A Research Annual: Volume 22 Part 1

The scientific correspondence between Harrod and Robertson was initiated by Harrod’s criticism of Robertson’s Banking Policy and the Price Level (1926).⁷ Harrod first wrote on 18 May 1926 (letter 2) raising at once the following “salient point”: Much of your argument depends on the view that justifiable expansions and contractions as defined by you are desirable. Why are they desirable? You give reasons on p. 22 why you think some instability in output desirable. But the reasons mentioned there (and I can’t find any others) don’t seem particularly directed to show that the special form of instability constituted by the so-called “justifiable” expansions and contractions is desirable. They seem to me to show that perhaps some instability, that, presumably, of less degree than we have been accustomed to in the past, is good, but by no means precisely how much is good. Thus, suppose the “hypothetical group member” or “the actual workman” of p. 19 were able to govern output according to their own self interest, there would still, according to the arguments of ch. 2, be some instability. Would not that be enough? Or if you want more, why stop at the “justifiable”? Why not have some of that due to “secondary” causes? It seems to me that you have been led away by purely aesthetic interests to identify that more moderate amount of instability which we really need (as shown on p. 22.) with that which we would get: (i) if secondary causes were removed; and (ii) if control of output stayed where it is now – in the hands of the entrepreneur. I don’t see how you can say to the banks more than “damp down fluctuation a bit, but leave some fluctuation, as that is healthful for the body economic”.He added two notes to his letter, in the first of which he commented upon the four proposed courses of policy outlined by Robertson on pp. 25–26 of his book. In the second note Harrod suggested that Robertson’s calculations in Appendix I to Ch. 5 of Banking Policy assumed the following behaviour of the public: (i) People do not allow for the effect of their withholding on the price level (this is reasonable). (ii) They are ignorant as the future course of inflation (or do nothing to meet it). (iii) On this basis they decide what withholding is necessary to restore H, decide that it would be too much effort to restore it at once, and…spread the restoration over K – 1 days. It so happens that by choosing K – 1 their 2 errors (or failures to take everything into account) cancel each other out, and they do effect the restoration in that time. If K or K – 2 had been chosen, this would not have been so.Harrod further argued that Robertson’s “so-called reasonable assumption of a restoration in K – 1 days is purely arbitrary,” and that “all this reasoning is rendered of doubtful value by the fact that we must suppose an alteration in view as to ‘the appropriate proportion between Real Hoarding and Real Income’ during the process of inflation. Not only will people not replenish H at once, but they may well voluntarily reduce it.”

Uncertainty was a lifetime preoccupation for J. M. Keynes. The notion of uncertainty features prominently in his economic writings and implicitly in his fellowship dissertation, A Treatise on Probability. A substantial interpretative literature has arisen on the nature of the conceptualisation of uncertainty and epistemic roots of Keynes’s discussion of the importance of expectations in the General Theory. Much of this literature has approached Keynes’s discussion from a variety of different perspectives exploring the nexus of Keynes’s contribution to the history of economic thought, philosophy, the foundations of probability, economics, psychology and contemporary economic events and analysis. Substantial light has been shed on Keynes’s discussion.

For approximately a century and a half after their dramatic deflation, the South Sea and Mississippi Bubbles of 1710–1720 had discredited finance. With the exception of government bond markets and a few chartered companies, the rapid rise and fall of fortunes associated with the South Sea Company, in Britain, and the Mississippi Company in France, had made the joint stock system of corporate finance almost synonymous with fraud and financial debauchery. (The most authoritative account of these schemes is given in Murphy, 1997.) The joint stock system of finance was seen as seriously flawed, and an indictment of the theories on credit money of the schemes’ instigator, John Law. During those one hundred and fifty years, classical political economy rose and flowered. Not surprisingly finance then came to be considered for its fiscal and monetary consequences. This pre-occupation left its mark on twentieth-century economics in an attitude that the fiscal and monetary implications of finance, eventually its influence on consumption, are more important than its balance sheet effects in the corporate sector. This attitude is apparent even in the work of perhaps the pre-eminent twentieth century critical finance theorist, John Maynard Keynes.

