Economic Analysis in Historical Perspective

234 Pages·1984·15.766 MB·English

by  John Creedy

Internationally written and refereed, Butterworths Advanced Economics
Texts seek to inform students and professional economists by provid-
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General Editor
Bruce Herrick
Department of Economics,
Washington and Lee University, USA
Consulting Editors
John Enos Michael Roemer
Magdalen College, Harvard Institute for International Development,
University of Oxford, UK Harvard University, USA
Gerald Helleiner Pan Yotopoulos
Department of Political Economy, Food Research Institute,
University of Toronto, Canada Stanford University, USA
Published titles
Cases in Economic Development by Michael Roemer and Joseph J. Stern
Comparative Economic Development by David K. Whynes
Butterworths Advanced Economics Texts
Economic Analysis in
Historical Perspective
Edited by
J. Creedy
Professor of Economics, Durham University
D.P. O'Brien
Professor of Economics, Durham University
Butterworths
London Boston Durban Singapore Sydney Toronto Wellington
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First published 1984
© Butterworths & Co. (Publishers) Ltd 1984
British Library Cataloguing in Publication Data
Economic analysis in historical perspective.—
(Butterworths advanced economics texts)
1. Economics—History
I. Creedy.J. II. O'Brien, D. P.
330'.09 HB75
ISBN 0-408-11430-4
Library of Congress Cataloging in Publication Data
Main entry under title:
Economic analysis in historical perspective.
(Butterworths advanced economics texts)
Bibliography: p.
Includes index.
1. Economics—History. I. Creedy, John, 1949—
II. O'Brien, D. P. (Denis Patrick), 1939-
III. Series.
HB75.E3 1984 330'.09 83-20906
ISBN 0-408-11430-4
Typeset by Scribe Design Ltd, Gillingham, Kent
Printed and bound in England by The Camelot Press Ltd, Southampton
Acknowledgements
We should like to thank Julie Bushby and Kathryn Cowton, who
shared the considerable amount of typing and retyping required
during the preparation of this book. We are also grateful to those
colleagues who read earlier drafts of some of the chapters.
J. Creedy
D. P. O'Brien
Contributors
J. Creedy is Professor of Economics at Durham University. His main
research interests are concerned with public policy, labour economics
and the history of economic thought. He is the author of State Pensions
in Britain (1982), editor of The Economics of Unemployment in Britain
(1981), and co-editor (with B. Thomas) of The Economics of Labour
(1982), and author (with others) of Economics: An Integrated Approach
(1984).
D. P. O'Brien is Professor of Economics at Durham University. His
research interests include the history of economic thought and
competition policy. His publications include (with D. Swann) Informa-
tion Agreements, Competition and Efficiency (1968), J.R. McCulloch: A Study
in Classical Economics (1970), The Correspondence of Lord Overstone (1971),
(with D. Swann et al.) Competition in British Industry (1974), (with D.
Swann et al.) Case Studies: Competition in British Industry (1974), J.R.
McCulloch: Treatise on Taxation (1975), The Classical Economists (1975),
(with W.S. Howe, D.M. Wright and RJ. O'Brien) Competition Policy
Profitability and Growth (1979), (co-editor with J.R. Presley) Pioneers of
Modern Economics in Britain (1981) and (with A.C. Darnell) Authorship
Puzzles in the History of Economics (1982).
R. F. Ekelund is Professor of Economics at Auburn University. His
research interests include the history of economic analysis, welfare
economics and the economics of regulation. He is co-author (with
R.F. Hebert) of A History of Economic Thought and Method (1975), and
co-editor (with E.G. Furubotn and W.P. Gramm) of The Evolution of
Modern Demand Theory (1972).
R. F. Hebert is Professor of Economics at Auburn University. His
main research interests are in the history of economic thought. He is
co-author (with R.F. Ekelund) of A History of Economic Theory and
Method (1975) and (with A.N. Link) of The Entrepreneur: Mainstream
Views and Radical Critiques (1982).
A. S. Skinner is Professor of Political Economy at Glasgow Universi-
ty. His research interests include eighteenth-century political eco-
nomy and the theory of the firm. He is the author of A System of Social
Science: Papers Relating to Adam Smith (1979), editor of Sir James SteuarVs
Principles of Political Economy (1966), and co-editor (with R.H. Camp-
bell and W.B. Todd) of The Wealth of Nations (1976).
M. C. MacLennan is Senior Lecturer in Political Economy at
Glasgow University. His research interests include industrial and
regional policies in the European Community. He is co-author (with
G. Denton and M. Forsyth) of Economic Planning and Policies in Britain,
France and Germany, and (with K.J. Allen) of Regional Problems and
Policies in Italy and France.
A. C. Darnell is Lecturer in Economics at Durham University. His
research interests include econometrics and the history of economic
thought. He is co-author (with D.P. O'Brien) of Authorship Puzzles in
the History of Economics (1982).
J. S. Chipman is Professor of Economics at the University of
Minnesota. His research interests include international economics,
welfare economics, demand theory and the history of economic
thought. His publications include The Theory of Intersectoral Money Flows
and Income Formation (1951), and he is co-editor (with L. Hurwicz,
M.K. Richter and H.F. Sonnenschein) of Preferences, Utility and
Demand (1971) and (with C.P. Kindleberger) of Flexible Exchange Rates
and the Balance of Payments (1980).
List of Figures
3.1 The demand curve as a welfare measure 57
3.2 Monopoly, price discrimination and economic welfare 61
3.3 The Dupuit taxation theorem 63
3.4 The social welfare function and utility-possibilities frontier 69
3.5 Pigovian externalities 73
5.1 Chamberlin's two average cost curves 126
Chapter One
Introduction
J. Creedy and D.P. O'Brien
The purpose of this book is to place a number of major subject areas of
economic analysis in historical perspective. Conventional work on the
history of economic analysis is arranged around particular authors,
schools of thought or so-called revolutions in economic thinking. In
