HISTORY OF ECONOMIC ANALYSIS BY JOSEPH A.SCHUMPETER EDITED FROM MANUSCRIPT BY ELIZABETH BOODY SCHUMPETER AND WITH AN INTRODUCTION BY MARK PERLMAN Table of Contents INTRODUCTION BY viii MARK PERLMAN EDITOR’S INTRODUCTION xxx PART I INTRODUCTION SCOPE AND METHOD CHAPTER INTRODUCTION AND PLAN 2 1 CHAPTER INTERLUDE I: THE TECHNIQUES OF ECONOMIC 10 2 ANALYSIS CHAPTER INTERLUDE II: CONTEMPORANEOUS DEVELOPMENTS 23 3 IN OTHER SCIENCES CHAPTER THE SOCIOLOGY OF ECONOMICS 31 4 PART II FROM THE BEGINNINGS TO THE FIRST CLASSICAL SITUATION (TO ABOUT 1790) CHAPTER GRAECO-ROMAN ECONOMICS 48 1 CHAPTER THE SCHOLASTIC DOCTORS AND THE PHILOSOPHERS 70 2 OF NATURAL LAW CHAPTER THE CONSULTANT ADMINISTRATORS AND THE 139 3 PAMPHLETEERS CHAPTER THE ECONOMETRICIANS AND TURGOT 202 4 CHAPTER POPULATION, RETURNS, WAGES, AND EMPLOYMENT 240 5 CHAPTER VALUE AND MONEY 264 6 6 CHAPTER THE ‘MERCANTILIST’ LITERATURE 318 7 PART III FROM 1790 TO 1870 CHAPTER INTRODUCTION AND PLAN 358 1 CHAPTER SOCIO-POLITICAL BACKGROUNDS 371 2 CHAPTER THE INTELLECTUAL SCENERY 384 3 CHAPTER REVIEW OF THE TROOPS 438 4 CHAPTER GENERAL ECONOMICS: A CROSS SECTION 502 5 CHAPTER GENERAL ECONOMICS: PURE THEORY 548 6 CHAPTER MONEY, CREDIT, AND CYCLES 657 7 PART IV FROM 1870 TO 1914 (AND LATER) CHAPTER INTRODUCTION AND PLAN 721 1 CHAPTER BACKGROUND AND PATTERNS 727 2 CHAPTER SOME DEVELOPMENTS IN NEIGHBORING FIELDS 749 3 CHAPTER SOZIALPOLITIK AND THE HISTORICAL METHOD 768 4 CHAPTER THE GENERAL ECONOMICS OF THE PERIOD: MEN AND 793 5 GROUPS CHAPTER GENERAL ECONOMICS: ITS CHARACTER AND 853 6 CONTENTS CHAPTER EQUILIBRIUM ANALYSIS 918 7 CHAPTER MONEY, CREDIT, AND CYCLES 1040 8 PART V CONCLUSION A SKETCH OF MODERN DEVELOPMENTS CHAPTER INTRODUCTION AND PLAN 1104 1 CHAPTER DEVELOPMENTS STEMMING FROM THE MARSHALL- 1114 2 WICKSELL APPARATUS CHAPTER ECONOMICS IN THE ‘TOTALITARIAN’ COUNTRIES 1119 3 CHAPTER DYNAMICS AND BUSINESS CYCLE RESEARCH 1126 4 CHAPTER KEYNES AND MODERN MACROECONOMICS 1136 5 EDITOR’S APPENDIX 1151 LIST OF BOOKS FREQUENTLY QUOTED 1171 AUTHOR INDEX 1174 SUBJECT INDEX 1218 Introduction MARK PERLMAN* There is, as we shall see, much in this book which is redundant, irrelevant, cryptic, strongly biased, paradoxical, or otherwise unhelpful or even harmful to understanding. When all this is set aside, there still remains enough to constitute, by a wide margin, the most constructive, the most original, the most learned, and the most brilliant contribution to the history of the analytical phases of our discipline which has ever been made. (Viner 1954, pp. 894–5). I PUTTING SCHUMPETER AND HISTORIES OF ECONOMIC THOUGHT IN PERSPECTIVE 1.1 Schumpeter was a man of many interests as well as talents. Beyond that he had, certainly as a young man, monumental ambitions. It is not appropriate in this essay to devote much space to the journey of his life; fortunately there are now available not only the 1950 insightful memorials by his colleagues, particularly the one by Gottfried Haberler,1 a massive as well as a magnificent piece of bibliographical scholarship on what he wrote, who wrote about him, and with whom was he most frequently compared by Massimo M.Augello (1990),2 but also three recent (1991) and assuredly major biographies of the man. Schumpeter, A Biography by Richard Swedberg contains a particularly carefully balanced, scholarly assessment of * Thanks are owed to several friends who have read and corrected the manuscript: Professors A.W.Coats, Warren Samuels, Yuichi Shionoya, Richard Swedberg and Shigeto Tsuro, and Dr Charles McCann. 1 This essay appeared originally in the Quarterly Journal of Economics. It was reprinted in Seymour Harris’s edited volume, Schumpeter, Social Scientist (Harris, 1951) and again in Haberler (1993). The 1951 volume also contained essays by 16 leading economists, including inter alia Ragnar Frisch, Arthur Smithies, Paul A.Samuelson, Jan Tinbergen, and Fritz Machlup. 