There has recently been a flurry of interest in analysing trade policy regimes and their particular historical expressions among economists. This has been provoked in part by new developments in trade theory such as those based on the concepts of increasing returns and market structure, and in part by more awareness among the general public on development issues. For example a significant empirical study of the late nineteenth century concluded that a previously identified positive correlation between tariffs and growth was surprisingly robust (O’Rourke, 2000, p. 473). The previous study had concluded that: The reintroduction of protective tariffs (around 1880–1890) in the ‘less developed’ countries coincided in each case with a total reversal of the economic trends: growth accelerated and the pace of innovation and investment speeded up (Bairoch, 1972, p. 211).Hence protection was associated with high rates of economic growth at least for less developed states such as Germany and the USA in the period specified. This was in contrast to an identified negative correlation observed for much of the twentieth century, one predicted by the conventional neoclassical theory of free trade.

The first American university to have a graduate programme was Johns Hopkins, founded in 1876. Between 1880 and 1914 a number of new universities such as Stanford and Chicago were established, and older institutions such as Yale and Harvard were modernised. The University of Chicago was founded in 1892, with the help of a large founding endowment from the oil tycoon, John D. Rockefeller.

According to Clark (1935a, b), if the various studies on the secondary effects of public works expenditures are examined, two main approaches to the analysis of the problem are revealed: “one via successive cycles of income and spending by ultimate recipients of income” – which the Columbia economist termed the “Kahn-Keynes” approach – “the other via the volume of money and its velocity of circulation.” As is well known, in the first approach, business fluctuations are seen primarily as a consequence of fluctuations in current investment. Accordingly, the amount of the secondary effects is determined by: (a) the amount of the net increase in investment; (b) the marginal propensity to consume; and (c) the length of the income propagation period. As it appears from the above, in the “Kahn-Keynes” analysis of the secondary expansion, money plays only a passive role.

The following materials were presented at a session of the History of Economics Society at its annual meeting, on July 6, 2003, at Duke University. Organized and chaired by Dan Hammond, the principal participants at the Roundtable were also, in order of speaking, Malcolm Rutherford, Ross Emmett, Warren Samuels, Brad Bateman, and Steven Medema.

Dan Hammond’s written comments on a paper I presented at the ASSA/HES meetings in January on Chicago economics and institutionalism (Hammond, 2003; Rutherford, 2003a) questioned the usefulness of the concept of “institutional economics” as a category with which to discuss the history of American economics from about 1918 on. My paper and Hammond’s comments form the background to this roundtable discussion. Although my original piece is not reproduced here, I will begin with some direct comments on what I take to be Hammond’s main points of contention.

From the work of Veblen (1909) forward, a number of American economists found it useful to use the terms “institutions,” “institutional,” or “institutionalism” to describe the object of their study, the method of their study, or the school of thought to which they belonged. Acknowledging the centrality that these terms have in the work of these economists seems to me to be an essential part of my work as a historian concerned with providing historical reconstructions. That is, if I wish to provide an account of their work that these thinkers could at least in principle agree with, I will probably need to use the term institutionalism.

I have two preliminary points to make. The first concerns the type of category we have in mind. It is perfectly sensible to think of “Institutional Economics” as a candidate for describing, in part, the “reality” of economics. But in so doing, one must remember that terms and their definitions are tools of analysis. Different definitions of Institutional Economics may be used to describe part of the history of economics but doing so only means that we are using the definition as a tool and that our description is driven by the definition we adopt.

By now, it is one of the standard tropes of those who write about the professionalization of American economics that there was a methodenstreit between the marginalists and the historicists at the turn of the nineteenth century into the twentieth. As recently as last year, Nancy Cohen (2002) argued that the only problem with this picture is that we have not understood correctly that the marginalists had actually won much sooner than we realized, sometime before 1900. Dorothy Ross’s classic The Origins of Amercian Social Science (1991) plays off the same dichotomy, but offers the older chronology, that “[b]etween about 1890 and 1910 marginal economics became the dominant paradigm in American economics.”

