read other textbook treatments in Blaug (1997) or Roncaglia (2005) or Screpanti and Zamagni (2005) or in the books mentioned earlier will notice the thinness of Skousen’s discussion. There is nothing on Smith’s theory (theories?) of value, for instance. The origins of the invisible hand theorem in the writings of Mandeville, Cantillon, and others is clumsily downplayed and relegated to an appendix. Skousen notes that Murray Rothbard, whom Skousen seems to hold in high regard, and other economic historians consider Cantillon the true father of modern economics, but then fails to engage with the notion. These pioneers should have been hailed for their insights in the body of the chapter even at the risk of bringing Smith down a notch. More controversially, Skousen notes that 1776 marks both the signing of America’s Declaration of Independence and the publication of the Wealth of nations and writes, ‘‘In that prophetic year, two vital freedoms were proclaimed—political liberty and free enterprise—and the two worked together to set in motion [italics added] the Industrial Revolution.’’ This is a gross simplification of the origins of the Industrial Revolution, which are the subject of debate even today (see Clark, 2007, and Wade, 2007). Ricardo’s deductive use of abstract theory is criticized (p. 55) and yet the first welfare theorem (of Arrow, Debreu, and others), which is in a sense the mother of all abstractions, is deployed in support of Smith’s invisible hand theorem (p. 20). The real reason for Skousen’s doubts about Ricardo’s

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method seems to be Skousen’s ideological dislike of Ricardo’s emphasis on income distribution among the classes; he is comfortable with abstractions as along as the policy prescriptions that follow from them are ideologically correct.4 Nevertheless, Skousen’s criticisms of the empirical invalidity of the Ricardian–Malthusian assumptions of the iron law of wages and of diminishing returns to scarce land are strong and persuasive. Although Smith preceded Malthus and Ricardo, it was Smith who understood the economics of the industrial era that lay ahead, whereas Malthus and Ricardo were busy discussing the economics of the pre-industrial era that was already coming to an end. Smith was clearly ahead of his time. Moreover, Smith was probably a lot more complex in his attitudes than is commonly believed. As Skousen notes (p. 7), ‘‘His sympathies lay with the average citizens.’’ Here are a few zingers from Smith (2000) that might surprise Skousen’s readers: As soon as the land of any country has all become private property, the landlords, like all other men, love to reap where they never sowed. (p. 56) Masters are always and every where in a sort of tacit, but in constant and uniform combination, not to raise the wages of labor. (p. 76) Our merchants and master-manufacturers complain much of the bad effects of high wages in raising the price y They say nothing concerning the bad effects of high profits. They are silent with regard to the pernicious effects of their own gains. They complain only of those of other people. (p. 113) Civil government y is in reality instituted for the defence of the rich against the poor. (p. 771) Wherever there is great property, there is great inequality. (p. 766) With the greater part of rich people, the chief enjoyment of riches consists in the parade of riches, which in their eye is never so complete as when they appear to possess those decisive marks of opulence which nobody could possess but themselves. (p. 198) Were the expence of war to be defrayed always by a revenue raised within the year, y wars would in general be more speedily concluded, and less wantonly undertaken. (p. 1004)

The penultimate quote could be mistaken as something from Veblen, of whom Skousen is not an admirer (p. 122). The final quote could have come from Cindy Sheehan, the Iraq War protester. Skousen notes Smith’s endorsement of universal public education (p. 34) but does not speculate about what this endorsement might or might not tell us about how Smith would have responded to some of the prominent

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features of the European welfare state of today. Heilbroner has argued that Smith was primarily opposed to governments of the mercantile era that were meddlesome and monopoly-coddling instruments of oppression of the common people by the aristocrats. What Smith would have said about a helpful and caring government that is accountable to the people is perhaps still open to debate. The third paragraph of the passage from Smith that Skousen quotes suggests that Smith was against government spending that pays for ‘‘the people who compose a numerous and splendid court, a great ecclesiastical establishment, great fleets and armies’’ or, in other words, the most egregious forms of waste, fraud, and abuse (p. 35). Skousen’s chapter on Marx is written in a fluid and brisk style and is both enjoyable and informative. But the story of Marx’s life takes up a surprisingly large amount of space. Skousen leaves nothing out, not even some pretty personal and lurid details that have only a tenuous link, if any, to Marx’s intellectual life. Skousen’s discussion of the massive failure of Marx’s predictions is right on the money. But capitalism has changed a lot since the nineteenth century. In many countries, workers nowadays belong to strong and powerful labor unions, working conditions and work safety are monitored by alert legal authorities, and workers are insured against job loss. In many countries, government-funded healthcare, higher education, and pensions are available to all. Can we not say that Marx’s writings have been a significant force behind this transformation of capitalism? In his narration of an anecdote about a student of his (p. 66), Skousen makes those who are fascinated by Marx’s ideas look delusional. Could it not be that the ‘‘abundance and variety of goods’’ provided by capitalism are not enough for many of us? Could it not be that we also hanker for equality, dignity, and freedom from humiliation at the hands of the rich and powerful? Could it not be that Marx was able to tap into this hurt within many of us? Keynes and his followers get two very readable and interesting chapters in the book. But once again Skousen cannot resist recounting some unflattering (and largely irrelevant) details from Keynes’s life, perhaps with the intention of priming the reader for the weightier intellectual criticisms to come. Skousen begins his attack by enlisting the real-balance effect of Pigou and Patinkin against the Keynesian model (pp. 177–178). But here is Patinkin (1987) himself on this issue: In any event, no one has ever advocated dealing with the problem of unemployment by waiting for wages and prices to decline and thereby generate a positive real-balance effect

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that will increase aggregate demand. In particular, Pigou himself concluded his 1947 article with the statement that such a proposal has ‘very little chance of ever being posed on the chequer board of actual life.’ Thus the significance of the real-balance effect is in the realm of macroeconomic theory and not policy. Correspondingly, recognition of the real-balance effect in no way controverts the central message of Keynes’s General Theory.

Skousen then brings up the unquestioned long-run importance of saving to attack Keynes’s paradox of saving, even though the latter is entirely a short-run result (pp. 178–179). Even more absurdly, Skousen then attacks Keynes’s use of independent saving and investment functions, as in the familiar Keynesian Cross diagram that has become a fixture of introductory textbooks: y saving and investment do not involve two separate schedules at all. y Thus there is no intersection of S and I at a single point and therefore no determination of macro equilibrium. The Keynesian cross crumbles under its own weight. (p. 186)

Before we rush to re-write all macro textbooks, we should see that Skousen is again attacking Keynes’s short-run analysis with concepts that are appropriate in long-run analysis. For example, the Solow model of longrun growth assumes that all saving is automatically invested; it has no independent investment function. Only the proponents of the real business cycle theory of macroeconomic fluctuations may claim that Solow’s model is an appropriate basis for short-run analysis. Skousen seems to endorse a theory of short-run recessions that he attributes to J.-B. Say (p. 185). In that theory, producers overestimate demand and, as a result, overproduce. Unsold goods pile up and, consequently, workers get fired. Skousen does not discuss whether this theory has any falsifiable predictions or whether it has been empirically tested by anyone. In his concluding chapter, Skousen gives a detailed policy-centric account of the ‘‘counter-revolution’’ led by Milton Friedman and discusses miscellaneous other facets of the slow but sure triumph of the ideas championed by Adam Smith over those proposed by Marx and Keynes. It cannot be denied that our trust in the effectiveness and relevance of countercyclical fiscal policy has been shaken and that free-market ideas have achieved a very prominent and pre-eminent place in the toolbox we use to make sense of the world around us. But some nagging doubts remain. Skousen himself seems to acknowledge that our environmental problems may require a coordinated effort by governments to organize some global market in tradable pollution permits. Also, who will pay for fundamental

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scientific research if not the government? Who will stand by those of us who were not lucky enough to be born with talent, ability, and luck? When financial markets periodically go on the fritz, who will steer them to sanity if not the government? Yes, socialism has been routed. But it is not totally clear that it was the laws of economics that did it. The use of American military might have been a big part of the story. Even democratically elected socialist governments in several Third World countries were violently overthrown by agencies of the U.S. government and not allowed to evolve on their own (see Kinzer, 2004, 2007). Finally, what is to be done when economic freedom and political freedom are in conflict? What if the rich can pay for the best lawyers and in effect purchase legal immunity for their crimes?5 What if public offices are monopolized by the rich who can finance their own election campaigns? Skousen deplores the power of special interests in public life. But would he support the public financing of all election campaigns? To sum up, Prof. Mark Skousen has written a concise and exciting account of the history of economic ideas. But not every reader will like his heavy reliance on biographical tidbits. And not everybody will be satisfied with the clarity of his theoretical exposition.

NOTES 1. Hume’s specie-flow mechanism is mentioned but not explained. 2. For a fuller treatment, see Garrison and Kirzner (1987). 3. The Introduction says nothing about his target readership. There is no Preface. 4. Although Smith’s invisible hand theorem and the first welfare theorem have a superficial similarity, they are actually two very different arguments. In the words of Blaug (1997, p. 60), ‘‘[T]he effort in modern textbooks to enlist Adam Smith in support of what is now known as the ‘fundamental theorems of welfare economics’ is a historical travesty of major proportions.’’ 5. We still remember the O. J. Simpson murder trial and its outcome. In a more recent echo of that episode, the actor Robert Blake, after being declared not guilty of the murder of his wife, reportedly said of the American system of justice, ‘‘You are innocent until proven broke.’’

REFERENCES Blaug, M. (1997). Economic theory in retrospect. Cambridge, UK: Cambridge University Press. Brue, S., & Grant, R. (2006). The evolution of economic thought. Mason, OH: Thomson Southwestern.

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Buchholz, T. G. (1989). New ideas from dead economists: An introduction to modern economic thought. New York, NY: Penguin Books. Clark, G. (2007). A farewell to alms: A brief economic history of the world. Princeton, NJ: Princeton University Press. Ekelund, R. B., & Hebert, R. F. (2004). A history of economic theory and method. Long Grove, IL: Waveland Press. Garrison, R. W., & Kirzner, I. M. (1987). Friedrich August von Hayek. In: J. Eatwell, M. Milgate & P. Newman (Eds), The new Palgrave: A dictionary of economics (Vol. 2, pp. 609–614). New York, NY: The Stockton Press. Heilbroner, R. L. (1999). The worldly philosophers: The lives, times, and ideas of the great economic thinkers. New York, NY: Simon and Schuster. Kinzer, S. (2004). All the Shah’s men: An American coup and the roots of Middle East terror. New York, NY: Wiley. Kinzer, S. (2007). Overthrow: America’s century of regime change from Hawaii to Iraq. New York, NY: Times Books. Landreth, H., & Colander, D. C. (2002). History of economic thought (4th ed.). Boston, MA: Houghton Mifflin. Patinkin, D. (1987). Real balances. In: J. Eatwell, M. Milgate & P. Newman (Eds), The new Palgrave: A dictionary of economics (Vol. 4, pp. 98–101). New York, NY: Stockton Press. Roncaglia, A. (2005). The wealth of ideas: A history of economic thought. Cambridge, UK: Cambridge University Press. Screpanti, E., & Zamagni, S. (2005). An outline of the history of economic thought. New York, NY: Oxford University Press. Smith, A. (2000). The wealth of nations. New York, NY: Modern Library. Wade, N. (2007). In dusty archives, a theory of affluence. The New York Times, August 7.

Backhaus and Drechsler’s FRIEDRICH NIETZSCHE DID NIETZSCHE SAY ANYTHING TO ECONOMISTS OR ABOUT ECONOMICS? John Linarelli A review essay of Ju¨rgen Backhaus & Wolfgang Drechsler (Eds.), Friedrich Nietzsche (1844–1900): Economy and Society. New York, NY: Springer, 2006. xiþ253 pp. ISBN 13 978-0387-32979-6. ISBN 10 0-387-32979-X. Understanding Nietzsche is hard work. His works reflect a deep understanding of Western history, culture, and philosophy, from the Ancients through and beyond the Enlightenment. If the greatness of a thinker is to be decided on the basis of whether his work transcends his time, Nietzsche certainly meets that test. His work set the stage for twentieth century philosophy. Martin Heidegger, who wrote a two-volume work on Nietzsche, characterized Nietzsche as ‘‘the last metaphysician of the West’’ (Heidegger, 1991, p. 8).1 The Introduction to the Cambridge Companion to Nietzsche declares that Nietzsche ‘‘was quite simply one of the most influential European thinkers’’ (Magnus & Higgins, 1996, p. 1). Writing his beginning sentences in the first edition of his widely known text, Walter Kaufmann says that ‘‘Nietzsche, more than any other philosopher of the past hundred years, represents a major historical event. His ideas are of concern not only to the members of one nation or community, nor alone to philosophers, but A Research Annual Research in the History of Economic Thought and Methodology, Volume 26-A, 117–137 Copyright r 2008 by Emerald Group Publishing Limited All rights of reproduction in any form reserved ISSN: 0743-4154/doi:10.1016/S0743-4154(08)26012-8

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to men everywhere, and they have had repercussions in recent history and literature, as well as in psychology and religious thought’’ (Kaufmann, 1974, p. xiii). Brian Leiter explains that ‘‘Nietzsche has long been one of the dominant figures in twentieth century intellectual life’’ (Leiter, 1997, p. 250). Nietzsche’s critique of morality, while perhaps as much cultural criticism as philosophy, deals with questions that continue to concern philosophers into the twenty-first century. Nietzsche took on as his central task the questioning of the core of Western philosophy, morality, religion, and culture. Thus, to even begin to understand Nietzsche, one must have a thorough grounding in the history of philosophy and in the ideas associated with European modernism (Leiter, 1997, pp. 250–251). Add to the difficulties of understanding Nietzsche that he did not write some of his most important works in what we would characterize today as expository prose. He wrote a good many of his works in aphorisms, and one as fiction. Nietzsche’s poor health complicated his production of some of his most important works. One of the main reasons suggested for his aphoristic style was his severe migraines, which impaired his vision, and his digestive problems. The story goes, he could sit at a desk and write for only short durations. His ill-health, however, dates from his childhood, and his writing style may simply reflect his thought, which some say, includes a sustained critique of the role of reason (Magnus & Higgins, 1996, p. 33; Leiter, 2002, pp. 11–12). Even among Nietzsche scholars, disagreement persists about what Nietzsche meant: Interpretation of Nietzsche’s thought is a complex enterprise. Because of his avoidance of any conventional philosophical system and his many experiments with styles and genres, Nietzsche’s writing seems to demand a sense of active reading. The ‘‘Nietzsche’’ that emerges from scholarly discussion typically depends on the interests of the interpreter and especially often those of the interpreter’s discipline. Themes which are taken to be most central to Nietzsche’s philosophy often depend on which works are regarded as most important or most accessible; but the relative importance which attaches to each of Nietzsche’s works is by no means obvious. Indeed, Nietzsche scholarship has experienced fads with regard to given points of interest. (Magnus & Higgins, 1996, p. 8)

The temptation is to read Nietzsche as literature, as we would a Jane Austen, drawing out our own interpretations of his texts. A good deal of Nietzsche scholarship takes freedoms of interpretation. Limits exist on how far one can go in interpreting Nietzsche without violating the integrity of his work. Doing the work of drawing out Nietzsche’s philosophy on Nietzsche’s own terms is a worthy effort. His philosophy requires the exegetical fidelity one gives any great philosopher. Of course, different disciplines do their

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tasks differently. Nietzsche has a way of meaning different things to different people. We are all, in a sense, stuck in the reductionist cage of our disciplines. The volume reviewed here is a collection of papers inquiring into the influence, if any, of Nietzsche on economic thought. A more specific aim of the volume appears to be in its inquiry into any connection Nietzsche might have had with the German Historical School of Economics. The connection to the German Historical School is important because that School was prominent in continental Europe at the time Nietzsche was writing his philosophy. The German Historical School could be seen as a ‘‘different’’ way of doing economics, to be distinguished from ‘‘mainstream’’ economics, dominated by Anglo-American approaches. Risking oversimplification, the Anglo-American approach to economics is abstract, dominated by mathematical modeling and hypothesis testing, very much in the Popperian mode of theory falsification (Friedman, 1953), while the German Historical School, influenced by Hegel, sees understanding coming from thicker descriptions of social reality, in the historical and the contextual, an economics closer to a normative discipline at its core, with affinities to what in the United States we might classify as sociology. But there seems a connection to a field American economists practice. The German Historical School has its possible American cousin in what has become known as Institutional Economics, with its ‘‘old’’ version in the early twentieth century and its new version ongoing today.2 A question beyond our scope here is the connection of the German Historical School, if any, to New Institutional Economics, an approach to economics that is becoming more prominent in the United States, Europe, and globally.3 Of course, it is precarious to make any generalizations about the current state of the economics discipline in the English speaking universities, with behavioral economics, experimental methods, and the study of institutions becoming the increasingly prominent areas of research focus. One has only to look at Samuel Bowles’s graduate microeconomics text to understand how the study of institutions, in a historically informed context, is becoming (or perhaps has become) mainstream in the United States (Bowles, 2004). In the Preface to the volume under review, the editors, the prominent European economists Ju¨rgen Backhaus and Wolfgang Drechsler, explain that the collection has its origins in the Heilbronn Symposia in Economics and the Social Sciences. My admittedly limited understanding of the mission of the Heilbronn Symposia is to bring the German language tradition in economics and the social sciences to the attention of the broader non-German speaking community. The editors are founders or influential

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members of ‘‘The Other Canon’’ (www.othercanon.org), a group of mainly (but not exclusively) continental European economists who see their intellectual origins in the German Historical School. Before launching into a discussion of the volume, a brief summary of Nietzsche’s life and works would seem to be in order. Nietzsche and his works may be unfamiliar to many economists and historians of economic thought.

NIETZSCHE’S LIFE AND WORKS 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. I must stress at the outset that an important caveat to the discussion to follow is that it is difficult to convey in summary the essence of Nietzsche’s work. In the world of philosophy, Nietzsche is a unique figure. He is as much a cultural critic as philosopher. His work is not systematic, but important systematic insights can be drawn from it. Its lack of systematic presentation presents to us the circumstance that any ‘‘survey’’ of his works cannot do his philosophy full justice. If one is willing to put the effort into understanding Nietzsche, intellectual rewards come. Perhaps the most rewarding experience one can get from studying Nietzsche is that he forces one to leave the cage of one’s discipline and to think about the world in ways that one is not inclined to do. One does not have to agree with Nietzsche to appreciate his probativeness. Derrida considered Nietzsche a great deconstructionist, though one does not have to accept this characterization to value Nietzsche, and indeed his work could be seen as constructive in a therapeutic sense, such as in the works of the later Wittgenstein, later Heidegger, and others (Magnus & Higgins, 1996, p. 4). Nietzsche was born in Ro¨cken, in Saxony, Germany on October 15, 1844.4 He descended from lines of Lutheran ministers on both sides of his

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family. His father Ludwig was a Lutheran minister, as were both his paternal and maternal grandfathers. His father became ill from a brain malady when Nietzsche was the age of 4, and died soon after. When Nietzsche’s father died, the family lost their status and income. In 1850, the family moved to the small city of Naumberg, where Nietzsche lived with his mother, sister, maternal grandmother, and two aunts. Throughout his early school-life, he was plagued with health problems. The migraines had already started in childhood. His final years in secondary education were spent in a boarding school in Pforta, on a full scholarship, where he excelled in German literature, classics, and religion. The medical records of the school note his father’s illness and Nietzsche’s migraines, and say that ‘‘As yet no grave signs are visible, but the antecedents require consideration’’ (Kaufmann, 1974, p. 23). Nietzsche’s later insanity was determined not to be inherited. Nietzsche was not an economist. The essays in the volume under review acknowledge that he said little if anything about economics. He was a philosopher, but he did not undertake formal study in philosophy and had no graduate degree in philosophy. He began his university studies at the University of Bonn in October 1864. He started out in theology and classical philology but gave up theology and transferred to the University of Leipzig to continue studies in philology with his favorite teacher, Friedrich Ritschl. Ritschl cultivated Nietzsche’s work in philology, and published Nietzsche’s papers in his own prestigious journal. In Leipzig, Nietzsche began to become dissatisfied with philology as a discipline. He found it too confining and unimaginative and cultivated interests in Schopenhauer’s philosophy and in music. He was an accomplished pianist. In Leipzig, Nietzsche first met Wagner, the beginning of a long and tumultuous relationship with the composer. In 1868, an associate professorship in philology at the University of Basel opened because of an unexpected resignation, and Ritschl and others recommended Nietzsche for the appointment. Nietzsche had not yet written a dissertation. Leipzig conferred a doctorate without examination, on the basis of articles Nietzsche had written for Ritschl’s journal. Nietzsche thus had a university appointment by the age of 24. Nietzsche became increasingly dissatisfied with philology. He stayed at Basel for 10 years, receiving a promotion, and was widely viewed as a fine lecturer, though his time was plagued by leaves of absence for personal and health reasons. During his time at Basel, Nietzsche developed a close relationship with Wagner and Wagner’s partner, Cosima von Bu¨low, the wife of the great conductor Hans von Bu¨low. Wagner and Cosima lived in

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Tribschen, near Basel. Nietzsche spent a good deal of time at Tribschen, a liberating time for him, interacting with artists and intellectuals far removed from his Lutheran upbringing. During the years 1869–1872, Nietzsche did military duty as an ambulance driver in the Franco-Prussian war, catching both dysentery and diphtheria, aggravating his chronic medical conditions. In 1872, Nietzsche published his first major work, The Birth of Tragedy from the Spirit of Music, a controversial work that did not meet the expectations of his philologist peers and mentor (Nietzsche, 1967). He had yet to establish his reputation as a scholar, yet in this book he ignored philological methods. The book contained no footnotes and was speculative in approach, quite outside the mainstream of philology. Its latter parts were a cultural critique of sorts of Wagner. On reading the book, one gets a sense, however, of Nietzsche’s profound understanding of the ancient world. The book offers a theory about Greek tragedy that could be seen as a precursor to Nietzsche’s later works. He saw Greek tragedy as reflecting a tension between that of Apollo and Dionysus. An Apollonian view of the world is about order, reason, and the detached point of view of the individual. A Dionysian view, however, sees the world as a frenzy, as chaotic, as excess, as focusing only on the whole or the group. Nietzsche saw both of these elements as essential for understanding reality. Greek tragedy combined both of these views. Nietzsche saw the chorus as adding the Dionysian element, and found Euripides’ lessening of the role of the chorus to have placed too much focus on the detached, reasoned Apollonian standpoint. In The Birth of Tragedy, Nietzsche began his dim assessment of Socrates as seeing only reason as the source of understanding. Nietzsche saw these incomplete understandings as extending into his own time, with the overreliance on reason and science, suppressing the Dionysian aspects of reality. In 1878, Human All Too Human, A Book of Free Spirit was published, the first of Nietzsche’s aphoristic works (Nietzsche, 1996). Between the publication of this work and The Birth of Tragedy, Nietzsche wrote four essays, grouped as Unfashionable Observations, and a number of additional essays, which, for purposes of staying with the aim of reviewing the Backhaus and Drechsler text, I shall not discuss. In Human All Too Human, Nietzsche distinguishes between the humans of his time, who are ‘‘all too human,’’ and free spirits, humans who have freed themselves from their culture and from what is revered in their culture. Nietzsche said that free spirits did not yet exist in his time. Here we see a precursor to Nietzsche’s distinction between slave and noble morality and his u¨bermensch. In Human All Too Human, Nietzsche introduces what has become known as

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perspectivism, the idea that truth is an interpretation based on a perspective. What perspectivism means is a subject of some debate among philosophers. One of Nietzsche’s controversial claims, made in Human All Too Human but pervasive in almost all of his work, is that morality is perspectival and is a human practice. He contrasts Greek and Christian thought, finding Greek thought to be far superior. He continues this latter theme in Daybreak: Thoughts On Moral Prejudices, published in 1881. The Gay Science, published in 1882, sets forth a number of themes of potential relevance to economists, one of the principal ones being his critique of the scientific methods employed in the Europe of his day (Nietzsche, 1974). Nietzsche lived in an age of science, when scientific methods were applied to many disciplines. Some of these extensions seem odd to our contemporary ear, such as the ideas of a science of morality or of law. Nietzsche recommended an esthetic approach to understanding the world. Illuminating work does not have to be stodgy or dreary, loaded with footnotes. Rather, it can be aesthetic and profound. Even what some may see as superficial can be illuminating. A good deal of what Nietzsche says by way of critique of scholarship may be a reaction to a particularly German or ‘‘Teutonic’’ conception of science (Nietzsche, 1974, p. 5). As well, The Gay Science continued Nietzsche’s critique of Christian morality. The Gay Science contains the first discussion of eternal recurrence, a ‘‘doctrine’’ that is more directly brought out in Thus Spoke Zarathustra: A Book for All or None (Nietzsche, 1995). Thus Spoke Zarathustra: A Book for All or None, published in sections in 1883, 1884, and 1892, written in the form of fiction, is perhaps Nietzsche’s most popular book. The German government issued it to soldiers in World War I as inspirational reading (Wicks, 2004). Regrettably, the Nazis coopted the work in World War II, and this has exacerbated misunderstandings of the work. Thus Spoke Zarathustra continues Nietzsche’s antagonism to Judeo-Christian thought. Throughout Thus Spoke Zarathustra, Nietzsche relies on literary devices and illusions resembling those found in the Old and New Testaments, along with nature metaphors and parody. The result is that Zarathustra is shown to be someone like Christ or Socrates, but also as an alternative to them. It is in this book that Nietzsche introduces the concept of the u¨bermensch, or, roughly translated, ‘‘superhuman’’ or ‘‘higher men,’’ who he contrasts with the ‘‘last man.’’5 Just what Nietzsche means in employing these terms has been the subject of longstanding philosophical interest. The u¨bermensch strives for greatness, willing to take risks to improve humanity. The last man, by contrast, is only concerned with happiness. The last man lacks the transforming desire of the u¨bermensch and

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is only interested in personal comfort. Zarathustra himself seems the archetypal u¨bermensch: a strong-willed sage, a solitary, reflective, strongwilled person in charge of his own destiny. Nietzsche saw someone in the position of an u¨bermensch to be in far better psychological health than the last man. To Nietzsche, the u¨bermensch is a higher and better mode of being human. Nietzsche’s idea of will to power takes its prominence in Thus Spoke Zarathustra. The concept has been much maligned and abused by nonphilosophers, and particularly by those in the political world. The Nazis misappropriated the idea and did much damage to the meaning Nietzsche intended for it. For Nietzsche, as for Schopenhauer, the will is more important and fundamental than reason or other ways of knowing. Philosophers disagree on its meaning and its importance to Nietzsche. In Thus Spoke Zarathustra, Nietzsche provides more on his doctrine of eternal recurrence. Quite simply, and perhaps giving too much emphasis on eternal recurrence as a cosmological hypothesis, it is the idea that ‘‘everything that has already happened in the universe, and everything that is happening right now, and everything that will happen in the future, has already happened, and will happen again, preceded and followed by exactly the same events in exactly the same order, infinitely many times’’ (Nehamas, 1980, p. 332). Eternal recurrence is, according to Alexander Nehamas, Nietzsche’s most peculiar of ideas, one which has done Nietzsche a ‘‘great disservice’’ (Nehamas, 1980, p. 331). Nietzsche describes in Beyond Good and Evil: Prelude to a Philosophy of the Future, published in 1886, as a ‘‘critique of modernity,’’ but it actually seems directed at the ‘‘dogmatism’’ of philosophy (Nietzsche, 1989b). His critique remains relevant in at least two ways. Firstly, he claims that philosophy is not about the search for truth. Rather, it is a ‘‘personal confession of its author and a kind of involuntary and unconscious memoir’’ (Nietzsche, 1967, p. 13). This reflects an important theme in philosophy. Secondly, in Beyond Good and Evil, Nietzsche suggests that a robust naturalism should be the task of philosophy. He says that the study of morals should be about the natural history of morals, a way of doing moral philosophy that differs from the methods used by German philosophers that formed the tradition against which Nietzsche was reacting. Nietzsche argued that morality changes over time and that multiple moralities can exist at the same time. In Beyond Good and Evil, Nietzsche introduces the ideas of slave morality and master morality, ideas he develops more fully in Toward the Genealogy of Morals. Finally, Nietzsche’s concept of will to power appears again and more prominently in Beyond Good and Evil.

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Toward the Genealogy of Morals: A Polemic, published in 1887, is a set of three essays (Nietzsche, 1989a). Here, Nietzsche abandons his aphoristic style. Nietzsche starts his first essay in The Genealogy of Morals with a critique of utilitarianism and Judeo-Christian morality. To Nietzsche, the idea of the good has nothing to do with utility. Nietzsche contended that if we examine the genealogical origins of ‘‘good,’’ we will discover that the concept of good started out as self-referential, referring to the qualities of the person using the concept. Those with the unhealthy slave perspective, however, thought of good in a negative sense; their qualities were good because they lacked what they saw as their master’s evil qualities. To Nietzsche, Judeo-Christian morality is a slave morality, built on ressentiment against the masters. The second essay is on the origins of bad conscience in cruelty as a human disposition. The third essay is a critique of asceticism in Christianity. He ends this last essay with an argument that science is no better than religion as a world-view because it substitutes faith in truth for faith in God. Nietzsche stopped writing in 1888, but that year was his most prolific. Nietzsche produced five books in 1888. The Twilight of the Idols, or How to Philosophize with a Hammer, written in 1888 and published in 1889, includes some familiar Nietzschean themes (Nietzsche, 1990). At the book’s beginning, Nietzsche says that he wants to accomplish a ‘‘revaluation of all values.’’ His main targets – the idols – are philosophers and moralists. He attacks their worship of reason. He continues his attack on Socrates, who he sees as the source of much that is wrong in philosophy’s focus on reason. He thus dismisses Plato. He continues his attack on Judeo-Christian morality and on moralism generally. His main source of value in Greek thought is Dionysus, who he associates with eternal recurrence. Otherwise, he favors the Romans over the Greeks. He contrasts Dionysus and a positive approach to sexuality with Christ and Christian views on the un-cleanliness of sexuality. The Antichrist, written in 1888 and published in 1895, is a strident critique of Judaism and Christianity (Nietzsche, 1990). Nietzsche meant it to be the first part of a larger work entitled ‘‘The Revaluation of all Values,’’ but this project never came to pass (Hollingdale, 1990, p. 27). In The Antichrist, Paul is blamed for the failure of Christianity as an institution. Nietzsche seems to praise to Jesus, but sees Christianity as going wrong once institutionalized. The book has been criticized as strident, shrill, crude (Tanner, 1990, p. 7). Nietzsche’s penultimate book, written in 1888 is Ecce Homo, an unconventional autobiography (Nietzsche, 1989a). He began the work on his 44th birthday, but it did not get published until 1908. It lends credence to

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the conclusion that Nietzsche was mentally incompetent by the time he wrote it, though some of its eccentricities could be seen as attempts at humor. His final work of 1888 is Nietzsche contra Wagner: Documents of a Psychologist, an anthology of passages edited from other works, in which he seeks to show that he and Wagner are opposites. From here, there is nothing more to say about Nietzsche’s intellectual life. He collapsed on a street in Turin in January 1889 and from the time of that fall until his death on August 25, 1900, at the age of 55, he suffered from complete mental incompetence. Some say he may have been suffering from the late stages of syphilis, but there is no diagnosis. Almost immediately after hearing of his total breakdown, his sister Elizabeth took over his affairs. She took advantage of Nietzsche in his debilitated state, acquiring sole rights in all of his works and taking over his care after his mother’s death. Elizabeth published Nietzsche’s notes as Will to Power. Elizabeth, along with her fascist and racist peers, did much damage in the editing of the notes and to Nietzsche’s reputation. Will to Power is widely seen as of questionable fidelity to Nietzsche’s ideas.

CONNECTING NIETZSCHE TO ECONOMICS Given the above summary of Nietzsche’s major works, one might come to Friedrich Nietzsche: Economy and Society, with some skepticism. Did Nietzsche have anything to say about economics as a discipline, to economists, or about economics within society? With this book, one has to try to leave aside one’s American viewpoints, or shall I say biases, about what economics as a discipline is supposed to do. Perhaps the economists in this volume are less susceptible to some of the familiar critiques of economics, as one would find in the philosophy of the social sciences literature. One could not imagine mainstream American economists looking to Nietzsche for ideas. The authors could be seen as historians of economic thought, mining a great thinker for influences on and ideas about economic thought, a thinker who wrote at a time when contemporary economics was forming. Alternatively, what the authors (or perhaps some of them) are doing in this volume is more in the nature of social theory. The sociologist Anthony Giddens uses the idea of social theory as an umbrella: ‘‘It is a body of theory shared in common by all the disciplines concerned with the behavior of human beings. It concerns not only sociology, therefore, but also anthropology, economics, politics, human geography, psychology – the whole range of the social sciences’’ (Giddens, 1982, p. 5).

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The Preface, which the editors wrote, tells us the origin of the project, and places the project within the German Historical School and the Heilbronn Symposia on Economics and the Social Sciences. The Preface explains that plans were laid for an ‘‘exploratory conference’’ which needed even further work, in the form of a ‘‘pre-conference’’ (p. ix). The editors complain in the Preface that ‘‘Nietzsche is difficult to access in any language other than German, and the older translations into English are generally flawed’’ (p. x). They continue on a bit further in: ‘‘Still the present book had to be in English, because the fact of the matter is that English is the lingua franca of the academic world these days, and knowledge that is not transmitted in it does get lost’’ (p. x). Senn (p. 10) makes a similar point in Chapter 2 of the volume. These are good points, and it bears repeating that it would be difficult to believe that this sort of work would get done in the American economics academy. The Preface helps us understand the overall placement of the book within the German or continental economics literature. It leads one on to inquire about the German Historical School and its influences. Chapter 1, ‘‘Friedrich Nietzsche and Economics: Research Problems’’ by Wolfgang Drechsler, one of the editors of the volume, begins the identification of a research agenda around Nietzsche in the economics discipline. He explains, ‘‘my own assumption was not so much that he had contributed to economics directly, but that economists, especially ‘real’ economists and business scholars with a hard-nosed propensity for – and I mean what comes now completely non-pejorative – legitimizing the selfish pursuit of private gains, would have turned to Nietzsche as a philosophically viable source (or foundation) for their, after all, traditionally suspect-asimmoral proclivities’’ (p. 1). Drechsler finds that economists have not relied on Nietzsche. As for the lack of reliance on Nietzsche by economists, he says: ‘‘This could be viewed as a strong indictment of economics; after all, it appears that the discipline was not even able to utilize the philosopher most fitting to its mainstream’’ (p.1). The authors of a few other chapters contend that Nietzsche supports the self-interestedness assumption in economics. That Nietzsche’s idea of morality, or perhaps more accurately, his critique of morality, supports the assumption made in economics that persons are self-interested, maximizing egoists, rational in the instrumental and deterministic sense in which economists define the idea of rationality, and is an odd conclusion from a philosophical point of view. Philosophical inquiries about Nietzsche’s approach to understanding morality present a more nuanced picture. In an indirect and limited sense, Nietzsche’s critique of morality shares some affinities with economics in that there is a shared emphasis on a psychological question, the motivation of individuals. To an

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economist, a single motivation reliably explains human behavior – selfinterest. It is an assumption not a normative or a descriptive account. In economic terminology, people’s morals are preferences, exogenous to economic models. Economists cannot make a claim that they are saying much of anything about morality if morality is excluded from economic analysis. Of course, my biases are in Anglo-American microeconomics, so all this may be a misunderstanding of other approaches to economics. In Nietzsche’s philosophy, a range of motivations come into human consciousness, including conscience, guilt, and ressentiment (Leiter, 2002, p. 302). Self-interest may come into Nietzsche’s slave and noble morality framework, but it is incidental in his account, and in some places he says that higher men are not hedonists (Leiter, 2002, pp. 121–122). Nietzsche’s critique of morality is partly a response to the morality canons of his time and also our time: Christianity, Kantian deontological theories, and ‘‘English’’ utilitarianism. Nietzsche was not opposed to morality or to the idea of morality (Leiter, 2002, pp. 73–74). The morality he conceptualized was one of the u¨bermensch, ‘‘higher men,’’ noble creative elite. Nietzsche seems to be saying that higher men take on substantial projects, but that they also treat others instrumentally in order to get on with these projects (Leiter, 2002, pp. 116–117). We are left with the conclusion that finding the notion of self-interest in Nietzsche’s philosophy requires close study and a good degree of interpretation. I do not want to make too strong a point here, as I see Chapter 1 as setting forth a research agenda and not coming to hard-and-fast conclusions on this point. Drechsler asks a question about the lack of economics research on Nietzsche; he does not provide a comprehensive exegetical survey. In Chapter 1, Drechsler continues, that we should ‘‘put some trash out of the way’’ (p. 2). Here, he dispels the well-familiar fictions about Nietzsche. Nietzsche was not anti-Semitic, not a nationalist, and did not write Will to Power. He makes a number of other points about setting the research agenda as well. In Chapter 1, Drechsler complains about English translations of Nietzsche. ‘‘Earlier translations’’ were based on flawed and forged texts and thus ‘‘not valid’’ (p. 3). We do not know his concerns and about which translations, though he says in a footnote that through his widely used translations, Kaufmann tried to rehabilitate Nietzsche for an Englishspeaking audience and so he would choose the ‘‘least offensive’’ word when he had to make a choice (p. 6, no. 6). This point about Kaufmann’s translation seems widely accepted (see Leiter, 2002, p. 291). Working in the German seems essential for any sustained Nietzsche scholarship.