2 Augello cites 260 works (including articles and books translated into languages other than the original) by Schumpeter and 1916 works on Schumpeter. Augello’s own generalizations or findings are in a comprehensive 93-page essay, replete with valuational (that is, Augello’s straightforward evaluations) notes. I am not aware of a comparable task done recently by any economist on an economist. Schumpeter’s four or five major efforts as well as an intriguing general account of the times and environments in which he lived. Swedberg discusses ad seriatim the various decades of Schumpeter’s life and work, and if he attempts to explain the man, he does so only by inference. The second biography is different. Opening Doors: The Life and Work of Joseph Schumpeter by Robert Loring Allen has more of the characteristics of James Boswell’s The Life of Samuel Johnson, LL.D. or Samuel Pepys’ Diary (1815). Benefitting greatly from the massive, scholarly, even daunting3 task of deciphering Schumpeter’s personal diaries undertaken by Mrs Erica Mattschnigg Gershenkron,4 Allen interpreted the often elliptical, if not actually obscure, materials. Unlike Swedberg (a sociologist), Allen (an economist) was a much-impressed, even overwhelmed, Schumpeter student. Allen documents much of what Swedberg could do no more than infer. The third biography, Joseph Schumpeter: Scholar, Teacher, and Politician by Edward März, a Viennese Marxian historian, eschews not only discussion of Schumpeter, the idiosyncratic individual, but virtually all mention of Schumpeter’s historico-cultural- epistemological interests. März’s effort is to fit Schumpeter into the ranks of latter-day Marxians, an interesting effort but one hardly germane to what we are interested in. For that reason, what follows is based in large measure on the memorials and the other two studies. 1.2 I believe that Schumpeter’s intellectual efforts centered on five (possibly four and a half) major projects. I would classify the first burst of effort (including three books) as at least two major projects, one involving the nature of economic theory and economic science and the other concentrating on the nature and sources of economic development. The first surfaced in the 1908 Das Wesen und der Hauptinhalt der theoretischen Nationalökonomie (The Nature and Essence of Theoretical Economics) and to a lesser degree in the 1914 Der Dogmen- und Methodengeschichte (Economic Method and Doctrine: An Historical Sketch)5; the second in the 1911 Theorie der wirtschaftlichen Entwicklung (The Theory of Economic Development). His next (I would term it the third) major effort involved a book on money (partly written but never published by him although it did appear in 1970 as Das Wesen des Geldes6) and his 1939 two-volume Business Cycles. This generally unsuccessful effort paralleled Maynard Keynes’s 1930 abortive Treatise on Money and his thoroughly successful 1936 General Theory of Employment, Interest, and Money. Schumpeter did not think that his Capitalism, Socialism, and Democracy was a major effort; indeed he ‘often called it a “pot-boiler”’ (Allen, 1992, II, p. 133). Others have not shared that assessment, and it may well be termed Effort ‘Three and a Half’ or even Four. 3 The task was daunting because much was written, even scribbled, in an archaic German shorthand. 4 I am indebted to Professor Yuichi Shionoya for this information and other points, too. 5 This book was essentially the basis for the last effort. However, as Schumpeter thought all study of economic theory involves knowledge of its origins, at the time (pre-World War I) he linked the two. 6 Edited and introduced by F.K.Mann. Göttingen: Vandenhöck & Ruprecht, 1970, pp. xxvii, 341. His fifth effort involved his interpretation of the filiation of ideas in the development of economic theory. This effort surfaced initially with his 1914 Epochen der Dogmen— und Methodengeschichte (translated later as Economic Doctrine and Method: An Historical Sketch) and was unfinished when he died, but the outline of the corpus appeared as History of Economic Analysis (1954). I would also include in this fifth effort another posthumous collection, Ten Great Economists (1954), which contains polished essays. 1.3 The unfinished History of Economic Analysis (HEA) is the most significant part of the fifth and last of Schumpeter’s great projects. To some, its development represents the somber reflections of an older scholar, one embittered by personal, career, and character tragedies. To others, it is the quintessential, if uncompleted, final great professional tour d’horizon of the leading practiced academic professional economics visionary of the twentieth century. And for still others it is the wisest compendium of names and titles ever published in English (and possibly in all other languages) in the long history of the discipline. 