The very subject of this roundtable and published symposium suggests that there is something going on, some smoke, here – that there is some distinction that scholars past and present have found it useful to make, legitimately or not, between American institutionalism on the one hand and, say, classical, neoclassical, Keynesian, and Austrian economics in the interwar period. One problem, of course, is that examining how “x” is different from “y” requires a specification of both what constitutes “x” and what constitutes “y.” Put another way, figuring out what constitutes “institutionalism” simultaneously requires defining “not institutionalism,” both in toto and its constituent elements. This is not an easy task when even the question of what it means to be “Keynesian” admits to no small number of (or even consistent) answers. And indeed, one could just as well ask whether “neoclassical” is useful as an historiographic category during this period.¹

I will use Malcolm Rutherford’s paper, “Chicago Economics and Institutionalism,” as the basis for general comments about the historical enterprise of writing and evaluating the history of institutional economics (or institutionalism). In doing so I will take liberties with Rutherford’s paper, some of which he may not approve. The thrust of my comments is to take Rutherford’s thesis (“There is an important sense in which Chicago economics has always been institutional,” p. 21) and run with it to find implications for the very idea of institutional economics. My conclusion is that the category institutional economics (or institutionalism) may have little historiographic value.

Prior to the first session I was asked about my view of rent seeking, mentioned in passing in the document of mine distributed earlier. I replied that my view had three parts. First, I agreed that rent seeking, however defined, was ubiquitous. Second, I argued that rent seeking is not bad per se. Third, I argued that I found particularly disgraceful treatments of the allocation of resources to efforts to change the law as bad rent seeking. Both this person and Jim Buchanan (later in the conference) insisted that rent seeking was objectionable when it involved a transfer without a gain in efficiency, i.e. the creation of something productive. I responded that this view substituted the analyst’s definition of productive for that of the economic agent – who obviously believed that hiring a lawyer, etc. to help bring about a potential change in the law was a desirable, hence productive, use of his or her resources. I further insisted that this definition, especially when it was used in a blanket, indiscriminate way, functioned to privilege existing law and those benefiting from existing law and to deny people access to their government, and that it did so by manipulating the definition of rent seeking to give effect to selective antecedent normative premises hidden within the use of the term “productive” (in at least one discussion the term “artificial” was used). I pointed to this as a problem in the use of language. Further aspects of the terminology of rent seeking will be dealt with below.

One important discussion comes under Knight’s heading of “Social Control.” To appreciate his argument, one has to understand that Knight’s social theory is developed within a tension between: (1) his knowledge that social control is both inevitable and necessary; and (2) his correlative desire for individual autonomy. One could add to that a hatred of social control, some of which is relevant. But what Knight dislikes is, first, selective elements of existing social control and, second, change of social control, e.g. change of the law by law, except for those changes of the law that remove the selective elements he dislikes; Knight is not opposed to all change of social control. In any event, the problem of social control is also for Knight (as it was for Vilfredo Pareto) the problems of social change and of the status of the status quo as well as of hierarchy.

The three volumes before us comprise the second title in the “Elgar Reference Collection” of Critical Ideas in Economics, a new series which, we learn from the book cover, aims to provide “an essential reference source for students, researchers and lecturers in economics.” Each volume in the series will bring together a collection of previously-published articles and book-chapters which “focuses on [a] concept widely used in economics,” and will thereby “improve access to important areas of literature which will not be available in the archives of many of the newer libraries.” No one can deny that Professor Walker’s topic is ideally suited to this stated intent; is there a concept more “widely used in economics” than that of equilibrium? A collection of previously-published items cannot, of course, be appraised in terms of the originality of its content. Such a work offers a different sort of contribution. In addition to the publisher’s stated aim of an improved access to those key articles which, either because of their age or the location of their publication, are not widely available, a work such as this can perform a function not unlike that which Weintraub (1991, pp. 129–130) ascribes to the survey article. The act of selection (and, hence, of exclusion) serves to delineate the field for the non-specialist, and the ordering of the items in the collection can reveal instructive lines of intellectual development – a “filiation of scientific ideas” to adopt Schumpeter’s (1954, p. 6) felicitous phrase – that otherwise might be obscured.