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The question I have, then, is why there is no definitive translation of Nietzsche, such as the Mary Gregor, Paul Guyer, and Allen Wood translations of Kant (Kant, 1996, 1998, 2000). There is something to be said for reading an English translation by someone who has dedicated their life to a philosopher. I trust, for example, Mary Gregor’s translation of Kant’s Groundwork as far more reliable than my own. A good translator makes their translation decisions evident in notes at the beginning of the text and in footnotes throughout the text. The final section of Chapter 1 is significant in that it lays out two framing questions about where Nietzschean economics research should go. Drechsler organizes the research agenda around two points: (1) ‘‘research on Nietzsche’s specific thought on economics;’’ and (2) ‘‘the use of Nietzsche’s general thought for economics’’ (p. 5). The book provides research in both categories. In Chapter 2, ‘‘The Influence of Nietzsche on the History of Economic Thought,’’ Peter R. Senn documents his thorough review of the economic literature from Nietzsche’s time to the present, in search of references to Nietzsche. He researched the English literature but did not confine his research to it. His research includes but is not limited to the literature on the history of economic thought. Senn’s research is comprehensive but he does not confine himself to simply documenting his literature review. In the final section of the chapter, Senn provides a short assessment of the literature. He argues that he cannot prove a negative, that Nietzsche did not influence economics: ‘‘One cannot logically prove that Nietzsche did not influence economics. The best that can be done is to search for evidence that he did. None was found. No one has yet presented any clear proof that Nietzsche had any important influence on the development of economic thought. It remains to explore possible reasons for the situation’’ (p. 28). Leaving aside the commentary on logic, the reasons offered for no direct influence were various. One obvious reason that Senn points out is that Nietzsche did not write anything about economics. Another reason Senn offers is that the few remarks Nietzsche made about economists were ‘‘almost universally derogatory’’ (p. 29). These remarks, however, such as his attacks of J.S. Mill, were likely directed against utilitarianism, ‘‘English’’ moral philosophy, not economics. Other reasons for the lack of reception of Nietzsche in economic thought were ‘‘his rejection of reason and the contradictions that are to be found in his work’’ (p. 29). As well, Senn contends that Nietzsche’s views on logic and mathematics ‘‘are also in sharp contrast with those of mainstream economists both now and during his time’’ (pp. 29–30). Senn explains that others have made the

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case that Schumpeter was influenced by Nietzsche. Chapter 4 covers that subject. The final points in Chapter 2 draw us to notions of indirect influences of Nietzsche on the economics literature, and on the possible use of hermeneutics to review the economics literature. In Chapter 3, ‘‘Nietzsche and Economics,’’ by Marcel A. G. Van Meerhaeghe, we find a close reading of Nietzsche’s texts, to discover whether Nietzsche said anything that is economically related. It has the opposite aim of Senn’s chapter. Senn’s is a search of the economic literature for Nietzsche’s influences. Meerhaeghe reads Nietzsche’s work to determine if he said anything about economics or economists. In Section 1 of the chapter, Meerhaeghe looks for economists Nietzsche may have quoted. He finds that the number of economists Nietzsche cited ‘‘is fairly limited and it is not necessarily the most important ones that are referred to’’ (p. 40). Meerhaeghe identifies some of Nietzsche’s attacks on Bentham and Mill, but these attacks are likely on their utilitarianism as an ethical theory. Section 2 explains why economists do not take Nietzsche seriously. Section 2.1 details some of Nietzsche’s disparaging comments about commerce and economics, though Meerhaeghe finds that Nietzsche is ‘‘one of the heralds of ‘egoism’’’ (p. 44). Section 2.2 outlines some basic economic principles found in Nietzsche. These principles seem trivial or marginal. Finally, Section 2.3 deal with what Nietzsche said about European unification. The chapter finds that Nietzsche was an ‘‘enthusiastic European’’ and anti-nationalist. The chapter’s conclusion is a reflective summary. In Chapter 4, ‘‘Creative Destruction in Economics: Nietzsche, Sombart, Schumpeter,’’ Hugo Reinert and Erik S. Reinert state a clear thesis: Schumpeter’s idea of creative destruction comes from Werner Sombart, who acknowledges that he got it from Nietzsche, and Sombart influenced Schumpeter. Thus, Schumpeter’s idea is Nietzschean, or at least it could be said that Sombart sees the concept as coming from Nietzsche. Though I am not a scholar in the history of economic thought, it would seem that from a history of economic thought perspective, whether the concept can actually be found in Nietzsche’s philosophy is a different question. Sombart may have got Nietzsche wrong. The authors advise that the roots of the creative destruction concept trace back to Indian philosophy, which was being read in Germany in the eighteenth century, and thus Nietzsche’s and Sombart’s influences could possibly be there. The chapter is a detailed piece of scholarship on economic thought in Germany of about the last two centuries. Section 3 contains a lengthy and detailed discussion of Nietzsche’s philosophy. Section 3 is an attempt to show that Nietzsche endorsed the idea

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of creative destruction. Whether or not the concept came from Nietzsche does not threaten its explanatory power. Schumpeter might be right regardless of the source of the idea and whether Nietzsche is correctly interpreted. Chapter 5, ‘‘The Word of Honour,’’ by Ju¨rgen Backhaus, one of the editors, reviews passages from The Gay Science and Toward the Genealogy of Morals, which suggest that Nietzsche defines human beings as animals that can make and keep promises, and then extends these quotes to argue that Nietzsche had ‘‘profound insights’’ about how a market economy works. The chapter connects the promise keeping aspects of humans to institutions needed for a market economy. The final section of the chapter connects Nietzsche’s insights on promise keeping to Leland Yeager’s theories on price indices, a demanding argument, which seems far-fetched. Nevertheless, this is a creative essay, one that goes well beyond an exegetical account. It suggests some further research on the role of promising in connecting moral and economic theory generally, quite apart from anything Nietzsche had to say on the subject. Chapter 6, ‘‘An ‘All Too Human’ Question: Nietzsche, Die Soziale Frage, and the German Historical School of Economics,’’ written by Sophus A. Reinert and Erik S. Reinert, is a careful and nuanced essay in which the authors acknowledge, as do others in the volume, that Nietzsche made no direct or even indirect contributions to economics. The authors explain that Nietzsche did, however, struggle with ‘‘fundamental questions of human coexistence, that once used to interest economists, and even the odd criticism of laissez faire made its way into his works’’ (p. 111). The piece explores how Nietzsche’s thought relates to the social problems of his day. The authors advise that a significant question of the time was the so-called ‘‘Social Question’’: why was liberalism tearing society apart, making the rich richer and the poor poorer? The intellectual movements of the time were trying to understand the ‘‘extremes of liberalism and communism’’ and seeking a ‘‘functioning compromise’’ between them. The authors argue that Nietzsche gives readers freedom of interpretation but they acknowledge the limits of this freedom. The focus of the chapter is on two of Nietzsche’s minor works: ‘‘The Greek State,’’ an essay Nietzsche wrote in 1871–1872 and ‘‘A Glance at the State,’’ a chapter in Human All Too Human. As well, they examine Nietzsche’s lecture, ‘‘The Future of our Education Institutions.’’ In these, the authors claim that Nietzsche considered the Social Question. Section 2 outlines the major issues covered by the Social Question and the German economic program of the 1870s. Section 3 begins the work on interpreting Nietzsche. The authors find that Nietzsche dealt with some

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of the same questions outlined in the prior section, but ‘‘with very different armaments and a very different agenda.’’ According to the authors, the fundamental question for Nietzsche was where and how shall Europe progress? The authors contend that Nietzsche was familiar with economic works; his hatred of English philosophy affected his reception of English economic ideas. One of the main themes of the chapter is that Nietzsche’s philosophy is roughly compatible with that of the German Historical School to the extent that he distrusted free markets alone to do the work of bringing about a successful society. The authors acknowledge that beyond that, any connection to German economics of the time seems tenuous. In ‘‘The Greek State,’’ for example, Nietzsche is mainly concerned with the threat the modern world poses to culture. Nietzsche saw the need of the state to promote esthetics through art as its main functions – the state should nurture genius, which means that some ordinary folk will be subjected to these higher esthetic goals. Nietzsche was dissatisfied with liberalism, communism, and socialism because in his view they failed to promote state support of the ‘‘Olympian’’ creative minority. The authors do a fairly close analysis here, looking at various minor sources, such as Nietzsche’s unpublished notes, for hints on Nietzsche’s political and economic views. But they acknowledge difficulties of interpretation. They find that Nietzsche’s hints at skepticism about free markets, and this connects him, albeit indirectly, to the tensions between ‘‘English’’ versions of economics versus the German Historical School. Section 4 provides a close analysis of ‘‘A glance at the state.’’ It connects Nietzsche to the Social Question and to the political and economic questions of his day. Chapter 7, ‘‘Nietzsche and Business Ethics’’ by Marcel A. G. Van Meerhaeghe, makes some errors on what ethics is in a philosophical sense. It confuses the normative and the causal in arguing that deontological and consequentialist theories ‘‘explain’’ behavior and ‘‘cause’’ individuals to act in certain ways. These are important questions for social scientists (including economists), but subsidiary for traditional moral philosophers. On the other hand, philosophers who accept naturalistic accounts of ethics may have less concern with the author’s approach. Avoiding evaluating the discussion of deontological and consequentialist moral theories, the author’s understanding of Nietzsche’s morality critiques make, if read charitably, a naturalistic point about Nietzsche giving a ‘‘better explanation of the decisions of the businessman.’’ The above cautionary points about arguing that Nietzsche supports the self-interest assumptions in economics apply here, though the author points to passages in Nietzsche that he says supports the notion that Nietzsche includes love and pity in his ethical

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system. The idea here is expressed in the conclusion, that ‘‘egoism does not exclude human feelings.’’ Chapter 8, ‘‘On the Anticipation of Knightian Uncertainty in Nietzsche’s Genealogy of Morals,’’ by Stephen John Nash, inquires whether Nietzsche anticipated in the Toward the Genealogy of Morals some of the important theories that Chicago economist Frank Knight set forth in his 1921 book, Risk, Uncertainty, and Profit. In that book, Knight made some important distinctions between the kinds of uncertainty that exist and how they may or may not be measurable or quantifiable. Nash looks at the ‘‘genealogy of Knightian uncertainty’’ and finds it in both the American pragmatist school of philosophy and in Nietzsche. This is essentially a paper that attempts to understand the epistemological influences of Nietzsche’s philosophy on a particular economist. The conclusion contains an accessible summary of the author’s findings. It includes the explanation ‘‘that Nietzsche’s emphasis on the fact that humanity can never perceive perfect knowledge as a benchmark for evaluating reality, possibly represents an important anticipation of what was to come later: Pragmatic philosophy as well as the emphasis on uncertainty in economic theory. By referring to some works of Knight, a more direct linkage between Knight and Nietzsche is suggested’’ (p. 162). Further study of the questions posed in this chapter might benefit from a close study of works that deal with Nietzsche’s epistemology. Chapters 9 and 10 deal with Nietzsche’s reception in the GDR. Chapter 9, ‘‘On the Nietzsche-Reception in the GDR,’’ by Ulrich B. Busch, traces the intellectual history of Nietzsche’s eventual acceptance in the German Democratic Republic (GDR). The author shows that the reception was gradual because Nietzsche was associated with fascism. The author explains that an understanding of Nietzsche’s treatment in the GDR requires that we understand the political and economic conditions of the time. Chapter 10, ‘‘Wolfgang Harich and Friedrich Nietzsche – A Chapter of the East German Debate,’’ by Gu¨nter Krause, examines Nietzsche’s influence on Wolfgang Harich, who the author identifies as one of the most prominent philosophers in the GDR. Harich’s take on Nietzsche was negative, seeing him as one of the principal creators of Nazi ideology. The chapter explains that in his understanding of Nietzsche, Harich was influenced by the Hungarian Marxist philosopher George Lukacs. Chapter 11, ‘‘Justice and Economy From Human All Too Human to Thus Spoke Zarathustra,’’ by Rainer Kattel, argues that Nietzsche’s critique of morality in between these two books locates the ways in which humans operate in the world as practical wisdom and technical skill, which, the author contends, Nietzsche deals with in discussions of justice and the

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economy. The author attempts to show that to Nietzsche, morality and economic activity are nihilistic in the mass societies of the day. The final chapter, Chapter 12, ‘‘Democracy and Aristocracy in Nietzsche’s Later Writings,’’ by Otto Kaiser, relates some themes from the beginning to the end of Nietzsche’s philosophy to the fate of democracy in a Nietzschean world-view. He finds a unity of Nietzsche’s views in Greek tragedy and Nietzsche’s interpretation of the Dionysian. The author uses some of the main themes from Nietzsche’s work to discuss Nietzsche’s views on democracy as a precursor to an international aristocratic order. The chapter is essentially an attempt at seeing whether Nietzsche’s predictions about the future are correct. The author uses Nietzsche to interpret recent historical circumstances relating to globalization.

CONCLUSION The essays in this volume could be seen as a refreshing change. For the most part they are willing to break out of the strict dictates of the analytical social science methods restricting much of the economic discourse in mainstream economics. Here are historically informed economists interpreting texts. The chapters exhibit a blend of thought by economists reflective about both traditional economic tools and ways of understanding from the humanities. Of course, the essays could simply reflect what historians of economic thought do. One of the most important insights to take from the book is that it suggests a further economic research agenda beyond Nietzsche, into the roots of how economics developed different schools of thought. This in itself poses an important question, because economics claims to be a science and science claims to be universal. The volume is ambitious and risky. It takes on a difficult task. These qualities in and of themselves are not negative qualities, but they open the book to criticism. The main worry about the book is in the reductionism it reflects, not explicitly, but in the questions upon which it must focus if it is to examine Nietzsche’s corpus from an economic perspective. Economic questions were not Nietzsche’s concern. Several chapters in this book tell us this. The risk the book runs is that it is unlikely to achieve a broad acceptance by mainstream Nietzsche scholars. The methods of inquiry of some of the chapters, that of picking isolated parts from Nietzsche’s corpus to show support, or lack of support, for some proposition in economics, or more broadly, for some school of thought in economics,

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may be subject to critical questioning by Nietzsche scholars who see Nietzsche as saying important things within the central philosophical categories of epistemology, ethics, and metaphysics. The trend in Nietzsche scholarship, at least in North American philosophy departments, seems to be moving toward looking at Nietzsche’s philosophy as a whole, which requires that we avoid selective or narrow use of Nietzsche’s corpus. Nietzsche is prone to misinterpretation because of the manner in which he presented his ideas. Leiter sums up the concerns as follows, which he wrote in response to attempts to get a political philosophy out of Nietzsche: Even the casual reader knows, of course, that Nietzsche has intense opinions about everything, from German cuisine to the unparalleled brilliance (in Nietzsche’s estimation) of Bizet’s operas, not to mention various and sundry ‘‘political’’ matters. The interpretive question, however, is whether scattered remarks and parenthetical outbursts add up to systematic views on questions of philosophical significance. Unfortunately, scholarly caution has not been the hallmark of the ‘‘revival’’ of interest in Nietzsche’s political philosophy. (Leiter, 2002, p. 292)

I hope that my worries are unfounded. The text is about, after all, Nietzschean economics, or the lack of such a thing. Whether philosophers happen to disagree with the way economists and historians of economic thought research the ideas of prominent thinkers of a time when contemporary economics was being formed could largely be beside the point. On the other hand, the traditional core of expertise on Nietzsche seems to be in philosophy. If it is possible to take a view of Nietzsche from The View from Nowhere,6 outside of any discipline, perhaps the philosophers engage in reductionism too, centered on the categories of their discipline. The basic challenge this book makes is to the disciplinary ghettos we all live in. Perhaps Nietzsche can speak to many more of us than we think.

NOTES 1. Heidegger’s writing on Nietzsche has been discredited for its acceptance of Will to Power as authentic Nietzsche and as expressing Nietzsche’s most important idea (Magnus & Higgins, 1996, p. 58). The other widely known and standard criticism of Heidegger’s work on Nietzsche was his use of Nietzsche to support his own philosophical agenda. 2. For discussions of the history of Institutional Economics, see Hodgson (1998, 2004) and Rutherford (1994, 2001).

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3. For introductions to New Institutional Economics, see Eggertsson (1990) and Furobotn and Richter (2005). The latter contains a number of comparisons of the German Historical School with New Institutional Economics. 4. Unless otherwise indicated, what follows is primarily from Kaufmann (1974), Magnus and Higgins (1996), and from some of the translators’ notes and introductions from the Nietzsche works found in the bibliography. There is a significant secondary literature in English on Nietzsche. For just a few of the more influential books in the field, see Clark (1991), Danto (1965), Leiter (2002), Nehamas (2006), Richardson (2002), and Schacht (1985). Deleuze (1983) is an influential translation from the French. Journal literature continues in production on Nietzsche as well. For an excellent collection of papers, see Richardson and Leiter (2001). 5. The ‘‘higher men’’ terminology is from Leiter (2002, p. 115). 6. I of course borrow the idea of The View from Nowhere from Nagel (1989), though I am sure that I do not use it as well or as precisely as Nagel did.

REFERENCES Bowles, S. (2004). Microeconomics: Behavior, institutions and evolution. Princeton: Princeton University Press. Clark, M. (1991). Nietzsche on truth and philosophy. Cambridge: Cambridge University Press. Danto, A. C. (1965). Nietzsche as philosopher. New York: Columbia University Press. Deleuze, G. (1983). Nietzsche and philosophy. New York: Columbia University Press. Eggertsson, T. (1990). Economic behavior and institutions. Cambridge: Cambridge University Press. Friedman, M. (1953). The methodology of positive economics. In: Essays in positive economics (pp. 3–43). Chicago: University of Chicago Press. Furobotn, E. G., & Richter, R. (2005). Institutions and economic theory: The contribution of New Institutional Economics (2nd ed.). Ann Arbor: University of Michigan Press. Giddens, A. (1982). Profiles and critiques in social theory. Berkeley: University of California Press. Heidegger, M. (1991). Nietzsche (Vols. 3 & 4). New York: Harper Collins. Hodgson, G. (1998). The approach of institutional economics. Journal of Economic Literature, 36(1), 166–192. Hodgson, G. (2004). The evolution of institutional economics. London: Routledge. Kant, I. (1996). Practical philosophy. Cambridge: Cambridge University Press. Kant, I. (1998). Critique of pure reason. Cambridge: Cambridge University Press. Kant, I. (2000). Critique of the power of judgment. Cambridge: Cambridge University Press. Kaufmann, W. (1974). Nietzsche: Philosopher, psychologist, antichrist (4th ed.). Princeton: Princeton University Press. Leiter, B. (1997). Nietzsche and the morality critics. Ethics, 107(2), 250–285. Leiter, B. (2002). Nietzsche on morality. London: Routledge. Magnus, B., & Higgins, K. M. (1996). Nietzsche’s works and their themes. In: B. Magnus & K. M. Higgins (Eds), The Cambridge companion to Nietzsche. Cambridge: Cambridge University Press. Magnus, B., & Higgins, K. M. (Eds). (1996). The Cambridge companion to Nietzsche. Cambridge: Cambridge University Press.

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Nagel, T. (1989). The view from nowhere. Oxford: Oxford University Press. Nehamas, A. (1980). The eternal recurrence. Philosophical Review, 89(3), 331–356. Nehamas, A. (2006). Nietzsche: Life as literature. Cambridge: Harvard University Press. Nietzsche, F. (1967). The birth of tragedy and the case of Wagner. New York: Vintage. Nietzsche, F. (1974). The gay science. New York: Vintage. Nietzsche, F. (1989a). The genealogy of morals/Ecce Homo. New York: Vintage. Nietzsche, F. (1989b). Beyond good and evil. New York: Vintage. Nietzsche, F. (1990). Twilight of the idols/the antichrist. New York: Penguin. Nietzsche, F. (1995). Thus spoke Zarathustra. New York: The Modern Library. Nietzsche, F. (1996). Human all too human. Cambridge: Cambridge University Press. Richardson, J. (2002). Nietzsche’s system. Oxford: Oxford University Press. Richardson, J., & Leiter, B. (2001). Nietzsche: Oxford readings in philosophy. Oxford: Oxford University Press. Rutherford, M. (1994). Institutions in economics: The old and the new institutionalism. Cambridge: Cambridge University Press. Rutherford, M. (2001). Institutional economics: Then and now. Journal of Economic Perspectives, 15(3), 173–194. Schacht, R. (1985). Nietzsche. London: Routledge. Wicks. R. (2004), Friedrich Nietzsche. Stanford encyclopedia of philosophy. Available at http:// plato.stanford.edu/entries/nietzsche/

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Le Gall’s A HISTORY OF ECONOMETRICS IN FRANCE FROM NATURAL ORDER TO ARTIFICIAL WORLDS Marcel Boumans A review essay of Philippe Le Gall’s History of Econometrics in France: From Nature to Models. London: Routledge, 2007. xxþ296 pp. ISBN 9780415322553. 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 author of the above quotation is Irving Fisher, who may be considered as the first economist that developed constructions which we A Research Annual Research in the History of Economic Thought and Methodology, Volume 26-A, 139–146 Copyright r 2008 by Emerald Group Publishing Limited All rights of reproduction in any form reserved ISSN: 0743-4154/doi:10.1016/S0743-4154(08)26013-X

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now recognize as models (Morgan, 1999, p. 351), and was one of the founders of the Econometric Society. This quotation gives an imaginative characterization of a period of transition in economic methodology at the end of the nineteenth century in America. It is this transition but now in France that has been described by Philippe Le Gall in A history of econometrics in France: From nature to models. The scientists of the nineteenth century are adequately called ‘‘natural econometricians,’’ who according to Le Gall are extinct, but in my view live on as Bourbaki economists, take for example Gerard Debreu. This book would be better given the title ‘‘a history of econometric ideas,’’ as the author himself actually emphasizes: ‘‘My investigation is based on the basic idea that the institutional rise of econometrics, whose most visible expression is the birth of the Econometric Society, is clearly distinct from the scientific rise and development of econometrics ideas, which occurred during the nineteenth century’’ (p. 3). The term ‘‘econometrics’’ was introduced by Ragnar Frisch in 1926 and institutionalized only after 1931 by the establishment of both the Econometric Society and its journal Econometrica in 1933. According to Frisch, who coined the term econometrics in his very first paper in economics ‘Sur un proble`me d’e´conomique pure’ (1926), the term means the unification of economic theory, statistics, and mathematics: Intermediate between mathematics, statistics, and economics, we find a new discipline which, for the lack of a better name, may be called econometrics. Econometrics has as its aim to subject abstract laws of theoretical political or ‘‘pure’’ economics to experimental and numerical verification, and thus to turn pure economics, as far as possible, into a science in the strict sense of the word. (Frisch, 1971)

In his first Editorial of the newly established journal Econometrica, Frisch (1933) gave an explanation of the term econometrics: Its definition is implied in the statement of the scope of the Society, in Section I of the Constitution, which reads: ‘‘The Econometric Society is an international society for the advancement of economic theory in its relation to statistics and mathematics. The Society shall operate as a completely disinterested, scientific organization without political, social, financial, or nationalistic bias. Its main object shall be to promote studies that aim at a unification of the theoretical-quantitative and the empirical-quantitative approach to economic problems and that are penetrated by constructive and rigorous thinking similar to what has come to dominate in the natural sciences. (Frisch, 1933, p. 1)

Each of these three aspects of statistics, economic theory, and mathematics, taken by itself, should not be confounded with econometrics: Experience has shown that each of these three view-points, that of statistics, economic theory, and mathematics, is a necessary, but not by itself a sufficient, condition for a real

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understanding of the quantitative relations in modern economic life. It is the unification of all three that is powerful. And it is this unification that constitutes econometrics. (Frisch, 1933, p. 2)

Because one will find this combination of economics, mathematics, and statistics well before the 1920s, a history of econometric ideas can legitimately start much earlier: Le Gall’s history starts in the 1830s and Morgan’s (1990) history in the 1870s. Although Le Gall convincingly shows that early twentieth-century econometrics is a continuation of a practice that was developed in nineteenth-century France, he also aims to show an essential difference between both practices. The nineteenth-century approach is conceived as ‘‘a means of identifying and measuring an alleged natural order ruling the social world’’ (p. 7). Because of this ontological commitment (worldview) to a ‘‘natural order,’’ Le Gall labels this practice as ‘‘natural econometrics.’’ ‘‘Natural order’’ referred to a limited set of mathematical laws that would rule not only the natural world but also the socio-economic world. Moreover, and this may even be a more distinctive feature with respect to the twentiethcentury worldview, the order was considered to be designed by divinity. The works of three natural econometricians are discussed – leaving open, however, the question whether there are more of them: Antoine Augustin Cournot (1801–1877) in Chapter 2, Jean-Edmond Briaune (1798–1885) in Chapter 3, and Jules Regnault (1834–1894) in Chapter 4. The first one is of course well-known among both economists and econometricians and was actually the very first being discussed in Econometrica (first issue!) as to be considered as one of the main ancestors of econometrics (Roy, 1933). The other two were, until now, largely unknown: Briaune, an agronomist and farmer, who had investigated economic cycles and relationships between prices and quantities of agricultural goods, and Regnault, a stockbroker, who had analyzed stock price behavior and aimed at a ‘‘financial physics,’’ similar to Adolphe Que´telet’s ‘‘social physics.’’ One of the important contributions of Le Gall’s book to the history of economics is that it introduces these two apparently interesting scholars to a larger audience outside France, among others by translating and presenting relevant parts of their works into English. These three men did not form a scientific community in any sense. The reason, however, that they can be discussed as a group and be denoted as ‘‘natural econometricians’’ is that they shared a similar worldview: various kinds of natural and social phenomena were perceived as being parts of a deterministic and unified ‘‘system of the world,’’ using Laplace’s terminology, of a divine origin. Building on this, they characterized society as a

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self-regulating natural order: a limited set of mathematical laws that work together pre-determinately toward a harmonious end-state. This worldview imposed the following methodology: the use of mathematics is legitimized by the ‘‘postulate’’ that the world is intrinsically mathematical, and statistics is used for discovering and measuring the mathematical laws that rule the world. Their statistical ‘‘instrument’’ par excellence was the average, following Que´telet’s program. Using this instrument, they discovered the ‘‘law of sales’’ (Cournot), the ‘‘laws of proportionality’’ (Briaune), and the ‘‘law of attraction’’ (Regnault). Deviations from these laws were considered to be caused by historical accidents or dissenting behaviors originating in ignorance. They assumed that gradually, due to progress in science, these deviations will diminish, and with it, historical time, so that society moves in the direction of a timeless, ahistorical system, toward the ‘‘end of history,’’ an end-state of a society that at that state is perfectly organized: ‘‘when the deterministic, mechanical, and mathematical nature of the social world triumphs, when the social world does not differ from the natural world, when God’s design and the natural order to which it corresponds prevail and can be fully revealed’’ (p. 65). An important consequence of this worldview is that, in contrast with twentieth-century econometrics, the search for laws is not instigated by economic theory but in analogy with laws in physics, e.g., with regard to attraction and gravitation. The twentieth-century worldview, particularly after the Great War, could not be less than different. According to Le Gall (p. 159) ‘‘Man has killed God.’’ True, but I would like to add that He burned His lungs in a chloride fog clouding the many swampy trenches. Since that disaster, nobody would anymore perceive the world as divinely designed, to the contrary: the world is complex, disordered, and uncertain. Nature was not anymore a divine design whose beauty should be unveiled, but an unpredictable creature that should be tamed. But also in science itself a dramatic change in worldview had taken place: due to the fall of the unified and deterministic worldview as an ontological foundation of science, one could observe foundational crises in mathematics and physics. As an answer to these crises, two new developments arose: one was the axiomatization movement initiated by Hilbert and the other, less obvious and acknowledged, was the practice of mathematical modeling. Generally, one can state that axiomatization took foot in the theoretical branches and modeling initially developed as an empirical research practice. The rise of this modeling practice in France is nicely illustrated in Part II by a discussion of the works of Lucien March (1859–1933) in Chapter 5, and Marcel Lenoir (1881–1927) in Chapter 6.

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If the world is too complex and ‘‘out of reach,’’ that is, any one-to-one mapping of it will turn out to be a mess and incomprehensible, then the construction of idealized and simplified representations of parts of it, that is, ‘‘autonomous ‘small world,’ in which kinds of experiments could be realized and from which they escape from he alleged complexity and out of reach nature of the economy’’ (p. 17) is a pragmatic solution to this problem of complexity. This new practice of modeling is rooted in the work of James Clark Maxwell, in particular, his ideas about the use of analogies: ‘‘that partial similarity between the laws of one science and those of another which makes each of them illustrate the other’’ (Maxwell, 1965, p. 156). To the extent that two physical systems obey laws with the same mathematical form, the behavior of one system can be understood by studying the behavior of the other, better known, system. Of importance here is to realize that this can be done without assuming any ‘‘postulate’’ about the real nature of the system under investigation. Maxwell’s method led ultimately to a practice of understanding phenomena which the (Frenchman!) Pierre Duhem (1954, p. 72) explicitly disapproved but, nevertheless, adequately described as ‘‘designing a model imitating the phenomenon; whence the nature of material things is to be understood by imagining a mechanism whose performance will represent and simulate the properties of the bodies.’’ According to Le Gall, this ‘‘artificial’’ nature of models does not necessarily imply an instrumentalist ‘‘as if ’’ perspective, for which he refers to Milton Friedman’s (1953) essay on the methodology of positive economics: ‘‘Lenoir’s model is not artificial in that sense. It is rather a ‘maybe’ model, i.e. an idealized hypothesis about a version of the complex and out of reach world; it is a kind of reduced-scale map, a schematic but usable instrument to get around the real world’’ (p. 213). I agree and disagree with Le Gall. I agree that the artificial nature of models does not imply an instrumentalist position, but I disagree that Friedman’s ‘‘as if ’’ perspective does represent this instrumentalist position. In my view, the ‘‘as if ’’ perspective employs the ‘‘as if p’’ assumption, where p is an analogous mechanism. This perspective comes quite close to Nancy Cartwright’s (1983) simulacrum account of model, which stands in the above discussed Maxwellian tradition as being adequately described by Duhem. Her account deals with the problem of bridging the gap between theory and phenomena in physics. Her aim is to argue against the facticity of fundamental laws; they do not picture the phenomena in an accurate way. For this we need models: ‘‘To explain a phenomenon is to find a model that fits it into the basic framework of the theory and thus allows us to derive analogues for the

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messy and complicated phenomenological laws which are true of it’’ (Cartwright, 1983, p. 152). The striving for too much realism in the models may be an obstacle to explaining the relevant phenomenon. To fulfill this bridge function, Cartwright argues that models consist partly of genuine properties of the phenomena modeled, but others will be merely properties of convenience or fiction. Models of complex and messy phenomena are necessarily a mixture of fictitious and realistic ingredients. If one has lost ‘‘a natural order’’ as foundation for theories, this does not mean that the models, as constructed ‘‘artificial worlds’’ are ‘‘independent’’ from the real world, but they are ‘‘autonomous.’’ Morrison and Morgan (1999), in their ‘‘models as mediators’’ account, consider models as one of the critical instruments of modern science, including physics and economics. They demonstrate that models function as instruments of investigation helping us to learn more about theories or the real world, because they are autonomous agents: that is to say, they are partially independent of both theories and the real world. We can learn from models because they can represent either some aspect of the world, or some aspect of a theory. Anyhow, leaving this philosophical hairsplitting aside, the work of Lenoir provides a good exemplar of this typical twentieth-century practice of economic modeling. Beside the drastic change of worldview, there were also other developments that changed the character of econometrics. To capture this change, Le Gall borrows the term ‘‘unity of orchestration’’ from Morrison (2000) to identify a new focal point of unification: instead of a unifying natural order, unity is created by institutionalization and the formation of a discipline. While the natural econometricians worked isolated from each other, ‘‘they worked on separate domains, and they are the product of different educations, trainings, and backgrounds – no scientific community existed and the field had no proper existence’’ (p. 7), several of the early twentieth century French econometricians were affiliated to the Statistique Ge´ne´rale de la France, benefiting from the training and experience of March, head of that institution. But this orchestration did not only take place within national borders, also at the international level one could observe the growing of a ‘‘homogeneous and self-conscious community,’’ whose members ‘‘were now beginning to share instruments, results, theoretical references, agendas’’ (p. 15), and which ultimately led to the foundation of the international Econometric Society. There is another essential element of econometric ideas that should be noted: the application of a methodology which was copied from the natural

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sciences ‘‘to turn economics into a science’’ (see the quotations above). One will find the same science ideal in the works of another leading econometrician of the 1930s, Jan Tinbergen, who was trained as a physicist. Both Frisch and Tinbergen were awarded the first Nobel Memorial Prize in Economics. In a speech on this occasion Erik Lundberg gave the following assessment of their contribution to economics: Their aim has been to lend economic theory mathematical stringency, and to render it in a form that permits empirical quantification and a statistical testing of hypotheses. One essential object has been to get away from the vague, more ‘‘literary’’ type of economics. (Lundberg, 1970, p. 192)

As everyone knows, the Nobel prize for economics is not a real Novel prize. In conjunction with its tercentenary celebration in 1968, the Central Bank of Sweden instituted The Central Bank of Sweden Prize in Economic Science in Memory of Alfred Nobel. The award is designed to be given according to the same principles and rules as the original Nobel prizes. When the Royal Swedish Academy of Science, which is the awarding authority for the Nobel prizes in physics and chemistry, was approached with the idea of the new prize, there was certain skepticism among some natural scientists in the Academy. This was due partly because of a general reluctance to extent Nobel prizes to new fields, and partly because of doubts as to whether a social science, such as economics, would be ‘‘scientific’’ enough to warrant a prize of this kind on an equal footing with prizes in ‘‘hard sciences’’ like physics and chemistry (Lindbeck, 1985, pp. 37–38). Apparently, the achievements of Tinbergen and Frisch met the requirements of a ‘‘hard science.’’ The reason I emphasize this hard science methodology as an essential aspect of econometrics is that Le Gall labels the nineteenth-century scientists, who combined economics, mathematics, and statistics, as ‘‘natural econometricians’’ because of their ‘‘postulate’’ of a natural order. But if one interprets the term ‘‘natural econometricians’’ to denote economists that advocated and employed a ‘‘natural science’’ approach, the term ‘‘natural econometrics’’ does not only apply to these nineteenthcentury econometricians but also to their twentieth-century colleagues. Le Gall wrote a very instructive history, not only because he gave access to formerly obscure French economists who turned out to have contributed true pioneering work, but also because he showed us that mathematical and statistical concepts and techniques are not neutral with respect to ontological commitments.

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REFERENCES Cartwright, N. (1983). How the laws of physics lie. Oxford: Clarendon Press. Cartwright, N. (1999). The dappled world: A study of the boundaries of science. Cambridge: Cambridge University Press. Duhem, P. (1954). The aim and structure of physical theory. Princeton: Princeton University Press. Fisher, I. (1925). Mathematical investigations in the theory of value and prices. New Haven: Yale University Press. Friedman, M. (1953). The methodology of positive economics. In: Essays in positive economics. Chicago: University of Chicago Press. Frisch, R. (1933). Editorial. Econometrica, 1(1), 1–4. Frisch, R. (1971). On a problem in pure economics. In: J. S. Chipman, L. Hurwicz, M. K. Richter & H. F. Sonnenschein (Eds), Preferences, utility, and demand (pp. 386–423). New York: Harcourt Brace Jovanovich. Lindbeck, A. (1985). The prize in economic science in memory of Alfred Nobel. Journal of Economic Literature, 23(1), 37–56. Lundberg, E. (1970). The prize for economic science, in memory of Alfred Nobel. Les prix Nobel en 1969, 192–194. Maxwell, J. C. (1965). On Faraday’s lines of force. In: W. D. Niven (Ed.), The scientific papers of James Clerk Maxwell (Vol. 1, pp. 155–229). New York: Dover. Morgan, M. S. (1990). The history of econometric ideas. Cambridge: Cambridge University Press. Morgan, M. S. (1999). Learning from models. In: M. S. Morgan & M. Morrison (Eds), Models as mediators (pp. 347–388). Cambridge: Cambridge University Press. Morrison, M. (1999). Models as mediating instruments. In: M. S. Morgan & M. Morrison (Eds), Models as mediators. Cambridge: Cambridge University Press. Morrison, M., & Morgan, M. S. (2000). Unifying scientific theories: Physical concepts and mathematical structures. Cambridge: Cambridge University Press. Roy, R. (1933). Cournot et l’e´cole mathe´matique. Econometrica, 1(1), 13–22.

Klein’s ECONOMICS CONFRONTS THE ECONOMY CONFRONTING ECONOMISTS WHO ARE CONFRONTING ECONOMICS David Colander A review essay of Philip A. Klein’s Economics Confronts the Economy. Cheltenham, UK: Edward Elgar, 2006. 416 pp. ISBN 9781840646504. As a simultaneous critic and defender of mainstream economics, I am often asked to review books on the economics profession by both critics and by cheerleaders. I accept too many of these invitations—probably because of some deep seated psychological flaw in me—and I usually end up in hot water with one group, the other, or both. The problem is that I tend to see the books laudatory of mainstream economics as inevitably too laudatory, and the books critical of mainstream economics as inevitably too critical. To me, the economics profession is best though of as an emerging complex system that defies simple classification, both because it is continually changing and because it is multifaceted, with strengths and weaknesses. This nature of academic economics makes it difficult for both critics and cheerleaders, because there is seldom a simple characterization of the profession that one can build one’s argument around unless one is both simultaneously a critic and defender. If one does not follow that approach, one is left focusing too much on the ‘‘goods’’ or the ‘‘bads’’ of the profession.

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With that background of where I am coming from, let me turn to Phillip Klein’s Economics Confronts the Economy. It is a book about economics by a critic of the profession and it poses some simple questions: Why doesn’t the economics profession consider issues that matter? and, Why doesn’t the economics profession take a more active role in policy? Klein does not really answer these questions, but instead provides evidence that mainstream economics does not consider issues that matter, and that it advocates the wrong policies. He argues that the economics profession has become too mathematical, too removed from policy, other than to advocate nonintervention, and that much of economics is ideological biased. While I think the book is too critical, and misses important positive elements of the economics profession, I also think that there’s much to like in this book. It is well written; while critical it is not a vindictive or overly emotional book, and its arguments are both tempered and substantiated with examples. Klein’s is the criticism of an aging Institutionalist, not the criticism of an intemperate young Turk.

BRIEF OVERVIEW OF THE BOOK 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.’’ Chapter 3, ‘‘Lowering the Learning in Economics, 1950–2000,’’ considers the mathematization of economics—and what is lost by it. In it Klein

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approvingly quotes Deirdre McCloskey’s comment that ‘‘during their conversion to a mathematical way of talking the economists adopted a crusading faith, a set of philosophical doctrines, that makes them prone now to fanaticism and intolerance’’ (p. 84). Chapter 4, ‘‘Trivialization and Elegance I: The World of Microeconomics,’’ laments the movement away from policy-oriented micro and toward game-playing and mathematical elegance in the study of microeconomics. Chapter 5, ‘‘Trivialization and Elegance II: The World of Macroeconomics’’ makes the same argument for macro. Both chapters argue that the profession selectively chooses when to advocate intervention into the market and when not. (Klein takes it as given that the profession generally opposes intervention into the market.) He concludes the chapter with the statement that summarizes his view of the economics profession. He writes, ‘‘Our portrait of a field where any possible links to improved public policy have carefully been surgically removed is complete. It is at its core, a portrait of a ‘positive’ discipline doing its quantitative thing. It monitors our self-adjusting world’’ (p. 219). Chapter 6, ‘‘Theory and the Role of the Public Sector,’’ considers the role of economic theory in guiding the view of the state. He argues that most mainstream economists attempt to trivialize the need for government intervention into the economy and essentially let their ideological bias guide their analysis. He concludes by stating his belief that ‘‘the fundamental task of economic theory, we argue, is to offer guidance to the policy makers in both sectors’’ (p. 265). He feels that mainstream economists see their role as opposing government intervention, and thus they do not try to offer guidance to government officials, other than do not intervene. Chapter 7, ‘‘Focus on ‘Mainstream Economics’: Obstacles to the Competition for New Ideas’’ looks at the journal publishing game in economics. It concludes by asking ‘‘Why does no mainstream economic theorist ever ask, from his classical, mainstream, hard-nosed, positive point of origin whether, things being how they are in the modern world, modern societies can really afford to divert so important a discipline for problem solving to gameplaying, no matter how elegant, precise, logical and grand the game may be?’’ (p. 317) His concluding chapter, Chapter 8, ‘‘Economics Confronts the Economy: An Alternative View – Don’t Cry for Me,’’ sums up, and makes the argument that the profession should be more pluralistic and open to heterodox ideas, and more concerned about policy. Put another way, the profession should be more Institutionalist, where by Institutionalist Klein means the tradition in which he works and writes. He relates his goal in writing this book to the early Institutionalist, Clarence Ayres’s, goal in

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writing his 1944 book, The Theory of Economic Progress. For both the goal is to ‘‘set forth a new way of thinking about economic problems.’’