1.4 In the past there have been many treatments of the history of the discipline employed as explanations of the development of economic theory. Indeed, one way to explain the emergence of the Smithian and Ricardian virtual hegemony was simply to recount how Smith had fused earlier writings, rejected some, and made others canon. Ricardo, referring to Smith’s 1776 economics masterpiece,7 offered a tighter type of reasoning, and thus it seemed classical economics was assembled, if not actually born.8 The official ‘registry of birth,’ as seen by the British, was undoubtedly John Ramsay McCulloch’s The Literature of Political Economy (1840), just as Jérôme-Adolphe Blanqui’s Histoire de l’économie politique en Europe9 (1838) could be said to have been an even earlier French claim—of course making McCulloch’s either a collateral, if lesser, relative or simply a Pretender. There is a German lineage, as well. Wilhelm Georg Friedrich Roscher first brought out his Geschichte der Englishen Volkswirtshaftslehre (1851) and then later in 1874 his Geschichte der Nationalökonomie in Deutchsland, and his student, Gyula Kautz, published in 1860 Die Geschichtliche Entwicklung der Nationalökonomie und Ihrer Literatur. One could go on, but it suffices to indicate that not only Marx treated the history of economics in Das Kapital (particularly in Volume One, 1867) but that object of Marxian scorn, Eugen Karl Dühring, published a positivist Kritische Geschichte der Nationalökonomie und der Sozialismus in 1871. From a more ‘modern’ standpoint, I am tempted first to point to William Stanley Jevons’ decision to commission a translation of Luigi Cossa’s Guido allo Studio dell’Economia Politica (1875) as our ‘cornerstone.’ Cossa was so pleased with Jevons’ request that he expanded and partially rewrote his first edition for that translation. So it 7 The earlier (1759) masterpiece was the more carefully written, The Theory of Moral Sentiments. 8 A more properly systematic approach is to refer to that collector’s ‘gem of a servant,’ The History of Economic Thought and Analysis (1973) by Emma Fundaburk, to consider the wealth of efforts at synthesizing the various approaches. 9 This book went through several successive editions. The fifth French edition is dated 1882, and there was a translation into English of the fourth French edition (1880). was that the 1876 second edition with a Preface by Jevons (and not published in Italian until the next year, 1877!) became the template for many of the analytical history of economics texts which followed.10 Until Schumpeter’s 1954 History of Economic Analysis appeared, American (and presumably British) economics graduate students generally referred to several ‘old standbys:’ Eric Roll’s strange mixture of pro- and then a-Marxian (to coin a neologism) A History of Economic Thought (particularly the post-World War II 2nd  and 3rd  editions) and Charles Gide and Charles Rist A History of Economic Doctrines from the Time of the Physiocrats until the Present Day (translated into English in 1948 from the several [2nd, 6th, and 7th] French editions). More recently, that is, within the last 20 years, Mark Blaug’s Economic Theory in Retrospect and The New Palgrave have been the principal authorities for graduate students. For economics undergraduate students there was Alexander Gray’s excellently composed The Development of Economic Doctrine: An Introductory Survey (1931) and Henry W.Spiegel’s The Growth of Economic Thought (1971). More advanced scholars relied on monographs on writers, schools, periods, and sub-sets of the topic (e.g. monetary theory, etc.). None of the foregoing, however, is, in my view, magisterial—none attempts to synthesize a vision. Since the appearance of the History of Economic Analysis two other particularly authoritative works have appeared: Wesley Clair Mitchell’s Types of Economic Theory: From Mercantilism to Institutionalism as edited by Joseph Dorfman (1967, 1969)11 and Karl Pribram’s A History of Economic Reasoning (1983). Neither attempted to synthesize