History of Economic Thought - Modern Economics

534 Pages·2012·10.4 MB·English

FOURTH EDITION
--------------------
History of
Economic Thought
FOURTH EDITION
--------------------
History of
Economic Thought
Harry Landreth
Centre College
David C. Colander
Middlebury College
Houghton Mifflin Company
Boston Toronto
Contents
1 Introduction 1

The Central Focus of Modern Economic Thought 1
Divisions of Modern Economic Theory 3
Terminology and Classification 3
Our Approach to the History of Economic Thought 4
Relativist and Absolutist Approaches 4
Orthodox and Heterodox Economists 5
The Role of Heterodox Economists 6
Defining Heterodoxy 7
How dissenting Economists Influence Economic Thought 7
and the Profession
Problems of Heterodox Economists 8
The problem of Presenting Diversity 8
Methodological Issues 10
Economics as an Art and as a Science 11
The Importance of Empirical Verification 11
Benefits to Be Gained from the Study of the History 12
of Economic Thought

Key Terms 1 4
Questions for Review and Discussion 14
Suggested Readings 15
Appendix for Chapter 1 16
The Profession of Economics and Its Methodology 16
The Spread of Economic Ideas 1 7
The Evolution of Methodological Thought 18
iv Contents
The Rise of Logical Positivism 1 8
The Logical Positivism to Falsificationism 1 8
From Falsificationism to Paradigms 1 9
From Paradigms to Research Programs 2 0
From Research Programs to Sociological and Rhetorical 2 0
Approaches to Method 2 1
Postrhetorical Methodology 2 2
PART ONE PRECLASSICAL ECONOMICS 22
2 Early Preclassical Economic Thought 2 7
Important Writers 27
Some Broad Generalizations 28
Non-Western Economic Thought 29
Greek Thought 31
Hesiod and Xemophone 31
Aristotle 32
Arab-Islamic Thought 33
Abu Hamid al-Ghazali 34
Ibn Khaldun 35
Scholasticism 35
The Feudal Foundation of Scholastic Thought 35
St. Thomas Aquinas 37
Summary 40
Key terms 42
Questions for Review and Discussion 42
Suggested Readings 43
3 Mercantilism, Physiocracy, and Other
45
Precursors of Classical Economic Thought
Important Writers 45
Mercantilism 46
Every Person His Own Economist 46
Power and Wealth 46
Balance of Trade 47
Contents v
48
Money and Mercantilism
49
Modern Analysis of Mercantilism
50
Theoretical Contributions
51
Of the Mercantilists
51
Influential Precursors of Classical Thought
51
Thomas Mun
52
William Petty
53
Bernard Mandeville
56
David Hume
57
Richard Cantillon
59
Physiocracy
59
Natural law
60
The Interrelatedness of an Economy
64
Physiocratic Economic Policy
65
Spanish Economic Thought
68
Summary
70
Key terms
70
Questions for Review and Discussion
71
Suggested Readings
PART TWO CLASSICAL ECONOMIC THOUGHT, AND ITS CRITICS 73
Important Writers
74
Classical Political Economy
76
Marx’s Political Economy
78
4 Adam Smith
80
The breadth of Adam Smith 80
Smith’s Analysis of Markets and Policy Conclusions 83
Contextual Economic Policy 83
Natural Order, Harmony, and Laissez Faire 85
The Working of Competitive Markets 86
Capital and the Capitalists 89
The Impact of Smith on Policy 90
The Nature and Causes of the Wealth of Nations 90
Causes of the Wealth of Nations 91
Summary of the Causes of the Wealth of Nations 93
vi Contents
International Trade
95
Value Theory
98
Relative Prices
98
The Meaning of Value
99
Smith on Relative Prices
100
Distribution Theory
103
Wages
103
Wages Fund Doctrine
104
Profits
104
Rent
105
The Rate of Profit over Time
105
Welfare and the General Level of Prices
106
Chapter 5, Book 1
106
Summary
108
Key terms
110
Questions for Review and Discussion
110
Suggested Readings
111
5 Ricardo and Malthus 1 1 3
David Ricardo – A Theorist’s Theorist 113
The Period Between Smith’s Wealth of Nations 114
and Ricardo’s Principles
The Malthusian Population Doctrine 114
Population Theory as an Intellectual Response 114
to Problems of the Times
The Population Thesis 115
Controversy about the Population Thesis 116
Ricardo: Method, Policy, Scope 118
Ricardo’s Method 118
Ricardo and Economic Policy 119
The Scope of Economics According to Ricardo 120
Ricardo’s Model 121
The Problem of the Times: The Corn Laws 122
Analytical Tools and Assumptions 124
Ricardo’s Theory of Land Rent 125
Diminishing Returns 125
Rent Viewed from the Product Side 125
Rent Viewed from the Cost Side 125
Contents vii
A More General View of the Concept of Rent
131
Ricardo’s Value Theory
132
Ricardo’s Labor Cost Theory of Value
133
Competitively Produced Goods
134
Difficulties of a Labor Cost Theory of Value
135
Did Ricardo Hold a Labor Theory of Value
137
Summary of Ricardian Value Theory
138