ASSESSMENT In assessing the book, I find myself conflicted because, while the writing is reasoned, the picture one gets of the economics profession from Klein’s book is, in my view, misleading. It is a picture of a profession obsessed with irrelevancies, even when there is important work for economists to do; it is a picture of a profession biased against government, even though government is needed for the economy to function effectively. It is a picture of a profession that seems to have no regard for what is important. That’s not the view I have. While there are definitely examples of each of these tendencies in the profession, there are also counterexamples, and explanations for why the profession does what it does. There are also myriad examples of problems that develop when alternative approaches are used. For Klein to be right would require a really stupid and uncaring set of economists in the mainstream. That does not fit my view of the mainstream. For all their faults, mainstream economists are very bright, very concerned about policy, and continually trying to be relevant in a meaningful way. Any critique that does take that reality into account is not going to hit home. The problem for a critic of economics is to explain how intelligent people trying to do good are actually not doing good. Klein does not do that. Thus, while, in broad terms, I find myself in agreement with many of the arguments in the book—clearly, the profession has all the tendencies that Klein describes, I cannot agree with the overall picture he paints. Consider the ideological one-sided picture. When I surveyed graduate students in economics, I found that their political views mirrored the views of the general public. They are certainly not as progressive as Klein, or as are most Institutionalists, but neither is the US population. My problem is that Klein simply assumes that his ideological view is right, and wonders why it is not shared by all economists. In my view the issue of determining ideological bias is much more difficult to sort out than Klein suggests. A second point I cannot accept is that the profession is not concerned with policy. The mainstream economists I know, of all ideological persuasions, think they are doing ‘‘good’’ by doing ‘‘good economics.’’ The majority of them see themselves as applied, rather than as theoretical economists. They would argue that those who do not do applied work their

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way are not doing as much good as they could or should. In my view, mainstream economists today are trying to be relevant is the best way they know how, just as Klein is. The two approaches can only be meaningfully compared by a thick history—a detailed study of both approaches; only such a thick history can separate out the shades of gray that inevitably differentiate the approaches. Klein does not provide a thick history. Consider one of Klein’s arguments—that mainstream economists are not operating as public policy economists. This is true if by public policy one means hands-on policy. Mainstream economists are not trained to do that. But they are trained to operate as applied technicians, and they see their role as bringing the best technical skills to bear of economic policy issues. They see themselves very active in policy. When I interviewed economists at top graduate schools they conveyed a sense of economics being useful, and changing—behavioral economics is making issues more relevant, and new statistical developments are making economics shed better light on issues. In the eyes of young economists, economics is successful, and any critic of economics must explain why young economists entering the profession are as positive about modern mainstream economics as they are, and why, more than 60 years after Ayers’ call for a new economics, we need that same call for a new economics.

CONFRONTING ECONOMISTS WHO CONFRONT ECONOMICS I believe that the profession has many problems, and I have been vocal about them. But, unlike Klein, my critique is not about motivation or ideology of mainstream economists. My critique is narrower; it is about institutional incentives that have become skewed, so that they direct academic economists of all persuasions (mainstream and heterodox) to target their research toward other academics, not toward policy makers. Academic economists’ incentives are not to solve problems, but rather to take part in an academic debate. The result for economics is that research focuses on studying problems that fit the statistical tools available, not studying problems that researchers find most important. As one student I recently interviewed stated, ‘‘economists study unimportant problems that they answer; sociologists study important issues that they can’t answer.’’ My point is that in the economics profession, institutional incentives for advancement do not work to direct researcher’s incentives toward what many people, such as Klein and myself, see as the most productive ends.

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The problem of incentives is not, however, unique to mainstream economists; the same incentive problems exist for heterodox economists, although they show up in different ways. Instead of working on policy issues, heterodox economists’ incentives are to write papers about methodology and the economics profession that are directed toward other heterodox economists, and not directed toward those economists who might be able to change the situation. The same thing happens when heterodox economists write papers on policy issues; their intended audience is generally other heterodox economists who agree with them, not policy makers. They write on policy issues in forums that have little to no chance of influencing policy. Like the majority of mainstream academic economists, academic heterodox economists seldom play a hands-on role in policy. Academic publications can, of course, lead to policy change, but for that to be the case, the publications must be written for the people who can affect change. Most academic articles and books are not. Even those books written about the profession are seldom written with the thought of actually changing the situation. To write a book that the mainstream might possibly read and consider, a critic would have to interpret mainstream economics in its best light, and show how, even when portrayed in the best light, mainstream economics is not achieving its goals. Klein’s book does not do that. He is only too happy to portray mainstream economics in its worst light. My point is that good mainstream economists know that there are problems with the profession. The best of the mainstream are working on fixing those problems as best they can, given the institutional structure which limits the way in which change can take place. Klein’s book does not provide a guide to such economists for fixing the problems; it simply states the problem, without exploring the nature of the interaction between institutions and researchers that led to the problems. An effective critical book would, in my view, be written for the ‘‘good mainstream’’ and would offer suggestions for change that work within the institutional framework. In summary, my complaint about Klein’s book is that it is not sufficiently institutional; it does not seem to take into account the institutional realities of the economics profession. It is those institutional structures that led to the current situation. It is those institutional structures that keep it where it is. Change will only come about through policies based on a deep understanding of those institutional structures.

Duncan Foley’s ADAM’S FALLACY DID ADAM SMITH PRODUCE FALLACY OR HAS FALLACY BEEN THRUST UPON HIM? Warren J. Samuels A review essay of Duncan K. Foley’s Adam’s Fallacy: A Guide to Economic Theology. Cambridge, MA: Harvard University Press, 2006. xvþ265 pp. ISBN 9780674023093. 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

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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. An overview of the book’s contents is as follows (numbers after chapter numbers are page count). Chapter 1 deals with Adam Smith. The centerpiece is the division of labor from which Foley moves on to his theories of value, capital accumulation, the Invisible Hand and the State, and money. Chapter 2 examines the gloomy science of Malthus on population and Ricardo on the limits to growth, and the latter’s labor theory of value, stationary state, machinery, and poverty. Added to it is an account of population and food since Malthus’s time; absent is Malthus on gluts. Chapter 3 covers Marx and the conventional list of topics from historical materialism, the labor theory of value, exploitation, accumulation and the falling rate of profit, to the transition to socialism, proletarian revolution, and Marxist theory and social change, with the two parts tied together with a neat discussion of primitive accumulation. The first three of the six chapters account for about 150 of some 230 pages. Chapter 4 examines a variety of topics centering on marginalism and the desire to naturalize the economy, removing questions of morality, and resemble science. The work of Jevons, Menger, and Clark is discussed in seven pages, that of Marshall, called ‘‘the most influential figure,’’ only mentioned. The work of Pareto and Walras on price, social welfare, and time are given nine pages, and Veben, almost four. Chapter 5 takes up Keynes, Say’s Law again, the labor market and unemployment, expectations and money, the recent history and fate of capitalism, Hayek (nine pages), and Schumpeter. Chapter 6 will be examined below. Perhaps someone who has not written a history of economic thought textbook should not criticize the coverage decisions made by authors who have written them. Nonetheless, I find it odd that the first three chapters, through Marx, occupy two-thirds of the pages, and that the next three chapters run 74 pages in length, of which the concluding chapter taking 16 pages. (There is also a section on further reading, an appendix covering demographic equilibrium, theories of money and prices, Ricardo’s theories of rent and accumulation, the decomposition of the value of commodities, and the working day. There is also an index.) The result is that the history of economic thought since Marx runs some 58 pages. I do not fault the desire to critique the development of economic thought. But the reader is given very little sense of the breadth of the discipline in the twentieth century.

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Foley distinguishes his identification of ‘‘Smith’s Fallacy’’ from several common claims, such as that ‘‘self-interest is a powerful motivating force for human beings (though far from being the only one);’’ that ‘‘harnessing the pursuit of self-interest through competitive capitalist markets can be (though it is not invariably) a powerful mechanism for fostering progressive technical change and producing material wealth,’’ and that ‘‘it would be far from correct to claim that all pursuit of self-interest through competitive markets is morally bad’’ (p. xiii). Pervading the book are indeed numerous tensions, two of which are, first, between the old values of the third stage and the new values of the fourth stage, and, secondly, among the values of the new stage, both resulting in cognitive dissonance. By ‘‘Adam’s Fallacy,’’ Foley intends ‘‘something a little more subtle than these much-debated claims.’’ Thus, he writes: For me the fallacy lies in the idea that it is possible to separate an economic sphere of life, in which the pursuit of self-interest is guided by objective laws to a socially beneficent outcome, from the rest of social life, in which the pursuit of self-interest is morally problematic and has to be weighed against other ends. This separation of an economic sphere, with its presumed specific principles of organization, from the much messier, less determinate, and morally more problematic issues of politics, social conflict, and values, is the foundation of political economy and economics as an intellectual discipline. (p. xiii)

This is not Adam Smith. Smith had in his mind and lectured on a tripartite synoptic and synthetic system of what we now would call social science (Skinner, 1979; Samuels, 1977). The three interacting spheres were the generation of moral rules (represented by Smith’s Theory of moral sentiments (1976a), the market (The wealth of nations (1976b)), and the generation of legal rules (Lectures on jurisprudence (1978)). Smith was aware of the undesirability of writing a single, massive treatise encompassing all three spheres and their interaction. (The Oxford editions of the Theory of moral sentiments and the Wealth of nations run in excess of 340 pages and 1,000 pages, respectively.) Accordingly, he applied his principle of the division of labor to his problem, which arose in both his teaching and his writing, and told us of his plans for eventually preparing volumes covering all three spheres. Foley’s characterization of the fallacy contains several themes: one is the separation theme; second is that the pursuit of self-interest, guided by objective laws, leads to a socially beneficent outcome; and the third is that the first two themes constitute the ‘‘foundation of political economy and economics as an intellectual discipline.’’ Turning first to the second theme, it overstates what Smith himself wrote, namely, that: ‘‘By pursuing his own interest he frequently promotes that of the society more effectually than when he really intends to promote it’’ (Smith, 1976b, IV.II.9, p. 456).

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Foley’s absolutist form is contradicted by Smith’s probabilistic form, in which (in the famous invisible hand paragraph) he qualifies the transformation of self-interest into public interest by using such terms as ‘‘frequently,’’ and ‘‘in this, as in many other cases.’’ On the other hand, Foley can point to another example of Smith’s language, in which he says of the owner of capital that ‘‘the study of his own advantage naturally, or rather necessarily leads him to prefer that employment which is the most advantageous to the society’’ (Smith, 1976b, IV.ii.4, p. 454). If Smith had had an editor, that formidable person likely would have asked, here as elsewhere in Smith’s writings, ‘‘Mr. Smith, what do you mean by this?’’ It seems that in using ‘‘necessarily’’—which here connotes ‘‘always’’—Smith was carried away by his revolutionary doctrine. For throughout his writing, Smith’s accounts are not absolutist. The fallacy of Adam’s Fallacy is not a figment of Foley’s imagination but it is not Smith’s theme. Again, let us quote Foley: I would argue that it is more to the point that everyone who reads The Wealth of nations comes away believing that Smith presents the world through the lens of what I have called his fallacy. Smith is too clever and too wily to present the fallacy in its barest form; his political economic world of self-regulating competitive self-interest actually depends crucially on innumerable value-laden political contingencies and institutions y presenting a reasonably balanced view of the interaction of politics and the economy. But the premise of Smith’s book is that it makes sense to start with the examination of purely economic principles that arise from the interaction of self-interested individuals. (p. xiv)

The implication of the last sentence just quoted is that Smith began his serious studies with the pure economics of the Wealth of nations. That is not the case. Wealth of nations was published in 1776, but the Theory of moral sentiments had been published in 1759; and we know with some confidence that he began the serious work leading to Wealth of nations thereafter. I add only that the ‘‘purely economic principles’’ were by no means purely economic. The design strategy of Foley’s textbook was to present the ways in which the fallacy arose in the work of successive major economists. Some form of the fallacy is examined no less than 19 times. The first is unusually comprehensive: Smith asserts the apparently self-contradictory notion that capitalism transforms selfishness into its opposite: regard and service for others. Thus by being selfish within the rules of capitalist property relations, Smith promises, we are actually being good to our fellow human beings. y This is Adam’s Fallacy. y it is an argument that is logically fallacious y and in the end it is unsatisfactory both morally and psychologically.

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The moral fallacy y is that it urges us to accept direct and concrete evil in order that indirect and abstract good may come of it. The logical fallacy is that neither Smith nor any of his successors has been able to demonstrate rigorously and robustly how private selfishness turns into public altruism. The psychological failing of Smith’s rationalization is that it requires a strategy of wholesale denial of the real consequences of capitalist development, particularly the systematic imposition of costs on those least able to bear them, and the implacable reproduction of inequalities that divide people from one another in society. Adam’s Fallacy is all the more seductive and dangerous because Smith delivered it to the world wrapped in a cloud of sensible, often insightful, observations on the operation of capitalism. (pp. 2–3)

Say’s Law is brought within the Fallacy (pp. 11, 188). So, too, the accumulation of capital: ‘‘But he [Smith] offers no explanation for how society at large will actually receive the increases in standard to living that the widening division of labor makes possible’’ (p. 32). ‘‘The real heart of The Wealth of nations,’’ Foley writes, is its philosophical and moral defense ‘‘of capitalist social relations through his ingenious, if tortured, claim that the ruthless pursuit of self-interest, which can lead people to do bad things to other people, is transmuted by capitalist social relations into a moral good’’ (p. 43). One wonders if and how this can be shown in any social system. The tension between the old morality and the new arises again, ‘‘between his economic theology and his good sense. As a theologian of capitalist social relations, he is willing to remove traditional moral constraints on the pursuit of self-interest through the accumulation of capital’’ (p. 44). If an old morality is equated with ‘‘good sense,’’ one wonders how any new morality can escape condemnation. The fallacy is applied again to the giving of charity to the poor, contrasting ‘‘the immediate effects of action (charity relieving the suffering of the poor) with indirect, systemic effects (charity expanding the population and lowering the standard of living of the poor’’ (p. 85); to commodity fetishism (pp. 112–113); to the creation of ‘‘an axiomatized, mathematical political economy that could endow the social relations of capitalism with the aura of ‘natural laws’ y’’ (p. 157) and which replaces the question of morality with objective laws (p. 158). John Bates Clark’s version of the Fallacy both explains and justifies market distribution, by attributing income to marginal productivity, when in fact it is driven by the social relations of capitalism (pp. 163, 168–169). For Veblen, ‘‘the threat capitalism poses to conventional morality is less important than the threat capitalists pose to engineers’’ (p. 176). A successful defense of market socialism results in our having ‘‘to believe that there is no difference between a socialist and a capitalist organization of the division of labor’’ (p. 205). The fallacy arises again in the conflict between Hayekian spontaneous market

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organization and Schumpeterian historical tides (pp. 208–212). ‘‘Keynes’s view is a modified and conditional form of Adam’s Fallacy, emphasizing the extreme improbability that laissez-faire will find its way to a viable path of development without constant guidance’’ (p. 221). In the final chapter, we read that ‘‘not everything in the economist’s way of thinking is fallacious’’ (p. 223), that ‘‘One of the worst effects of Adam’s Fallacy is that it risks endorsing one-sided presentation of complex situations’’ (p. 226; he also cautioned against elevating ‘‘statistical phenomena into universal principles’’ (p. 225), and that ‘‘y moral and social conflict are part and parcel of capitalist economic development’’ (p. 227)). The foregoing manifestations of Adam’s Fallacy amount to serious condemnation of the reigning economic system. Whether it all hangs together is less a matter of truth and more a matter of persuasion. One wonders how much of it Foley would apply to all social systems, not solely capitalism. I digress to take up the subject of cost. When two parties engage in trade, the assumption is that it is more than likely that both parties will be better off (they would not trade if the expectation to benefit were not held by both) and, accordingly, the sum of the benefits of both likely will increase as a result. An agent can engage in activities that likely will benefit him. If those activities intentionally cause harm to someone, the agent may be liable for damages. If the damage caused to another agent was incidental and unintentional, the welfare reasoning is that if the gain from the activity is greater than the harm to the other party, society is better off. It will be noted that interpersonal comparisons of utility, or welfare, are being made. The ‘‘systematic imposition of costs on those least able to bear them, and the implacable reproduction of inequalities’’ is yet another matter, taking us to one of the theories of cost, namely, that the structure of costs is governed in part by the structure of rights as to who can injure who, consequent to the protection of competing interests. Externalities are a case in point. All this is further complicated by questions of the definition of injury (or damage) and of the evidence of injury. Damnum absque injuria is the legal term for damage without injury in the legal sense, i.e., does not give rise to an action for damages. I digressed in part to place the following statement by Foley on ‘‘Schumpeter’s ambivalence’’ in the high position it deserves: The only part of capitalism Schumpeter seems to have much enthusiasm for is its restless search for, discovery of, and deployment of new technologies. For Schumpeter the recognition of the immense costs of maintaining this process, in terms of social disruption, loss of community, unemployment, and inequality, is almost a cliche´.

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Schumpeter has the imaginative breadth of vision to see how oppressive capitalism is for those who find themselves at the bottom of the heap, and how helpless capitalism is to avoid empowering precisely those social forces that are its enemies. (p. 222)

Gains, in other words, are accompanied by costs. New technology and capital accumulation confer gains on some people and costs on others, but over the long pull most people and their progeny are beneficiaries. The last quotation is from Foley’s last chapter in which he is more even-handed in his treatment of both Adam’s fallacy and capitalism. He writes, therefore, that: Viable capitalist institutions are far from being a spontaneously generated social phenomenon which will reliably take over once the dead hand of political intervention can be removed from markets. ‘‘Human nature’’ seems just as likely to evolve stagnant, predatory power hierarchies as it is to create a progressive capitalism. (p. 224)

The implication is, I think, that Foley would have done his readers a great service if his design strategy had been centered on not one but two sets of fallacies of political economy, the fallacies of the orthodox and those of the heterodox, fallacies paralleling ‘‘the great problems of religious theology, which strive to reconcile the bad things that happen in human life with the omnipotence and omniscience of God y the problem of why God doesn’t do something about it’’ (p. 215). (Unfortunately, Foley treats ‘‘capitalism’’ as an active agent.) This, then, is the matter of ‘‘economic theology.’’ It is hardly a novel idea; perhaps the best-known example is Schumpeter. For Foley, ‘‘Contemporary economicsyhas deeply embedded within it the idea of a division between specifically economic and broader social and political spheres,’’ in such a way that ‘‘the economic way of thinking is just as value-laden as any other way of thinking about society, and can foster dangerous mistakes of judgment’’ (p. xiv). Foley writes that he envisions the book to be a ‘‘guide to economic theology’’ because ‘‘at its most abstract and interesting level, economics is a speculative philosophical discourse.’’ Its discussions, however, are ‘‘discussions above all of faith and belief, not of fact, and hence theological.’’ Thus, the final sentence of the Preface reads, ‘‘May the Invisible Hand guide you to the truth’’ (pp. xiv–xv). We have seen that, apropos of Smith, Foley writes, ‘‘As a theologian of capitalist social relations, he is willing to remove traditional moral constraints on the pursuit of self-interest through the accumulation of capital’’ (p. 44). As to the separation of an economic sphere, someone with an open mind is likely to be ambivalent. The division of subject matter among political science (including law), psychology, history, sociology, and economics is

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both arbitrary and not set in stone. So, too, with the division of variables between endogenous and exogenous. The more one studies Smith, the more likely one will be impressed with his tripartite system. I myself have urged that the economy and law are not separate, self-sufficient, and independent spheres; emphasizing initially their interaction and subsequently their common origin in the legal–economic nexus. The differences between scholars are due to interest, manageability, ideology, convention, and so on. None of this can properly support the idea of a truly separate subject each with its own laws, say, as if the economic domain had a given and fixed ontological existence. One among the numerous problems is the defining of the economy in such a way as to seemingly legitimize certain policies and ideological sentiments. One potential dimension of putative fallacy not identified by Foley, has to do with multiplicity. Not every aspect of multiplicity is fallacious. Multiplicity records the incompleteness and promise of greater completeness in the future (though not completeness in the sense that Smith intended in his tripartite, synoptic, and synthetic and system). And the problem is not multiplicity itself but the failure to acknowledge its consequent deep-rooted ambiguity while claiming rigor and scientific stature. The multiplicity itself is ubiquitous: several different theories of the demand curve, uncertainty, entrepreneurship, the firm, consumption, competition, equilibrium, rule of law, labor theory of value, cost, money, demand for money, the interest rate, and so on. This is a readable book, one whose coverage is useful for some purposes and not others, and a political tract more than perhaps all other similar textbooks.

REFERENCES Samuels, W. J. (1977). The political economy of Adam Smith. Ethics, 87(3), 189–207. Skinner, A. S. (1979). A system of social science. Oxford: Oxford University Press. Smith, A. (1976a). The theory of moral sentiments. Oxford: Oxford University Press. Smith, A. (1976b). An inquiry into the nature and causes of the wealth of nations. Oxford: Oxford University Press. Smith, A. (1978). Lectures on jurisprudence. Oxford: Oxford University Press.

Montes and Schleisser’s NEW VOICES ON ADAM SMITH ADAM SMITH: ONE AUTHOR, MANY CONTEXTS Willie Henderson A review essay of Leonidas Montes and Eric Schliesser’s (Eds.) New Voices on Adam Smith. London: Routledge, 2006. xviiiþ364 pp. ISBN 0415356962. 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

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(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. Overall, the collection is highly successful. Each chapter identifies a problem of context or of interpretation and then systematically follows the issue through with clarity and skill. The Adam Smith community (whatever that is) will be learning more from the contributors over time for there is much to welcome in this volume. There is likely to be something to interest Smith scholars in particular fields. There is also enough coherence to add to the richness of the experience of actually reading Smith, especially with reading the Theory of moral sentiments (TMS) and the Lectures on jurisprudence (LJ) whatever the particular purposes that the researcher or reader of Smith is ultimately interested in. Having drawn attention to the range of topics, in order to acknowledge the breadth of contributions, I now simplify the task of reviewing by focusing on the papers that either caught my imagination or interest, or that, on reflection, seem to me to be most likely to appeal to readers of this journal. Although the choice of what to include or exclude is in essence arbitrary, there is a link, even if tenuous, among three of the chapters out of the four that I have chosen, through Smith’s conceptualization of human nature. Hanley’s opening contribution, entitled ‘‘Adam Smith, Aristotle and virtue ethics’’ is, for me, significant. I have sometimes found TMS to be beautifully written but difficult to understand. I enjoy reading it but often get to the end of a chapter and wonder if I have really understood anything. Hanley sets out an interesting set of connections between Aristotle and Smith, two philosophers not normally thought to be closely associated. Smith as a virtue ethicist is concerned with what Hanley calls the ‘‘education of character.’’ Smith moves—as Force (2003) has also identified in a recent work, though I think Hanley achieves his ends, in this respect, more economically than Force achieves his—from the search for ‘‘praise’’ to the achievement of, or moral status of, being ‘‘praiseworthy.’’ In the end the character concerned with being ‘‘praiseworthy’’ exhibits similarities with ‘‘Aristotle’s contemplative.’’ For both Aristotle and Smith, Henley sees rhetoric and criticism as central to the development of their ethical thinking. Both hold that benevolence in the ordinary sense of the term is weak but

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both feel that this ordinary benevolence can be transcended. Smith, in Hanley’s account, ‘‘recovers’’ Aristotle’s ‘‘lover of self in an exceptional degree’’ in his substitution of ‘‘praiseworthiness’’ for mere ‘‘praise’’ (bestowed by the uncritical regard of the untutored mind). Hanley sees the TMS as constructed around a project of ethical education with ordinary ‘‘self-love’’ deemed capable of being educated. TMS in this view is structured as a progression from self-regard and its consequences through an examination of the actions that deserve praise and then, in Part III, to an encouragement of such actions and from there to the moral status of a ‘‘self-worth’’ that is in effect beyond the ‘‘praise’’ and the ‘‘malice’’ of others. Smith’s concern in the addition made to the text in 1790 is to ‘‘direct vanity to proper objects’’ and these are ‘‘objects’’ for Smith, according to Hanley, neatly switching to a passage in the LJ, the improvement of the human condition. Having read Hanley, my next experience of reading the TMS will be markedly different from many previous experiences. Hurtado-Prieto’s chapter is on ‘‘The Mercantilist foundations of ‘Dr. Mandeville’s licentious system y.’’’ We are in that area of discussion, largely initiated by Mandeville, and followed through and disputed/explored by Hutcheson, Hume, Smith, and Rousseau (also covered, as mentioned before by Force, and treated, to some extent, by Hurtado-Prieto in her originating thesis). Hurtado-Prieto is concerned here only to make a set of comparisons between Smith and Mandeville capable of illustrating the fact that Smith both used Mandeville and disagreed with him, essentially, but not uniquely, in the moral context of economic life. Hurtado-Prieto makes particularly good use of evidence drawn from the LJ (a work that is really worthwhile taking the time to get to know for all sorts of reasons concerning the development of Smith’s ideas). The method is relatively straightforward and consists, essentially, in a series of comparisons between Smith and Mandeville in terms of: the money/wealth confusion or ambiguity; policy and theoretical concerns about the balance of trade and the nature of luxury. Smith sees money as the outcome of exchange, Mandeville sees it as a ‘‘condition’’ of exchange. Smith thinks that Mandeville was not responsible for the confusion of ‘‘money’’ with ‘‘wealth’’ but, according to Hurtado-Prieto, Mandeville builds his ideas on ‘‘one of the consequences of the confusion.’’ Mandeville is sucked into erroneous concerns about the balance of trade as a result. Basically Smith argues, in this account, that the emerging theory is that, in Hurtado-Prieto’s words, ‘‘it does not matter what people spend their money on as long as they spend it at home.’’ A moment’s reflection and we can see why Smith, concerned about the balance between productive and

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unproductive labor, may have some objections to make here. Smith is depicted, in his criticisms of Mandeville, as pointing out that difference between a price-effect and a volume-effect as a result of the depreciation of an exchange rate. The comparison becomes even more interesting when Hurtado-Prieto turns her attention to ‘‘luxury spending.’’ Mandeville unlike Smith does not see ‘‘frugality’’ as a source of wealth. Mandeville defines ‘‘luxury’’ in (almost) allor-nothing terms. Smith introduces an element of ‘‘customs and manners’’ into the identification and definition of luxury. Of course Smith is usually concerned with development and progress and knows very well that all human societies very quickly move beyond elementary survival needs. Smith sees ‘‘frugality’’ leading to savings and domestic investment and ‘‘prodigality’’ as leading to the depletion of ‘‘the national stock’’ while, at the same time potentially shifting expenditures from the support of productive to the support of unproductive labor. In essence Smith moderates Mandeville’s view of luxury by narrowing the definition and placing constraints on its capacity to generate wealth. More than this, Smith rescues the notion of ‘‘luxury’’ from the domain of human vice—the context favored by Mandeville. Smith holds that humans have a taste for beauty, an aesthetic that is built into human nature and part of the framework (derived only partly from Hutcheson) that is called upon to make moral judgments. Humans have needs that are not derived simply from the need to fuel our bodies. Smith sees, in Hurtado-Prieto’s words, ‘‘that the diversity of commodities proper to the notion of commercial society is not longer the result of human vice but of a natural inclination which implies no moral corruption.’’ This is, I think, nicely done. Here it would seem, as with many other aspects of Smith’s developments from Mandeville—I am thinking, for example, of the way Smith adapted Mandeville on the division of labor and Smith’s use of the natural propensity to truck, barter, and exchange in order to provide a mechanism in human nature for social and economic development—Smith is the more consistent and subtler theorist of human nature. Craig Smith’s paper on ‘‘Adam Smith on progress and knowledge’’ deliberately sets out to ‘‘rake over old coals.’’ New voices need to reconsider old or former voices. What matters to the reader is the quality of the reassessment. Craig Smith’s chapter is short, clear, and relatively uncomplicated. However, as many a lowland Scot will gladly tell you, ‘‘guid gear gangs in tae sma’ bulk.’’ In order to keep the discussion manageable, Craig Smith will be referred to as ‘‘Smith’’ and our philosopher will be referred to, henceforth, as ‘‘Adam Smith.’’ Smith is interested in the reconsideration of Adam Smith’s stadial theory of development. This is an idea of that he held

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in common—though he developed through the idea of four stages of social development, his own spin on the notion—with other members of the Scottish literati, and on its relationship with other central issues such as ‘‘the spontaneous generation of social order’’ and ‘‘the growth of human knowledge.’’ Smith re-examines familiar passages in an attempt to show that central to Adam Smith’s analysis of social and economic change is his understanding of the significance of ‘‘the growth and exploitation of human knowledge.’’ Smith takes Adam Smith’s notion of the emotional need for humans to acquire knowledge and reduce uncertainty (the initial re-reading is conventional) and marries this to ‘‘the search for subsistence’’ and latterly to the natural propensity to trade, in order to develop new insights. Once again we are dealing with Adam Smith’s conceptualization of human nature as being central to his exploration of social and economic phenomena. The uncomplicated goal of the chapter is, with respect to the stadial theory of social development, to integrate the knowledge drive with the other two with respect to social development. Smith argues that, Adam Smith posits the ‘‘discovery of new skills’’ as one of the drivers of the movement from one type of society to the next and draws, skillfully, on evidence from LJ to make his point. In what I took to be, at first sight, a simple historical contextualization of Hume’s notion of the relationship between property, justice, and government, Smith points to Adam Smith’s use of the stage of pastoralists (shepherds) as one in which ‘‘property rights develop as an unintended consequence of the acquisition of the knowledge of shepherdry.’’ Hume is not mentioned in the chapter. Adam Smith’s emphasis, according to Smith, is on knowledge development, however, and not on human nature more widely characterized, and social formation. Government is the outcome of appeals to judges, and an outcome not intended by those who make such appeals. Smith links further developments in the law with the growth of cities and then makes the link in Adam Smith’s thought between the ‘‘calming’’ of the mind (the removal of uncertainty) and the removal of uncertainty through the development of the rules of justice. Justice (a practical concern) and abstract knowledge flow from the common well of human nature. I find this interesting and challenging. It makes me wish to re-read and reconsider Hume whom I tend to see as the greater exponent of the links between the development of economic life and human nature, on the origins of property and justice as well as the writings of Adam Smith. Adam Smith’s conceptualization of human nature would seem to have equal claims to attention. Smith then looks at Adam Smith’s development of the idea of the division of labor and highlights the benefits that flow from increased skill and

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technical knowledge. He points to Adam Smith’s sense of ‘‘human capital’’: ‘‘The improved dexterity of the workman may be considered in the same light as a machine or instrument of trade which facilitates and abridges labour.’’ Eventually Adam Smith sees the continued development of specialist knowledge as essential to the development of commercial society but he is also clear that this knowledge must be ‘‘brought into the common stock.’’ Smith reaches the conclusion that Adam Smith sees social and economic change as the result of knowledge enhancement especially within the context of increases in the capacity to divide labor: ‘‘If this increased, and increasing, wealth is to be taken as an argument in favor of commercial societies, then a key plank in the justification must be that specialization allows for the enhancement and exploitation of knowledge held by individual specialists through trade.’’ Such a justification is, of course, the contemporary justification applied by many to the present form of capitalism and to globalizations many manifestations in India and China. Adam Smith, according to Smith, in a somewhat under-developed conclusion (he could have worked up the implications a bit more), links ‘‘three natural drives’’: ‘‘the desire to calm the mind through the acquisition and utilization of ordered knowledge, the natural pursuit of subsistence and the ‘propensity’ to trade.’’ This may not be rocket science but, goodness me, it is very neatly as well as professionally executed. Montes chapter, ‘‘On Adam Smith’s Newtonianism and general economic equilibrium theory’’ deals with Smith’s social and economic analyses within the Scottish tradition of Newtonianism. Montes holds that the precise nature of that tradition ‘‘is still a matter of debate’’ and rejects the notion that Smith’s application of the Newtonian method led to ‘‘general equilibrium theory.’’ Picking out Newtonian vocabulary such as ‘‘gravitation’’ and ‘‘center of repose’’ is not enough. Concern, Montes argues, about ‘‘what’’ is said must be moderated by ‘‘why’’ and ‘‘how’’ it is said. Montes accepts that Smith was a significant developer of Newtonian methods as applied to social phenomenon, but his ideas do not ‘‘fully rest upon an axiomatic-deductive methodology’’ fundamental to the development of neo-classical general equilibrium theory. Key to Montes approach is the specification of Newtonian method as ‘‘open-ended’’ with respect to the status of theory. Smith adopted the Newtonian method as a research tool for ‘‘a potentially open-ended process of successive approximation.’’ Montes skillfully uses passages from Astronomy to closely illustrate, citing fine details of Smith’s writing, Smith’s understanding of the ‘‘conditional nature of scientific progress.’’ Smith is usually and just about everywhere a very careful writer and it is nice to see someone else examine Smith’s

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hedging in a scientific or methodological context concerning knowledge claims. Although Hume’s Treatise is not mentioned in the chapter there are numerous links that can be made with Hume, including the commitment to using a ‘‘long chain of reasoning’’ based upon ‘‘experimental’’ evidence and observation.1 Hume is, I think, very aware of Newton’s distinction between ‘‘Analysis’’ and ‘‘Synthesis.’’ It is interesting that Smith asked Hume to consider the publication of Smith’s Astronomy in the event of Smith’s death. Montes takes the ideas of possible ‘‘connections in nature’’ and applies them to Smith’s project with respect to social phenomena. The project, Montes holds, was to investigate the ‘‘nature and the causes’’ of social phenomena and, like Newton, Smith resisted the idea of the merely mechanistic. Montes then concentrates on a textual analysis of Book one, Chapter 7 of the Wealth of Nations, the chapter normally explored for evidence of the foundations of general equilibrium. He suggests that the textual evidence also needs to be read with care and that a strict understanding of Newtonian attraction as applied to prices would lead to disequilibrium rather than equilibrium. Smith it seems understood Newton very well. Montes concludes with an appeal for a nuanced approach to Smith’s work based on a balance (sometimes difficult to achieve) between the ‘‘what,’’ ‘‘why,’’ and ‘‘how’’ of interesting texts. This is a cause with which I have considerable sympathy, even if I have over-stressed, perhaps, in my own work, the ‘‘what’’ and the ‘‘how.’’

NOTES 1. I am currently interested in the textual implications for Hume’s writing of the idea of a ‘‘long chain of reasoning’’ as a significant and indeed (with respect at least to the assessment of Adam Smith by his peers) a culturally admired aspect of the social application of Newtonian methodology. The notion seems significant to both Hume as Smith and yet is hardly mentioned in discussions that I have seen of the views on Newtonianism as held by the literati.

REFERENCE Force, P. (2003). Self-interest before Adam Smith: A genealogy of economic science. Cambridge: Cambridge University Press.

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Peart and Levy’s THE ‘‘VANITY OF THE PHILOSOPHER’’ SYMPATHY LOST (AND REGAIN’D?) Andrew Terjesen A review essay on Sandra Peart and David Levy’s ‘‘The Vanity of the Philosopher’’: From Equality to Hierarchy in Post-Classical Economics. Ann Arbor: University of Michigan Press, 2005. 344 pp. ISBN 9780472114962. 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 midNineteenth 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 A Research Annual Research in the History of Economic Thought and Methodology, Volume 26-A, 169–186 Copyright r 2008 by Emerald Group Publishing Limited All rights of reproduction in any form reserved ISSN: 0743-4154/doi:10.1016/S0743-4154(08)26017-7

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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. My contribution to the discussion that Peart and Levy have initiated will be much more limited in scope, and in large part it strengthens the argument that the authors have made. The focus of this article will be on the way in which Adam Smith fits into their narrative of the transformation of economic thought in the last few centuries. Admittedly, the book is focused on the middle of the Nineteenth Century and therefore is (and ought to be) far more concerned with how Smith was perceived at that time by Mill, Greg, Edgeworth, and others, rather than with what he may have actually said or believed. However, a consideration of Smith’s ideas will uncover another important ‘‘incident’’ in the history of economic thought that preceded the changeover from analytical egalitarianism to analytical hierarchicalism (and it will be argued, actually made it easier for that changeover to happen): the rise of utilitarianism. In addition, as the notion of sympathy is put forward as the missing element in modern economic theory, the notions of sympathy at play in Smith’s writings will be distinguished from each other in order to show the different roles that sympathy might play in economic analysis. In light of these two issues, utilitarianism and the meaning of sympathy, it will become clear that the things that were lost in Post-classical economics are not things that can be easily reintroduced to modern economic theory. Although this does not mean abandoning Peart and Levy’s optimism, it does mean that it will require more effort to achieve (and some of the necessary changes might be more trouble than they are worth). In their initial discussion of sympathy, the authors make some very helpful general observations about the differences between Hume and Smith’s definitions of ‘‘sympathy.’’ Notably, the fact that Hume’s notion of sympathy is largely limited to those who resemble us, whereas Smith’s notion of sympathy makes it easier for us to bridge the gap between ourselves and those who do not resemble us (pp. 131–132). However, while this general observation captures the spirit of the difference between the two thinkers, they can be seen as much closer together. ‘‘Sympathy’’ is a word with multiple meanings—both now and then.1 Both Hume and Smith use the word in a number of different ways. It is true that Hume’s usages tend to center around the ways in which sympathy operates as a form of ‘‘emotional contagion’’ (Hume, 1978, p. 576). Even when he speaks of sympathy as a process that we consciously engage in, it still seems to happen through an

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associative mechanism that is set off by people like us (Hume, 1978, p. 317).2 But in other parts of his work, he speaks of ‘‘sympathy’’ as a kind of benevolence—‘‘The former sentiment, to wit, that of general benevolence, or humanity, or sympathy, we shall have occasion frequently to treat of in the course of this enquiry’’ (Hume, 1998, p. 166n)—or as an act of imagination—‘‘we often feel by communication the pains and pleasures of others, which are not in being, and which we only anticipate by the force of imagination.y I shou’d be actuated by the same principle of sympathy, which makes me concern’d for the present sorrows of a stranger’’ (Hume, 1978, p. 385). These notions would make it easier for Hume to use sympathy to make people equal. But these are definitely not the predominant usages of sympathy in Hume’s work, and so it is fair to say that ‘‘Humean’’ sympathy is a matter of contagion by association. However, these other usages suggest that Hume was aware of the limitations of relying solely on ‘‘Humean’’ sympathy. On the flipside, while Smith’s usages tend to involve imagination, there are times when his use of sympathy is more akin to contagion (which would rely on people being equal to start with). For example, Smith’s statement that Upon some occasions sympathy may seem to arise merely from the view of a certain emotion in another person. The passions, upon some occasions may seem to be transfused from one man to another, instantaneously, and antecedent to any knowledge of what excited them in the person principally concerned. (Smith, 1982, p. 11)

This suggests that the division between Hume and Smith need not reflect a deep divide in their views concerning human nature. Instead, it might reflect a continuum—with each thinker emphasizing different aspects based on the problems he finds most pressing. All of these different notions of sympathy may be necessary for dealing with different problems that we face in getting along with our fellow humans (including the issues in modern economics that the authors think sympathy is needed to address). Since they are different notions though, one must recognize that they might need to be learned in different ways or have different pitfalls. One very important example that will be addressed later is the difference between sympathy as a means of understanding and sympathy as a means of motivating people to altruistic actions. There is a tendency to conflate these two notions, but it is important to recognize that I can understand that you are in pain without wanting to do anything about it. If it wasn’t possible for these two kinds of sympathy to be separated, sadists would be very unhappy individuals.