a vision, although each sought to present an organizing theme, itself a ‘Whiggish’ interpretation (I would not consider such interpretations really to be visions). I shall compare their major approaches below. The most important thing about Schumpeter’s History of Economic Analysis is its impact on the profession. Unfinished and published with obvious and identified lacunae, it can not serve as a good reference guide. Yet, reference is regularly made to it. Why? Although I will expand on this point later, let me say here only that it offers a complex but not-quite-idiosyncratic vision of economics. Schumpeter knew Continental sources, with which most British- and American- and often imaginatively. Most of all, he escaped the usual constraints of having been educated within the bounds of British Utilitarianism, and even though for much of his life he apparently had a weakness for the effortless superiority of the English gentleman-scholar, he was in the important sense an intellectually superbly equipped outsider. 1.5 In sum, then, the importance of the book is that it gives a vision of the development of the economics discipline, a vision created by an unusually well-read ‘outsider’ (from the standpoint of most British and American-trained professional economists) at a time when he shunned most professional company and was driven by a personal ambition work ethic to complete a monumental effort explaining the relationship 10 The well-known text by Charles Gide and Charles Rist, A History of Economic Doctrines, was not published until 1915. 11 The basic manuscript was the result of a student’s shorthand notes; in that form it was sold in 1949 by Augustus Kelley, Bookseller (New York) with Mrs Mitchell’s permission (extended to a very limited number of sets) as Lecture Notes on Types of Economic Theory: From Mercantilism to Institutionalism. Dorfman corrected and greatly expanded the material. between what he called the economic science and not only other sciences but also other social studies and philosophical disciplines. Flawed by its incompleteness (due to the author’s sudden death), there is, nonetheless, nothing else like it in the English language; and even when one turns to other cultures, nothing has appeared which has its appeal, if not its scope. Most of all, it is the product of an imaginative mind embittered by a World War in which his adopted country, perhaps misled by an ubiquitous Anglo- Saxon cultural penumbra (which he came to despise), was seemingly fighting the wrong enemy. The book stands as a challenge (perhaps if it had been finished it would have been as a rejection) to the way Anglo-American economists were accustomed to looking at themselves and their craft. II THE BOOK’S PART IN SCHUMPETER’S LIFE 2.1 Just why Schumpeter undertook to write the 1914 Der Dogmen—und Methodengeschichte seems to me to be less of a mystery than is the slant of its contents. He was at the time a young man, perceived both by the world and by himself as a Wunderkind. It was part of his judgement as well, perhaps, of his conceit, that he wanted to lay out a schema for the understanding of the development of the economics discipline, both as a science and as practiced as an art. Assertive in tone, it reflects an intellectual confidence that was as yet essentially untouched by any serious career failures. But, if Schumpeter was unscarred, he certainly was aware that others had been. Of them, according to Swedberg (1991, pp. 91–3), he was greatly concerned about the opinions of Max Weber, whose efforts to combine an overly abstract theoretical science of economics with a comparably over-detailed history of events and policies had resulted in a new ‘discipline,’—Sozialökonomie. Opportunity came to please him in the form of a request from Weber, himself, to prepare a history of the subject of economic theory. Weber was undertaking the organization and publication of a deliberately important collective handbook, Grundriss der Sozialökonomie. The other selected authors were two eminent older scholars, Karl Bücher and Friedrich von Wieser. Their presence, plus his own desire to ingratiate himself with Weber12, doubtless affected the rhetoric in the book. And while it retains a nominal tolerance for a kind of historical approach, it seems to me to be clear that this was a concession to Weber’s feelings and was more of a courtesy than a fully sincere opinion. At that time, Schumpeter was generally putting his chips on abstract theory. 