modern journal articles or monographs it is seldom possible for
authors to place the discussion in historical perspective; indeed, it is
not always possible to place work in the context of contemporary
literature. However, each chapter in this book attempts the much
more difficult task of tracing the evolution of the main current ideas
about a specified subject, and considers the ways in which important
questions were raised in the past and the factors which influenced
methods of analysis and the nature of assumptions used.
The best-known general books in the history of economic analysis,
such as those by Schumpeter (1954) and Hutchison (1953), or the
rather different text by Blaug (1964), have concentrated on the twin
subjects of value and distribution. The following chapters therefore
deal with areas which have not received such detailed treatments.
These areas are, in order of appearance, Monetary Economics,
Welfare Economics, Public Finance, Oligopoly and the Theory of the
Firm, Economic Statistics and the Balance of Payments.
Economics has in recent years been undergoing something of a
'crisis of confidence', and in this kind of atmosphere it is not
surprising that there is greater interest in the work and results of
earlier generations. But the study of the evolution of ideas does not
only provide an 'antidote to despondency', it often indicates just how
painfully slow the progress in economic understanding has been. The
need to study earlier work and preoccupations has been stated quite
bluntly by Schumpeter (1954):
Modern problems, methods, and results cannot be fully understood without
some knowledge of how economists have come to reason as they do (p.6).
1
2 Introduction
It is useful to add to this important point the argument that this
kind of work can often provide a stimulus to further research in
fruitful directions. As Schumpeter again persuasively argued,
A man's mind must be indeed sluggish if, standing back from the work of his
time and beholding the wide mountain ranges of past thought, he does not
experience a widening of his own horizon (p. 5).
In any attempt to place current ideas in historical perspective it is
also worth while keeping in mind the point clearly made by Black
(1976) in discussing changing attitudes, during 200 years, towards the
work of Adam Smith. He suggested that
just as the size and shape of objects appears to change in visual perspective as
the position of the observer changes, so in historical perspective the significance
of an event or an idea changes as it is seen from different points of time (p. 42).
The authors of each of the following chapters have had to deal not
only with this problem of changing perspectives but with the severe
constraints imposed by the economics of book publishing. Each
author has been faced with enormous problems of selection and
emphasis, and it is almost certain that a different set of authors would
choose different formulae for arranging and selecting material. While
an attempt has been made to use a consistent style of presentation, the
editors have not attempted to impose their own preferences or
judgements on the individual contributors.
Furthermore, the book does not examine general issues such as the
question of whether economics has developed according to its own
'internal logic5, or the debate between 'relativists' and 'absolutists', or
wider methodological questions. These issues are perhaps best ex-
amined by a single author, or by joint authors working very closely,
but it is hoped that this book may nevertheless provide some useful
materials for such studies. It will, however, have succeeded if it
manages to 'widen the horizons' of the reader, and to stimulate the
study of earlier valuable literature.
References
BLACK, R.D.C (1976). Smith's Contribution in Historical Perspective. In The Market
and the State (ed. by T. Wilson and A.S. Skinner), pp. 42-63. Oxford, The
Clarendon Press
BLAUG, M. (1964). Economic Theory in Retrospect. London, Heinemann Educational
Books
HUTCHISON, T.W. (1953). ^4 Review of Economic Doctrines 1870-1929. Oxford, Oxford
University Press.
SCHUMPETER, J. A. (1954). History of Economic Analysis, London, George Allen and
Unwin
Chapter Two
Monetary Economics
D.P. O'Brien
2.1 Introduction
In this chapter an attempt is made to place the body of modern
monetary discussion, with which students are familiar, in historical
perspective. The problems of attempting an exercise of this sort are
particularly acute in the field of monetary writing, where there is an
enormous and prolix literature covering several centuries of effort.
Indeed, it is probably true that monetary theory was the first branch
of economics to reach sophisticated levels of analysis and that its
analytical concepts have the longest history. Considerable compress-
ion has thus been necessary; and in the process a number of writers
who are important in post-1945 monetary theory have perforce been
neglected, both because their contribution can be embodied in the
summary of the modern position which is given in each section of this
chapter and because particular contributions which may be impor-
tant in relation to the literature produced within a short span of time
tend to seem rather less important when viewed against the historical
perspective of the long evolution of monetary theory.
The very nature of money has been an issue throughout much of the
development of monetary theory, and this is considered first. Next
comes the discussion of theories of the demand for money, disting-
uishing between those approaches which emphasize velocity and
those which emphasize the demand for balances. In considering
approaches to the supply of money it is easy to find both independent
supply and demand-determined supply in the literature over a long
period, and this leads to different approaches to monetary control
both in the great nineteenth-century debates and in the twentieth-
century literature. Some of the differences over monetary control
relate to different approaches to the rate of interest/and section 2.5
discusses the history of interest theory. However, the major source of
division concerning monetary control is, inevitably, the transmission
mechanisms, and these are discussed in section 2.6. 3