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Of far greater interest for the debate that this book engages us in, is the ambiguity in Smith’s usages of ‘‘sympathy’’ at the beginning of the Theory of moral sentiments (hereafter TMS). There is an understandable tendency to equate Smith’s notion of ‘‘sympathy’’ with a form of imaginative projection as the authors do (p. 133). However, the first actual use of the word ‘‘sympathy’’ occurs after his discussions of imaginative projection. As Smith puts it, ‘‘sympathy’’ is to be used ‘‘to denote our fellow-feeling with any passion whatever’’ (Smith, 1982, p. 10). Although the sort of perspective-taking that Smith mentions at the beginning of TMS is an important part of the sympathetic process, the most distinctive aspect of Smith’s notion of sympathy is the possible result of that imaginative process.3 What really matters in sympathy is the match between the emotion of the person sympathizing and the person being sympathized with (i.e., the ‘‘fellow-feeling’’) and the pleasure that such a match causes. When there is no match, there is (in Smith’s view) a failure of sympathy. This shift in understanding of sympathy—especially if one recognizes that such ‘‘fellowfeeling’’ can only be obtained by using one’s imagination—should not in any way undermine Peart and Levy’s contention that Smith’s notion is a ‘‘sympathy that equalizes’’ (p. 130). In fact, this particular notion of sympathy should strengthen their point. In Smith’s view, when there is sympathy (that is, a match in our feelings with those of the person we are sympathizing with), we derive pleasure from it. These good feelings would encourage us (through positive reinforcement) to try and see others as our equals—since we certainly would want to feel pleasure whenever it is possible to do so; as opposed to allowing barriers to exist that obscure our similarities and cause us displeasure when we experience antipathy (that is, the lack of matching). So far then, this revised understanding of sympathy only furthers the authors’ point about how important sympathy is to analytical egalitarianism. However, further reflection on this notion of sympathy highlights an important aspect of Smith’s moral theory that is not really addressed, even though the authors want to make use of the idea of sympathy as a source of moral obligation (p. 181). Since the pleasure of sympathy comes from matching our feelings to that of the person we’re sympathizing with, there seems to be little incentive for us to deviate from the way people actually feel (as it would be an unpleasant sensation if we did so). This raises a common criticism of sympathy-based ethics: how can they provide moral judgments that will enable us to criticize someone who feels that they are justified when they are killing an innocent person? Smith’s answer to this is to provide a corrective for sympathy—the mechanism of the impartial spectator. As

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Smith puts it, actions ‘‘seem proper and approved of, when the heart of every impartial spectator entirely sympathizes with them, when every indifferent by-stander entirely enters into, and goes along with them’’ (Smith, 1982, p. 69). From an ethical and public policy point of view, the question must be raised: if the kind of sympathy that is necessary to generate non-discriminatory behavior requires the notion of an impartial spectator, how can we be sure the impartial spectator’s point of view has been properly identified? To be honest, this is not a problem unique to sympathy-based ethics. However, it does show that sympathy alone is not enough to guarantee that people will judge things rightly or behave in a compassionate manner—at least, in a manner that everyone would agree is compassionate. But when the authors call for the return of sympathy in economics, it is unclear whether they mean sympathy simplicter or corrected sympathy.4 The many meanings of ‘‘sympathy’’ further highlight this problem. When sympathy is invoked in moral discourse, the idea seems to be to provide a mechanism that motivates us to resist the self-interest that most people are prone to. The authors refer to sympathy as a ‘‘motivation principle that leads individuals to take other persons’ interests into account’’ (p. 181). Certainly the intention of Hume and Smith is to respond to the egoistic view of morality proposed by Hobbes and his adherents. But, as a quick study of the usages of ‘‘sympathy’’ would illustrate—sympathy is not necessarily an affective or motivating mechanism. Sympathy might be an important part of how we recognize the rightness and wrongness of actions, but it might not be able to do anything about whether we choose to do the right or wrong thing. For example, the sadist would not take much enjoyment in their work if they did not experience the pleasant match between what the person they are torturing is feeling and what they think that person ought to be feeling. However, neither the ability to imagine what they feel nor fellow-feeling with their feelings would move the sadist to cease their tortures. Now, one might at this point try and invoke the impartial spectator as a way to correct for that. In that case, the sadist might experience some displeasure at the delight they are taking in the pain caused, but this displeasure would be experienced differently than the pleasure of causing someone pain and it is not clear that the displeasure of the impartial spectator would be enough to make the sadist stop.5 Certainly Hume and Smith seemed to think that there was an intimate connection between sympathetic judgments and behavior, but proving that it must be so is another matter. All of these concerns might seem beside the point if you take the utilitarian view, in which pleasure and pain are the determinants of moral value. Something that brings us pleasure is good and something that brings

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us pain is bad. Sympathy would give people access to the pleasures and pains of others and therefore enable us to judge more clearly how good or how bad an action is. On this view, ‘‘sympathy’’ seems to be more akin to how rational choice theorists use it when they describe sympathetic judgments.6 This idea of sympathy—as simply incorporating the pleasures and pains of others into our existing desires—would have no problem in motivating us. After all, these new pleasures and pains would become felt by us and have the same effect as if they were our own. In effect, sympathy becomes the mechanism for turning other people’s interests into our own. In addition, the utilitarian approach would enable one to be less concerned about the question of how we determine the impartial spectator. One could just assume that these pleasures and pains are brute normative facts (it’s wrong because it hurts and provides no long-term pleasure) that can be observed by anyone who does not have a particular interest in the situation. Thus one promotes the idea that viewing things from the perspective of someone who has no interest (impartial in the sense of not partial to either side) taking for granted that the truth will be seen clearly—at least as clearly as someone can tell that something is yellow under normal conditions. That the authors view sympathy, as used by the classical economists, as part of a utilitarian moral framework is evidenced by some of their remarks. For example, they describe classical economics as ‘‘part of the utilitarian tradition characterized by an imperative to find the greatest happiness for the greatest number’’ (p. 180). Insofar as they viewed sympathy as an important component of classical economics, they must also have seen sympathy as embedded in the utilitarian perspective. Also, in a footnote they describe the basis of sympathy as ‘‘our strong retentiveness of former states of pleasure and pain’’ (p. 147, n. 24). That this notion of sympathy is also similar to sympathetic preferences is evidenced by their definition of ‘‘sympathize’’ as the ability ‘‘to take into account other people in the selfinterested calculus’’ (p. 19).7 Furthermore, that their focus is on sympathy as entailing the incorporation of the preferences of others is illustrated in their discussion of how sympathy can serve to encourage reform. As they describe it, ‘‘if agents are motivated by sympathy in addition to monetary gain, then taxpayers may be willing to pay for reforms because they are willing to give something up to make a perceived evil go away’’ (p. 191). And even more clearly when they define the classical economics analysis of well-being one of the elements is the view of ‘‘reform as an exchange entailing compensation in terms of sympathy or money’’ (p. 198). In order to bring about social change, the homo economicus needs an incentive, either in terms of their own preference (money) or the preferences of others that they have internalized

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through sympathy. Understood in this fashion—sympathy as the source of sympathetic preferences—the potential for sympathy to bring about reform seems very great from an economic (and utilitarian) perspective. That most Nineteenth Century economists were classical utilitarians and that they viewed sympathy in a manner akin to sympathetic preferences is not being disputed. Rather, it is the utilitarian approach to Smith (which seems to influence the authors’ understanding of sympathy in Smith) that is being challenged. The authors identify Smith as a median-based utilitarian as opposed to a mean-based utilitarian and for them the shift in utilitarianism from majority to average is what is significant (p. 181). One of the author’s has argued more specifically for this description of Smith’s ethics, an argument which will be addressed later. To make it clearer why it is not best to think of Smith as a utilitarian, it is helpful to begin with Hume’s moral theory. Hume is another figure who is often seen as a protoutilitarian—and largely for the same reasons as Smith. Both thinkers discuss the importance of utility when making moral judgments and both were students of Hutcheson who is credited for the famous utilitarian phrase ‘‘the greatest good of the greatest number.’’ However, in their writings they clearly distanced themselves from utilitarian moral theory. According to Hume, something is judged to be virtuous based upon our response to the thing being judged (for Hume, it can be an action, a sentiment or a character)—whether ‘‘its view causes a pleasure or uneasiness of a particular kind’’ (Hume, 1978, p. 471). The four indirect passions of pride (pleasing about self), humility (displeasing about self), love (pleasing about other), and hate (displeasing about others) cover all the permutations of painful and pleasurable sensations relevant to moral judgments. In fact, Hume specifically identifies virtue and these passions: ‘‘these two particulars are to be consider’d as equivalent, with regard to our mental qualities, virtue and the power of producing love or pride, vice and the power of producing humility or hatred’’ (Hume, 1978, p. 575). Hume notes a distinction in the qualities of the cause of our indirect passions: those that please because they are ‘‘agreeable’’ and those that please because they are ‘‘naturally fitted to be useful’’ (Hume, 1978, p. 591). When one adds the initial distinction between self and others contained in the sentiments of pride and love, one gets four sources of pleasure: (1) agreeable to self; (2) agreeable to others; (3) useful to self; and (4) useful to others. In the Second Enquiry Hume adds the qualifier ‘‘immediately’’ to agreeable qualities—no doubt because one could argue that those qualities which are useful are also agreeable, but only after we reflect on them to determine their usefulness (making them mediately agreeable). Qualities 1 through 3 cover the natural virtues, because those

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motives are activated by every instance of that quality. Only 1 and 3 act on us without fail: after all, Hume presupposes we all possess an innate selfinterest that will be activated by qualities useful to ourselves and being agreeable by definition means that we are moved by those qualities in a positive way. Quality 2 requires the kind of likeness of character that the authors identify as the definition of ‘‘sympathy’’ in Hume’s writings. As a result of this similarity, the person sympathizing will experience something akin to, though probably not as strong as, Quality 1 (as they can see themselves in others), which moves people by definition. The only quality that does not explicitly move us is Quality 4, as Hume does not presume that we have an innate interest in the well-being of others. Interestingly, Qualities 1 through 3 are all titles of chapters in the Second Enquiry, but there is no chapter titled ‘‘Of Qualities that Are Useful to Others.’’ Presumably that is because this topic was already covered under the chapter ‘‘Of Justice.’’ In fact, it seems as if Quality 4, in Hume’s estimation, represents all acts of Justice and the only ‘‘artificial virtue.’’ Hume goes so far as to say in the Second Enquiry that ‘‘public utility is the sole origin of justice’’ (Hume, 1998, p. 83). What is noteworthy in all of this is that consideration of utility only enters into some of our virtues—although obviously an appeal to utility in the case of others requires something to make us want to care about the utility of others. In responding to the problem posed by our lack of motivation to be just, Hume appeals to sympathy—in a manner which seems very akin to sympathetic preferences. Justice, as far as Hume is concerned, does not arise out of some other ‘‘natural’’ motive—unlike the other ‘‘natural’’ virtues. According to Hume, there is ‘‘no such passion in human minds, as the love of mankind, merely as such’’ (Hume, 1978, p. 481). The regard we have for people arises out of their personal qualities (which would be agreeable to us—Quality 1), the service they render (which would either be useful to us (Quality 3) or useful to someone we care about which we like to see (Qualities 1 and 2)), or some relation they possess to ourselves (and through that relation we come to regard them as agreeable to us and we become concerned about what is agreeable to them (Qualities 1 and 2)). The only way that something that is beneficial to others will ‘‘naturally’’ motivate us is if we already care for them. Thus, without its own distinct motive, the sense of justice must be artificial—which is to say that is developed out of other natural motives combined with human constructions.8 Hume views justice as the rules we agree to follow in order to get along as a society (which we need to do if we are to survive in this world). However, when justice does not directly benefit us it is harder to get people to uphold

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it (after all, our motivation initially is self-interest). But Hume turns to sympathy as the means by which we are moved to uphold justice. He states, ‘‘yas the good of society, where our own interest is not concern’d, or that of our friends, pleases only by sympathy: It follows, that sympathy is the source of our esteem, which we pay to all the artificial virtues’’ (Hume, 1978, p. 577). Sympathy then is a necessary condition for creating the passions associated with justice—and appears to be functioning in the manner that the authors describe sympathy’s role in reform. Given the preceding discussion in the Treatise one might assume that Hume intended ‘‘sympathy’’ to be read as the conversion of an impression to an idea made possible by the similarity in character of those involved (the generic definition of sympathy in Hume already mentioned). Thus, when I am moved to act according to justice when it is not to my benefit, it is because I have come to identify with the needs of those who are benefited. For example, Ken has frittered away his employees’ pension plan. Ralph, an employee in a different company, wants to make Ken pay them back because Ralph has taken on the distress of the employees. The problem with this scheme is that Ralph could have just shut himself off to the employees’ pain. Unless he happened to already ‘‘naturally’’ care about one of the employees, why wouldn’t he seek to avoid their distress?9 Overall, this seems to be the cynical view towards justice (we only appeal to it when someone we care about is affected) that Hume wishes to avoid. Another way of interpreting the sympathy involved is that Ralph has a general concern for the public good (which he has been taught) and so the injustice of Ken has moved him to seek a restoration of the public good. In that case he would not need to (though he might anyway) feel the distress of the employees. It would be sufficient if he was upset at how the public good has been affected. Thus the sympathy involved here would be a feeling of general benevolence. Hume’s discussion of virtue in the Second Enquiry would seem to favor that interpretation as he repeatedly refers to the ‘‘principles of humanity’’ that influence our actions, when no other benefit is involved.10 But there also appear indications in the Treatise that Hume had such a sentiment in mind when he discusses what moves us to be just. Hume makes reference to how ‘‘men receive a pleasure from the view of such actions as tend to the peace of society’’ (Hume, 1978, p. 533). This would seem to be a mere feeling and not a sharing in the feelings of society. However, it is conceivable that this pleasure is shorthand for the group’s sympathies with each other. What is less easily dismissed is how he describes the motive for justice: ‘‘the interest on which justice is founded is the greatest imaginable and extends to all times and places’’ (Hume, 1978, p. 620). Such

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a wide feeling does not seem to be something that could be captured in the act of sympathizing with a group of individuals. The ambiguity in the meaning of ‘‘sympathy’’ has been mentioned previously, but the discussion of justice (and its need for sympathy) provides a means of showing how the different kinds of sympathy can work together in a sympathy-based ethics. And consequently, how they might all be a necessary part of the proposed return to sympathy in economics. When Peart and Levy call for a return of sympathy in economic analysis, it must be recognized that a couple of different kinds of sympathy (Hume’s solution is but one possible solution, but it illustrates well the interplay between such notions as sympathy as understanding, sympathy as motivation, and sympathetic preferences) need to be restored in order to ensure that people act morally. Otherwise, the return of sympathy will have little effect on current inequalities (other than that we’ll feel worse about not doing anything). But this complicated story only deals with one aspect of morality—justice. The other three qualities are morally relevant and they cannot all be reduced to aspects of utility. One might wonder what the difference is in practice between the immediately agreeable qualities and the useful ones. If the two kinds of qualities are always found together, what is the point in distinguishing them? Hume’s discussion of courage in the Second Enquiry illustrates why Hume distinguishes them: The utility of courage, both to the public and to the person possessed of it, is an obvious foundation of merit. But to any one who duly considers of the matter, it will appear that this quality has a peculiar lustre, which it derives wholly from itself, and from that noble elevation inseparable from it. Its figure, drawn by painters and by poets, displays, in each feature, a sublimity and daring confidence; which catches the eye, engages the affections, and diffuses, by sympathy, a like sublimity of sentiment over every spectator. (Hume, 1998, p. 134)

The value of courage is more than the sum of its consequences to Hume. And when discussing benevolence in the Second Enquiry Hume allows that the bulk of its praiseworthiness is the good it promotes, but he also insists there are other reasons why we praise it (Hume, 1998, p. 136). It is this discussion of benevolence that also highlights one of the ways in which immediately agreeable and utility come apart: ‘‘As a certain proof that the whole merit of benevolence is not derived from its usefulness, we may observe, that in a kind way of blame, we say, a person is TOO GOOD; when he exceeds his part in society, and carries his attention for others beyond the proper bounds’’ (Hume, 1978, p. 137). Even though more benevolence means producing more good (utility) too much of it in one person is

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unseemly. Similarly, the notion of immediately agreeable enables Hume to refer to the moral praiseworthiness of good manners, without making the difficult to defend claim that such manners produce more good, especially than any other particular set of manners (Hume, 1998, p. 139). Smith makes similar statements about the relationship between utility and moral judgment. Like Hume, Smith sees it as an important part of our judgments of approbation, but he does not think all judgments of approbation are caused by utility. His discussion of judgments of propriety revolves around joy and sorrow—which is not necessarily the same as pleasure and pain. Similarly, when discussing judgments of merit, Smith says they are based on ‘‘first, in relation to the cause or object which excites it; and, secondly, in relation to the end which it proposes, or to the effect which it tends to produce’’ (Smith, 1982, p. 68). Only some of this criteria appeal directly to the consequences, whereas the other could be interpreted along the lines of Hume’s notion of immediate agreeableness. So far, these facts only suggest the plausibility of reading Smith as similar to Hume. Later in TMS Smith makes a more explicit appeal to Hume’s analysis of utility, when he references ‘‘The cause too, why utility pleases, has of late been assigned by an ingenious and agreeable philosophery’’ (Smith, 1982, p. 179). But Smith is clear that, like Hume, he thinks that ‘‘utility is one of the principal sources of beauty’’ (Smith, 1982, p. 179). Though utility is an important part of his system (as it is in Hume’s), it is important because it is one of the things that pleases us (and not the only one) not because it is a normative value in its own right. In reading Smith as a utilitarian one removes an important part of his moral philosophy. Samuel Fleischacker is adamant that Smith not be read as a utilitarian (Fleischacker, 2004, p. 47). And in TMS Smith clearly distinguishes between his theory and ones founded on utility, claiming that in regards to the affections created by sympathy ‘‘The only difference between (those theories like Hume’s) and that which I have been endeavoring to establish, is, that it makes utility, and not sympathy, or the correspondent affection of the spectator, the natural and original measure of this proper degree’’ (Smith, 1982, p. 306). Later on he takes pains to distinguish a theory that ‘‘surveys the utility of any quality from sympathy with the happiness of those who are affected by it’’ from his own based on a sympathy the motives or gratitude of those involved. (Smith, 1982, p. 237). In effect, Smith is rejecting sympathetic preferences and utilitarianism, since the motives or gratitude may have nothing to do with the self-interest of the agent (one could be grateful for something that does not produce happiness in any utilitarian sense).11

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Now one could take these passages and argue that at his heart, Smith is still a thorough-going utilitarian in a broad sense. James Otteson does that in his book Adam Smith’s Marketplace of Life. As Otteson puts it, Hume might accept Smith’s claim that it is sympathy, not utility, that immediately prompts the moral judgment, but that Hume might respond in turn that Smith’s own analysis leaves us without an explanation for the moral sentiments themselves. Why, Hume might ask, do certain agreeable sentiments well up in us in certain situations, others in other situations? I suggested that Hume’s argument might be that it is nevertheless utility that, quite unbeknownst to us, accounts for our sentiments. He could argue that the sentiments are themselves reflections of utility, that our agreeable sentiments arise from viewing beneficial actions or characters, and that our disagreeable sentiments arise from viewing harmful actions or characters. (Otteson, 2002, p. 250)

First off, note that Otteson’s attributions to Hume are arguments he thinks Hume could make – though in fact Hume may not have held to this view. Nonetheless, even if neither Hume nor Smith made this argument, Otteson has argued that they should recognize that utility (i.e., pleasure and the absence of pain) underlie all their moral judgments. Things that do not appear useful to us might still have a use that our sentiments recognize even if our reason can’t. The reason to resist this interpretation of Hume (and therefore any attempts to read it into Smith) is based on Hume’s own comments on things that are disagreeable even though they are clearly beneficial (for example, the overabundance of benevolence in one person described earlier). Now, one might propose an even broader conception of utilitarianism than one based in pleasure and pain, and argue that both Hume and Smith are ultimately concerned with what is desirable or undesirable. Things that please because they possess utility are desirable for their consequences and things that please because they are agreeable are desirable for how they make us feel. But nothing in their view tells us how to balance those competing desires in a way that would mimic the principle of utility. This may seem a quibbling point, but it is an important change in moral thinking to go from Smith with his conception of multiple kinds of goods and Bentham and Mill with their conception of a single kind of good—utility in the sense of pleasure and absence of pain. To begin with, since there is only a single kind of good, it is not possible to use one good against another to constrain our judgments. After all, as the authors recognize, what might be ‘‘best’’ for society if one were merely calculating pleasure or survival rates could be something that we intuitively regard as morally undesirable. Utilitarianism, as a doctrine, has often been criticized for such ‘‘moral lapses’’ due to its inability to judge the results of maximizing the greatest good for the greatest number. The authors

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hold that median-based utilitarianism is important for counteracting some of these excesses. But even a majority-based view will come up short in situations where the majority of the people have preferences that someone might find morally unjust. As has already been mentioned, correcting the view of Smith would not change the main theses of the book. However, in recognizing this difference between Smith and an actual Utilitarian like Mill, one can see how economists like Mill unintentionally opened the door for the shift to analytical hierarchicalism. Mill is a thorough-going utilitarian and thinks that every moral judgment is based upon the pleasure or displeasure of something. Even complex moral statements can be reduced to this—as exemplified in the utilitarian reading of Smith mentioned by Otteson. But once morality is identified with utilitarianism, the outlying aspects of sympathy become problematic. One can see how this ‘‘opening of the door’’ illustrated in the change in biological attitudes towards sympathy. As long as sympathy is seen as part of morality (as opposed to just an embodiment of utilitarian thinking), biologists saw human existence as something that could not be captured by natural selection. For example, Wallace is quoted as saying that ‘‘the action of natural selection is therefore checked’’ by human sympathy (p. 62). Now, that conclusion does not have to lead to a rejection of sympathy or, as the authors describe it later in the book, a change in the direction of sympathy. Thus, someone like Spencer actually holds that sympathy is a necessary part of human development as it helps us to deal with evils—a view which he sees following from Smith’s TMS (p. 214). But once morality is equated with utilitarian principles, any time that sympathy seems to demand something that is not for the benefit of the species one could reject sympathy without being concerned about a rejection of morality. And so someone like W.R. Greg can say that social progress serves to ‘‘counteract and suspend the operation of that righteous and salutary law of ‘natural selection’ in virtue of which the best specimens of the race—the strongest, the finest, the worthiest—are those which survive’’ (p. 62). The biologists with eugenicist leanings would have difficulty seeing how sympathy could be important to morality since it recommends things that appear useless or harmful to the species—and morality in the utilitarian framework is measured solely by harms and benefits. Even a more refined perspective like Spencer’s preserved sympathy only inasmuch as it seemed useful to overall society (p. 210). Consequently, when one begins to insist that some people can’t be improved upon—that they become ‘‘granite’’—sympathy with them seems pointless and unjustifiable even from a utilitarian perspective (p. 152).

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The shift in thinking about utility after Mill is the final nail in the coffin for sympathy. As has already been pointed out, Mill’s utilitarianism regards utility as pleasure and the absence of pain, with the assumption that pleasure and pain have an intrinsically normative component. But with the marginal revolution, utility takes on a different meaning (at least in economics, but arguably much of ethical thinking followed suit). Although Jevons pays lip service to the utilitarianism of Bentham and Mill, as when he says ‘‘pleasure and pain are undoubtedly the ultimate objects of the Calculus of Economics’’ (Jevons, 1888, III.1). But Jevons makes it clear that ‘‘utility, though a quality of things, is no inherent quality’’—a view he traces to Senior (Jevons, 1888, III.13). This idea is very important to the development of the theory of marginal utility, but it is a departure from the normative theories of Bentham and Mill. Menger more explicitly diverges from Bentham and Mill in not equating utility with pleasure and pain, but he agrees with Jevons in the idea that ‘‘value’’ is ‘‘nothing inherent in goods, no property of them, nor an independent thing existing by itself. It is a judgment economizing men make about the importance of the goods at their disposal for the maintenance of their lives and well-being’’ (Menger, 2004, pp. 120, 121). Focusing on the principle of utility as the sole principle of morality does not have to lead to a dismissal of sympathy—as long as one presumes that utility tracks real values and sympathy is a means to access those values in others (by means of something like a sympathetic preference—but it is not simply an individual preference, it is a moral fact that something is good or bad for them). But with the marginal revolution, that presumption is upset (and arguably it is right in doing so, since there is no prima facie reason for thinking that what pleases us is good for us) and now it is much easier for social scientists and biologists to be dismissive of sympathy. From their perspective what matters is what is judged to be of value for the maintenance of human well-being and that can be examined from a scientific/mathematical perspective. The feelings which seem at odd with these calculations can be dismissed as mistaken judgments. Even when analytical egalitarianism returns in the Twentieth Century, there is no pressing need for sympathy, as all value is judged to be a matter of individual preference and not something that we need to take into account beyond our individual preferences to satisfy the preferences of others (i.e., sympathetic preferences). But this is probably not enough to engage people in full scale social reform—since they’ll put a premium on individual preference (as seems to have been the case in practice with such free market views).

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The shift to a fully utilitarian perspective (as opposed to one which acknowledges a place for utility as an important moral principle, but not the sole moral principle) was an important event in the development of classical economics and one which probably hastened, and may have made possible, the shift from analytical egalitarianism to analytical hierarchicalism. The authors have documented very well an important transition in economic history, and perhaps this paper will serve to encourage them to turn their attention to another one. Understanding why the shift to thorough-going utilitarianism occurred may help us to understand whether economics is incompatible with the kind of sympathy that Smith ascribed to. And Smith’s sympathy seems to be one of the kinds of sympathy needed to counteract the pursuit of naked self-interest that occurs in an unregulated, non-hierarchical market (certainly, the large-scale incorporation of sympathetic preferences would be a step in the right direction, but it would just not be enough to satisfy most intuitions about social justice. After all, a majority could still exploit others and even the exploited might believe that it is best that things stay the way they are). Moreover, it has been suggested that such sympathy can only be effective if it is embedded in an ethical framework that gives it the kind of power it needs to resist being dismissed as irrelevant—for example, one that is not strictly utilitarian.12 But none of this alters the important lessons about the practical dangers of the ‘‘vanity of the philosopher,’’ nor should it take away from the fact that the authors have pointed us in the right direction as to how we might avoid it in the future. All this paper has tried to suggest is that avoiding such ‘‘vanity’’ will not be easy—especially if one clings to a view of morality as trying to maximize preference satisfaction.

NOTES 1. As is ‘‘empathy,’’ which is why it is not very helpful to refer to Hume’s notion of ‘‘sympathy’’ as ‘‘empathy we feel for those like us’’ (p. 131). For example, many people regard empathy as non-judgmental, but if that is the case then Hume could not have founded a theory of moral judgment on ‘‘empathy we feel for those like us.’’ The complicated history of both terms makes it difficult to treat either term as having a definitive meaning beyond what is stipulated by a particular author. This problem with terminology will spur on much of the discussion that follows. 2. Although Peart and Levy seem to overstate this when quoting Hume: ‘‘this resemblance must very much contribute to make us enter into the sentiments of others, and embrace them with facility and pleasure’’ (p. 132). They read this as support for the idea that Hume’s notion of sympathy requires resemblance, but the passage itself merely states that resemblance makes sympathy a lot easier to enter

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into and maintain. Nonetheless, it is very helpful to distinguish a ‘‘mechanical’’ form of sympathy based on principles of association (as in Hume)—which is less likely to be sensitive to cultural differences—from an imaginative form of sympathy (as in Smith) that is better able to incorporate cultural difference. 3. It is beyond the scope of this paper to defend this assertion in detail. For the most part, it must be admitted that the reading of sympathy as the experience of fellow-feeling is simply consistent with what Smith says. The traditional reading of sympathy as imaginative projection is also consistent with the text and cannot be disproved by appealing to the text itself. Instead, it would be argued that the notion of sympathy as fellow-feeling (or at least one which incorporates both role-taking and fellow-feeling) presents a more interesting and effective moral theory. For example, take Smith’s statement that in a situation where someone is angry at some people ‘‘We readily, therefore, sympathize with their fear or resentment, and are immediately disposed to take part against the man for whom they appear to be in so much danger’’ (Smith, 1982, p. 11). This could be read as merely stating that we easily imagine ourselves in the situation of those who are being attacked. But when one adds in the concept of fellow-feeling, it is also being asserted that we readily experience that our feelings match theirs and are pleased by it. Such pleasure is more likely to move us to action than their fear and resentment (which could just as easily cause us to run as they might). Similarly the idea of sympathy as fellow-feeling is more consistent with Smith’s discussion of the pleasure of mutual sympathy in the second chapter of TMS. Robert Sugden (2002) has drawn attention to this particular notion of ‘‘sympathy’’ in Smith (though he calls it ‘‘fellow-feeling’’ to avoid confusion). 4. Even if one regards sympathy as mere imaginative projection, this question seems to linger in the air. 5. To argue that it must make the sadist stop, would be to argue that all moral judgments are internally motivating, but that is a controversial position in moral philosophy. 6. It is interesting to note that Edgeworth (1881) seems to have introduced this particular notion of sympathy—as incorporating the preferences of others into our utility functions. What makes this so interesting is that the author’s regard Edgeworth as a major figure in the rise of hierarchicalism who questions Mill’s doctrine of moral equality (p. 230). 7. In a separate work, one of the authors describes the process by which one can imagine being someone else with the result that one ‘‘can impute a kind of as-if wellbeing’’ (Levy, 2001, p. 215). And in the same passage, describes that imputation of as-if well-being as being arrived at ‘‘sympathetically.’’ Such a description sounds more like an empathetic preference, but such preferences were intended to help solve choice problems and would seem to further the idea that Smith’s notion of imaginative sympathy (which probably creates both sympathetic and empathetic preferences) is necessary for reform. 8. Interestingly, while Hume considers the motive for justice to be artificial, he also thinks it arises ‘‘necessarily from education, and human conventions’’ (Hume, 1978, p. 483). 9. Hume is seeking an explanation for moral action that does not depend on a purely egoistic psychology, precisely because not all moral actions involve some

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benefit to the person acting altruistically (otherwise we would be naturally moved to justice). It is worth noting that the personal distress model has been used by some psychological egoists to explain altruistic action. However, psychological research suggests that Hume was right in looking for a non-egoistic explanation—personal distress does not seem to be a very effective motive for pro-social behavior in situations where someone else’s interests are not also at stake, as people will usually seek to ‘‘escape’’ the situation rather than help the person in real distress (Batson and Coke, 1981). One might point out that sympathy in Hume appears to involve sympathetic concern (being pained with them at what whatever is paining them) and not personal distress (being pained by their pain oblivious to its cause) and therefore avoids the problems of personal distress explanations. However, while sympathetic concern might yield some motive to act for the person, it can’t trump self-interest in every case. What Hume is most genuinely concerned with is developing a mechanism that will enable people to act even when their own interests are affected. 10. One such discussion can be found in the Second Enquiry, where Hume insists that a person ‘‘must unavoidably feel some propensity to the good of mankind, and make it the object of choice, if everything else be equal’’ (Hume, 1998, p. 114). Hume’s point here is that if we can have this feeling (which appears to be a feeling and the generic notion of sympathy in Hume) when our interests are not involved, then maybe we should pay attention to it when they are involved and let that sentiment guide our judgments of moral praise and blame. 11. It could be argued that Smith is not the only one to reject a completely utilitarian framework. Despite what Smith says about him, there is evidence that Hume did not found his moral theory solely on considerations of utility. However, insofar as Hume puts greater emphasis on utility, it may explain why he seems more hierarchical than Smith to the authors. 12. Although the Wealth of Nations has only been touched upon peripherally here, it is only because (and the authors would probably agree) the ways in which TMS supplements the ideas of Smith’s economic theory are precisely what is relevant in a discussion of how Smith’s analytical egalitarianism was probably supposed to operate. Smith’s Wealth of Nations might be entirely utilitarian (and maybe that also explains a large part of the shift to full-blown utilitarianism in later economics), but it was not meant to be read as a complete statement on human nature. The Wealth of Nations is peppered with examples (like the charity towards the beggar in Chapter 2 of Book I) that suggest other principles operate in the marketplace than simple selfinterest. What those other principles should be seems to come from TMS.

REFERENCES Batson, C. D., & Coke, J. (1981). Empathy: A source of altruistic motivation for helping? In: J. P. Rushton & R. M. Sorrentino (Eds), Altruism and helping behavior: Social, personality, and developmental perspectives (pp. 167–187). Hillsdale, NJ: Lawrence Erlbaum Associates. Edgeworth, F. Y. (1881). Mathematical psychics. London: Keagan Paul.

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Fleischacker, S. (2004). On Adam Smith’s ‘‘Wealth of Nations’’: A philosophical companion. Princeton, NJ: Princeton University Press. Hume, D. (1978). A treatise of human nature. Oxford, UK: Oxford University Press. Hume, D. (1998). An enquiry concerning the principles of morals. Oxford, UK: Oxford University Press. Jevons, W. S. (1888). The theory of political economy. Available at http://www.econlib.org/ library/YPDBooks/Jevons/jvnPE.html Levy, D. (2001). How the dismal science got its name: Classical economics and the ur-text of racial politics. Ann Arbor: University of Michigan Press. Menger, C. (2004). Principles of Economics. Ludwig Von Mises Institute. Available at http:// www.mises.org/etexts/menger/Mengerprinciples.pdf Otteson, J. (2002). Adam Smith’s marketplace of life. Cambridge, UK: Cambridge University Press. Smith, A. (1982). The theory of moral sentiments. Indianapolis, IN: Liberty Press. Sugden, R. (2002). Beyond sympathy and empathy: Adam Smith’s concept of fellow-feeling. Economics and Philosophy, 18(1), 67–83.

Schonhardt-Bailey’s FROM THE CORN LAWS TO FREE TRADE COMPLEMENTARY FORCES BEHIND THE REPEAL OF BRITAIN’S CORN LAWS Andrea Maneschi A review essay on Cheryl Schonhardt-Bailey’s From the Corn Laws to Free Trade: Interests, Ideas, and Institutions in Historical Perspective. Cambridge, MA: The MIT Press, 2006. xiiiþ426 pp. ISBN 0262195437. 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 SchonhardtBailey 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 A Research Annual Research in the History of Economic Thought and Methodology, Volume 26-A, 187–195 Copyright r 2008 by Emerald Group Publishing Limited All rights of reproduction in any form reserved ISSN: 0743-4154/doi:10.1016/S0743-4154(08)26018-9

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historians, economists, and political scientists, and this book is the latest in this long and diverse series of accounts. Cheryl Schonhardt-Bailey, a political scientist, has contributed extensively to the literature on Corn Law repeal ever since her doctoral dissertation on ‘‘A model of trade policy liberalization: Looking inside the British ‘hegemon’ of the nineteenth century’’ (Schonhardt-Bailey, 1991). In addition to writing numerous articles on this and related issues, SchonhardtBailey celebrated the 150th anniversary of the repeal of 1846 by editing four volumes titled The Rise of Free Trade (Schonhardt-Bailey, 1997). They contain documents relating to Britain’s move toward free trade in the nineteenth century, and recent articles on the political, economic, and sociological forces that led to repeal. Her views have evolved over time, and she does not hesitate to point out the reasons for her change of opinion or emphases. Schonhardt-Bailey’s central thesis (repeated several times in the book) is that the repeal of the Corn Laws cannot be understood as originating from a single cause. Single causes previously advanced as explanations include the force of self-interest, the cogency of ideas or concepts such as the gains from free trade, and the institutional changes that allowed repeal to finally take place. The subtitle of her book stresses that three i-words – interests, ideas, and institutions – are required to fully explain why repeal finally succeeded in the face of powerful opposing forces. Although I was previously unfamiliar with the methodology used by the author to try to measure the relative importance of the force of ideas, interests, and institutions, I believe it is likely to catch the attention of social scientists, even those not normally drawn to quantitative explanations for social events, and suggest that a similar methodology may be applied to other historically interesting events. Schonhardt-Bailey’s central thesis appears to me to be both persuasive and well documented. Further research into the subject of Corn Law repeal may well run into diminishing returns after her book, although I am sure that the last word on repeal has not yet been said. In her 1991 dissertation, Schonhardt-Bailey had singled out ‘‘interests’’ as a force sufficient by itself to account for repeal. Interests, of course, continue to be an important part of the story in this book, where they are featured in Chapters 3–6 of Part I under the rubric ‘‘the demand side.’’ The forces of ideas and institutions, previously neglected or downplayed by her, are analyzed in Chapters 7 through 10 of Part II under the rubric ‘‘the supply side.’’ As an economist, I am puzzled by this terminology. Perhaps it is current among political scientists and readily understood by them. Economists, however, are likely to be baffled by it, particularly those who

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mechanically remind their students that in equilibrium demand always equals supply, or enjoy spelling out the inadequacies (or virtues) of the ‘‘supply-side economics’’ of the Reagan years. In this book, the demand side refers to the self-interest of Members of Parliament (MPs) as shaped by their personal fortunes, the pressures from their constituents, the strength of lobbying groups such as the Anti-Corn Law League, and their conversion to free trade, thanks to what Schonhardt-Bailey calls ‘‘nationalizing the interest’’ in free trade. The latter means advocating free trade as an economic policy that benefits the nation as a whole and is consistent with Christian or ethical ideals, and not simply one that advances personal or local economic interests. In Part I, detailing the ramifications of the demand side pressures for repeal, Schonhardt-Bailey broadens the exclusive position it had held in her dissertation and spells out the methodology to be used. While economists have used political economy models to explain protection in particular industries, the author argues that such models can equally well illuminate the pressures that led to eventual free trade in corn. In addition to the standard static gains from free trade, she includes economies of scale as an important additional stimulus that led Britain’s manufacturing export sectors to lobby hard for Corn Law repeal. After confirming statistically that contributions to the Anti-Corn Law League from towns in Lancashire were significantly higher than those from other towns, she argues that the industrial and geographic concentration of cotton producers in Lancashire added to their lobbying clout. At the same time, she shows that the British export sector became more diversified between 1830 and 1846 in terms of standard concentration indices, and that economic interests as measured by city directories became geographically more dispersed – with the sole exception of the landed aristocracy, which became more concentrated. These trends show that the political influence of the export sector expanded to an increasing number of towns. This important demand-side stimulus for repeal was itself facilitated by significant institutional changes. The Reform Act of 1832 allowed parliamentary representation to extend to the middle class, giving business interests the chance to dilute the influence of the landowners over legislation. These business interests coalesced into one of the most powerful lobby groups ever formed, the Anti-Corn Law League, an institution founded in 1838 that magnified their voice many times over. Its superior organizational skills influenced the public at large and led to additional pressure on MPs to vote for repeal. The League, in turn, promoted and was inspired by ideas such as free trade that were being advocated by

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economists, statesmen, and other publicists. As documented in Chapter 4, it was very effective in ‘‘nationalizing the interest’’ in free trade in order to turn public opinion in its favor. I agree with Schonhardt-Bailey that this important additional demand-side force should be added to those directly deriving from League members and their financial interests. Unfortunately, she tries to formalize her thinking with a series of charts plotting along Cartesian axes some inherently non-measurable concepts (labeled ‘‘dimensions’’) such as ‘‘interests’’ and ‘‘ideas or ideology.’’ She represents ‘‘preferences’’ by means of ‘‘indifference curves’’ that are linear, circular, or elliptical in nature. It is as well that this illegitimate (to an economist) graphical apparatus was not utilized in the rest of the book. This chapter instead moves on to helpful tables such as Table 4.2 indicating the strategy that the League used when its interests either coincided and conflicted with those of the individuals it was trying to influence, on the alternative assumptions that those individuals know their interests, do not know them, or are mistaken about them. The League fulfilled the conditions required for ‘‘nationalizing the interest’’ by advocating the positive externalities or spillovers that would benefit the public at large, and having a devoted leadership able to create an effective organization to advance its aims. On the institutional side, it utilized the 1832 Reform Act in order to expand the franchise, and exploited the vacuum produced by ideologically weak parties in Parliament with no clear agenda. Among the arguments used by the League were the nefarious consequences of the increase in landlord rents associated with an increase in the price of corn, that were also being formalized by political economists such as David Ricardo and Robert Torrens. While the latter maintained that repeal would raise workers’ wages, T. R. Malthus supported the Corn Laws, arguing that repeal would instead lower wages. Besides invoking economic arguments related to national prosperity in order to sway opponents such as landowners, the League also attempted to ‘‘nationalize the interest’’ on ideological grounds by contending that free trade would promote morality, Christianity, and even international peace. To convince industrialists, professionals, and workers, the League appealed instead to the injustice of the economic and political monopolies of the aristocracy. My conclusion from this chapter is that interests, ideas, and institutions – insofar as they can be quantified – are not analogous to the ‘‘independent variables’’ in regression models. Instead, interests evolve over time and are drastically affected by the contemporaneous evolution of both institutions and ideas in a complex feedback process that Schonhardt-Bailey traces effectively in her book.