12 It succeeded: Weber became a strong admirer and a supporter when it came to Schumpeter’s applying for chairs. Swedberg reports, however, that the two once avoided coming to blows only by Weber’s stomping out of a coffee house. What caused such violence? Schumpeter was fascinated by what was going on in the Soviet Union, and seemingly endorsed Leninism, as practiced. Weber, incensed by Schumpeter’s indifference to human cruelty, could not restrain himself (Swedberg, 1991, pp. 92–3). This earlier book went untranslated into English until after Schumpeter’s death, but for most of the history of economics aficionados of the inter-Wars period, its existence and (for those who could read German, its contents) assured Schumpeter of an extra degree of professional standing. Yet, Schumpeter himself seems to have regarded it as evidence of an unfinished product. Space limitations do not permit much dwelling on its contents (cf. Perlman, 1982), but at the time he wrote it he was intent upon (1) drawing a distinction between scientific economics and political economy; (2) showing how British classical economics was giving way to ‘schools of economic thought;’ (3) indicating that the future of economic analysis lay in the tradition of Walrasian general equilibrium analysis, albeit in a ‘dynamic rather than a static form;’ and (4) insisting that the filiation of ideas as well as economic policy rested best in the minds and hands of a disinterested cultural elite. 2.2 By the 1940s Schumpeter was estranged from many of his Harvard colleagues. It is popularly believed that this breach came about because of World War II and the alliance between the Western democracies and Stalin’s Soviet Union. More than fifty years after the event, it is hard to reconstruct the many feelings influencing the situation. Loring Allen suggests that the alienation may have had an earlier source in Schumpeter’s ambivalence regarding anti-Semitism and the Nazis; but many of Allen’s judgements seem to me to be facile and too easily based on hearsay as well as post hoc, ergo propter hoc assessments. But, whatever the cause, Schumpeter withdrew from Cambridge and concentrated on reformulating his ideas about the historical development of the discipline. When the war ended, Schumpeter reemerged from his cocoon, but he was never the caterpillar, much less the butterfly, he had been as a young man. He wrote brilliant essays on Irving Fisher and Maynard Keynes; both of them were published posthumously in Ten Great Economists (TGE), surpassing his analysis in the HEA. He served as President of the American Economic Association in 1948 and in that capacity delivered an address on ‘Science and Ideology’. More to our point, he was asked to deliver, inter alia, a eulogy of Wesley Clair Mitchell just after the latter’s death (in 1950). It was a strange, idiosyncratic performance but, for the record, the written essay, finished just before Schumpeter’s own death, if effusive is also wise. The History of Economic Analysis seems to have been largely the product of the bitter years leading to and during the War. Swedberg relates how Schumpeter proposed the volume to the Oxford University Press, and from the first it was conceived as a vision, a massive treatment of the emergence of the scientific discipline. But, like many last great works of artists and other writers, it seems to have been cursed by an evil star. What was written was done so by a depressed author. It was unfinished when he died, and his devoted student and third wife, Elizabeth Boody Schumpeter, who had brought out of chaos what order there had been during the years from around 1938 onwards, sought to polish the manuscript as best she could and to integrate as much as possible. The task was extremely difficult. Schumpeter’s writing method was disordered. Major bits and large pieces were to be found in three different studies, and it was not always clear which had been written first and which later. Much was written in an archaic German shorthand. However, she persevered.