The United States, it was once felt, could have a different foreign policy when isolated by two oceans in comparison to the later period when modern technology destroyed its isolation. Foreign policy is thus a function of geography modified by technology. The United States, commencing some time after the first third of the 19th century, had a further choice. It could live up to its self-image as a liberal constitutional democracy and follow a foreign policy of live and let live, in both respects serving as a role model for the rest of the world. Or, like the monarchical dynasties of the past and other regimes of more recent times, it could pursue an aggressive foreign policy in pursuit of what it considered its interests, engendering enmity in various quarters. The United States has done both. In the first category it has preferred isolationism, reluctantly joining the two World Wars in defense of its autonomy. In the second category, it increasingly either engaged in the practices of conventional imperialism, often at the behest of entrepreneurial interests, or flexed and deployed its muscle in pursuit of national interests either on its own initiative or in response to threats from and capabilities of other countries. The former is American exceptionalism; the latter is conventional. Of course, the history is much more complex than the foregoing directly allows. Several other stories or models can be developed (the most recent is Mead, 2001).

In his preface Thompson argues that structural, sociological and ideological aspects of the economic “environment” foreclosed on socialism during the period in question. The structural aspect was the increased globalisation of economic activity; the sociological was the “triumph of possessive individualism and the uncritical celebration of private as against social consumption” (p. vi); and the ideological was the ascendancy of the nostrums of the New Right. Given the importance attached to these “environmental” forces one might have expected the author to organise his argument by discussing how and why these forces came to be all-powerful in the last quarter of the 20th century.

A review essay on Postmodernism, Economics and Knowledge. Edited by Stephen Cullenberg, Jack Amariglio and David F. Ruccio. London: Routledge, 2001. p. 495. Most economists agree that economic knowledge has gradually increased as more facts and data have been accumulated to support (or reject) theories. That is, economic knowledge and progress of the discipline have benefited from the scientific method. While not disputing this modernist conception of historical progress in economics, the articles in the volume consistently urge a broader discourse in economics, suggesting that without an expanded discourse economics will, as Hutchison (1979) argues, be “destined for a somewhat ambiguous and problematic place in the spectrum of knowledge” (p. 4). This edited volume discusses and seeks to discover what the postmodernist movement can add to broad economic discourse.

Review essay on Wade Hands’, Reflection without Rules: Economic Methodology and Contemporary Science Theory. Cambridge: Cambridge University Press, 2001. Wade Hands’ Reflection without Rules is the best book in town for the student who wants to get acquainted with the field of economic methodology. Just like Mark Blaug’s The Methodology of Economics and Bruce Caldwell’s Beyond Positivism during the 1980s and the 1990s, Reflection introduces the reader to the debate in the area, in all its complexity and with many of its details, yet in a clear and logical manner. The book reproduces portions of the author’s earlier articles published since 1985 in different periodicals and books. Hands successfully achieves his goal of building a survey of recent developments in the field of economic methodology in a book that can be praised for its comprehensive outlook; its wide array of subject-matters; successful incursions into the neighboring fields of epistemology, philosophy, rhetoric, sociology of knowledge and others; its clear discussion of relevant topics, following a logical order; and its full coverage of the available literature, with the impressive reference list of more than 1,200 entries.