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Starting with the classical school of economic thought, economists divided economic agents into landowner, worker, and capitalist classes. Twentieth-century trade models based on them such as the specific-factors model have clear-cut distributional implications: a rise in the price of an agricultural commodity leads to a rise in the income of the landowner class, a fall in that of the capitalists, and has an ambiguous effect on the income of workers. Schonhardt-Bailey rejects the propositions of trade economists Richard Caves and Ronald Jones (1985), in their well-known textbook World trade and payments, that the repeal of the Corn Laws was due to (1) landowners and capital owners having diametrically opposite economic interests, as implied by the specific-factors model, and (2) industrialists after 1832 acquiring a majority in the House of Commons. Both assertions are wrong. Landlords in fact remained firmly in control of Parliament between 1841 and 1847. To explain why some of them began to favor repeal, Chapter 5 argues that by 1846 many had in fact diversified their portfolios away from land and toward capital, thanks to the emerging stock market and a boom in railroads. By means of logistic regressions, Schonhardt-Bailey links portfolio diversification to MP voting patterns, and shows that a vote on repeal in 1846 was more likely in constituencies with a higher proportion of stocks and shares held in portfolios and a smaller share of agricultural holdings. Schonhardt-Bailey defines an ‘‘index of diversification’’ that rises with the participation of stocks and shares, reaching a maximum value of 1 when the portfolio consists entirely of stocks and shares. Since the portfolio is then highly undiversified, this label is misleading. The author confirms that Non-Peelite Conservatives represented districts with ‘‘hard-core’’ protectionist interests and less diversification into nonagricultural ventures, whereas Peelite Conservatives represented districts whose constituents were more oriented toward free trade and held more diversified portfolios. To round out the demand-side influences, in Chapter 6, SchonhardtBailey attributes parliamentary votes on repeal to a combination of ‘‘interests,’’ when MPs vote as ‘‘delegates’’ of their constituents, and ‘‘ideology,’’ when they vote as ‘‘trustees.’’ She concludes that an ‘‘abrupt change’’ in their behavior occurred in 1846, when some MPs switched from voting as trustees of a conservative party ideology or a liberal free-trade ideology, to voting as delegates acting on behalf of the economic interests of their constituents. She rejects the finding of some scholars that Peelites voted as the ultimate trustees in order to prove their ‘‘independence’’ from the rest of their party. In fact, she argues, ‘‘ideology came to matter less in a crucial policy shift’’ (p. 132), and ‘‘the Conservative party was an ideological coalition that cut across two distinct interest-based alliances and so was

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inherently unstable’’ (p. 139). Peelite MPs were torn between a desire for party unity with the Non-Peelites, and a desire to represent more closely their constituents’ interests. When in 1846 Peel himself came out in support of repeal, this coalition broke up and Peelites felt free to vote as delegates rather than trustees. Schonhardt-Bailey uses a NOMINATE model to identify how different parties’ votes, and those of Peelite and Non-Peelite MPs, depended on constituents’ interests, party affiliation, and a residual attributed to the MP’s personal ideology. Logistic regressions reveal a major difference between the repeal vote of 15 May 1846 and previous motions for repeal from 1842 to 1845: in 1846, the MPs’s personal ideologies had no influence on their vote, in contrast to their highly significant effect on previous votes. This explains her contention that in 1846 there was an ‘‘abrupt change’’ in voting patterns. Schonhardt-Bailey explores the reasons for the abruptness of this change on the part of Peelite MPs in Part II of the book under a ‘‘supply side’’ rubric, arguing that the demand side alone cannot account for it. Her interpretation is that the Peelites justified their volte-face by claiming they were voting as ‘‘trustees’’ of the national interest while in fact voting for repeal as delegates. More starkly put, ‘‘a reinterpretation of repeal allowed Peelites to vote as delegates but to justify their betrayal of a protectionist Conservative ideology in the language of disinterested and moral trustees whose only motive was to promote the nation’s well-being’’ (p. 154). To clinch the point, only in 1846 did the Peelites invoke the ‘‘territorial constitution’’ in order to justify their votes. This led to the split of the Conservative party between Peelites and Non-Peelites, their loss of the election of 1847, and hence their consignment to the political wilderness for a whole generation. Chapters 7, 8, and 9 explore the ‘‘supply side’’ by analyzing the content of parliamentary speeches by MPs and peers on Corn Law repeal by means of computer-assisted content analysis such as Alceste, a method based on ‘‘cooccurrence analysis, which is the statistical analysis of frequent word pairs in a text corpus’’ (p. 160). In Chapter 7, Schonhardt-Bailey classifies the content of the 1846 debates on repeal according to a ‘‘tree graph’’ consisting of six lexical classes, of which three are economic and three political. The largest classes by frequency of occurrence in speeches are ‘‘parliamentary rhetoric and timing of repeal,’’ ‘‘wages and prices; and high farming’’ (where ‘‘high farming’’ implies a push to improved agricultural efficiency), and ‘‘international trade.’’ In the class labeled ‘‘MPs as trustees,’’ the term ‘‘territorial constitution’’ was often used to invoke the continuing political prerogatives of a landed aristocracy that Peelites maintained would

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be secured by a vote for repeal. From these debates, Peel himself appears to have followed the lead of Peelite MPs in defending repeal as the way to preserve (rather than endanger) the political power of the aristocracy, and did not anticipate them as others have claimed. Schonhardt-Bailey illustrates a shift in the MPs’ concerns between the first reading, where political factors predominated, and the second and third readings, where economic factors became more important in their speeches once a majority vote for repeal seemed likely. In order to investigate if the shift to a trustee mode of representation was indeed unique to the 1846 debates, Chapter 8 carries out a similar content analysis of the speeches of 1814–1815, leading to the passage of the 1815 Corn Law; those of 1826–1828, leading to the 1828 sliding scale duty on corn; and of 1842–1844, leading to a new sliding scale and the defeat of a motion for repeal sponsored by the Anti-Corn Law League. The years 1826–1828 highlighted ‘‘political economy’’ as an important topic of speeches where MPs increasingly embraced the notion of voting as delegates for their constituents: ‘‘MPs were increasingly aware of the practical relevance of the theories of the economists for British trade policy’’ (p. 203). They argued that Britain should develop its comparative advantage in manufactures and exchange them for the corn produced by other countries. In 1842–1844, some MPs also maintained that ‘‘agricultural protection lowered the income of foreign producers y and consequently lowered their demand for manufactured exports from Britain’’ (p. 209). Trade economists can recognize this as an early (though unconscious) anticipation of the Lerner symmetry theorem, according to which protection reduces a country’s exports as well as its imports. On the basis of the content analysis of House of Commons speeches since 1815, Chapter 8 concludes that the justification of repeal as a means to preserve the ‘‘territorial constitution’’ that was advanced in 1846 was indeed unique to that year, and hence qualifies as a ‘‘supply-side shift.’’ Chapter 9 is notable for providing the first detailed empirical examination of the role of the House of Lords in repeal, again using a content analysis of their speeches. Previous research on repeal neglected or made only a cursory study of the House of Lords, whose approval however was needed for the legislation to become effective. The puzzle their vote poses is to explain why a highly conservative body of protectionist landowners was induced on 25 June 1846 to vote for legislation that appeared to run counter to their own economic interests. SchonhardtBailey shrewdly ascribes this to political self-interest: ‘‘The Lords were alarmed by the agitation of the Anti-Corn Law League, and they feared

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that by rejecting repeal, the middle-class industrialists would ally with the working-class Chartists in favor of more sweeping reforms, such as universal suffrage and reform of the House of Lords’’ (p. 228). Mindful of the reforms unleashed by the 1832 Reform Act, peers believed that repeal would stave off the even more radical reforms that would follow a negative vote, and hence preserve the territorial constitution and their own political power. Schonhardt-Bailey’s analysis contradicts some of the historiography surrounding the House of Lords’ vote on repeal, such as the paramount influence of political personalities such as the Duke of Wellington who were favorable to repeal, and validates (as it did for the earlier positive vote in the Commons) the usefulness of content analysis in deciding among alternative rationales for this vote. Her underlying thesis, that peers traded the economic loss of reduced protection for the political benefit of averting the more radical reform (and accompanying constitutional crisis) that would follow a negative vote, can appeal to social scientists who adopt a decision criterion of maximizing expected benefits minus costs. While this book can be enjoyed by political and other social scientists, trade economists can readily recognize the use of models and concepts they are familiar with, such as political economy models of the endogenous protection literature, specific-factor models, Ricardian and other classical economic models. Economists of imperialist tendencies will be pleased to note the extent to which their models, methodology, and terminology have seeped into other social sciences. However, for the sake of social scientists (including some economists) who are not acquainted with this literature, it would have been helpful if Schonhardt-Bailey had included a description of these models, or at least a glossary of some of the key technical terms used throughout her book, rather than assuming knowledge of them. Successive chapters of Schonhardt-Bailey’s book explain how interests, ideas, and institutions played out in Britain in the first half of the nineteenth century and eventually led to the repeal of the Corn Laws. The concluding chapter effectively argues that the one-dimensional, single-cause explanations used in the past by some historians and political scientists cannot adequately account for repeal. While her 1991 dissertation enshrined ‘‘interests’’ as the paramount all-encompassing explanations for repeal, ‘‘[t]he present book, in contrast, represents the work of a reformed (but not repentant) rational choicer’’ (p. 387). While ‘‘interests’’ still dominate the other two i-words, they would not have prevailed without the force of ideas

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and the accompanying institutional changes whose manifestations Schonhardt-Bailey painstakingly documents.

REFERENCES Caves, R., & Jones, R. (1985). World trade and payments: An introduction. Boston, MA: Little, Brown. Schonhardt-Bailey, C. (1991). A model of trade policy liberalization: Looking inside the British ‘‘hegemon’’ of the nineteenth century. Ph.D. Dissertation. University of California, Los Angeles, CA. Schonhardt-Bailey, C. (Ed.) (1997). The rise of free trade (4 Vols.). London: Routledge.

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Augello and Guidi’s ECONOMISTS IN PARLIAMENT THE DETERMINANTS OF THOUGHT Robin F. Neill A review essay on Massimo M. Augello and Marco E.L. Guidi (Eds), Economists in Parliament in the Liberal Age (1848–1920). Aldershot, UK: Ashgate Publishing, 2005. 315 pp. ISBN 0754639657.

QUESTIONS NOT ASKED AND QUESTIONS NOT ANSWERED 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? Such questions imply that economics has developed as a result of external factors: elements in the information environment generated in part by the A Research Annual Research in the History of Economic Thought and Methodology, Volume 26-A, 197–207 Copyright r 2008 by Emerald Group Publishing Limited All rights of reproduction in any form reserved ISSN: 0743-4154/doi:10.1016/S0743-4154(08)26019-0

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exigencies of national economic and political life. They seem to imply that the nineteenth century German Historical School understood well the nature of economics. This is not to say, however, that the massive scholarly effort that has gone into the production of Economists in Parliament was intended to support that implication. It is only that external forces shaping the history of economics are the ones targeted by the questions asked. Whether there was any internal, logical, or empirical correction and development of economic ideas in the designated era is a question not raised. Interaction between ideas and external forces of history is mentioned, but the independent force of ideas in the discipline of economics (political economy) is not then taken up. At one point in the narrative (p. 6) the role of ongoing empirical observation in shaping the content of economic thought almost rises to the surface, but only to terminally submerge. The introductory chapter is followed by ten essays on the presence of economists in the parliaments of ten different countries: eight European countries, the United States, and Japan. In these essays, the consideration narrows even further. They contain information on the basis of which a reader may conjure up a beginning of answers to the Augello/Guidi questions, but no more. Except the essay on the United States experience, all feature a list (or virtual list) of economists, who were members of the legislative bodies in their respective countries. All provide much of the basic information that one would want before undertaking a cross-country comparative study attempting to formulate answers to the questions asked. The material is suggestive, but the Augello/Guidi questions are not explicitly answered. Bradley Bateman’s account of the United States experience is exceptional insofar as it reports that there were no economists in the United States legislature. The assertion is remarkable because, on a quick count, the essay on Greek experience lists 65. The Belgium study presents the next to shortest list at16. Diro Kumagai’s account of the experience in Japan is also exceptional, but comment on that paper is beyond the competence of this reviewer. The Bateman exception points out the problem with the Augello/Guidi project. The problem is that the definition of ‘‘economist’’ reflects the institutionalization of economics so that defining an economist by ‘‘profession and authorship’’ or ‘‘self-definition and reputation’’ (p. 15) before empirical study is undertaken, begs the questions asked. Augello and Guidi are vaguely aware of the problem, noting that the different studies depart somewhat from the given definition, and that the departures are themselves

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important clues to the nature of the different informational and institutional contexts of economics in different countries. Their preordained heavy emphasis on formal, academic economics, however, leads them to push aside the economic thought of non-academic businessmen, journalists, and politicians, even though their externalist question should have led them to emphasize those voices. In an earlier related study of economists in the British Parliament, Frank W. Fetter (1980, pp. 6–8) designated Parliamentarians as economists depending on their activities in Parliament. Some, who spoke in Parliament, though not academics, were said to have the qualities of academic economists. (There were few, if any, formally academic economists in Britain over most of Fetter’s chosen period.) Some had business interests that led them to speak on economic matters. Some, not because they thought themselves economists, but just because they were in Parliament, had discussion of economic matters thrust upon them. Of course, letting Parliamentary activities determine who is an economist puts a priority on external factors in the determination of the content of economics, but Fetter need not apologize for this. His intention was to uncover the content of economics in a particular context, not to discern the forces shaping it. The Augello/Guidi studies, while explicitly seeking external factors shaping economics, virtually define economists as academics, that is, those whom one would expect to be most influenced by internal factors. It is interesting, in this regard, that Fetter’s period (1780–1868), which he describes as the period of Classical economics, overlaps the Augello/Guidi ‘‘Liberal Era’’ (1848–1920). Fetter asserts that after John Stuart Mill, who came at the end of his ‘‘Classical’’ period, economists tended to be Neoclassical and found other podiums from which to speak: academic chairs, the civil service, and royal commissions. The Augello/Guidi studies have little or nothing to say with respect to other podiums, such as the popular press. Further, for the years (1818–1868) in which Fetter’s study overlaps Roger Backhouse’s contribution to the Augello/Guidi volume, Fetter (1980, pp. 266–75) finds some 60 economists in the British Parliament. Backhouse, though clearly aware of the definition problem, finds 17 (pp. 111, 124–126). Evidently definition does make a difference. Having to report that there were no economists in Congress might have prompted Bateman to reflect on different definitions of economic thought and the importance of definition in any answer to the Augello/Guidi questions. But, of course, he was constrained by the rules set down in advance. Had he addressed the questions, rather than simply followed the rules, his conclusion would have been different. He could not have avoided

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noting that if the presence and activities of economists in parliaments were important in determining the content of economic thought, as the Augello/ Guidi questions suggest, then the content of economic thought in the United States was different from that of the other countries. To use Joseph Dorfman’s felicitous phrase, he would have concluded that the economic mind in America was different from the economic mind in Europe. But Bateman, along with the other authors present in the volume, does not address this head-on. He chooses rather to deal with a related matter, the reason why there were no economists in the Congress.

A TEASING CONJECTURE To address these considerations, I begin with the abstract conjecture that economic thought in the United States was less theoretical, less deductively or inductively scientific, than in Europe. It was, then, less influenced by the evolution of ideas through internal logic and empirical correction, and more influenced by the external exigencies of national economic life. It was more economic thought than economics. Further, by implication, once economic thought in the United States became economics, a subject generally taught and researched in academic institutions, it began to separate itself from the exigencies of national economic policy. It began to live a ‘‘scientific’’ life, in which the force of its own ideas, correct or not, gained strength in relation to the external forces of history impinging on it. To put this conjecture to work, I draw on the studies under review, except the study of Japanese experience. In his attempt to show why there were no economists in Congress Bateman has provided questionable grounds for his assertion that laissezfaire was the predominant mind set in the United States. His point is that, because all Americans favored the market as opposed to government enterprise, Congress favored laissez-faire and did not need instruction from economists. Approval of a market system, however, is not the same as laissez-faire; or else how are we to categorize State funding of canals in America in the early Liberal Period, federal land grants to agriculture and transportation in the middle of the century, and national tariffs in the last half of the nineteenth century and the first decades of the twentieth century? Cannot governments be pro-active in supporting a private market system? Further, only by Herculean effort has Bateman turned Henry Carey into a standard, free market political economist (pp. 294–295); and Bateman has to admit that when economics emerged in American universities towards the end of the Liberal Era its professors were largely educated in the

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interventionism of the German Historical School. They were forced, he asserts, into what may be called the free market fold by the anti-labor bias of university administrations. Bateman is not here arguing that institutionalization of economics in the universities forced them to accept political economy’s support for laissezfaire, though, given the Augello/Guidi questions, well he might. He is arguing simply that America favored laissez-faire while using a definition of economics that leads him into some tortured logic. In that protectionist age the administrations of universities were not against government action on behalf of capital. As Bateman himself points out, they were only against government action on behalf of labor (p. 298). His logic seems to take the following path. Economics and the policy of laissez-faire are inseparable but different. Laissez-faire means no (so to speak) negative interference with the market, while economics, being broader than this, concludes to no interference, positive or negative, in the market. So positive interference in the market does not negate laissez-faire, but it is interference so it cannot be compatible with economics. Accordingly, none of the discussion in Congress favoring support for economic enterprise can be called economics, and there were no economists in Congress. But I am now over my depth in the history of economic thought in the United States, and I must turn to the Canadian ‘‘American experience,’’ as a substitute for United States ‘‘American experience.’’ There I am more at home.1 I justify this substitution on the grounds that in Canada, too, there were ‘‘no economists in parliament’’ during the Liberal Era. So I question Bateman’s account and comment on the Augello/Guidi studies by conjecturally teasing out the Canadian rather than United States experience.

THE CANADIAN CASE Canada is not a republic and does not have a constitutional division of powers, as does the United States, nor did it in the ‘‘Liberal Era.’’ It had parliamentary government modeled on the British system. It would seem, then, that the Canadian case supports Bateman’s contention that the absence of economists from the United States Congress was not a consequence of the structure of government. Consider Canadian experience. Were there ‘‘economist members of parliament’’? There was Isaac Buchanan, whom Goodwin described as ‘‘a merchant and member of the Legislative Assembly.’’ Buchanan has a book attributed to him: 525 pages of selections from his speeches and pamphlets

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all collected and edited by an admirer. He was a principal founder of the Association for the Promotion of Canadian Industry, the task of which was to lobby for a protective tariff. There was Alexander Tilloch Galt, whom Goodwin describes as ‘‘a railroad promoter, diplomat, and Minister of Finance.’’ Galt’s only publication, apart from the record of speeches in the legislature, was a pamphlet version of a speech he made in Britain justifying a set of tariffs. Galt was familiar with banking and monetary theory, having inherited a scheme for central banking from Francis Hincks, Minister of Finance both in the 1840s and the 1870s. Hincks, in turn, had inherited the idea from Governor General Lord Sydenham at the very beginning of the Liberal Era. Sydenham, who, as George Poulet Thompson, had been responsible for the substance of the British Bank Act of 1844, proposed to establish a Canadian central bank based on the principles of the English Currency School. It would seem then that there was economic content in the proposals of Buchanan and Galt, but were Buchanan and Galt ‘‘economists’’? Neither would qualify by any stretch of the definition in the Augello/Guidi studies. The principal intrusions of government into the economy in Canada, as in Europe and the United States according to the Augello/Guidi studies, bore on international commerce (free trade or tariff protection), the nature of currency (metallic or paper), and the organization of banking (central and public or decentralized and private). Galt and Buchanan could agree on tariff protection, but not on banking and monetary policy. Indeed, the tenets of the Currency School and the Birmingham School battled one another in Canadian legislatures throughout the Liberal Era. Buchanan was able to rally support against Galt in the 1860s on ‘‘theoretical’’ grounds. The force that definitively defeated the central bank, however, was not an economic argument. Rather, regional economic interests came together to prevent centralization of economic influence. Neither Canada nor the United States adopted central banking until the twentieth century, and for like reasons: regionalism and availability of external capital. Most, if not all, European countries adopted central banking in the nineteenth century. In Canada, the tariff question, like the banking question, was settled by the force of economic interests and political influence, not by the force in debate of protectionist and free-trade theories. In the first two decades of the twentieth century, at the end of the Liberal Era, there were members of the United Farmers of Alberta Party who spoke in the House in favor of a central bank and a fiat currency. They were the last representatives of the Birmingham School, and forerunners of William Aberhart and the Social Credit Crusade. But were any of these

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‘‘economists’’? By 1911, economics was taught in Canadian universities by economists as defined in the Augello/Guidi studies. The academics mockingly opposed parliamentary social creditors on the grounds that they did not understand economics. If ‘‘economist’’ means ‘‘political economist,’’ and if that entails adherence to Classical/Neoclassical economics, then few in Canada were economists. Most of those who followed Buchanan into the National Currency League or into the Association for the Promotion of Canadian Industry joined with him in depreciating political economy. They decried its pretentious claim (as they saw it) to be a science. Although Galt was an opportunistic politician in economic policy, Buchanan used the term ‘‘political economist’’ as a pejorative when describing him. Crauford Goodwin found some supporters of Classical economics and free trade in Liberal Era Canada, and certainly free trade was upheld in the House of Commons in one way or another until the Liberal Party was defeated in 1911 on a platform of free trade with the United States.2 Still, none of those who supported free trade in the House can be classified as professional economists. Both Macdonald and Laurier, long-period Prime Ministers, could be found on either or both sides of the tariff debate at some time in their careers. There were a group of pamphleteers in Canada West/Ontario who joined the debate over ‘‘soft’’ money and ‘‘hard.’’ Some of them were members of legislatures, but none were economists by the Augello/Guidi definition. Like a number of European nations, Canada was not a united democracy until well into the Liberal Era. Prior to Confederation in 1867, British North America was a set of separate colonies, each with increasing but limited selfgovernment. The Liberal Era was upon them, but not as provinces of Canada. It is interesting then, to consider the role of economists in the legislatures of the Maritime provinces-to-be and of Canada East (Quebecto-be). Canada East was part of the united colony of Canada from the beginning of the Liberal Era, but it had a separate, vestigially feudal, francophone tradition. Was its experience then more like that of France and the countries of Europe? The answer would seem to be ‘‘no.’’ There were no francophone professional economists in the Legislative Assembly of Canada before 1867 or in Parliament thereafter. Of those who contributed to economic thought in francophone Quebec in the Liberal Era (principally, Etienne Parent, Antoine Gerin-Lajoie, Stanislaus Drapeau, Francois LaRue, Cleopas Beausoleil, Francois Vezina, Robert Errol Bouchette, and Esdras Minville), none were members of legislatures. They were journalists, lawyers, civil servants, a professor of Medicine, and a Banker.

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One might say that in the Maritimes there were exceptions to the general Canadian situation. There were four who might be classified as economists – four who were to some extent familiar with the writings of European economists and who made public pronouncements on that basis: Thomas McCulloch, John Young, Thomas Chandler Haliburton, and Abraham Gessner. Joseph Howe and Charles Tupper were politicians who spoke frequently on economic issues, but could not be counted as economists by the Augello/Guidi definition. Young and Haliburton were members of the Nova Scotia Legislative Assembly. Gessner was a medical doctor, an inventor, a civil servant, and eventually an academic. Thomas McCulloch was a minister of religion and an academic. McCulloch, Young, Haliburton, and Howe were publicists and journalists supporting particular policies, and cannot be considered among those who pursued economics in anything like a scientific way. It would seem that the exceptions in the Maritimes are ‘‘technical’’ and not real. Haliburton (1836) was a member of the legislature, but his The Clockmaker, or the sayings and doings of Sam Slick of Slickville has survived as humor, not as economics. The last decades of the ‘‘Liberal Era’’ (1890–1920) saw the beginning of academic economics in all the Canadian provinces. It immigrated from Europe and the United States when Historical economics and American Institutionalism were insurgent in Euro-American economic thought. But this again puts the definition of ‘‘economist’’ in doubt, because Neoclassical economics was ‘‘mainstream,’’ and called simply ‘‘economics,’’ whereas Historical economics and Institutionalism were excluded from that category. Further, those who belonged to any of these schools in Canada in the late Liberal Era did not enter politics. They became quasi-civil servants on fact-finding and policy-proposing bodies or they became permanent members of the civil service. This, then, is the Canadian-American experience. It contrasts markedly from the European. In Portugal ‘‘institutionalization of the economic and financial sciences took place in parallel fashion in both the universities and the political activities of Parliamentarians’’ (p. 33). In Belgium, of 15 members of parliament who were defined as economists, six were professors in universities, and one had a doctorate in political economy. In Spain, of 63 members of parliament who were defined as economists, 20 were professors in post secondary institutions. In Britain, of 28, six were professors in universities. The studies of French and German experience in the Augello/ Guidi collection do not contain explicit lists, though explicit lists might be constructed from what they contain. The German parliament of 1848–1849

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included so many academics that it was called the Professorenparliament. By comparison the German parliaments of the late nineteenth century had ‘‘very few’’ (p. 179) professors of economics, but among those mentioned were a number of academic economists familiar to anyone who has studied the history of economics: Bruno Hildebrand, J.H. von Thunen, Wilhelm V.F. Roscher, Karl G.A. Knies, F.B.W. von Herman, Hans K.E. von Mangoldt, Gustav von Schmoller, Adolf H.G. Wagner, and Eduard Bernstein. Of the 65 economists in the Greek parliament, 41 had graduated in law, and 11 were professors in academic institutions. In virtually every case in these essays the term ‘‘economist’’ means someone who was thoroughly educated in or professed political economy.

SOME CONJECTURED ANSWERS So, assuming that there were sufficient similarities between the Canadian and United States experiences, what can be conjectured as answers to the Augello/Guidi questions? The questions were generalized to the following. First, what were the forces of history leading to the rise of economics in the informational environment of a set of Western nations, and what resulting form did its institutionalization take? Second, what were the consequences for the content of economics of its being institutionalized in the way it was? That is, did institutionalization, itself, generate a recursive competing force of history shaping economics? I begin the conjectured answer by questioning Bateman’s heavy reliance on the pervasive force of a Republican/laissezfaire ethos in keeping United States economists out of Congress. In his view, as noted, economists (defined as favoring laissez-faire) did not need to go to Congress to get their ideas across, because the Republican/laissez-faire idea was already present there. In Canada, however, Republicanism was rejected (in Tory Ontario, in loyal Nova Scotia, and in feudal Quebec) and government involvement in economic life was accepted in the Canadian information environment. So, not only the structure but the ethos of government was quite different in the two countries, even though economic thought, the character of economists, and the participation of economists in ‘‘parliament’’ were the same. Accordingly we must look for something other than a Republican/laissez-faire idea to find a ‘‘cause’’ of the absence of economists from parliaments in America. Weight may be accorded to Bateman’s argument that in the United States economics was not taught as a separate subject in Law schools, as it was in Europe, but was taught as part of moral theology. Weight should also be

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given to the argument that it was taught much less frequently (less ubiquitously, less intensively) than in Europe until the last decades of the century when Historical economics moved from Europe to America. These arguments also hold, more or less, in the Canadian case. Do they lead to the conclusion that the content of economics, the extent to which and the way it was taught in the universities, and the appearance of economists in legislative bodies are related to one another? In answer to this question I carry my conjecture forward. In America (Canada and the United States) a number of factors generated a difference in economic thought. Economics was not as well-developed as an academic subject as it was in Europe. So, economic thought in America had less of an independent existence. The internal force of its ideas was weak in comparison with the external forces impinging on it. It was less the theoretical political economy of Europe and more a practical response to the exigencies of national economy life. There were, then, no economists of the Augello/Guidi sort (excepting Amasa Walker for 3 months) in the United States Congress, and much the same can be said of the Canadian Assemblies and Parliament, whereas there were many such economists in European parliaments. So, it would seem that the conjecture that economic thought in America (Canada and the United States) responded more to the exigencies of immediate national economic conditions has support. That is, economic thought in America was shaped by factors external to the subject. Internal development of ideas was secondary to the immediate concerns of journalists, pamphleteers, and lobbyists. Not principles and long chains of logic, but emerging and vestigial economic interests informed the discourse in America. In comparison, economic thought in Europe developed under a more balanced set of forces. Certainly the exigencies of and debates about national economic policy had a formative influence on the content of economic thought in Europe, as can be deduced from the Augello/Guidi studies. In Europe, however, economic thought had a stronger second life as economics, in which the internal processes of a science played a greater role. A further question arises with respect to the similarity in content and institutionalization of economic thought in Canada and the United States, and its contrast in this respect with the experience of European nations. That question is, ‘‘What is it that is common to these two countries that is the formative influence generating similar economic thought?’’ The conjectured answer is, ‘‘an open agricultural frontier associated with westward political expansion.’’ Both countries treated the interior of the continent, the great central plain, as terra nullius. Both countries were

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engaged in constitutional consolidation in relation to political expansion. Questions of economic efficiency of the sort addressed in economic theory remained of secondary importance until their geographic and political contexts were established. Establishing the overall limit and ownership of resources preceded considerations of relative scarcity and allocation. This is a conjecture, of course, albeit a conjecture for which some support can be found in the Augello/Guidi volume. It is far from a firm conclusion. Two firm conclusions, however, can be drawn from its underlying considerations. First, the search for internal and external factors in the shaping of economic thought should start from the broadest possible definition of the subject, if from any definition at all. Second, the search might well focus on the causes and consequences of the different institutionalization of economic thought in Europe and America.

NOTES 1. Throughout, I rely as much on Goodwin (1961) study of Canadian economic thought as on my own (Neill, 1991). Excepting two preceding decades, Goodwin confined his attention to the Liberal Era as defined in the Augello/Guidi studies, and he gave more space to the biographies of those who contributed to the literature of economic thought. I focused more on the content of economic thought. 2. Adam Shortt (1986) wrote that virtually all of Canada’s commercial and monetary policies were (unfortunately, in his view) copies of United States practice.

REFERENCES Fetter, F. W. (1980). Economists in parliament, 1780–1868. Durham: Duke University Press. Goodwin, C. D. W. (1961). Canadian economic thought. Cambridge, UK: Cambridge University Press. Haliburton, T. C. (1836). The clockmaker, or the sayings and doings of Sam Slick of Slickville. Toronto, Ont.: Musson. Neill, R. (1991). A history of Canadian economic thought. London: Routledge. Shortt, A. (1986). Adam Shortt’s history of Canadian currency and banking. Don Mills, Ont.: Canadian Bankers’ Association.

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Kornai’s BY FORCE OF THOUGHT WE’RE ALL AUSTRIANS NOW: JA´NOS KORNAI AND THE AUSTRIAN SCHOOL OF ECONOMICS Peter T. Leeson A review essay of Ja´nos Kornai’s By Force of Thought: Irregular Memoirs of an Intellectual Journey. Cambridge, MA: MIT Press, 2007. xixþ461 pp. ISBN 0262113023. The Austrian School of Economics occupies a peculiar position in our discipline.1 On the one hand, it is largely marginalized. Apart from the occasional, obligatory citation to F. A. Hayek’s Road to Serfdom (1944) or Constitution of Liberty (1960), very few self-described Austrian economists are mentioned in the upper echelons of the mainstream economics literature. Hayek’s teacher and former ‘‘Dean of the Austrian School,’’ Ludwig von Mises, who laid out large tracts of the theoretical Austrian landscape that inspired the careers of a number of notable economists, such as Hayek, is almost never discussed. Even in many contemporary, mainstream discussions of the infamous ‘‘socialist calculation debate,’’ such as the one offered by Joseph Stiglitz (1994), Mises, whose 1920 article, ‘‘Economic Calculation in the Socialist Commonwealth,’’ initiated this debate, does not get so much as a mention. Despite this apparent marginalization Austrian economists also have good reason to rejoice. Many Austrian ideas forged originally by Mises, Hayek, and A Research Annual Research in the History of Economic Thought and Methodology, Volume 26-A, 209–219 Copyright r 2008 by Emerald Group Publishing Limited All rights of reproduction in any form reserved ISSN: 0743-4154/doi:10.1016/S0743-4154(08)26020-7

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others, have crept their way into the work of major mainstream economists. Although Austrians are rarely credited, to anyone familiar with their work, the basic concepts at hand are unmistakably ‘‘Austrian.’’ In this sense Austrians have been victorious. Perhaps no where is this increasing tendency more apparent than in the celebrated Hungarian economist Ja´nos Kornai’s new autobiography, By Force of Thought. Although the book’s subtitle suggests that these memoirs are ‘‘irregular,’’ in fact they are well organized and can be easily digested even by those unfamiliar with Kornai’s work. This sporadically immodest account of Kornai’s life weaves together his personal story – one of adolescence in Nazi-controlled Hungary, young adulthood as a committed communist, and later adulthood as an economist growing out of his socialist youth – with his intellectual story, recounting the emergence and substance of his major work. Kornai’s life is indeed a fascinating one, and as he describes, created potent fodder for the development of his contributions to economics. The present essay has two purposes. First, I hope to give the reader a flavor for the basic contents of Kornai’s book. Second, I aim to draw attention to the important and close connections between several of Kornai’s major works discussed in his autobiography, as well as their genesis, and the ideas and genesis of these ideas in the Austrian tradition associated with Ludwig von Mises and F. A. Hayek. Although Kornai briefly refers to Hayek’s Road to Serfdom in discussing the evolution of his impressive intellectual journey, Mises, as is typical, receives no mention. More importantly, the close connection between the substance and development of several of Korani’s ideas and those of Mises and Hayek are virtually unnoted. In pointing to the Austrian precursors to Kornai’s work I do not intend to detract from the important contributions Kornai has made to our understanding of the economic world. Instead, my goal is to highlight how in several important respects these contributions are ‘‘Austrian’’ ones. Although the absence of an explicit connection to the ideas of Hayek, and even more so to those of Mises, may chafe some Austrians, a measure of self-satisfaction is also warranted when an economist of Kornai’s stature, however unwittingly, grounds his highly praised contributions to economics in the ideas of the Austrian School.

KORNAI’S LIFE Ja´nos Kornai was born as Ja´nos Kornhauser, on January 21, 1928. The son of a prominent Hungarian business attorney, Kornai grew up with three

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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. Kornai’s family, like many others in Hungary in 1944, suffered at the hands of Nazi control. The Nazis took his father to a ‘‘work camp,’’ whose inmates were ultimately moved to Auschwitz where Kornai’s father was killed. Kornai’s personal experiences with Nazism, coupled with Soviet liberation of his family at the end of WWII, fueled his first ideological turn, which was to communism. Chapter 2 of Kornai’s book, provocatively entitled, ‘‘How I Became a Communist,’’ describes this process in depth. Kornai identifies ‘‘five grades’’ of communist identification, each of which he went through on his way to becoming a full-blooded believer. The first of these is sympathizing with the Communist Party as an outsider. The second step is becoming a party member. The third is engaging actively in this membership. The fourth step is that of becoming ‘‘a true Communist’’ – not only thoroughly training oneself in Marxist–Leninist theory, but also subordinating one’s private interests to the party. The fifth and final step is becoming ‘‘a party warrior, a professional party worker’’ (pp. 24–25). In Chapter 3, Kornai describes how in his capacity as a ‘‘party warrior’’ he worked as an economic columnist for Hungary’s daily newspaper of the Communist Party, Szabad Ne´p. In this job, which he held for nearly a decade between 1947 and 1955, Kornai faithfully reported on the economic success of various aspects of Hungary’s socialist system and encouraged workers and producers to reach quotas set by economic plans, reminding them of the important and righteous mission they were a part of as comrades in the communist system. It was in the latter years of working for Szabad Ne´p that Kornai began to notice serious fissures in the socialist edifice. But rather than abandoning the idea of a planned economy wholesale, he initially sought for ways to improve it by introducing a greater, though still very limited, role for markets in the socialist system. According to Kornai, ‘‘Never for a moment did I think that the troubles [with socialism] were systemic, originating in the system itself. On the contrary, while perceiving many problems and faults in it, I was still convinced that socialism was superior to the capitalist system’’ (p. 51). Ultimately, it took the government’s arrest and torture of a man Kornai knew to be innocent to shake his faith in Hungary’s Communist Party. As Kornai describes in Chapter 4, appropriately titled, ‘‘Waking Up,’’ only

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then did he begin to question the system he had until this point devoted his life to. Although Kornai went on to become known as an important critic of the economic side of socialism, it was actually the system’s ‘‘ethical failures,’’ rather than the economic ones, that awoke Kornai from his dogmatic slumber. As Kornai puts it, these ethical failures ‘‘undermined the moral foundation on which I had hitherto based my Communist convictions’’ (p. 60). From this point forward Kornai’s newly opened mind began to be able to see, and increasingly critically scrutinize, the reality of the socialist economy. After being fired from his post at Szabad Ne´p, in 1955 Kornai started what was the beginning of his illustrious research career. Although he was never permitted to teach a ‘‘real’’ university course in Hungary, his growing stature as a researcher over the next 30 years gained him international recognition, culminating in an offer from Harvard in 1985. The beginnings of this recognition resulted from his dissertation thesis, Overcentralization, published in English in 1959, which created a commotion in the West by providing one of the first insider accounts of the socialist economy. Chapters 5–15 discuss the evolution of this research over the next three and a half decades of Kornai’s life. Each step in the pursuit of Kornai’s research agenda was in some way intimately connected to the evolution of his thinking about socialism vs. capitalism more generally, as he successively broke the vestiges of lingering belief that some form of centralized economic planning was desirable. These chapters are littered with fascinating tidbits, both personal and intellectual. I will not attempt to do them justice here. Instead I confine myself below to a consideration of only a few of the larger intellectual themes that unfolded in Kornai’s life over this lengthy period leading up to the collapse of communism in the late 1980s and early 1990s.