Ricardian Distribution Theory
140
Distribution Theory
140
Distribution of Income over Time
141
Back to the Corn Laws
143
Comparative Advantage
143
Absolute Advantage
144
Comparative Advantage
145
Ricardo, Smith and the Foundations of Trade
148
Stability and Growth in a Capitalistic Economy
150
Mercantilist Views of Aggregate Demand
150
Smith’s Views of Aggregate Demand
152
Malthusian Underconsumptionism
152
Say’s Law
154
The Bullion Debates, Henry Thornton, and Ricardo’s Monetary Theory
155
Technological Unemployment
156
Keynes and Malthus and Ricardo
156
Summary
159
Key terms
160
Questions for Review and Discussion
161
Suggested Readings
162
6 J.S. Mill and the Decline of Classical Economics 1 6 3
Post-Ricardian Developments 165
Early Critics of Classical Economic 165
The Scope and Method of Economics 166
Malthusian Population Theory 168
Wages Fund Doctrine 169
Historically Diminishing Returns 170
The Road Not Taken: Charles Babbage and Increasing Returns 171
Falling Rate of Profits 171
Theory of Profits (Interest) 172
viii Contents
J.S. Mill: The Background of His Thought 173
Mill’s Approach to Economics 173
Mill’s Eclecticism 175
Jeremy Bentham’s Influence 176
Laissez Faire, Intervention, or Socialism? 177
A Different Stationary State 179
Mill’s Social Philosophy 180
Millian Economics 181
The Role of Theory 181
Mill on Contextual Analysis 183
Value Theory 184
International Trade Theory 186
Mill’s Monetary Theory and Excess Supply: Say’s Law Reconsidered 187
The Currency and Banking Schools 188
The Wages Fund: Mill’s Recantation 189
Summary 190
Key terms 192
Questions for Review and Discussion 193
Suggested Readings 194
7 Karl Marx and His Critique of Classical Economics 1 9 5
An overview of Marx 195
Intellectual Sources of Marx’s Ideas 197
Marx’s Theory of History 197
A Closer Look at the Dialectic 200
Socialism and Communism 201
Marx’s Economic Theories 204
Marx’s Methodology 204
Commodities and Classes 206
Marx’s Labor Theory of Value 206
Surplus and Exploitation 208
Marx’s labor Theory of Value: A Summary Judgment 209
Marx’s Analysis of Capitalism 210
The Reverse Army of the Umemployed 211
Falling Rate of Profit 213
The Origin of Business Crises 216
Cyclically Recurring Fluctuations 217
Disproportionally Crises 218
Contents ix
The Falling Rate of Profit and Business Crises 219
Business Crises: A summary 219
The Concentration and Centralization of Capital 220
Increasing Misery of the Proletariat 221
Summary 223
Key terms 224
Questions for Review and Discussion 224
Suggested Readings 225
PART THREE NEOCLASSICAL ECONOMIC THOUGHT AND ITS CRITICS 227
8 Jevons, Menger, and the Foundations of Marginal Analysis
231
Important Writers 231
Historical Links 232
Forerunners of Marginal Analysis 233
Jevons, Menger, and Walras 234
A Revolution in Theory? 235
Inadequacies of the Classical Theory of Value 236
What is Utility? 238
Comparisons of Utility 239
Utility Functions 241
Utility, Demand, and Exchange 241
The Value of Factors of Production 242
Evaluation of Jevons and Menger 243
Classical Versus the Emerging Neoclassical Theory of Value 245
Second-Generation Austrians 246
Friedrich von Wieser 246
Eugon von Bohm-Bawerk 248
Which Way to Go? The Changing Scope and Method of Economics 248
The Influence of Jevons, Menger, and Walras on Subsequent Writers 249
Summary 250
Key terms 251
Questions for Review and Discussion 251
Suggested Readings 252
x Contents
9 The Transition to Neoclassical Eocnomics:
254
Marginal Analysis Extended
Important Writers 254
Marginal Analysis Extended: The Second Generation 255
Marginal Productivity Theory 257
Principle of Diminishing Returns 257
The New and the Old 260
Product Exhaustion 262
Wicksell on Product Exhaustion 265
Ethical Implications of Marginal Productivity Theory 266
Marginal Productivity as a Theory of Employment 268
Marginal Productivity Theory Criticized 269
Profits and Interest 270
Profit Theory 271
Capital and Interest Theory 272
The Problem of Interest 274
Bohm-Bawerk’s Theory of Interest 276
Fisher on Interest 277
The Problem of Interest: A Summary 279
Summary 280
Key terms 281
Questions for Review and Discussion 281
Suggested Readings 282
10 Alfred Marshall and Neoclassical Economics 2 8 4
Marshall’s Claim to Being the Father of Neoclassicism 284
Scope of Economics 286
Marshall on Method 289
Understanding the Complex: The Marshallian Method in Action 291
The Problem with Time 292
The Marshallian Cross 293
Marshall on Demand 295
Consumers’ Surplus 298
Taxes and Welfare 300
Marshall on Supply 301
Marshall on Distribution 303