Review essay on Neil Fligstein’s, The Architecture of Markets: An Economic Sociology of Twenty-First-Century Capitalist Societies. Princeton: Princeton University Press, 2001. 274 pp. Competitive markets are the sine qua non of economics principles texts. A system of competing firms, input suppliers including labor, and consumers is automatic and can be taken for granted. Firms are busy combining inputs and choosing what products to produce. They come and go, forming, dissolving and reforming. There is little place in this theory for cognition, social movements, shared meanings, that is, of economic sociology. Fligstein wants to change that. He wants to add a “political-cultural theory” to the theory of the firm.

Review essay on Stephen A. Resnick and Richard D. Wolff’s, Class Theory and History: Capitalism and Communism in the USSR. New York and London: Routledge. xiv + 353 pp. 2002. The overwhelming ideological dominance of neo-liberalism has led to the widespread acceptance of the most facile explanations of the collapse of the Soviet Union, whose demise supposedly demonstrates the validity of Adam Smith’s critique of political intervention in the functioning of the market. In this book Stephen Resnick and Richard Wolff undertake the vitally important task of theorizing the rise and fall of the Soviet Union from a Marxist perspective. Resnick and Wolff follow the neo-liberals in seeing the Soviet Union as a form of capitalism administered by the state, but reject the neo-liberal critique of the inefficiency of state capitalism, celebrating the supposedly great economic achievements of the Soviet Union. The failure of the Soviet Union lay not in the dominance of the state, but in the failure to go beyond state capitalism to establish a communist society. Instead of building on the limited communist elements in soviet society, the Soviet Union was marked by the persistence of what Resnick and Wolff call the “ancient” and “feudal” class structures which ultimately proved its undoing, by undermining the state capitalist appropriation of the surplus and providing the cultural and political foundations for a return to private capitalist forms of surplus appropriation.

A review essay on Nancy Churchman’s, David Ricardo on Public Debt. London: Palgrave, 2001. This is a fair minded, temperate and well-written essay on Ricardo’s treatment of the “National Debt” as it is known in the British literature. It hangs together, despite prior publication of the majority of the chapters, very well – only Chap. 5 (dealing with Ricardo’s motives, and the imputation of personal financial interest) is unmistakably a journal article.

We must begin, of course, by understanding the strengths and limitations of our own approach. If we are to make progress, it is necessary to examine carefully the institutionalist position, to view it not just as a battering ram with which to inflict damage on currently prevailing orthodoxies, but to identify the strengths and weaknesses in its current incarnations. In so doing, we must be critical as well as constructive.

This is an unusual book and a striking phenomenon. It comprises a collection of thirteen essays on the German Historical School of Economics (henceforth GHSE), exclusively written by Japanese contributors who are mainly full professors at leading universities and mostly have already published on various aspects of the GHSE. The editor, Yuichi Shionoya, is well known internationally as one of the most prominent students of Joseph Schumpeter and Max Weber, whose works provide the basis for the editor’s attempt to erect the framework of the rational reconstruction of the GHSE in the opening essay. This holds in particular for economic sociology, which – besides theory, history and statistics – constitutes the fourth discipline in economics, and includes the social institutions relevant to economic behaviour and also political, legal or religious aspects. The investigation of Schumpeter’s conception of economic sociology (see, e.g. Schumpeter, 1954, pp. 20–21) is at the very heart of Shionoya’s second essay (9) in which the author concludes that Schumpeter combined two essential elements of the GHSE, a belief in the unity of social life and the inseparable relationship among its components and a concern for development, with some stimulus by Max Weber’s analysis of comparative-static social systems and Marx’s analysis of the dynamic process of capital accumulation. It is Shionoya’s belief “that Schumpeter should be regarded as one of the successors of the German Historical School because he attempted a rational reconstruction of that school, especially Schmoller’s research program, in terms of economic sociology and made his own contribution from this perspective” (p. 9). Whether and how this statement from the editor’s first essay fully fits with the one from Shionoya’s second essay, that “Schumpeter’s conception of economic sociology intended to integrate history and theory, the antitheses at the Methodenstreit between Gustav von Schmoller and Carl Menger” (p. 139), is left to the reader’s judgement. Characteristically, the contradictions involved can be found in Schumpeter’s own writings. In the very same year, 1926, in which he published the article “Gustav von Schmoller and the Problems of Today,” which forms the key basis for Shionoya’s argument, Schumpeter eliminated the seventh chapter on “The Overall View of the Economy” of the first German edition of The Theory of Economic Development from the second German one and omitted it in all later editions of the book, including the 1934 English translation. The reason was that Schumpeter believed that this chapter with its much broader perspective and its fragment of cultural sociology has sometimes distracted the reader’s attention from pure and “dry” economic reasoning. It had led to a kind of consent which was at the very opposite of his intentions in so far as the seventh chapter was misunderstood as an alternative to economic theory. For that kind of reasoning Schumpeter did not want to provide any ammunition. For Shionoya, on the other hand, Chap. 7 is not a fragment of cultural sociology but a research program for a universal social science that he has specified in an earlier article (Shionoya, 1990) in which he regrets Schumpeter’s decision to omit it.