TWO-LEVEL PLANNING AND THE MISES–HAYEK SOCIALIST CALCULATION CRITIQUE As noted above, Kornai’s earlier ‘‘critiques’’ of socialism were very much half-hearted in that, although they sought to bring a larger part of the socialist economy within the purview of markets or ‘‘quasi-markets,’’ they still saw a significant and important role for state ownership and central planning of the economy. One of Kornai’s most well-known contributions to this area was ‘‘Two-Level Planning,’’ which he coauthored with Tama´s

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Lipta´k, who did the mathematical modeling in the paper (Kornai & Lipta´k, 1965). This work extended previous work Kornai conducted with Lipta´k, which used mathematical methods to tackle various aspects of efficient planning under market socialist type arrangements. The Kornai–Lipta´k two-level planning idea is very much reminiscent of the Taylor–Lange market socialist models described 30–35 years earlier in the throws of the early stages of the socialist calculation debate with Austrian economists Ludwig von Mises and F. A. Hayek (see, for instance, Lange, 1936; Taylor, 1929). The Taylor–Lange model worked as follows: let there be a market in consumer goods and labor but leave the means of production in government’s hands. The central planning office will set prices for producer goods and on the basis of these ‘‘accounting prices’’ producers will be instructed to set price equal to marginal cost and to combine resources in such a way as to minimize average cost. Of course, the initial administered prices will be wrong. At these non-equilibrium prices some goods will sit unpurchased; for others there will be excess demand. The resulting shortages and surpluses will signal to planners how they need to modify prices to bring the economy into equilibrium. Through trial and error the planners will engage in a kind of Walrasian auctioneer tattonement process that will eventually converge on or approximate general competitive equilibrium. This equilibrium will have the same efficiency properties that general competitive equilibrium has in the Walrasian world in which producers’ goods are privately owned (or rather more precisely, there are no institutions of ownership of any variety). Kornai’s model argued similarly but with a slight twist. The structure of ownership (state for producers’ goods, private for consumers’ goods) was essentially the same as in Lange, but instead of the central planning office setting prices, which producers were to respond to parametrically, reporting quantity information back to the center, the central office would set quantities in the form of input quotas and output targets and producers ‘‘would devise optimal plans to satisfy the center’s demands y and then report back shadow prices for their resources and targets’’ (p. 143). In other words the Kornai–Lipta´k model reversed the flow of information between the central planning office and producers in the market socialist economy. Forty years after writing this paper, in his memoirs Kornai seeks to assess the ‘‘lasting validity’’ of his idea. His reflections reveal that he ultimately evaluates his market socialist model using criteria introduced by Mises and Hayek in their original responses to proposals like Lange’s during the calculation debate of the 1920s, 1930s, and 1940s. The core of the Mises– Hayek market socialist critique had several elements, only a few of which

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I will touch upon here. The first of these is the necessity for the ‘‘correct’’ institutions – namely private property rights – for rational resource allocation. The second of these is the necessity of information, which exists in a decentralized and fragmented form, dispersed throughout the members of society, in order to bring individuals’ economic plans into coordination with one another. The third of these is the uselessness of the fictional Walrasian equilibrium economy for economic calculation and rational resource allocation. I will deal with one and three later. Here, I want to make the connection between the Mises–Hayek ‘‘information argument’’ and Kornai’s ex-post evaluation of his two-level planning model. As he puts it today, his model requires that ‘‘All information in the model is accurate, whether it is flowing upward or downward.’’ However, ‘‘the reality of the socialist economy is that all items of information are uncertain’’ (p. 146). This is not the only requirement the model must satisfy, but it is among the most six critical assumptions its operation rests on. And, as Kornai tells us, ‘‘it is [in fact] impossible for them to be fulfilled’’ (p. 146). Kornai’s assessment of the market socialist model he proposed and even his choice of language in rendering this assessment is strongly reminiscent of the Mises–Hayek position. Mises’ original argument was that economic calculation under socialism is ‘‘impossible.’’ His critical insight proceeded by way of simple syllogism: without private property in the means of production there can be no market exchange. Without market exchange there can be no (monetary) market prices. Without market prices indicating the relative scarcity of resources there could be no rational economic calculation. And without rational economic calculation, economizing behavior – indeed economy – is impossible. Hayek followed up on Mises’ argument with his ‘‘Use of Knowledge in Society’’ (1945), which highlighted that the key element was information about the relative scarcity of resources, which as Mises had showed could only be reliably generated under a system of private property and exchange. The connection between the Mises– Hayek reasoning – written 45 and 20 years respectively before Kornai’s twolevel planning paper – and Kornai’s own reasoning is quite clear. Although Kornai touches on the influence Hayek had on his thinking in this regard, as is unfortunately so often the case, Mises receives no credit at all. My point here, however, is not this one. It is the clear ‘‘Austrian-ness’’ of Kornai’s reasoning for the superiority of capitalism over socialism, an ‘‘Austrian-ness’’ which, as I argue below, only grew stronger as his research progressed.

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ANTI-EQUILIBRIUM AND THE AUSTRIAN CRITIQUE OF NEOCLASSICAL ECONOMICS In the late 1960s, Kornai turned his attention to a different, and quite remarkable, project for an economist whose exposure to Western economics at this point was exclusively neoclassical in its approach: a strident critique of the mainstream equilibrium theorizing. Kornai makes it clear that in each of his major research endeavors, indeed at each substantive stage of intellectual growth, he was driven by a concern for ‘‘the world outside the window.’’ Kornai did not receive formal economic training of any sort in the West. Although he did formally study economics in Hungary, he is very much a self-taught political economist who relied on his own readings and discussions with interested friends and colleagues and simple observation of reality around him to inform his understanding of the economic world. His experiences and the reality of life that he encountered, not abstract theory, drove his thinking and work. In this sense Kornai actually benefited from his lack of formal training in Western economics, which, even at the time he would have been engaged in such training, was very much dominated by theory, and in particular equilibrium theory. Indeed, one of the first sparks of Kornai’s discontent with this approach, which he knew primarily from reading the likes of Western economists, such as Paul Samuelson, was the Walrasian world upon which Arrow–Debreu and market socialist proposals, including his own two-level version, were based. As Kornai puts it in his discussion of his two-level planning model, ‘‘One of the main factors reinforcing my [later] criticism of mainstream economic thought was precisely’’ its failure to engage in ‘‘verification of the model’s assumptions and their comparison with the reality’’ (p. 147). Kornai’s critique of neoclassical economics, which culminated in his appropriately titled book Anti-equilibrium (1971) had multiple prongs. The major attacks, however, bear a striking similarity in important respects to the arguments leveled by Ludwig von Mises in Epistemological problems in economics (1933) and Human action (1949). These arguments were subsequently taken up by an entire generation of Austrian economists who railed against the sterility of equilibrium theorizing and the economic profession’s attendant lack of attention to economic reality and to the market as a process. As Kornai summarizes his argument in Antiequilibrium, ‘‘My main objection was that the [Walrasian] theory, the multiplicity of research it instigated, and the comprehensive scientific program of mainstream economics failed to answer the big questions, to

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assist in a deeper understanding of capitalism and socialism’’ (pp. 180–181). For Kornai, like for Mises, the world of equilibrium, or what Mises called the ‘‘evenly rotating economy,’’ is an indispensable mental tool for understanding economic theory. But it is demonstrably not about the world we live in and cannot tell us about the economic problems – ‘‘the big questions’’ to use Kornai’s language – we actually face. The connection here is even stronger upon recognition of the fact that for Mises and Hayek, much like for Kornai, the real trouble with the equilibrium approach became apparent only in the midst of the debate about market socialism in which, perplexingly, socialists were using the neoclassical model – traditionally associated with market advocacy – to demonstrate the equal (or superior) economic efficiency of the socialist system (Kirzner, 1987). Something must surely be wrong with the equilibrium mode of thinking, each of these thinkers independently reasoned, if it reduces economic reality to the point where socialism and capitalism effectively look and operate the same – where it is ‘‘immaterial whether we lived in a centralized or decentralized economy, under capitalism or communism’’ (p. 181). Hayek made this point in 1937 in his less well-known but equally insightful precursor to the ‘‘Use of Knowledge in Society,’’ ‘‘Economics and Knowledge.’’ The marginalist equilibrium conditions that market socialists like Lange saw as the salvation for socialist efficiency are outcomes of the market process, Hayek pointed out. They are not preconditions going into economic activity that could instruct socialist producers how they should proceed. Stated differently, the formal efficiency conditions of competitive general equilibrium are descriptive, in ex-post sense, of what the market process tends to move the economy toward in the context of a private property system of monetary exchange. They are not, nor can they be, prescriptive blueprints for achieving economic efficiency in the absence of this process. In stipulating from the start that socialist producers will set price equal to marginal cost and produce where average cost is at its minimum, Lange’s model assumes the very things it needs to prove. But of course, in a world in which production and consumption are already in equilibrium, which is the world of Arrow–Debreu upon which Lange was building, these features are by definition already in place. Thus, as Mises, Hayek, and many years later Kornai, pointed out, the equilibrium approach is fatally flawed for considerations of comparative political economy. Other important elements of Kornai’s critique of the neoclassical approach will also ring familiar with those knowledgeable of Austrian economics. For example, he is highly critical of the strict, and many would

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say, sterile rendering of rationality in the mainstream view where preferences are fixed and transitive. Kornai also objects to the static nature of the equilibrium approach, which facilitates the homogenization of capitalist and socialist political economy in the model. ‘‘Yet one of the essential differences between them lies in their dynamics. The competition in capitalism provides an impetus that pushes producers into continuous technical renewal. Socialism, in contrast, lacks the spontaneous force of competition: new products arise fitfully and reluctantly from the bureaucratic orders of central planners,’’ Kornai points out (p. 182). Such competition, however, can only come from a certain kind of institutional regime – namely one rooted in private property ownership. These sentences could have easily been written by Mises or Hayek in the 1940s. Oddly, though, Kornai does not acknowledge any connection between his anti-equilibrium views and those of Mises or Hayek. He does complain that behavioralists, such as Daniel Kahneman, who won the Nobel Prize in economics in 2001 for pointing to real-world anomalies with respect to the predictions of the neoclassical rational choice model, ‘‘failed to mention Anti-Equilibrium as one of the theoretical-historical precursors to newer developments’’ (p. 193). However, I found myself equally ‘‘disgruntled,’’ as Kornai puts it, that the Austrian ‘‘theoretical-historical precursors’’ to Kornai’s anti-equilibrium arguments are not mentioned in his book at all.

CONCLUDING REMARKS I have considered only two major themes in Kornai’s work that have strong Austrian connections. However, the description of other themes in his memoirs point to a number of others. Kornai’s most well-known idea, the ‘‘soft budget constraint,’’ for example, is also very much one with Austrian roots traceable back to Mises’ Bureaucracy (1944). It is even briefly touched on in his 1920 essay that kicked off the socialist calculation debate, where Mises argued that the absence of private property, and thus, market prices, and in turn profits and losses under socialism put firm managers in a position in which they neither reap the rewards of combining resources effectively nor incur the losses that would otherwise lead them to ‘‘go out of business’’ (Mises, 1975). The result is a kind of moral hazard problem for socialist producers. Kornai’s later and more thorough-going critique of socialism also very much reflects arguments made by Mises and Hayek, which are really institutional critiques rooted in the fundamental role of private property rights, which generate both the appropriate information for

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rational resource allocation and the incentives to act on that information in a capitalist economy, but as Mises pointed out are necessarily lacking in a socialist one. Kornai’s autobiography is therefore not only an interesting one for the story it tells in terms of Kornai’s own intellectual evolution. It is also an interesting one in terms of (unwittingly) highlighting the relevance and validity of Austrian arguments for understanding the world. For these reasons, perhaps somewhat unexpectedly, Kornai’s book will not only interest the ‘‘average economist,’’ who has undoubtedly in some way or another been impacted by Kornai’s important contributions to economics. It will also hold a special interest for Austrian economists who will both be struck by the correspondence between Kornai’s ideas – and in several spots how he came to those ideas – and Austrian ones, as well as heartened that an economist with the acclaim Kornai deservedly enjoys is, self-acknowledged or not, very much an Austrian.

NOTE 1. For a discussion of the Austrian School from 1950 to 2000, see Boettke and Leeson (2003).

ACKNOWLEDGMENTS I thank Pete Boettke and Chris Coyne for helpful conversation and comments.

REFERENCES Boettke, P. J., & Leeson, P. T. (2003). The Austrian school of economics: 1950–2000. In: W. J. Samuels, J. Biddle & J. B. Davis (Eds), A companion to the history of economic thought (pp. 445–453). Oxford: Blackwell. Hayek, F. A. (1937). Economics and knowledge. Economica, 4(13), 33–54. Hayek, F. A. (1944). The road to serfdom. Chicago, IL: University of Chicago Press. Hayek, F. A. (1945). The use of knowledge in society. American Economic Review, 35(4), 519–530. Hayek, F. A. (1960). The constitution of liberty. Chicago, IL: University of Chicago Press. Kirzner, I. M. (1987). The socialist calculation debate: Lessons for Austrians. Review of Austrian Economics, 2(1), 1–18.

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Kornai, J. (1959). Overcentralization in economic administration: A critical analysis based on experience in Hungarian light industry. Oxford: Oxford University Press. Kornai, J. (1971). Anti-equilibrium: On economic systems theory and the tasks of research. New York: American Elsevier. Kornai, J., & Lipta´k, T. (1965). Two-level planning. Econometrica, 33(1), 141–169. Lange, O. (1936). On the economic theory of socialism: Part one. Review of Economic Studies, 4(1), 53–71. Mises, L. (1944). Bureaucracy. New Haven, CT: Yale University Press. Mises, L. (1949). Human action: A treatise on economics. New Haven, CT: Yale University Press. Mises, L. (1975). Economic calculation in the socialist commonwealth. In: F. A. Hayek (Ed.), Collectivist economic planning (pp. 87–130). Clifton, NJ: Augustus M. Kelley. Stiglitz, J. E. (1994). Wither socialism? Cambridge, MA: MIT Press. Taylor, F. M. (1929). The guidance of production in a socialist state. American Economic Review, 19(1), 1–8.

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Backhaus’ ENTREPRENEURSHIP, MONEY, AND COORDINATION WHICH WAY FORWARD IN HAYEKIAN SOCIAL THEORY: EVOLUTION OR DESIGN? William N. Butos A review essay of Jurgen G. Backhaus’s (Ed.), Entrepreneurship, Money, and Coordination: Hayek’s Theory of Cultural Evolution. Cheltenham, UK: Edward Elgar, 2005. viiþ199 pp. ISBN 1845421302. 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 me´lange 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. A Research Annual Research in the History of Economic Thought and Methodology, Volume 26-A, 221–233 Copyright r 2008 by Emerald Group Publishing Limited All rights of reproduction in any form reserved ISSN: 0743-4154/doi:10.1016/S0743-4154(08)26021-9

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The area of social theory is itself difficult, requiring both hardheaded analysis and plunges into often murky normative and philosophical issues; fundamental questions are still hotly debated. Hayek’s theory of cultural evolution is controversial and the evolution of his ideas in this area seems to deny us the sort of closure we often seek and sometimes get from academic system-builders. As Kirzner (2000) notes, Hayek was a ‘‘puzzler’’ whose oeuvre reveals a continuity in the kinds of questions he asked. He was not a system-builder, but pursued an integrated program of research driven principally by ‘‘the internal dynamics of his thought’’ and a ‘‘set of closely related ideas’’ on knowledge and coordination (Birner, 1994, p. 2). The book under review and, indeed, much of the literature on Hayek reveal the fertility of his ideas. In perhaps the most interesting and effectively executed paper in the volume, Horst Feldmann uses a kind of ‘‘point counter-point debate’’ format organized around nine main areas of contention that can be compressed to four main points of contention: (1) the completeness of Hayek’s theory; (2) its compatibility with methodological individualism; (3) is his theory Panglossian?; and (4) does it satisfy Popperian falsification criteria? Feldmann energetically reviews all the critiques, dispatching one after another and finding that ‘‘All major charges against Hayek’s theory of cultural evolution are unfounded’’ (p. 33) and that, in fact, The theory explains the long-term development of human societies and their institutions comprehensively and in a uniform manner, uncovering deep-rooted causes and far-reaching effects. Its explanatory powers surpass all other attempts in this field to date and may even bring about a shift in the paradigms of the social sciences in the long run – a shift that may amount to nothing less than an evolutionist revolution. (p. 34)

Of the papers that follow Feldmann’s, only those by Backhaus, Schubert, and Ebner directly engage Hayek’s cultural theory. Backhaus’ desultory ‘‘Evolution of legal rules: Hayek’s contributions reconsidered’’ aims to establish a prominent place in Hayekian social theory for what he calls ‘‘legal economic policy,’’ defined as ‘‘policy which is designed to shape legal institutions in the interest of economic activity’’ (p. 74). His central argument is that Hayek’s approach to general rules applies to ‘‘what legislation will best suit catallactic orders’’ (p. 98), an approach preferable to those ‘‘linking policy objectives and particular measures case by case’’ (p. 102). These points conform to well-understood Hayekian sensibilities, although Backhaus’ emphasis on catallactic efficiency suffers from two difficulties. First, his claim that the ‘‘State may very well pursue political ends within this order’’ (p. 94) seems to confuse actual market economies

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with catallactic theory. The former, of course, is permeated with State intervention, while the latter is a theoretical structure that studies voluntary economic interaction within a pre-specified framework of property rights (Kirzner, 1963; Mises, 1966; Hayek, 1976, Chapter 10).2 As such, it seems unnecessarily restrictive for Backhaus to insist on a catallactic efficiency criterion when Hayek himself saw the market economy as a means for ensuring prosperity freedom. Second, Backhaus’ expansive conception of the catallactic order, leaves his policy objective underspecified. If the pursuit of political ends by the State is intrinsic to the catallaxy, then how can catallactic mechanisms, based as they are on voluntary exchanges of property, ensure the compatibility of political processes with the requisites of non-coerced exchange? If nothing else, such political processes introduce goals that have the capacity to structurally compromise the catallaxy and dominate the catallaxy via non-voluntary interactions. Backhaus follows Hayek in grounding ‘‘legal economic policy’’ on the ‘‘general rules of nomos’’ (p. 93)3 and supporting the evolution of the common law via ‘‘judge made law.’’ But why should common law judges make decisions that maintain the rules of nomos consistent with the catallaxy? What mechanisms ensure that the common law will evolve in the appropriate way? Hasnas (2005) points out that because the common law judge also faces constraints on knowledge, the evolution of the common law requires a filtering mechanism to weed out bad judge decisions, a point also noted in Schubert’s chapter. Hasnas shows that the history of the English common law was reasonably efficient because it entailed widespread competition among institutions in the provision of legal remedies and decisions, a point not evident in Backhaus’ discussion. In ‘‘Hayek and the evolution of designed institutions: A critical assessment,’’ Christian Schubert bemoans the fact that Hayek’s ideas ‘‘do not form an overarching conception of the evolution of designed institutions’’ (p. 124). This is a defensible position, and Schubert is on solid ground in arguing that it reveals a gap in Hayek’s social evolutionary theory. Schubert argues that the rules governing the spontaneous social order ‘‘can partly be the object of purposeful design,’’ a point Hayek never disputed, ‘‘without necessarily affecting’’ that order (p. 125), an ambiguous point that appears inconsistent with the first half of the sentence, and if not, certainly optimistic about the good intentions of designers knowing the effects of such rules. Perhaps this is why Hayek’s statement of constitutional structure in the final volume of Law, legislation and liberty is quite general and quite brief (Hayek, 1979).

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Hayek’s larger interest was dominated by those orders that were undesigned. After all, by the time the first volume of Law, legislation and liberty (Rules and order) was published, Hayek (1973) could state that it was rational constructivism that presented the biggest intellectual challenge for liberalism. For Hayek it was precisely the failure of social theorists to fully appreciate and understand that undergirding the advance of civilization are institutions that are mainly undesigned. Indeed, it can be argued that Hayek’s fundamental concern was how to extend the range of spontaneous order by removing, in particular, those elements of purposeful design whose effects are inhospitable to spontaneous orders. The dangers and epistemic difficulties associated with designed institutions were not lost on Hayek, pushing him to a very circumspect and critical view of State intervention. And even his suggestion in the third volume of Law, legislation and liberty (The political order of a free people) of separating government into a rule-making body and a policy-making body mainly served the objective of providing an environment suitable for maintaining and cultivating spontaneous social orders, not as a mechanism for designing new institutions (Hayek, 1979). Schubert’s concern, however, cannot be so easily parsed, as Hayek admitted that spontaneous social orders (and attendant sub-orders) may evolve in ways that are social dead-ends or stumble into an ‘‘impasse from which it cannot extricate itself’’ (Hayek, 1976, p. 88). Hayek knew that a fabric of interconnected rules and institutions may produce results which are undesirable and which cannot be easily reversed or overcome under existing institutional arrangements or through piecemeal changes. As Schubert correctly points out, Hayek does not provide a satisfactory resolution to this potential dilemma. All the same, calling for institutional design presents, if only as a practical matter, two problems: ascertaining under what circumstances a response is called for, and second, adopting a mechanism for selecting which of many possible responses is best deployed. It is not clear how a regime committed to institutional design could undertake its tasks and still claim to be consistent with Hayekian precepts of ‘‘general rules.’’ Even if Schubert is correct to chide Hayek in this area, Hayek’s strong anti-hubristic warnings remain highly important. Ebner’s paper on ‘‘Hayek on entrepreneurship: Competition, market process and cultural evolution’’ attempts to piece together a Hayekian theory of entrepreneurship. But Hayek did not articulate such a theory, nor does Ebner’s paper provide persuasive evidence to the contrary. At the same time, there is no question that Hayek’s economics is suffused with an implicit theory of entrepreneurial activity, as Kirzner has suggested. Hayek’s

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market process theory, as Kirzner notes of ‘‘Competition as a discovery process’’ (Hayek, 1984) and ‘‘Economics and knowledge’’ (Hayek, 1948a), requires entrepreneurial activity if prices are to move in coordinating directions that ensures relevant private knowledge ‘‘of time and circumstance’’ is widely communicated. Ebner claims that Hayek’s entrepreneurial theory is closely related to a Weiser-Schumpeter conception of the entrepreneur as a leader and innovator. But the evidence Ebner actually adduces seems to align Hayek’s (implicit) theory, in fact, more closely to the theories of Mises and Kirzner than to Schumpeter and Weiser. More importantly, Ebner’s desire to apply catallactic entrepreneurial activity to explain non-market social processes requires a theory of the entrepreneur appropriate for such non-catallactic domains. Unfortunately, a careful elaboration of a political or institutional entrepreneur is not given by Ebner. It is necessary to remember that catallactic entrepreneurship refers to functional aspects of action within a particular institutional setting working through particular social mechanisms; on the other hand, noncatallactic entrepreneurship functions in ways constrained by the arrangements particular to those corresponding domains of activity. This matters because in economics catallactic entrepreneurial theory produces insights about the working of a market process – a particular domain of social activity based on particular institutional arrangements pertaining to the voluntary exchange of property rights. Catallactic analysis and the results it generates cannot be presumed to carry over to other social domains, despite the presence of ‘‘entrepreneurs’’ actively functioning in these domains. The pursuit of profits in the economy and the pursuit of votes (or power) in the political system, for example, reflect actions that are driven by goals, require certain means to achieve those ends, and which are affected by perceived incentives. This describes an economic point of view suitable for analyzing behaviors in both realms of social interaction. But it is presumptuous to carry over, as Ebner suggests we do, entrepreneurship without qualification from the catallactic domain where it has specialized meanings to an entirely different domain in which similarly ‘‘economic’’ behaviors operate via different rules, mechanisms, and constraints. There are some central questions and issues that bear on the discussions in the book’s papers but which are not explicitly identified or adequately addressed. This is especially problematic for the papers so far discussed (and also Loasby’s). In particular, two broad and closely related themes concerning Hayek’s cultural theory are underdeveloped – one concerns the quintessential Hayekian interest in the production and distribution of knowledge and the other the evolutionary properties of social orders – that

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provide the necessary context for Hayek’s broader social theory. These somewhat more fundamental issues are not given their due in this book. As a consequence, it seems to me its moorings remain occluded, making it difficult for the reader to know how things fit together (or not) in Hayek’s social theory and why his ideas are important. Hayek’s famous knowledge papers (1948a, b), ‘‘The meaning of competition’’ (1948c), and his ‘‘Competition as a discovery procedure’’ (1984) dealt with dispersed private knowledge and the role of markets in its transmission. Hayek argued that it is only through market exchange that market prices are able to reflect the relevant dispersed private knowledge consistent with the coordination of individuals’ plans. This ‘‘constraints on knowledge’’ argument was also applied by Hayek to his broader social theory as a way of explaining the conditions necessary for the advancement of civilization, liberal values, and ‘‘the great society.’’ Those societies, he claimed, whose institutions best enabled the use of dispersed private knowledge enjoyed an advantage over those whose institutions were not as similarly well adapted (Hayek, 1960, Chapter 2). During the 1940s and the 1960s Hayek concluded that liberalism was in decline because its underlying principles were not well understood, prompting him to present arguments, directed mainly to intellectuals, supporting the value of freedom and the errors of central planning. In The constitution of liberty (1960) he assumed that achieving liberal society and its ‘‘ideal of freedom’’ was still possible through reform measures within the existing institutional framework; Hayek’s message in 1960 maintained there was still a chance, within the prevailing institutional framework, to reclaim ‘‘the abandoned road’’ of liberalism.4 But 13 years later in Law, legislation and liberty he held that because democratic constitutionalism had failed to secure liberal society, the more radical approach of constitutional design, as opposed to reforming existing democratic institutions, was necessary. Because Hayek believed that the foundational intellectual issue was between ‘‘rational constructivism’’ and ‘‘evolutionary rationalism’’ (Hayek, 1973, p. 2, italics added), his suggestions for constitutional design in volume three of Law, legislation and liberty (Hayek, 1979, Chapter 17) introduce a tension within Hayek’s work. But this is not a tension that need delay us too long since Hayek’s main interest (and impact of his ideas) was more deeply connected to spontaneous social orders, like the market economy, and their emergent properties, as rightly emphasized by Feldmann. All the same, there are some relevant issues here that Schubert’s essay on designed institutions raises that relate back to Hayek’s own duality in this area and also to the interpretation of Hayek in several essays of this volume. Hayek’s work allows it to be seen as

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encompassing a ‘‘rational theory of tradition’’ (Weimer, 1980), which essentially takes (within limits) an existing institutional framework as given and emphasizes piecemeal and purposeful marginal changes in that framework as the preferred mode of offsetting undesirable outcomes or addressing social problems. Hayek’s views here are grounded by the epistemic realities associated with binding constraints on individual knowledge; but these same views are sometimes seen in the secondary literature as justifying a built-in traditionalist bias as to what questions social theory needs to address and what sorts of initial conditions should be among the ‘‘givens’’ for the purposes of analysis. In short, to what extent may we usefully apply spontaneous order theory and its evolutionary stance in our broader social theory and how should that be done? More generally, in what ways is a traditionalist approach the appropriate vehicle for studying the emergent properties of spontaneous social orders? Some of this tension in Hayek tends to recede once we recognize that his interest in evolutionary processes grew quite naturally out of his epistemic orientation to social phenomena. He studied these problems in various contexts, including cognitive psychology, the market economy, and broader social theory. Because knowledge is necessarily dispersed,5 its social use will be affected by the kinds of mechanisms, institutional filters, and other constraints that govern how effectively the system in question functions epistemically. One of Hayek’s great insights that came out of the calculation debates is that social systems do not have the same capacities for using dispersed knowledge. Also, Hayek’s analysis supports path-dependencies and the value of a traditionalist approach in deliberately trying to change existing institutions because each of us is epistemically constrained with reference to the complex social orders we study. Hayek’s point is that we need to resist the temptation to equate our own personal planning with social planning (or institutional design), as we simply lack the necessary knowledge and understanding of the implications of our social manipulations. For Hayek this meant that changes we make to the system should be marginal – the flip side of taking the existing arrangements as more or less given, unless we have good reason not to. At the same time, Hayek is implicitly aware that the particular orders he studies, from the individual’s sensory order to those of the social realm, all exhibit features of evolutionary systems having the capacity to generate knowledge, not simply to use existing dispersed knowledge, a perspective Thomas McQuade (2000) in particular has persuasively suggested. This is perhaps most clearly seen in Hayek’s cognitive theory (a point strangely mentioned only in passing in Loasby’s contribution), whereby cognitive

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functioning adaptively generates knowledge in the form of a classification based in part on stimuli from external reality. In Hayek’s cognitive theory, each of us produces an interpretation of the environment that reflects a transformation of sensory stimuli into personal knowledge, which is integral to the social realm as both a cause and effect of that broader context. Something analogous happens in markets whereby interacting individuals, each necessarily possessing some knowledge not available to others, produce as a byproduct of their interactions an overall order having distinctive emergent properties, foremost of which is the generation of a constellation of market prices that, in terms of catallactic theory (if not in fact), tend to be systematically related to the preferences of the participants and existing constraints. In both the sensory order and the market order, the generation of knowledge refers to an emergent characteristic of a particular kind of order. Conceptions along these lines push Hayekian epistemics cleanly into evolutionary social theory by virtue of endogenizing knowledge throughout the entire social structure. The point here is twofold. First, the emphasis often given to the more traditionalist elements in Hayekian social theory needs to be complemented by a more complete account of Hayekian-inspired social epistemics that includes the generation of knowledge, not just its use. Justifying existing arrangements because they are traditional tends to underplay the necessity of analyzing the knowledge-generating characteristics associated with those arrangements or how the proposed piecemeal interventions are likely to affect the order’s emergent characteristics. And second, a more complete account of social epistemics helps to circumvent certain normative impasses by maintaining an analytical focus fixed on the properties and emergent characteristics of complex social orders. While normative questions will always be with us in dealing with social phenomena, normative propositions often get in the way of hardheaded analysis. If nothing else, understanding how complexly organized spontaneous orders function as evolving systems should precede our normative assessment of such structures. A major area of controversy in Hayek’s broader social theory surrounds the mechanisms of cultural evolution. In the constitution of liberty, Hayek (1960, see also 1967) argued that cultural evolution operated through group selection, whereby those groups with institutions best adapted to the prevailing environment enjoyed an ecological advantage favoring their perpetuation. Group selection, although at times discredited, has been recently rehabilitated as an important evolutionary factor by the research of some biologists (see e.g., Wilson, 2005)6 in emphasizing that evolutionary

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processes function adaptively on multiple levels, including the group level, and in complex ways. This leads directly to Vanberg’s (1986) important claim that group selection and methodological individualism are incompatible, a critique of Hayek’s evolutionary theory that many Hayekian scholars accept and, if correct, would certainly cast serious doubt on the suitability and internal coherence of Hayek’s cultural theory. Unfortunately, only Feldmann’s paper addresses this issue, finding that Hayek was not only sensitive to the potential dangers to the group of ‘‘free riding’’ and ‘‘opportunistic behavior’’ but that Hayek also identified mechanisms (such as traditional rules, conventions, and other norms of conduct) that deterred such behaviors (see pp. 15–19). Vanberg’s critique of group selection exposes Hayek’s evolutionary analysis to the charge of holism and collectivism, but the charge can be mollified if we take seriously the institutional embeddedness of behavior (see also Butos & McQuade, 2001; Caldwell, 2002). Doing so reveals that homo economicus does not provide a rich enough account of how real individuals are observed to behave as members of a social order. Because social behavior is institutionally contingent, such constraints makes it difficult, though certainly not impossible, for individuals to simply redeposit themselves into other contexts with different norms, conventions, and rules; consequently, it is necessary to recognize the incentives for them to work (perhaps with reformist notions) within the prevailing institutional context. More importantly, perhaps, institutional embeddedness means that individuals will ordinarily function within all sorts of institutional contexts, such as family, church, homeland, and so on, that carry certain prescriptions for behavior. Even in the most extreme circumstances of imminent life and death actions in warfare and natural disasters, time and again we routinely observe individuals acting in ways that cannot be easily captured with simple notions of ‘‘self-interest,’’ or even altruism for that matter. What we find, instead, is that individuals see themselves in a particular institutional setting – a company of soldiers, a group of fire fighters – that establishes the relevant context for appropriate behavior. Success here requires a willingness to abide by the norms and conventions of that setting. Importantly, as Feldmann suggests (p. 16), there is no guarantee that any group in particular will survive and when one does fail, an evolutionary account would emphasize that its existing institutions were insufficiently adapted to the environment, resulting in the demise or departure of its individuals.

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Brian Loasby’s chapter on ‘‘Hayek’s theory of mind’’ rehashes Hayek’s cognitive theory. Loasby believes that Hayek’s theory of mind can end up providing a ‘‘theory of the evolution of the evolutionary process’’ because ‘‘at the level of the individual it is a theory of the innovative mind,’’ a widely accepted take on The sensory order and ‘‘at the level of the species, it is part of a theory of genetic evolution’’ (pp. 69–70), a considerably less widely accepted interpretation of Hayek.7 Loasby’s paper encounters difficulty in negotiating how we actually get to a theory of cultural evolution from a theory of mind that describes an individual’s cognitive functioning. As Hayek says in ‘‘Economics and knowledge’’ in the context of equilibrium economic analysis, but which has clear application in all settings in social theory: I have long felt that y the methods which we employ which we employ in pure analysis have a clear meaning only when confined to the analysis of a single person and that we are really passing into a different sphere and silently introducing a new element of altogether different character when we apply it to the explanation of the interactions of a number of different individuals. (Hayek, 1948a, p. 35)

Loasby’s paper has difficulty making this traverse, although that certainly does not make it unique in the literature on Hayek’s cognitive theories. As suggested earlier, progress in this area may benefit from stepping back a bit in the hope of clarifying certain fundamental issues in the theory of Hayekian ‘‘orders’’ related to their structure and functioning, especially with respect to their epistemic capacities and adaptive characteristics. Walter Heering’s chapter on ‘‘Money and reciprocity in the extended order – an essay on the evolution and cultural function of money’’ acknowledges that the evolution of money roughly conforms to Menger’s spontaneous order explanation. He identifies two conditions that any monetary system must satisfy: a ‘‘rule of acceptance’’ and a ‘‘rule of access’’ (pp. 168–169), which appear to correspond to Robert Clower’s constraints for monetary exchange; viz., that only money buys goods and goods buy only money. Heering argues that when institutions supply fiduciary money (as opposed to theft by individuals, which does not affect the aggregate quantity of money), agents have an incentive to violate the rule of access, threatening to turn monetary exchange from a coordination game into a Prisoners’ Dilemma game. Thus, ‘‘monetary systems,’’ Heering claims, ‘‘can be characterized by the way they deal with the rule of access’’ (p. 171). This provides the necessary entre´e into his discussion of alternative monetary regimes (public monopoly versus private provision), suggesting that Hayek’s ‘‘competing currencies’’ arrangement – and also presumably the modern free

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banking school (see White, 1995) – is ‘‘unrealistic’’ relative to a constitutionally constrained central bank. But Heering’s discussion of the issues here is far too brief, with the result that his analysis and conclusions are no more than volleys across the bow. The questions Heering addresses or which are raised by his chapter are interesting and important and usually the fodder of monetary specialists. While no one disputes that money is not only an important byproduct of cultural evolution but also an institution that can affect cultural evolution, an expanded version of Heering’s chapter would probably more closely appeal to monetary economists than to social scientists interested in cultural evolution. Feldmann’s paper, as noted earlier, is probably the most successful in drawing the reader into a set of issues that are important and difficult. But even if Feldmann’s determined effort is a good starting place, the chapters that follow are uneven and in some instances disappointing. There is certainly value-added to be gleaned from these essays, but doing so requires considerable effort for the reader not already familiar with Hayek. If nothing else, the essays in this volume indicate that much work remains to be done in sorting out Hayek and, more importantly, understanding social evolutionary processes. That Hayek has been instrumental in bringing economists to this place is an accomplishment of the first order and confirmation of the fertility of his ideas. However, readers interested in Hayek’s theory of cultural evolution would probably be better served by going directly to Hayek himself than trekking through the present book.

NOTES 1. A nearly identical version of this paper was published previously (see Loasby, 2004). 2. The catallaxy is ‘‘the order brought about by the mutual adjustment of many individual economies in a market. A catallaxy is thus the special kind of spontaneous order produced by the market through people acting within the rules of the law of property, tort, and contract’’ (Hayek, 1976, pp. 108–109). 3. Hayek refers to ‘‘nomos’’ as ‘‘the law of liberty.’’ See Hayek (1973, Chapter 5). 4. The title of Chapter 1 in The road to serfdom (Hayek, 1944). 5. But note in ‘‘The use of knowledge in society,’’ Hayek (1948b) does not place ‘‘scientific knowledge’’ in this category. To the extent that such knowledge is codifiable, there is a relevant sense in which it is not necessarily dispersed. 6. As Whitman (2004) notes, Wilson argues for group selection and against methodological individualism. 7. Loasby mentions that, ‘‘though much is genetically determined and the remainder is genetically constrained, nevertheless in important respects,’’ quoting

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cognitive psychologist Karmiloff-Smith ‘‘the brain progressively sculpts itself, slowly becoming specialized over developmental time’’ (p. 56). I venture to suggest that most students of Hayek’s cognitive theory would not assign ‘‘genetic evolution’’ a prominent place in that theory, if by ‘‘genetic’’ we mean an evolutionary process induced by changes in genes. Clearly, Hayek’s theory is very much a theory about individual learning, as Loasby emphasizes, but Hayek accounts for this by the classificatory and self-organizing capacity of the brain and the effect of human interactions in establishing new classifications connections, not to genetic evolution (as that term is generally used) in that Hayek’s theory takes the genetic makeup of the individual as given. This is related to the point mentioned in the text of seeing cognitive functioning as a knowledge-generating process in a way analogous to what happens on markets. On this, see McQuade (2007).

ACKNOWLEDGMENT I wish to thank Thomas McQuade for helpful suggestions. All remaining errors are mine.

REFERENCES Birner, J. (1994). Introduction: Hayek’s grand research programme. In: J. Birner & R. van Zijp (Eds), Hayek, co-ordination and evolution (pp. 1–25). London: Routledge. Butos, W. N., & McQuade, T. J. (2001). Mind, market, and institutions: The knowledge problem in Hayek’s thought. In: J. Birner, P. Garrouste & T. Aimar (Eds), F.A. Hayek as a political economist (pp. 113–133). New York: Routledge. Caldwell, B. (2002). Hayek and cultural evolution. In: U. Maki (Ed.), Fact and fiction in economics: Models, realism, and social construction (pp. 285–303). Cambridge: Cambridge University Press. Hasnas, J. (2005). Hayek, the common law, and fluid drive. NYU Journal of Law and Liberty, 1(0), 79–110. Hayek, F. A. (1944). The road to serfdom. Chicago: University of Chicago Press. Hayek, F. A. (1948a). Economics and knowledge. In: Individualism and economic order (pp. 33–56). Chicago: University of Chicago Press. Hayek, F.A. (1948b). The use of knowledge in society. In: Individualism and economic order (pp. 77–91). Chicago: University of Chicago Press. Hayek, F. A. (1948c). The meaning of competition. In: Individualism and economic order (pp. 92–106). Chicago: University of Chicago Press. Hayek, F. A. (1960). The constitution of liberty. Chicago: University of Chicago Press. Hayek, F. A. (1967). Note on the evolution of systems of rules of conduct. In: Studies in philosophy, politics and economics (pp. 66–81). Chicago: University of Chicago Press. Hayek, F. A. (1973). Law, legislation and liberty. Volume 1: Rules and order. Chicago: Chicago University Press. Hayek, F. A. (1976). Law, legislation and liberty. Volume 2: The mirage of social justice. Chicago: Chicago University Press.

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Hayek, F. A. (1979). Law, legislation and liberty. Volume 3: The political order of a free people. Chicago: Chicago University Press. Hayek, F. A. (1984). Competition as a discovery process. In: C. Nishiyama & K. R. Leube (Eds), The essence of Hayek (pp. 254–265). Stanford: Hoover Institution Press. Kirzner, I. M. (1963). Market theory and the price system. New York: Van Nostrand. Kirzner, I. M. (2000). Hedgehog or fox? Hayek and the idea of plan-coordination. In: The driving force of the market (pp. 181–202). New York: Routledge. Loasby, B. J. (2004). Hayek’s theory of mind. In: R. Koppl (Ed.), Evolutionary psychology and economic theory: Advances in Austrian economics (Vol. 7, pp. 101–134). Oxford: Elsevier. McQuade, T.J. (2000). Orders and institutions as objects of investigation. Ph.D. dissertation, Auburn University. McQuade, T. J. (2007). Science and markets as adaptive classifying systems. In: E. Krecke, C. Crecke & R. G. Koppl (Eds), Cognition and economics: Advances in Austrian economics (Vol. 9, pp. 51–86). Oxford: Elsevier. Mises, L. (1966). Human action. Chicago: Regnery. Vanberg, V. (1986). Spontaneous market order and social rules: A critique of F.A. Hayek’s theory of cultural evolution. Economics and Philosophy, 2(1), 75–100. Weimer, W. B. (1980). For and against method: Reflections on Feyerabend and the foibles of philosophy. Pre/Text, 1–2, 161–203. White, L. H. (1995). Free banking in Britain: Theory, experience, and debate, 1800–1845 (2nd ed.). London: Institute of Economic Affairs. Whitman, D. G. (2004). Group selection and methodological individualism: Compatible and complementary. In: R. Koppl (Ed.), Evolutionary psychology and economic theory: Advances in Austrian economics (Vol. 7, pp. 221–250). Oxford: Elsevier. Wilson, D. S. (2005). Natural selection and complex systems: A complex interaction. In: C. Hemelrijk (Ed.), Self-organization and evolution of social systems (pp. 151–165). Cambridge: Cambridge University Press.

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Heertje’s SCHUMPETER ON THE ECONOMICS OF INNOVATION and Laperche, Galbraith, and Uzundis’s INNOVATION, EVOLUTION AND ECONOMIC CHANGE TECHNICAL CHANGE AND ECONOMIC STRUCTURE: SCHUMPETER AND GALBRAITH David Reisman A review essay on A. Heertje’s Schumpeter on the Economics of Innovation and the Development of Capitalism. Cheltenham, UK and Northampton, MA: Edward Elgar, 2006. viiþ142 pp. ISBN 184542445X; and B. Laperche, J. K. Galbraith, and D. Uzunidis’s (Eds.) Innovation, Evolution and Economic Change: New Ideas in the Tradition of Galbraith. Cheltenham, UK and Northampton, MA: Edward Elgar, 2006. xiiiþ330 pp. ISBN 1845427157. Economics is about the kaleidoscope of history set free through surprise and discovery. It is about creative destruction and unending evolution. Economics is more than the knee-jerk maximization of the born follower whose focus is the efficient allocation of an established endowment as between the entrenched and the familiar. Economics is also about the cascade of multipliers set in motion through initiative and alertness. A Research Annual Research in the History of Economic Thought and Methodology, Volume 26-A, 235–254 Copyright r 2008 by Emerald Group Publishing Limited All rights of reproduction in any form reserved ISSN: 0743-4154/doi:10.1016/S0743-4154(08)26022-0

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Schumpeter was in no doubt that his focus was the flow: ‘‘I was trying to construct a theoretic model of the process of economic change in time, or perhaps more clearly, to answer the question of how the economic system generates the force which incessantly transforms it’’ (Schumpeter, 1989, p. 165). Galbraith was in complete agreement that dynamics driven on by innovation was the mystery that the economist had to unravel. Technology revolutionizes the production function and shakes up the institutional integument. Supply and demand are a threat to conservatism and stability. They are another name for unknowledge and experimentation, change and more change. There is nothing more subversive than supply and demand. Schumpeter and Galbraith believed that matter was in motion. They knew that the economist could not responsibly escape from permanent revolution into the frictionless never-never-land of comparative statics. Two recent books have provided the opportunity to think again about how economic structures are at once the cause and the effect of something new.

HEERTJE’S SCHUMPETER 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. The first chapter is the biography and overview that Heertje contributed to The New Palgrave in 1987. It is followed by essays on methodological individualism, market structure, the decay of capitalism and, most of all, technical change. Comparisons are drawn with Stiglitz (whose Whither Socialism? (1994), Heertje describes as ‘‘a masterpiece’’), Keynes, Buchanan, Nelson, Winter, and Coase. Apart from Marx and Keynes, the great theorists of the past are not prominent. Ricardo makes a fleeting appearance. Smith, Malthus, and Marshall are not mentioned at all. This is not the historical investigation that will show how Schumpeter stood on the shoulders of giants. Nor is this a stage-by-stage account of how Schumpeter’s thought itself developed in the three decades that separated the iconoclastic entrepreneur of The Theory of Economic Development (1934, originally published in German in 1912) from the bureaucratic rigidities of Capitalism, Socialism and Democracy (1976, originally published in 1942) when no one could have said for certain that the future did not lie with

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Hitler and Stalin. Heertje’s essays are on themes and parts. This is not meant to be the definitive overview. As early as 1908, Schumpeter had shown that the starting point of any thought-driven economics had to be the unique decision-maker, the one-off individual cost-benefiting a discrete and isolated choice: ‘‘In the description of certain economic processes one had better begin with the actions of individuals’’ (Schumpeter, 1908, p. 91). His methodological reductionism, his self-conscious atomism not only looks backward to Menger’s subjectivist catallactics, but also looks forward to Hayek who mixed his methodological and normative individualism into a life-long campaign against statist serfdom. It is a theory of search. Heertje is adamant that it is not a theory of perfection: ‘‘Schumpeter remained far removed from the hypothesis that relates the analysis of social phenomena to the optimizing behaviour of individuals’’ (Heertje, p. 24). The emphasis is on the ‘‘optimizing.’’ Schumpeter, he seems to be saying, was a theorist of bounded search but not a votary of the global maximum. Heertje is intrigued by the fact that Schumpeter devoted only 10 pages to methodological individualism in his early book of 1908 and did not explicitly return to it again. Schumpeter in his Economic Development or in his Capitalism does not emphasize the uncompromising primacy of the Mengerian mind. Heertje says this is because the construct refers only to pure economics and that pure economics stops short at the flow of goods and services. He says that Schumpeter never intended that his logic should be used to explain the behavior of entrepreneurs, innovators, bureaucrats, or politicians: ‘‘His narrow interpretation of methodological individualism, in fact, blocked the analysis of the rich pattern of individuals acting in real life’’ (Heertje, p. 24). Heertje cannot be right. Buchanan has used the same factored-down goal setting to derive his prediction of entrepreneurial public choice: ‘‘The first and most critical presupposition that provides a foundation for any genuine democratic theory is that which locates sources of value exclusively in individuals’’ (Buchanan, 1986, p. 249). So, however, did Schumpeter, who defined democracy as a mandate secured explicitly ‘‘by means of a competitive struggle for the people’s vote’’ (Schumpeter, 1976, p. 269). Methodological individualism in Schumpeter’s thought is all about. It must be, since without the subjective and the reflective there would be no other way of understanding why our fellow individuals do what they do. If Heertje is correct, then technological innovation in Schumpeter’s economics is under-determined. Like Marx, Schumpeter thinks that capitalism is characterized by a never-ending revolution in the methods of

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production. Unlike Marx, however, he does not explain change in terms of objective variables such as the lifespan of capital, the falling rate of profit, the substitution of capital for labor and the imbalance between saving and spending. Schumpeter has only one theoretical tool, that of methodological individualism, that would enable him to account for the adoption of new innovations and novel combinations. This is the tool that he must use. Progress is process and process is people. Schumpeter explained the social dynamic in terms of endogenous changes that originate in forward-looking imaginings. His psychological economics recalls Weber on Verstehen, Pareto on residues and even Freud on the mind as the bedrock explicandum. An example from the economics of production would be cycles triggered-off by discontinuities, cumulative initiatives magnified through the herd instinct, the antiquated and the obsolescent pushed into the history books by the trend-setter’s courageous determination to swim against the tide. An example from the sociology of social movements would be the alienated intellectuals, marginalized and underemployed, who see the new business civilization through the prism of their own status anxieties. Whether the bursts and swarms of the gain-seeking new arrivals or the hostility and discontentment of the coffee-house estate, the explanation cannot be sought in objective parameters that are ‘‘mere clotheslines on which to hang propositions’’ but rather in perceptions and sensations that make lifeless aggregates into ‘‘living and fighting entities’’ (Schumpeter, 1954, p. 886). Evolution begins with the individuals who make up the system. Action can only come from an action approach that starts with the agent who makes the choice. Heertje seems to accept the need for decomposition when he homes on Schumpeter’s ‘‘new combinations.’’ Here at least he seems to say that it is the individual entrepreneur with his idiosyncratic characteristics who acts as the catalyst that brings the new production function into being: ‘‘In this sense Schumpeter belongs to the Austrian School’’ (Heertje, p. 101). Marxians would object that this is psychological reductionism, free-floating idealism holding itself up by its own bootstraps. Keynesians would say that Schumpeter on technological advance is a long-run without any understanding of the short-run demand deficiency. Schumpeter’s reply would be that things are what they are. Changes spaced through cycles result from restlessness and enterprise. Statistics confirms the Austrianism. Bright ideas become new departures because inspired adventurers choose to break with the norm. The bottleneck is the practical application of novelty. It is not the new idea per se. Invention in Schumpeter’s thought is not problematic: there is

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always a pool of new opportunities on hand. Some opportunities are material breakthroughs: these would be the test-tubing of a new product or the blueprint for a new manufactured input. Other opportunities are more like hidden treasures that are only waiting to be found: examples are the opening up of a new market, the recourse to new supplies of raw materials, the reorganization of a market because oligopoly pays better than do the multiple and the small (Schumpeter, 1976, p. 83). The distinction between science and its application is by no means clear. In Heertje’s words: ‘‘Schumpeter makes an excessively sharp distinction between innovations and inventions’’ (Heertje, p. 100). Schumpeter fails to provide any real account of where invention takes place or of why the inventor does what he does. Treating invention as a veiled exogeneity, a serendipitous accident, he is better placed to draw his radical distinction between newness and its conversion into an economic tradeable than he would have been if he had recognized that the causality is two-way, mutually reinforcing. An initial invention, once it has become an innovation, will lead in turn to cost-saving improvements. A new product, once it has tapped into a latent demand, will make it easier to obtain funding for the next step along the road. Heertje criticizes Schumpeter for neglecting the complementarities, the endogeneities and the non facit saltum. He also knows there would be no Schumpeterian theory of the cycle left if Schumpeter had to admit that ‘‘development occurs not so much in bursts as in a continuous stream of new technical possibilities and innovations’’ (Heertje, p. 100). Schumpeter’s theory is an evolutionary one. Like Marx, he predicts an unstoppable transition from the owner-operated family business to the concentrated, centralized corporation that socializes its technological breakthroughs in the hands of its bureaucracy: ‘‘Value judgments about capitalist performance are of little interest. For mankind is not free to choose’’ (Schumpeter, 1976, p. 129). Iron cage or no iron cage, however, what is clear to Schumpeter is that the upgrading and the advance will carry on very much as before. The capitalism of the small profit-seeker ‘‘not only never is but never can be stationary’’ (Schumpeter, 1976, p. 82). The socialism of the salaried and the pigeonholed need not mean the end of the road. Schumpeter sees no reason why the large organization should not be in a position to push back the frontiers of science. Simply, the large corporation will entrust its new production functions to trained researchers and developers who do not receive the residual surplus: ‘‘Technological progress is increasingly becoming the business of teams of trained specialists’’

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(Schumpeter, 1976, p. 132). Personality and willpower count less here. Routine and automaticity call the shots: ‘‘Bureau and committee work tends to replace individual action’’ (Schumpeter, 1976, p. 133). It need not mean that sluggishness and stagnation will put out the flames. It is just as likely to mean the opposite. As far as Schumpeter is concerned, the outcome might be even more development of products and an even higher standard of living than before: ‘‘The trail leads not to the doors of those firms that work under conditions of comparatively free competition but precisely to the doors of the large concernsy. Big business may have had more to do with creating that standard of life than with keeping it down’’ (Schumpeter, 1976, p. 82). Monopolies and monoliths can be the harbingers of new things. If Schumpeter can be accused of trivializing the difference between capitalism and socialism, then the defence of his position would be that innovation need not wither away merely because the cogs in the hierarchy inherit the functions previously performed by the captains of industry. The team innovates. The team becomes the high-powered combustion engine that takes over from the horse-drawn owner–entrepreneur. The description is there. The analysis is not. Heertje is right to say that there is no convincing explanation of why it is that the salary-earner should be so determined to break the mold that stamps out his own tenure and status in his job: ‘‘It is impossible to see in Schumpeter’s ideas a theory of economic development’’ (Heertje, p. 18). Methodological individualism could perhaps be mobilized to fill the gap. In favor of innovation would be the love of science and the thrill of the game. In favor of stagnation would be the fear of taking chances and the comfortable cosseting of the done thing. Schumpeter does not use his own theoretical tool to model R&D in the large organization. It is a wasted opportunity. Schumpeter seems to be on the point of saying where invention and innovation actually come from. Then he retreats from the reasons into the proof. Would you expect to buy a state-of-the-art computer or a clot-busting new anticoagulant from a perfect competitor who rustles them up in his shed? Big is beautiful when it is the anecdote that decides. Heertje is right to press the point that Schumpeter never really proves that evolution will decisively crowd the small firm out: ‘‘Schumpeter neglected the dynamic power in the emergence of new, small firms in the economy’’ (Heertje, p. 115). Outsourcing and buying-in make it possible for entrants and interlopers to reap economies of small scale. It is the personal touch and not the mass market that ensures repeat business in service sectors like restaurants and hairdressing. Even in manufacturing, moreover, Schumpeter, like Galbraith later on, may have been too quick to declare that new people

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with new ideas are no match for centralized laboratories and long production-runs. Schumpeter himself tends to explain breakthroughs in terms of the deus ex machina, of ‘‘the pioneering property and creative act of a few who are in this respect gifted by Nature or God’’ (Heertje, p. 39). Following Schumpeter’s own logic, Heertje reasons, it would make sense to say that alertness to ‘‘marketable applicationsy. is still an individualistic characteristic’’ (Heertje, p. 35). It is manna from Heaven. It lies where it falls. It lies in small firms as well as in the giants: ‘‘I can only express regret that Schumpeter did not stick to his original idea of considering the settingup of new firms as an important vehicle for innovations’’ (Heertje, p. 91). Profit-seeking can give ordinary people what they want. It is the ultimate antidote to ossification and inertia. The pursuit of private gain allows a competitive and decentralized economy to grind out a socially acceptable solution that both satisfies the wants of the consumers and strengthens the market position of the suppliers who second-guess the effective demand. Heertje, giving his own opinion, shows that he is more in sympathy with the invisible hand of Adam Smith than he is with Schumpeter’s unhappy dystopia that could dress us all in gray: ‘‘There is no attractive alternative, and therefore an upswing instead of a decay of capitalism is a better bet for the future’’ (Heertje, p. 37). So strong on the dynamics of capitalism, Schumpeter showed no interest in the dynamics of the multiple socialisms that might not after all represent the end of Hegel’s history. It is a curious omission in the worldview of an evolutionary economist. The Berlin Wall will not last forever. Mrs. Thatcher is on the way. One consequence might be that capitalism goes up in people’s estimation once it is seen that private enterprise is the better means to the end: ‘‘In predicting the decay of capitalism, Schumpeter was wrong and will remain wrong’’ (Heertje, p. 39–40). Modern societies are not becoming universally hostile to business. The intellectuals are not increasingly on the extreme left. Centrally planned socialism has not shown itself to be flexible, adaptable, or accountable. Stiglitz, just after the historic year of 1989, put into words what everyone seemed to be thinking: ‘‘Socialism as an economic doctrine is now dead’’ (Stiglitz, 1994, p. 57). The collapse of the Soviet Gosplan might, of course, prove only a temporary reverse in the inevitable march into statism and rationality. It is not very likely. How could Schumpeter have got things so wrong? Progress as process works against the giant structures: ‘‘The market as an institution is no longer under these circumstances a mechanism for the allocation of resources, but a device for the discovery of new methods of production and new products, which satisfy new wants’’ (Heertje, p. 46).

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Heertje is criticizing Schumpeter for having put his Barone and his Lange above his Hayek and his Mises. Each individual has access to bits of information. Only the market can put the pieces together. The supplier cannot know what consumers will make of his new innovation; or whether a new product will really pay off; or how quickly current and potential rivals will react to a price-change or mimic a breakthrough. Ex post all will be revealed. Ex ante businesses can only experiment and pray. Methodological individualism tracks the personal aspirations and the imagined scenarios. It is not very satisfying when the speculation collapses and the debts are called in. It is, however, the only game in town. Economists have to get inside the mind of the unique agents. They have to think as millions of atoms think. Mathematical models are more appealing when the first-years demand the whole truth in bullet-point presentation. Grand Theory has the great attraction that it quantifies the unforeseeable down to the third decimal place. Reality, however, lets the economists down. Each of us, nowadays, is condemned to be his own entrepreneur. Uncertainty is all that we know for sure. Schumpeter’s individualism is in the circumstances a better tool than Schumpeter’s Plan.

GALBRAITHIAN ECONOMICS The title of the book picks up the continuity of the theme: Innovation, Evolution and Economic Change: New Ideas in the Tradition of Galbraith. In this collection of 16 essays, Blandine Laperche, James K. Galbraith, and Dimitri Uzunidis have assembled the papers presented at a conference in Paris in 2004. Published in the year of his death, the book should be read as a tribute to one of the most stimulating and original of twentieth-century economists. The subject is advanced technology, the hierarchy of committees, the institutionalization of charisma and the transformation of economic systems. Galbraith, like Schumpeter, predicted that never-ceasing innovation would more and more be centralized in giant organizations run by salaried executives: ‘‘Power in the modern great corporation belongs to the management’’ (Galbraith, 2004, p. 58). The old-style owner-operator of the libertarian textbook is ceding the business high ground to a new vanguard of well-educated specialists who work together in balanced teams. The scientists, the economists, the marketing experts, the political lobbyists sink their differences into the long-lasting synthesis of the ‘‘group personality’’ (Galbraith, 1969a, p. 69). The technostructure that results is a sui generis,

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a whole far greater than the sum of its parts: ‘‘With the rise of the modern corporationy. the entrepreneur no longer exists as an individual persony. Organized intelligence is the decisive factor of production’’ (Galbraith, 1969a, p. 79). Enterprise does not vanish but it becomes embedded in structure. Individuals are replaceable. Corporations go on and on. The economic system performs better as a result. The Smithian, Marxian capitalist has traditionally been modeled as a single-minded maximizer of profit. Situating himself in the tradition of Berle and Means, of James Burnham, of behavioral economists like March and Simon, of theorists of the corporate culture like Penrose and Marris, Galbraith has preferred to treat the firm not as a boring black box but a matrix of interactions between self-aware virtuosi who put goals of their own above the profits that are the organization person’s free gift to faceless, anonymous shareholders who barely know the name of their company. Control has become separate from ownership. The new objectives that are pursued by the corporate decision-makers are the goals that one would expect from people who take pride in their technical prowess and do not want to leave their future to chance. These include technical virtuosity, personal responsibility, corporate growth, personal security, the autonomy of the team and the remuneration (despite their acknowledged identification with and adaptation to the business) of the members of its senior staff. Profits are not maximized. Instead the technocrats and the bureaucrats use their stranglehold on instrumental rationality to push through an expensive new laboratory and unwarranted product obsolescence. The goals of the business vanguard, as was predicted by the classical Marxians, then become the goals of society. This Galbraith terms the ‘‘Principle of Consistency.’’ R&D is expensive. Cost of production is high. Gestation periods are long. Innovation would simply not be possible without the ability to ‘‘plan.’’ Economic systems are not bipolar but convergent. The zero-sum face-off was always a Cold War myth that the technocrats and the bureaucrats inflated into the politics of fear in order to secure generous funding for what President Eisenhower termed the ‘‘military–industrial complex’’: ‘‘So the reality. In war command as in peace, the public becomes the private sectory. Management having full authority in the modern great corporation, it was natural that it would extend its role to politics and to government’’ (Galbraith, 2004, pp. 35–37). The goals are symbiotic, the bureaucracies interdependent. State creates jobs and markets for private. Private becomes an extension of State. Patriotism lends a veneer of legitimacy to a transcendence of laissez-faire that would never have been accepted had public spending been devoted to public housing and not to

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military hardware: ‘‘War remains the decisive human failure’’ (Galbraith, 2004, p. 62). The Americans plan and the Russians plan. It is worth it in the end: ‘‘There would be no flights to the moon and not many to Los Angeles were market incentives relied upon to bring into existence the required vehicles’’ (Galbraith, 1969a, p. 357). The planned economy is not the dismal stationary state where nothing changes and nothing moves. It is not Marx’s capitalism that has a tendency to self-destruct. Instead it is the white heat of technology. It is problem-solving and challenge-seeking because that is what the boffins want. Planning means forecasting the future. More actively, it also means the shaping of history-to-come into the image that best serves the ends of the enterprise. Demand-led markets are superseded by the ‘‘revised sequence’’ of advertising and salesmanship that brainwashes and manipulates. The government becomes a built-in stabilizer through military spending, research grants, and Keynesian full-employment policies. The labor force is bought off through high wages and Marxian displacement. Vertical integration supplemented by long-term contracts ensures supplies of inputs and reliable retailing opportunities. Self-financing through ploughed-back profits keeps bankers, inspectors, and auditors out. Walrasian neo-classicals and first-year textbooks that focus disproportionately on impersonal perfect competition conceal the truth about the price-fixing and the quantity-fixing that is the sine qua non for innovation and advance. Producer sovereignty has taken the place of autonomous consumer choice. Power, familiar from politics, takes the place of the passive free enterpriser who to his credit or discredit never did anything new. Demand-led supply belongs to an earlier stage of economic evolution. Technological determinism has crowded Adam Smith out. Nowadays, it is size and dominance that pipe the tune and feed through into progress: ‘‘Size is the general servant of technology, not the special servant of profitsy. The enemy of the market is not ideology but the engineer’’ (Galbraith, 1969a, pp. 42, 43). The Galbraithian vision of free markets eclipsed, price signals manufactured is set out in numerous influential books and papers. The first of these was American Capitalism (1993), which in 1952 argued that powerful unions or mass retailing chains as a rule will cancel out the original power of concentrated capital across the market divide: ‘‘Power on one side of a market creates both the need for, and the prospect of reward to, the exercise of countervailing power from the other side’’ (Galbraith, 1993, p. 113). It was followed by The Affluent Society (1958) (which is about shoppers’ bamboozlement, social balance, public-sector poverty despite private-sector

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opulence), Economics and the Public Purpose (1975) (which contrasts the powerful ‘‘planning system’’ with the price-taking small firm to show that competition need not mean progress) and, most important of all, The New Industrial State (1969a) – always intended by Galbraith to be his own Principles of Political Economy. The contributors at the 2004 conference recognized that it was the great book on which they had to concentrate their attention. Broadly speaking, they were sympathetic. Not one paper was commissioned which would follow in the footsteps of Milton Friedman’s From Galbraith to Economic Freedom or Colin Clark’s The Horrible Proposals of Mr. Galbraith. The overall consensus of the converted invited to preach has the advantage of refining and adapting the Galbraithian system in order to bring the worldview up to date. It also has the disadvantage that the volume fails to probe beneath the surface in order to find out if the foundations are built on sand. The authors broadly agree that knowledge embedded in institutions has replaced capital, land or labor as the bottleneck factor of production. The Marxian property-owner and the libertarian consumer have both ceded their power to initiate to highly educated experts who sit together in cross-disciplinary committees. The system remains capitalist for all that. Bresser-Pereira, accepting that the system is qualitatively different, warns that post-Smithian economics should not too quickly be categorized as post-capitalist in the way that over-enthusiastic Schumpeterians are tempted to do: ‘‘Capitalism does not need necessarily to be capitalism of the bourgeoisie, it may well be capitalism of the professional or, more directly, knowledge capitalism’’ (Laperche et al., p. 20). The new industrial state is still the old industrial state in the sense that the Galbraithian ‘‘technobureaucrat,’’ despite the separation of legal ownership from de facto control, is nonetheless willing to take risks in order to turn a business profit. Plowing back is necessary if the growth objective is to be combined with that of autonomy. Besides that, corporate decision-makers are nowadays being lured by bonuses, stock-options, and performance-related pay not to leave the dividends and the capital gains forever on the back burner. Knowledge persons who can increase productivity command a premium in the labor market. Productivity has a payoff. Its payoff is profit. Science and capitalism need not mean different turnings at the crossroads. Pascal Petit continues the theme of post-Galbraithian managers who grub their money as predictably as old Gradgrind did. Petit suggests that it would be useful to disaggregate Galbraith’s technostructure into its component job-descriptions. While the research chemists might be devoted exclusively

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to research chemistry, it is likely that the finance officers responsible for cash flow and foreign exchange will be more in sympathy with the money-making imperative. The finance officers, Petit says, have become more influential and important in the giant corporations in the 40 years that have passed since The New Industrial State. Capitalism is a dynamic system. It may well have evolved beyond Galbraith’s contention that the balance sheet has been left behind by the thrill of the Schumpeterian ‘‘new combinations.’’ Even if capitalism is once again becoming cost-conscious that need not mean that the profit-recipients will take home the difference. Petit is concerned that managerial remuneration seems today to be seriously out of step with company sales and earnings. Galbraith would say that this is only to be expected now that authority has been separated from ownership: ‘‘Corporate power lies with management – a bureaucracy in control of its task and its compensation’’ (Galbraith, 2004, p. 31). Many shareholders, many of them small shareholders, feel that they have been deceived by the irresponsible and the predatory. They would agree with Galbraith that paid bailiffs might be proving poor stewards of the master’s estate. It is a theme to which Galbraith returned in The Economics of Innocent Fraud (2004). In that book, his last, he writes of incomplete disclosure, creative accountancy, conflict of interest, withholding of information, deliberate overstatement, narrow-minded self-enrichment, ‘‘managerial misappropriation,’’ ‘‘socially undesirable behavior,’’ ‘‘devious actions’’ (Galbraith, 2004, pp. 50, 51). Yet he also accepts that Weberian bureaucrats cannot realistically be seen as modern-day robber barons who have things all their own away. External audit helps the owners to safeguard their entitlement. Detailed financial statements force the executives to table the bottom line for uninhibited scrutiny. And there is something else that has reduced the ability of top executives to pay themselves telephone-number salaries or to demand share options that water the value of the stock. Blandine Laperche argues that financial market deregulation and pooled savings schemes have boosted the profile and power of institutional investors such as pension funds and insurance companies – investors, in short, who have a duty of care on their own account to secure the best-possible returns for their account-holders and their stakeholders. The new transparency and the new portfolio elite, Laperche writes, ‘‘seem to ring the death knell of the technostructure while announcing the shareholder’s return at the controls of the firm’’ (Laperche et al., p. 157). Galbraith’s ‘‘euthanasia’’ of the ‘‘ceremonial,’’ the ‘‘obsolete,’’ and the ‘‘functionless’’ may have been prematurely announced. It is countervailing power all over again. One technostructure countervails the

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power of another. Both technostructures find it more difficult to deviate in public from the narrow aim of profit. Yet ‘‘quiet larceny’’ and even ‘‘outright theft’’ (Galbraith, 2004, p. 50) do occur. The fraudulent and the corrupt somehow slip through the regulatory net. The small owner-operator can only cheat himself: over-socialization into the textbook myopia is an important reason why economists have neglected the extent to which the principal–agent relationship can fall short of the property-owner’s reasonable expectations. Noncompetitive corporations with numerous small shareholders are more exposed to the substandard dividends, the unwelcome risks and the under-valued capital that is likely to be the rule in a Galbraith-type corporation where only the in-crowd has full access to the relevant parameters. Information asymmetry is at once the unequal access to facts and the unequal ability to process sector-specific information. The outcome of the imbalance is anti-social entrepreneurial activity. The alertness of the criminal and the initiative of the trickster are difficult to reconcile with Schumpeter’s eulogy of the creative, audacious frontiersman who extends the production possibilities. Abuse of power is possible where the transaction costs of policing are high, scrutiny is limited and legal sanctions only penalize the exceptionally unlucky. The slippage may be a fact of life. As Dietrich and Sharma write, ‘‘It is by no means obvious how simple information provision can remove the information asymmetry upon which corruption relies’’ (Laperche et al., p. 167). Barings was brought down by a single venal trader who was inadequately supervised. Enron created separate financial structures to hide its embarrassing liabilities. Parmalat falsified its accounts and used forged documents. Shell overstated its proven reserves of oil and gas. Perhaps identification and adaptation nowadays mean that the Galbraithian technocrat is putting the club goals of his team above the personal rake-off that he privately takes home in untraceable notes. Even if the malversation is explicitly intended to protect the whole, the fact remains that scandal after scandal has revealed that the shareholders have been treated like beggars and supplicants who must go to the end of the queue. The integrity of corporate governance has been called into question by a managed market that no longer disciplines the avaricious. The Schumpeterian mold-breaker has been cut down to size by the Galbraithian committee that relies on interchangeable parts to scale heights that once were the preserve of the inspired genius. The vision that emerges is of a post-competitive, post-individualistic business environment in which the capitalist, the consumer and even the technocrat himself must all cede their primacy to the organizational chart which alone seems to have the power to get things

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done. It is, as Sophie Boutillier indicates, rather a spiritless new world: ‘‘The entrepreneur has not disappeared, but he is no longer a heroy. He has become a socialized entrepreneur, an entrepreneur who is a player in the economy made up of the planning decisions made by big firms which, even if networked, nevertheless are powerful bureaucracies’’ (Laperche et al., p. 68). Small firms survive: Galbraith sees them as supplying about half the value added in the domestic private sector (Galbraith, 1975, p. 59). Lacking a skilled technostructure, long-production runs, economies of scale, the ability to plan, they are an economic embarrassment that is nowadays a footnote and even an anachronism: ‘‘The continued political and social celebration of small business and of family agriculture is a mildly innocent form of fraud. Tradition, romance; not the reality’’ (Galbraith, 2004, p. 25). Schumpeter’s 1912 (1934), Galbraith is convinced, has given way to Schumpeter’s 1942 (1976). The transition is irreversible: ‘‘Individuals still have ideas. But – with rare exceptions – only organizations can bring ideas into use’’ (Galbraith, 1975, p. 62). It is by no means certain that he was right: ‘‘The vast majority of job creating companies are fast-growing start-ups (or gazelles), independent of the technostructurey. especially with the downsizing of large corporations through the 1990s’’ (Laperche et al., pp. 216–217). New ideas still come from visionaries and adventurers. Courvisanos, like many others, believes that recent changes in business practice have given the small firm a post-Galbraithian second chance. Thus sequential networks can be an alternative to vertical integration: an illustration would be screen-toscreen interaction in global financial markets where the participants in a virtual community return repeatedly to the same unseen partners that they have learned to trust (Cetina & Bruegger, 2002). De-mergers can be a reaffirmation of made-to-measure. The electronic super-highway can bring into being new opportunities for nimble David to complement or even supplement the clumsy Goliath. Management buyouts, the selling off of the conglomerate periphery, the concentration of the focus on the core comparative advantage – all are reasons for thinking that Galbraith might be overstating the case for scale and scope when he declares repeatedly that the firm must be ‘‘large enough to carry the large capital commitments of modern technology,’’ ‘‘large enough to control its markets’: ‘‘There is no clear upper limit to the desirable size’’ (Galbraith, 1969a, p. 85). Large tasks ‘‘require large organizations’’ (Galbraith, 1977, p. 277). That is how it is. Coase draws attention to the internal slippage that must always be a constraint on the growth of the firm: ‘‘A firm will tend to expand until the costs of organizing an extra transaction within the firm become equal to the costs of carrying out the same transaction by means of an exchange on

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the open market or the costs of organizing in another firm’’ (Coase, 1988, p. 44). Galbraith recognizes no such slippage. Nor does he envisage the possibility that ruts, rules of thumb and established precedents might make the obese and the superannuated somehow sleepy and slow. There is no reason to think that the conditioned reflexes of Michael Polanyi’s bicycle rider – ‘‘We can know more than we can tell’’ (Polanyi, 1967, p. 4) – make the best use of the opportunity-set or that path dependence embedding tacit knowledge delivers economies rather than diseconomies of code. Galbraith describes corporate capitalism as ‘‘a hierarchy of committees,’’ as ‘‘the exchange and testing of information y by word of mouth – a discussion in an office, at lunch or over the telephone’’ (Galbraith, 1969a, p. 72). It has the feel of internal slippage congratulating itself for replicating a second-best routine. It has the feel of boarding school boys meeting up for squash at the Reform Club or playing a nice round of golf. It does not have the feel of the optimum, the maximum or the public interest. Schumpeter 1942 (1976) might not really hold all the good cards. Galbraith may be too quick to write-off the profit motive, the owner– entrepreneur, the spur of rivalry. He is certainly too quick to write off the thick veil of uncertainty which reduces even the technocrat’s plan to the status of a pious hope. In juxtaposing the trendsetters to the also-rans, he has overestimated the ability of the large organization to mold and shape its business future in its own desired image. Galbraith writes: ‘‘Planningy. consists of replacing prices and the market as the mechanism for determining what will be producedy. and consumed and at what price’’ (Galbraith, 1969a, p. 35). He cannot seriously have wanted his euthanasia of the demand curve to be taken at face value. Has there ever been a firm in the history of the world that has succeeded in making prices and quantities into any number that it plucked out of the air? Even in Galbraith’s ‘‘planning system,’’ business targets will always be at the mercy of exogenous shocks like wars, terrorists, financial crises, oil cartels. There will always be under-cutters and over-producers who sooner or later will refuse to plan cooperatively for mutually compatible market share. Innovation cannot take place without risk. Small firm or large firm, the invisible hand is volatility and wonder. The economy is not a monastery. It is never a quiet life. Galbraith writes as if the first movers in an industry are in a position to draw up the drawbridge behind them: ‘‘In an established industry, where the scale of production is considerable, there is no such thing as freedom of entry. On the contrary, time and circumstances continue to bar the effective entry of new firms’’ (Galbraith, 1993, p. 35). Even if it were true, however, that outsiders must stay forever out, even if it were true that amicable

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insiders will never cheat, undersell or elbow aside, still there is another threat to the big firm. Galbraith expressly rejects the life-cycle model of the economic organism as no more than ‘‘a pleasant but far-fetched fiction’’: ‘‘The present generation of Americans, if it survives, will buy its steel, copper, brass, automobiles, tires, soap, shortening, breakfast food, bacon, cigarettes, whiskey, cash registers and caskets from one or another of the handful of firms that now supply these staples’’ (Galbraith, 1993, p. 36). The first-mover advantage to him seems to be a synonym for the fountain of youth. His big businesses never put knee-jerk before fresh-faced alertness, remembered heuristics before calculative rationality. His big businesses never get out of touch. Marshall’s biological analogy of the trees of the forest suggests a sharply contrasting image. The tallest trees, Marshall writes, ‘‘gradually lose vitality; and one after another they give place to others, which, though of less material strength, have on their side the vigour of youth’’ (Marshall, 1949, p. 263). Old soldiers fade away: ‘‘In almost every trade there is a constant rise and fall of large businesses’’ (Marshall, 1949, p. 264). New clogs come up: ‘‘Small businesses are on the whole the best educators of the initiative and versatility, which are the chief sources of industrial progress’’ (Marshall, 1923, p. 249). It is a different window on the world. Inter-organizational communication reduces the premium on intraorganizational know-what and local knowledge. Organized intelligence need not be domiciled in a one-business technostructure: ‘‘It is based on cognitive proximity and not only on organizational proximity and spatial proximityy. The construction of cognitive proximity can offset a low level of organizational proximity’’ (Laperche et al., p. 128). Marshallian ‘‘industrial atmospheres’’ (Marshall, 1923, p. 284) like Solingen, Sheffield, Paternoster Square, or Silicon Valley need no longer be a place on the map once information is, literally so, ‘‘in the air.’’ Confronted with the evidence on the independent laboratories, the worldwide outsourcing, the international division of tastes, the buying-in of marketing, printing and catering because in-house production costs over the odds, the reader wonders if Galbraith is really right to treat the small provider as a dodo who enjoyed his floreat when Adam Smith was a lad. Yet one cannot be sure. Blandine Laperche writes as follows about the adverse effect that neo-liberalism and world free trade can have on the small manufacturer, the low paid and the disposable: ‘‘Far from making the big firm weaker, global competition, with the assistance of market liberalization and deregulation policies, has made it possible for the big firm to extend its power worldwide’’ (Laperche et al., p. 153). Not only is economics about

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power, it is about power at the transnational, supranational level. The small firm might be suffocated. It might not be given a new lease of life. The rustbelt stiff might have to accept a wage cut. He might have to forego a strike. His job might otherwise be outsourced to a far-away country where the locals are willing to work for less. The rust-belt stiff is not in any case a major player in the Galbraithian drama. Galbraith describes Marx as ‘‘the most original and imaginative economist, one of the most erudite political philosophers of this age’’ (Galbraith, 1977, p. 107). What he admires in Marx is more the historical determinism than the negation of the negation. Galbraith does not see the working class as misery conscious of its misery and resentful of its exclusion. He does not have a theory of surplus value, systemic injustice, the exploitation of the wage-slave so that the leisure class can pocket its dividends on the beach. Nor does he show much interest in workplace alienation, growing inequalities, labor pushed out by capital or Braverman-like deskilling that is the direct consequence of the Schumpeterian, Galbraithian industrial application of science. It is curious, despite Galbraith’s conviction that private property no longer determines the relations of production, that he says so little about worker-ownership, socialist cooperatives, or even public corporations along the lines of the specialized military contractors that, nominally private, in fact do almost all of their business with the State: ‘‘The big defense firms are really public firms and should be nationalized’’ (Galbraith, 1969b, p. 170). Marx’s workers are no more marginalized than are Marx’s capitalists in the Galbraithian corporate economy that has evolved beyond the profitmaximum motive. If there are to be gravediggers in the new industrial system, then they will come not from the blue-collar proletariat and the trade union movement but from the universities where intellectuals demystify commodification and students reject business degrees because an MBA is dull. Ideas are stronger than events in Galbraith’s theory of reform. The educational and scientific estate, underrepresented in Galbraith’s later work and hardly mentioned at all in this collection, is the sole source of resistance to the dominance of the technostructure that is today the new ruling class. Liodakis is not convinced that Galbraith any more than Schumpeter has got it right: ‘‘Methodological individualism could not possibly offer an adequate explanation of social change. For the contemporary, increasingly exploitative and repressive society, such an explanation may rather be offered by a satisfactory analysis of class relations and contradictions’’ (Laperche et al., p. 197). Liodakis thinks that Galbraith has not captured

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the complexities of social conflict in an economic system still driven on by the need to accumulate and reproduce. Galbraith’s reforms, Liodakis would argue, will not be enough to neutralize the ideological and social tensions, which continue to be generated by the capital-labor dialectic. Innovation, Evolution and Economic Change is intended as a book of essays on technical change and economic structure. It is not a great summing up or overall appraisal of the whole of Galbraith’s work. Galbraith wrote in the tradition of the great systems-builders from Smith to Schumpeter who sought to show the relationships and the interdependencies between the parts of the economic and political order. Taking the theory of the firm out of its social context is rather like removing the heart from the body in order to watch it beat and pump in a better light. That is why there are still more chapters to be written on still more Galbraithian themes. The technostructure and the corporation do not begin to exhaust the richness of Galbraith’s far-ranging world-view. Galbraith says that the business interest need not be the public interest. It is a contention that must be taken seriously. Each of its many dimensions must be scrutinized carefully. This book begins the evaluation. Other books will have to go beyond technology and economic structure to amplify the debate. Thus there are sections in this book on defence spending but not on welfare as a mechanism for integrating and upgrading. Entrepreneurship is well-represented. Keynesian under-consumption, monetarist inflation, skills-mismatch unemployment, prices and incomes policies are not. The shareholders are in. The trade unions are out. Profits, dividends, and reinvestment are considered. Progressive taxation, budget deficits and wise leadership are obiter dictum. Petit rightly says that Galbraith’s perspective is ‘‘strongly American’’ (Laperche et al., p. 41). The authors, almost all European, nonetheless resist the temptation to bring out the differences between Galbraith’s American capitalism and the conventions and customs of Europe or Asia. Neo-classical economists fit all the tribes and all the nations into the same Procrustean bed. Institutional economists, pragmatic, relativist, and sceptical are more open to the infinite varieties in time and space. Galbraith’s attack on the neo-classical market is also an attack on American individualism, materialism, and conformity. It reads differently in cultures that are solidaristic, in economies where family networks still play an important part, in countries where there is a tradition of statism and paternalism even as there is a commitment to market automaticity and individual responsibility. The multinationals and the conglomerates are at the center of this book. The subsistence farmers in Ethiopia and the street

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dwellers of Calcutta are shunted into some entirely separate account of why poor people are poor. Globalization is seen top-down from the boardroom. The view is different when seen bottom-up from the favela. It is almost as if Galbraith is being treated as a supermarket. The economists take what they need to enrich their microeconomics. They leave behind the other commodities for other consumers with other tastes and preferences. It is not a weakness but strength for scholars to probe deeply into a single area of the human condition. Breadth, however, is what made Galbraith so unique and so perceptive. Galbraith was a creative and original thinker whose greatest contribution lay in his ability to see that the environment, the women’s movement, the ideological underpinnings of freedom and choice, the exclusion of underrepresented minorities, the ambiguities of restrictive practices legislation, the election of sensible social democrats like Stevenson and George McGovern, the exposure of the State Department’s conventional wisdom that saw the communists in Indo-China as ‘‘a dagger pointed at the heart of Kansas’’ (Galbraith, 1986, p. 47) were not different topics but different facets of a single diamond. This book is a collection of interesting essays, well researched, which show that Galbraith on the corporation follows in the footsteps of Schumpeter on the technological dynamic. It will one day be complemented by another book, which will show that, to Galbraith as to Schumpeter, the truth is the whole.