A review essay on Kenneth E. Carpenter’s, The Dissemination of the Wealth of Nations in French and in France, 1776–1843. Published for The Bibliographical Society of America. New Castle, DE: Oak Knoll Press, 2003. Pp. LXIII, 255. $45.00. The Wealth of Nations is bipolar work: on the one hand it is an important philosophical treatise; on the other, it is the founding text of the discipline of economics. This characteristic gives it a unique place among the “great books” of western culture. How did a book, written over two centuries ago by a pedantic, idiosyncratic college professor come to achieve this lofty status? Although nowhere explicitly stated by the author of the work under review, this question serves as a lightning rod for his bibliographic efforts. The focus bestowed on France is justified because the reception of The Wealth of Nations (hereafter, WN) in France mirrored, in most important aspects, its reception throughout Europe. Nevertheless, the opaqueness of this book’s title masks its most fascinating feature, namely, the manner in which Carpenter unfolds the complicated answer to this central question.

Paul Strathern’s book, A Brief History of Economic Genius, is a history of economic thought that is written for the general public. The book contains photographs, no footnotes and a very limited list of sources that functions as a list of “further reading” advice. This book stands in a long line of over more than forty books by Paul Strathern on the lives and works of great philosophers such as Aristotle, Plato, Locke, Kant, Wittgenstein, Nietzsche, Hegel, and Madame Curie as the exceptional woman scientist. In these books he introduces the lay reader in an accessible and brief manner to often complicated ideas. As his other books, A Brief History tells the life stories of scholars, which are here woven into an account of the history of economics.

A review essay on Ronald Findlay, Lars Jonung and Mats Lundahl, eds. Bertil Ohlin: Centennial Celebration (1899–1999). Cambridge, MA: MIT Press, 2002. Pp. xvi, 546. $60.00. The Swedish economist Bertil Ohlin was born in 1899 and died in 1979. Less than half of his professional life he spent as a full time academic scholar in economics. He was a student at the University of Stockholm and was supervised by his teachers, Gustav Cassel and Eli Heckscher. In 1922, Ohlin presented his licentiat thesis where he set out the ideas later conceptualised as the Heckscher-Ohlin model. Two years later, in 1924, he took his doctoral degree under Cassel with a dissertation simply called Handelns teori (The Theory of Trade). A longer version of this dissertation was later published in English as Interregional and International Trade (1933). This work made him a famous trade theorist in a line of tradition going back to Ricardo and Torrens. Paul Samuelson in 1941 coined and immortalised the term “the Heckscher-Ohlin theorem” which he and Wolfgang Stolper developed further in a famous article in the Review of Economic Studies (1941) entitled “Protection and Real Wages.” Already at the age of 26 the bright young man Ohlin became a professor in economics at the University of Copenhagen and five years later he was appointed to a chair in the same subject at Handelshogskolan (The Stockholm School of Economics) in Stockholm.