REFERENCES Buchanan, J. M. (1986). Liberty, market and state. Brighton: Wheatsheaf. Cetina, K. K., & Bruegger, U. (2002). Global microstructures: The virtual societies of financial markets. American Journal of Sociology, 107(4), 905–950. Coase, R. (1988). The nature of the firm. In: The firm, the market and the law (pp. 33–55). Chicago: University of Chicago Press. Galbraith, J. K. (1958). The affluent society. Boston: Houghton Mifflin. Galbraith, J. K. (1969a). The new industrial state. Harmondsworth: Penguin. Galbraith, J. K. (1969b). The big defense firms are really public firms and should be nationalized. The New York Times Magazine, 16 November. Galbraith, J. K. (1975). Economics and the public purpose. Harmondsworth: Penguin Books. Galbraith, J. K. (1977). The age of uncertainty. London: British Broadcasting Corporation. Galbraith, J. K. (1986). The St. Pierre syndrome. In: A view from the stands. Boston: Houghton Mifflin. Galbraith, J. K. (1993). American capitalism. New Brunswick: Transaction Books. Galbraith, J. K. (2004). The economics of innocent fraud: Truth for our time. Boston: Houghton Mifflin. Marshall, A. (1923). Industry and trade (4th ed.). London: Macmillan. Marshall, A. (1949). Principles of economics (8th ed.). London: Macmillan.

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Polanyi, M. (1967). The tacit dimension. London: Routledge and Kegan Paul. Schumpeter, J. A. (1908). Das wesen und der hauptinhalt der theoretischen nationalo¨konomie. Leipzig: Duncker und Humblot. Schumpeter, J. A. (1934). The theory of economic development. Cambridge: Harvard University Press. Schumpeter, J. A. (1954). History of economic analysis. London: George Allen and Unwin. Schumpeter, J. A. (1976). Capitalism, socialism and democracy (3rd ed.). London: George Allen and Unwin. Schumpeter, J. A. (1989), Preface to the Japanese edition of The theory of economic development. In: Clemence, R.V. (Ed.), Essays on entrepreneurs, innovations, business cycles, and the evolution of capitalism. Brunswick, NJ: Transaction Publishers. Stiglitz, J. E. (1994). Whither socialism? Cambridge: MIT Press.

Parker’s JOHN KENNETH GALBRAITH THE CONVENTIONAL WISDOM AND THE PRETENSE OF KNOWLEDGE Steven Horwitz A review essay of Richard Parker’s John Kenneth Galbraith: His Life, His Politics, and His Economics. Chicago: University of Chicago Press, 2005. 820 pp. ISBN 0226646777. 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 A Research Annual Research in the History of Economic Thought and Methodology, Volume 26-A, 255–262 Copyright r 2008 by Emerald Group Publishing Limited All rights of reproduction in any form reserved ISSN: 0743-4154/doi:10.1016/S0743-4154(08)26023-2

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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. For all of those strengths, the story that Parker tells suffers from being overly hagiographic, as one searches nearly in vain in over 660 pages of text to find a place where Parker thinks, even in retrospect, that Galbraith might have been wrong in his analyses of the discipline or of economic policy. Many of the chapters, which are largely chronological and organized around particular issues or periods, follow a similar pattern whereby Galbraith’s views are ultimately vindicated by events or a version of ‘‘if only those in power had listened to him’’ all of these bad things would not have happened. Given the utterly amazing quantity of work that Galbraith produced (and in Parker’s portrayal, he comes across very much as a man centrally devoted to his work, leaving the reader to wonder how he managed to keep a marriage and family together, and teach his courses, with all of his travel and writing), it is hard to believe that he pretty much got it all right for almost 70 years. Galbraith’s marriage of Veblen and Keynes has few defenders these days, and his brand of Keynesianism has largely fallen from grace, which makes it even more notable that Parker offers no real examples of Galbraith having been wrong. The reader innocent of economics would think that there has been no criticism of Galbraith that has actually been correct, as opposed to simply successful in carrying the day. The book’s most central flaw is that it never really confronts the not unreasonable proposition that Galbraith (and Keynes) might, at the end of the day, have been wrong – and perhaps wrong all along. In particular, making no attempt to interrogate Galbraith’s ideas leaves Parker grasping at straws in trying to explain how, nearing the end of his life, Galbraith’s ideas had themselves become the ‘‘conventional wisdom’’ against which a conservative and libertarian intellectual counter-revolution had arisen and succeeded. In the last few chapters, Parker (and Galbraith in his last decades) is reduced to explaining the revival of classical liberalism as the consequence of the wealthy creating think tanks to further their own interests and the rise of a mean-spirited new version of Social Darwinism among the upper classes, rather than grappling seriously with the intellectual ideas and arguments that underpinned it. In reading both Galbraith’s own words and Parker’s highly sympathetic treatment of them through my own Hayekian political economy, several themes related to Galbraith’s relationship to economics are worth addressing.

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In Parker’s rendering, before Keynes, the vast majority of economists accepted a model in which perfect competition (with its assumptions of a large number of small, fully informed competitors, none of whom have any influence over the market as a whole) and equilibrium theory, crystallized in Marshall, explained how real-world markets operated and justified the view that government should not interfere with their ability to reach equilibrium. Against this view, which Parker clearly believes was wrong and naı¨ ve, comes Keynes to explain why economies can end up in unemployment equilibria and other situations that defy the Marshallian model and provide theoretical support for a different role for government. Parker is right that those perfectly competitive models were problematic, but recognizing those problems does not, in itself, undermine the other arguments being made for unfettered markets outside of the narrow Marshallian tradition, e.g., the Austrians and fellow travelers such as Edwin Canaan and W. H. Hutt and others. Parker’s narrative of Galbraith as heroic outsider begins with the ‘‘bastardization’’ of Keynesianism in the hands of the neo-classical synthesis and the development of increasingly abstract mathematical economic models of the macroeconomy. Galbraith’s own views are depicted as the true path for the progressives on the left, as they set Keynes’ basic ideas in a broader context of political and social theory, and they, in particular, took the role of power seriously within economic analysis. Galbraith, and Parker by extension, saw in the increasing centrality of abstract mathematical modeling, a discipline that was losing its way and giving up its ability to use its insights for progressive ends, all in the name of adopting a mantle of ‘‘science’’ and ‘‘neutrality’’ for its increasingly irrelevant pronouncements. Galbraith was clearly most disappointed with so-called ‘‘military Keynesianism,’’ where government spending was used to stimulate the economy, but the spending was not for the social projects that Galbraith thought were possible and morally necessary in an ‘‘affluent society.’’ The degree to which the rise of monetarism and New Classical economics, and the general revival of classical liberal, pro-market thinking (and the rejection of Keynesianism), was infuriating to Galbraith can be understood as the awful twin trends of overly abstract models and a loss of the goals he saw as progressive coming to a socially destructive marriage. To the very end, Galbraith called for a less ‘‘technical’’ economics that was more aware of issues of politics, power, institutions, and the limits of human rationality. Parker, to his credit, notes that some of these concerns have re-entered the discipline in recent years through a variety of subdisciplines and Nobel laureates, but he does not point out that many of those contributions have come from thinkers who repudiated the political conclusions strongly associated with Galbraith.

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The absence of that observation is especially frustrating, because at no point in the text does Parker acknowledge that many in the classical liberal tradition who continued to write after Keynes were equally concerned with the scientistic trend in economics, but came to different conclusions about its source and likely implications than did Galbraith. As Galbraith himself was sometimes accused of, Parker makes no serious attempt to address the best ideas on ‘‘the other side.’’ For all the depth and nuance he provides for Galbraith’s ideas and those of his fellow travelers, his portrayal of the views Galbraith opposed mostly amount to caricatures, or, in the case of the classical liberal revival since the 1970s, the use of sneer quotes around ‘‘markets’’ or ‘‘free market’’ and an explicit analogy to the fundamentalism of the contemporaneous Moral Majority (p. 533). He does offer a brief synopsis of Friedman and Lucas’s technical contributions, but offers no attempt to understand in any depth Friedman’s more general political economy, nor is there any sustained discussion of Hayek, Mises, Buchanan, or Coase, for example.1 This is frustrating because one will look in vain in the work of any of those four for the sort of abstract mathematical modeling that bothered Galbraith so much. All four saw economics as situated in a broader transdisciplinary context and paid explicit attention to issues of politics, philosophy, and human knowledge in their work. And all argued that their preferred political systems would better forward human freedom and flourishing for all. One would think that if Galbraith and Parker were really concerned with the direction of the discipline in terms of method, as opposed to its backing away from the political programs that they both clearly support, either would have recognized fellow heterodox critics who shared their concerns. But nowhere in Galbraith do we find that, and nowhere in this biography does Parker give any indication that there was an alternative political economy to Galbraith’s out there, with serious arguments of its own. The existence of an alternative political economy that shared Galbraith’s concerns about the methodological direction of economics but rejected his political conclusions also undermines the running argument that the expansion of mathematical technique was in service of ‘‘conservative’’ ends. There were contemporaries of Galbraith who shared, and in some cases were even more radical about, his critique of the direction of the discipline from a pro-market perspective, and there were also plenty of ways in which new technique was used in service of anti-market goals. The market socialist combination of general equilibrium theory and modified central planning would be the most obvious, but many of the very models that Parker lauds

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(e.g., Harrod-Domar) came out of extensions of mathematical technique that were put in service of interventionist ends that Galbraith broadly shared. These two counter-examples suggest that Parker’s explicit and implicit potted history fails to appreciate the complexities of the period and opens the question of whether Galbriath’s concerns about increased formalization were about method per se or about the ends to which many using those methods were putting them. Another running theme of Parker’s treatment of Galbraith is that both believe deeply in the role that economists should play in providing expertise to those with political power and how the conclusions of economics can and should be used to control and/or manage market economies. A unifying theme of Galbraith’s work is that markets cannot and should not be left to themselves, and that informed, humane policies should be developed, with input from economists and other intellectuals and experts, to ensure that modern societies meet what Galbraith saw as the social needs that markets supposedly could not meet sufficiently well. Most of the work that Galbraith did as an ‘‘insider’’ in the policy world of the New Deal was to implement such schemes, and the role that he played as gadfly adviser to Kennedy and subsequent presidents was to chide them either for not exercising enough of such control and management or for doing so toward the wrong ends (e.g., Galbraith’s long, principled, and largely correct objections to an expanding defense budget and Vietnam specifically). Galbraith believed that problems such as poverty, lack of education, environmental degradation, and inequality could be solved by a proactive government guided by expert knowledge. This was certainly the vision of Camelot era, when Galbraith’s influence was arguably at its zenith, as Parker amply demonstrates. What is equally clear is that Galbraith was frustrated by the frequent inability or unwillingness of political leaders to follow his advice. Parker portrays that frustration as the story of the heroic outsider who was very often ‘‘right all along,’’ but who was often not listened to in time to head off impending disaster. Galbraith also seemed to believe that the failure of political leaders to adopt his policies was a matter of a lack of will on their part (often due to a political calculus about re-electability) or as a matter of misplaced priorities. When the failure was of more conservative presidents, especially Reagan and Bush in the 1980s and early 1990s, it was a result of their not caring at all about solving (or even denying the existence of) the problems he had identified as social needs not addressed by the market. Those close to his views lacked the will to carry them out, while those who disagreed with him on policy clearly did not care about the problems in question.2

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Nowhere in Galbraith’s work, nor in Parker’s analysis and evaluation of it, did either ever step back and ask whether what Galbraith wanted the government to do was possible. Saying that government ‘‘ought’’ to do X should imply that government is capable of doing X, otherwise the ‘‘ought’’ is meaningless. Galbraith never seemed to ask in a serious way whether there were structural features of the political process that made it difficult or impossible for it to execute the plans and programs he thought necessary. The rich irony here is that Parker’s book shows how Galbraith frequently railed against economists who thought their blackboard models of markets could be easily translated to the real economy, only to find out that realworld markets are not like the rarified models of theory. No doubt that is true, but Galbraith was just as guilty of assuming a ‘‘blackboard model’’ of the political process where experts, politicians, and bureaucrats could easily obtain the knowledge necessary to do what Galbraith and others recommended and where the institutional incentives were such that they would have reason to act as advised. All of that looks just as good on the blackboard as do the models of more pro-market economists that Galbraith criticized, and, as in the case of the latter, the institutional reality of the political process is more complex and messy. Similarly, for all of Galbraith’s criticisms of the rationality of consumers, as portrayed in neoclassical models, he still seemed to expect political actors to behave with a degree of rationality that he was not willing to grant consumers. This asymmetrical treatment of the market and the political process was at the heart of the public choice and Austrian criticisms of proposals like those of Galbraith. Recognition of that asymmetry and those criticisms appears nowhere in Parker’s treatment of Galbraith. That absence is not surprising, given that Parker offers very little sense that the revival of pro-market thinking since the 1970s is part of a serious intellectual movement, as opposed to a recycling of old ideas combined with naked self-interest. Thinkers such as Buchanan and Tullock and the other early founders of public choice, or Mises, Hayek, and Kirzner developing the Austrian critique of planning, or Coase, North, and the rest of the new institutionalists, not to mention numerous contributions from outside economics, were all part of an intellectual movement to resuscitate classical liberalism from the dustbin of history. Nowhere in Parker’s treatment is there a sense that by the 1970s, Galbraith’s own work had become part of the era’s ‘‘conventional wisdom’’ against which a younger generation of scholars was reacting with new ideas and explanations for observed economic phenomena. With the advent of stagflation in the late 1960s, the increasingly obvious failures of the Soviet-style model, and technological

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breakthroughs that were making competition more frustrated in highly regulated industries, the shortcomings of the then-conventional wisdom were hard to overlook. Parker’s largely uncritical treatment of Galbraith’s ideas prevents him from even asking the right questions about why both the discipline of economics and the actual economy moved toward markets when they did. The problem for most of Galbraith’s career was that he had what Hayek called a ‘‘pretense of knowledge’’ with respect to economic policy, which itself became the ‘‘conventional wisdom’’ against which later thinkers would rebel. Whatever his status in retrospect as a contributor to the scholarship of economics, Galbraith’s influence on the course of events in the 20th century is undeniable, and his role as a public intellectual is certainly one that more contemporary economists should aspire to. In his concluding chapter, Parker chides the discipline for having turned inward too far, but also sees signs of hope for a revival of broader thinking by economists and a renewal of true political economy. This, I would argue, is all to the good. However, Parker’s narrative of Galbraith’s access to power and all of the famous friends he made over his life sometimes drifts into a dreamy, namedropping worship of Camelot. He clearly remains nostalgic for a time when men like Galbraith could imagine themselves guiding the hands of wellintentioned politicians to ‘‘do the right things’’ as Galbraith and others saw them. Early on, Parker notes that many saw Galbraith the man as arrogant. Perhaps he was, but more relevantly for the history of economics, there was an intellectual hubris about Galbraith the economist that played itself out in his clear belief that he knew better what the American people needed than they did. It also played out in his unwillingness to treat seriously the best and brightest of those who saw the world differently. There is much to emulate in Galbraith’s life as a broad thinker and public intellectual and adviser to politicians, but this time around, we need to avoid the mistakes that those of Galbraith’s generation made. We need to substitute humility for hubris. What is very clear in Parker’s richly detailed and wide-ranging biography is that removing the rose-colored glasses with which economists look at markets might be a good thing, but it is negated if we simply put them back on again when we look at the political process. The role for the economist as public intellectual needs to become less like the engineer who imagines applying theory from the blackboard without a problem, and more like the prophet who warns of the consequences of acting out of hubris (Boettke & Horwitz, 2005). For all of his great intelligence, wit, and humanitarianism, Galbraith’s life is a cautionary tale about what can happen when economists overestimate the power of their

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own ideas and underestimate the complexities of turning those ideas into political reality.

NOTES 1. In the case of Hayek, it appears that Parker thinks The road to serfdom (1944), and his one article that directly responded to Galbraith, were the extent of Hayek’s relevant work. At one point, Parker quotes Keynes’s quip about Hayek that he was ‘‘an extraordinary example of how, starting with a mistake, a remorseless logician can end up in Bedlam.’’ Unfortunately, Parker says that Keynes made that claim about The road to serfdom, which not only is not true (it was in the context of Hayek’s monetary theory), but when I consulted the source Parker cited for that quote, an article on US foreign policy in The Economist in 2003, the source only says that Keynes’s quip was about ‘‘a book of Hayek’s’’ and does not provide a title. Apparently, Parker assumed, wrongly, that it was Serfdom. That is certainly sloppy scholarship, and perhaps a trivial detail in a long biography such as this one, but it is some evidence of his unwillingness to see that there was a serious classical, liberal tradition of scholarship that Galbraith was also ignoring. 2. Parker’s harsh words for revival of classical liberalism in the 1980s and 1990s suggests that he shares Galbraith’s view of the ‘‘pro-market’’ crowd as after their own self-interest, either individually or as a class, rather than their having a different vision of both how the world works and how to solve the real problems of the time.

REFERENCES Boettke, P. J., & Horwitz, S. G. (2005). The limits of economic expertise: Prophets, engineers, and the state in the history of development economics. In: S. G. Medema & P. Boettke (Eds), The role of government in the history of economic thought. History of Political Economy 37(Suppl.), 10–39. Hayek, F. A. (1944). The road to serfdom. London: Routledge.

Donald Stabile’s FORERUNNERS OF MODERN FINANCIAL ECONOMICS PRIOR KNOWLEDGE: FINANCIAL ECONOMICS BEFORE MARKOWITZ Neil T. Skaggs A review essay of Donald R. Stabile’s Forerunners of Modern Financial Economics: A Random Walk in the History of Economic Thought, 1900–1950. Cheltenham, UK: Edward Elgar, 2005. viiiþ173 pp. ISBN 1845421019. 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. Of course, more technical sophistication is required to qualify as a ‘‘rocket scientist’’ today than was required two or three decades ago – or two or three centuries ago. But the lack of sheer mathematical wizardry, compared to A Research Annual Research in the History of Economic Thought and Methodology, Volume 26-A, 263–270 Copyright r 2008 by Emerald Group Publishing Limited All rights of reproduction in any form reserved ISSN: 0743-4154/doi:10.1016/S0743-4154(08)26024-4

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modern financial engineers, of such men as Blaise Pascal (1623–1662) or Thomas Bayes (1701/1702–1761) does not make their accomplishments less admirable. While lacking sophisticated techniques, they developed sophisticated concepts, acts of originality that supersede mere technical virtuosity. The statement that ‘‘assets yield a rate of return’’ is tautological, and the statement that ‘‘assets carry risk’’ is nearly so. Calculating the nominal yield of an asset practically free of default risk, such as British government consuls in the eighteenth and nineteenth centuries, was simple. Calculating the ex post return on an ordinary equity was, and remains, elementary. But projecting the return on equities has always been difficult. As Louis Bachelier recognized around 1900, security prices are unpredictable because buyers expect a price increase, while sellers expect a price decrease (p. 6). Lacking a concept of risk to which can be assigned probabilities of gain and loss, projecting the return on individual equities – much less on a portfolio of equities – is impossible. But in ‘‘The Theory of Speculation,’’ Bachelier provided such a concept of risk, arguing that the probability distribution of changes in security prices is governed by ‘‘the Gaussian law, already famous in the calculus of probabilities’’ (p. 6). In Bachelier’s paper, re-discovered decades later by L. J. Savage, lay the seeds that eventually would sprout into Harry Markowitz’s (1952) famous article. Of course, adding probabilities as measures of risk is not a straightforward project in itself. Probabilities can be regarded as existing in reality or as subject to revision as experience accrues. Pascal worked out the logic of probability by examining the probability of rolling particular numbers with a pair of perfectly balanced dice. He extended his theory to the concept of expected value in his famous wager regarding the reasonableness of belief in God: even a very small probability that God exists should lead rational beings to place their faith in God because of the infinite payoff if God does exist. There is no evidence, however, that Pascal’s concepts were adopted by traders buying and selling on the Paris Bourse (p. 16). Perhaps they thought more along the lines of Jacob Bernoulli (1654–1705), who argued that games of chance bear little similarity to social events, whose causes go far toward determining how people will react to them (p. 17). The differences of opinion regarding these two approaches still exist, as is evident in the continuing disagreements between frequentist and Bayesian statisticians. Donald Stabile, obviously a partisan of the Bayesian approach, turns this disagreement into one of the threads tying together his story of the development of modern financial economics. The historical twists and turns that led to the domination of the frequentist approach make illuminating reading.

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Probability theory was well advanced by the middle of the nineteenth century. Such luminaries as Pierre-Simon Laplace and Carl Friedrich Gauss had established the parameters of a number of probability distributions, including the normal distribution (p. 22). Laplace was an early advocate of Bayesian methods, arguing that ‘‘once the first toss [of a coin] was made, Bayesian methods would give evidence that the coin was biased’’ (p. 22). However, he also considered frequentist approaches valid under some circumstances. Karl Pearson’s The Grammar of Science (1892) furthered probabilistic pluralism, as well as stimulating the use of statistics in scientific analysis. Irving Fisher credited Pearson with stimulating him to utilize statistics in his study of financial economics. But Fisher was hardly the first well-known economist to apply statistics in this manner. William Stanley Jevons applied statistical analysis to the examination of business cycles in the 1870s, and Francis Y. Edgeworth attempted to integrate probability theory with utility theory in work undertaken in the 1880s and 1890s. Edgeworth also applied his statistical approach to the question of the optimal cash reserve a bank should hold against its deposits, formulating his famous square-root rule as the optimal solution. Interestingly, Edgeworth never applied his probability theory to investment decisions (p. 28); Irving Fisher was less reticent only a few years later. The battle between frequentist and Bayesian statisticians was joined and settled conclusively during a remarkably short time span. Warren Persons, (1919) whose research focused on business cycle analysis and forecasting, ‘‘took the view that statistics could be used in economics, but it was necessary to develop special tools’’ (pp. 28–29). Persons argued that the social scientist ‘‘must accept and analyze the mixed situation as it comes to him; gather pertinent statistics, not such as he would like, but such as are available; study figures which embody the combined effects of many factors; and express his conclusions in terms of probabilities.’’ All of this was contingent upon ‘‘a deep-seated belief in the continuity and orderliness of affairs’’ (quoted on p. 29). Persons had doubts about the existence of such continuity and orderliness. His doubts led him to advocate a Bayesian approach: The fundamental problem of practical statistics, in economics or in any other field, is the problem of ‘‘inverse probabilities.’’ This is the problem of estimating the accuracy of a sample, of judging the significance of a difference between two averages, or arriving at the constitution of an unknown ‘‘universe’’ on the basis of incomplete numerical data. A solution of the mathematical problem by Bayes was communicated to the Royal Society of Great Britain in 1763. (Persons, 1925, quoted in Stabile, p. 29)

Given the cogency of Persons’ argument and the extent to which such luminaries as Irving Fisher and Frank Knight appeared to agree with it, the

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rapid abandonment of the Bayesian approach in favor of the frequentist approach is rather remarkable. The key figures in the transformation appear to have been R. A. Fisher and Harold Hotelling. R. A. Fisher, seeking to ‘‘end the split in statistics that Bayes had introduced y used a complex mathematical operation to conclude that the Bayesian approach led to ambiguous results’’ (pp. 31–32). No details of Fisher’s approach are provided, and Stabile argues that Fisher’s results really only ‘‘clarified what was at stake by sharpening both sides’’ (p. 32). Yet frequentist statistics did rule the field thereafter, as Hotelling adopted and popularized R. A. Fisher’s approach and passed it along to his students, who included Milton Friedman and W. Allen Wallis. Friedman’s essay on methodological positivism taught economists not to worry about the realism of assumptions but rather to judge a theory by its ability to predict outcomes, an idea already put into practice by Trygvve Haavelmo. Others joining the bandwagon included Ragnar Frisch and Tjalling Koopmans. Stabile summarizes the approach thusly: In economics this method translated into seeing theory as the explanation (cause) of an event and economic data as the sample to gauge if the explanation was correct. With this approach, theory testing rather than theory building and modification became the main use of statistics in economicsy. Theory became a hypothesis to be tested rather than a working hypothesis to be modified as new data were introduced. (p. 35)

Stabile admits that he cannot provide a good explanation of why the economics profession shifted en masse to the frequentist approach. His purpose in discussing the triumph of frequentist statistics is to ‘‘establish a context for explaining why modern financial economics took a frequentist approach when Bayesian methods were equally appropriate’’ (p. 37). In short, modern financial economics took a frequentist approach because statistics had taken that approach in the 1930s. Why statistics took that approach is something of a mystery. Why Irving Fisher chose to analyze the stock market is not a mystery. Fisher’s earlier work on income and capital, The Nature of Capital and Income (1906) enabled him to clarify issues that still were not well understood in the 1920s. Fisher argued that capital is a fund of wealth, a stock, whereas income is the service derived from wealth. The value of capital is not determined by, or even necessarily closely related to, a corporation’s cost of physical capital. Book value could vary widely from market value, because a firm’s market value represents the present discounted value of an expected future income flow. Because future income is uncertain, so is the value of a corporation’s stock. The discount rate

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Fisher took to be the interest rate on a perpetuity (no example of which actually existed in the United States). Fisher was aware that the value of a stock is subject to rapid revision; ‘‘chance’’ is involved in estimating future income, and chance is subjective. This approach leads Stabile to label Fisher a Bayesian, an assessment that is bolstered by Fisher’s concept of a ‘‘coefficient of caution.’’ Irving Fisher was hardly alone in his assessment of stock prices. Such disparate figures as Thorstein Veblen and Frank Knight also distinguished – in fact, if not in so many words – between quantifiable risk and unquantifiable uncertainty. Fisher recognized the element of chance both in estimates of future income and in estimates of future interest rates. His statement of the latter problem is worth quoting: To attempt to formulate in mathematical language the complete laws determining the rate of interest under the sway of chance, would be like attempting to express the complete laws which determine the path of a projectile when affected by random gusts of wind. (Irving Fisher, 1907, p. 416, quoted in Stabile, p. 48)

Fisher’s attitudes on risk and uncertainty appear similar to the betterknown analysis produced a decade later by Frank Knight; similar, but not identical. Fidelity to the actual psychology of the situation requires, we must insist, recognition of these two separate exercises of judgment, the formation of an estimate and the estimation of its value. We must, therefore, disagree with Professor Irving Fisher’s contention that there is only one estimate, the subjective feeling of probability itself. Moreover, it appears that the original estimate may be a probability judgment. A man may act upon an estimate of the chance that his estimate of the chance of an event is a correct estimate. (Knight, 1921, p. 227, quoted in Stabile, p. 73)

Thorstein Veblen introduced yet another element of subjectivity into his analysis of asset valuation. The price of a stock reflects not only the firm’s tangible capital but also its intangible assets, which can also be expected to yield an income stream. This added a further element of fluidity to stock prices: Market values being a psychological outcome, it follows that pecuniary capital, an aggregate of market values, may vary in magnitude with a freedom which gives the whole an air of caprice. (Veblen, 1932, p. 311, quoted in Stabile, p. 57)

This was especially so, given the information asymmetries between insiders and outsiders. Those within a corporation enjoy a large informational advantage compared to those outside, and the insiders would not hesitate to benefit from their advantage: ‘‘Partial information, as well as

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misinformation sagaciously given out, will go far toward producing a favorable temporary discrepancy’’ in stock prices (Veblen, 1935, p. 156, quoted in Stabile, p. 60). Unlike Veblen, Irving Fisher actively promoted the purchase of common stocks by the public in the 1920s. Fisher argued that, relative to bonds, stocks provided an attractive investment during periods of inflation, such as had occurred since the turn of the century. The risk inherent in holding stocks could be reduced through proper diversification. Fisher became an advocate of investment trusts in the late 1920s (p. 84). In a peculiar twist, however, Fisher himself invested almost entirely in growth stocks – not that diversification would have prevented him from losing nearly everything in the great stock market collapse of 1929–1933. The stock market collapse awakened Fisher to the limits of diversification and to the danger of credit risk, especially when it turns into debt deflation. The fourth well-known economist woven into Stabile’s story is John Maynard Keynes, whose reputation for prowess as an investor is partly mythical, partly true. Like Knight, though in a somewhat different manner, Keynes differentiated between risk and probability and even broke probability into three types (p. 115). Despite holding a number of views consistent with the Bayesian approach, Keynes treated conventional knowledge as objective, causing Stabile to remove him from the Bayesian camp (p. 116). Keynes’s main contribution to the study of financial markets was his characterization of the market as a beauty contest. Of course, beauty is in the eye of the beholder. Thus, the key to winning in the market is not to select the stocks that appear most beautiful to you but to select the stocks that you believe others will find most beautiful. Keynes earned his riches in the 1930s by following another path: He stuck to stocks issued by companies about which he had a great deal of knowledge. In short, he was a value investor. Serious study of the behavior of the stock market began in the 1920s and accelerated in the 1930s. Alfred Cowles III began studying statistics after the stock market crash of 1929 and undertook extensive studies of the market on his own in the 1930s. He also formed the Cowles Commission for Research in Economics in 1932 and financed the publication of Econometrica in an effort to improve understanding of the market. An early target of Cowles’ investigations was technical analysis, ‘‘a way to read the market by focusing on events that stem from the market itself, which may influence short-term fluctuations of stock prices without regard to basic economic conditions’’ (p. 97). Even in the wake of the stock market’s collapse, technical analysis had its proponents (as it still does today). Cowles had

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already determined that stock-price changes appeared to be random before he evaluated how well a person following the prescriptions of the Dow Theory would have fared. William Peter Hamilton, the second editor of The Wall Street Journal (who died in 1929 – shortly after having used the Dow Theory to predict a bear market beginning in October 1929) wrote some 255 editorials forecasting the market during his 26 years as editor. Cowles scored these editorials as bullish, bearish, or doubtful, then investigated how well an investor following Hamilton’s advice would have fared.1 Cowles concluded that had an investor utilized the Dow method over this period, he would have realized an annual gain of 12 percent per year. Unfortunately for such an investor, passively holding the Dow Industrial Index over the same period would have produced an annual rate of return of 15.5 percent. Though Cowles’ analysis was later shown to be incorrect by Brown, Goetzmann, and Kumar (1998), they called Cowles’ work ‘‘a watershed study that led to the random walk hypothesis and thus played a key role in the development of the efficient market theory’’ (quoted in Stabile, p. 101). The first true financial economist to occupy an academic position was John Burr Williams. Trained in mathematics as an undergraduate, Williams worked as an investment analyst before returning to Harvard, where he earned his Ph.D. in economics. He wrote his dissertation on investment under the guidance of Joseph Schumpeter. In 1938, Williams published The Theory of Investment Value, a book which heavily influenced Harry Markowitz. Williams taught that the market had no ‘‘collective mind.’’ Rather, ‘‘marginal opinion’’ set prices; a small group of traders moved the market from day to day. Overall, he improved the theory of value analysis and laid much of the groundwork on which Markowitz built his model. Stabile tells an interesting story about the development of financial economics. If nothing else, it provides multiple confirmations of Alfred North Whitehead’s famous dictum: everything new has been said before by someone who did not discover it. Indeed. By bringing so many actors into the story, Stabile makes it somewhat difficult to discern who was really important in the development of financial economics and who simply had ideas that were consistent with its development. For example, I fully accept the fact that Frank Knight’s writings on risk versus probability were relevant to the development of financial theory, but I am not sure they were really important in its actual development. That said, erring on the side of inclusion was the right decision. The biggest problem with the book lies in its production. Put bluntly, whoever was assigned to copyedit the book should be reassigned to other duties immediately. I have never seen such a spate of spelling and

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grammatical errors, not to mention infelicitous wording, in any other book published by a company as well regarded as Edward Elgar. Putting that irritation aside, Forerunners of Modern Financial Economics is an interesting read.

NOTE 1. The details of Cowles’ approach can be found in Cowles (1933, pp. 314–316).

REFERENCES Brown, S. J., Goetzmann, W. N., & Kumar, A. (1998). The Dow theory: William Peter Hamilton’s record reconsidered. Journal of Finance, 53(4), 1311–1333. Cowles, A., III. (1933). Can stock market forecasters forecast? Econometrica, 1(3), 309–324. Fisher, I. N. (1906). The nature of capital and income. New York: Macmillan. Fisher, I. N. (1907). The rate of interest. New York: Macmillan. Knight, F. H. (1921). Risk, uncertainty and profit. Boston: Houghton Mifflin. Markowitz, H. M. (1952). Portfolio selection. Journal of Finance, 7(1), 77–91. Persons, W. M. (1919). Statistics and economic theory. Review of Economics and Statistics, 7(Supplement 1), 179–197. Veblen, T. (1932). The place of science in modern civilization and other essays. New York: The Viking Press. Veblen, T. (1935). The theory of business enterprise. New York: Charles Scribner and Sons.

NEW BOOKS RECEIVED Arena, Richard, & Festre, Agnes (Eds). Knowledge, Beliefs and Economics. Northampton, MA: Edward Elgar. ixþ278 pp. $125.00. Backhaus, Jurgen G. (Ed.) (2005). Entrepreneurship, Money, and Coordination: Hayek’s Theory of Cultural Evolution. Cheltenham, UK: Edward Elgar. viiþ199 pp. $130.00. Barnard, F. M. (2006). Reason and Self-Enactment in History and Politics: Themes and Voices of Modernity. Montreal: McGill-Queen’s University Press. xiiiþ271 pp. $80.00. Baumol, William, Robert E. Litan, & Carl J. Schramm (2007). Good Capitalism, Bad Capitalism, and the Economics of Growth and Prosperity. New Haven, CT: Yale University Press. xþ321 pp. $30. Brugi, Luigino, & Porta, Pier Luigi (Eds) (2007). Handbook on the Economics of Happiness. Cheltenham, UK: Edward Elgar. xxxviiþ596 pp. $255.00. Cartwright, Nancy (2007). Hunting Causes and Using Them: Approaches in Philosophy and Economics. New York: Cambridge University Press. 280 pp. $29.99. Cesarano, Filippo (2007). Monetary Theory and Bretton Woods: The Construction of an International Monetary Order. New York: Cambridge University Press. xiiiþ248 pp. $80.00. Cesarano, Filippo (2007). Monetary Theory in Retrospect. New York: Routledge. xiiiþ238 pp. $125.00. Clark, Samuel (1995). State and Status: The Rise of the State and Aristocratic Power in Western Europe. Montreal: McGill-Queen’s University Press. xiiiþ502 pp. $85.00. De Jong, Henry W., & William G. Shepherd (Eds) (2007). Pioneers of Industrial Organization: How the Economics of Competition and Monopoly Took Shape. Cheltenham, UK: Edward Elgar. xxxiiþ309 pp. $170.00. Dostalar, Gilles. Keynes and his Battles. Cheltenham, UK: Edward Elgar. 384 pp. $160.00. Findley, Ronald, Rolf G. H. Henriksson, Ha˚kan Lindgren, & Mats Lundahl (2006). Eli Heckscher, International Trade, and Economic History. Cambridge, MA: MIT Press. xiþ560 pp. $50.00. 271

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Foley, Duncan K. (2006). Adam’s Fallacy: A Guide to Economic Theology. Cambridge, MA: Harvard University Press. xviiþ209 pp. $25.95. Haakonssen, Knud (Ed.) (2006). The Cambridge Companion to Adam Smith. New York: Cambridge University Press. 423 pp. $70.00. Hatton, Timothy J., Kevin H. O’Rourke, & Alan M. Taylor (2007). The New Comparative Economic History. Cambridge, MA: MIT Press. xþ417 pp. $40.00. Hicks, Steven V., & Daniel E. Shannon (2007). The Challenges of Globalization: Rethinking Nature, Culture, and Freedom. Malden, MA: Blackwell. 270 pp. $39.95 (paper). Ioannides, Stavros, & Klaus Nielson (Eds) (2007). Economics and the Social Sciences: Boundaries, Interaction and Integration. Cheltenham, UK: Edward Elgar. viiþ302 pp. $120.00. Kornai, Ja´nos (2007). By Force of Thought: Irregular Memoirs of an Intellectual Journey. Cambridge, MA: MIT Press. xixþ461 pp. $40.00. Le Gall, Philippe (2007). History of Econometrics in France: From Nature to Models. London: Routledge. xxþ296 pp. $120.00. Lichtenstrein, Sarah, & Slovic, Paul (2006). The Construction of Preference. New York: Cambridge University Press. $95.00. McCraw, Thomas K. (2007). Prophet of Innovation: Joseph Schumpeter and Creative Destruction. Cambridge, MA: Belknap Press. xiþ719 pp. $35.00. O’Brien, D. P. (2007). History of Economic Thought as an Intellectual Discipline. Cheltenham, UK: Edward Elgar. xiiþ430 pp. $160.00. Parker, Richard (2005). John Kenneth Galbraith: His Life, His Politics, and His Economics. Chicago: University of Chicago Press. 820 pp. $22.50 (paper). Poitras, Geoffrey (2007). Pioneers of Financial Economics, Vol. 2: Twentieth Century Contributions. Cheltenham, UK: Edward Elgar. ixþ244 pp. $130.00. Schonhardt-Bailey, Cheryl (2006). From the Corn Laws to Free Trade: Interests, Ideas, and Institutions in Historical Perspective. Cambridge, MA: MIT Press. xiiiþ426 pp. $47.50. Shapin, Steven (1994). A Social History of Truth. Chicago, IL: University of Chicago Press. xxxiþ483 pp. $42.50. Shovlin, John (2006). The Political Economy of Virtue: Luxury, Patriotism, and the Origins of the French Revolution. Ithaca, NY: Cornell University Press. 265 pp. $24.95 (paper). Skousen, Mark (2007). The Big Three in Economics: Adam Smith, Karl Marx, and John Maynard Keynes. Armonk, NY: M. E. Sharpe. xiþ243 pp. $25.95.

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Stabile, Donald R. (2005). Forerunners of Modern Financial Economics: A Random Walk in the History of Economic Thought, 1900–1950. Cheltenham, UK: Edward Elgar. viiiþ173 pp. $100.00. Stabile, Donald R. (2007). Economics, Competition and Academia: An Intellectual History of Sophism versus Virtue. Cheltenham, UK: Edward Elgar. viiiþ148 pp. $70.00. Torre, Jose R. (2007). The Political Economy of Sentiment, Vol. 2: Paper Credit and the Scottish Enlightenment in Early Republic Boston, 1780–1820. London: Pickering & Chatto. xþ251 pp. $99.00. Van Overtveldt, Johan (2007). The Chicago School: How the University of Chicago Assembled the Thinkers Who Revolutionized Economics and Business. Chicago: Agate. 432 pp. $35.00. Woolhouse, Roger (2007). Locke: A Biography. New York: Cambridge University Press. 588 pp. $39.99.