The Ancient Greeks who gave to us the name of this subject lacked the concept of what we now call economics. Oeconomicus would be ‘Household Management’ in modern English, the domain of Mrs Beeton rather than J.S.Mill. Of course, what we would now recognize as economic questions are certainly ancient, but such questions and particular answers to them amount to less than the kind of knowledge that in Schumpeter’s elegant description, ‘…has been the object of conscious efforts to improve it’. In that sense, which is of a science in the broad and generous use of that term, economics is a young discipline. The term now usually employed is even younger than the modern form of the subject itself. Earlier writers described themselves as ‘political economists’. Too much can be and has been made of this distinction. In an age in which the educated knew Greek, it was pertinent to remind the reader what the term did not mean. However, any terminological distinction between economics and political economy must be questioned. The unadorned ‘economic’ had long been in use, and was frequently employed by Marx, while ‘political economy’ has continued in use into the twentieth century and has enjoyed something of a revival lately from writers wishing to advertise that their work has not treated its subject in isolation from the political system.
It is customary to associate the beginning of modern economics with the publication of Adam Smith’s The Wealth of Nations (1776). As this attribution sets aside more than a thousand years of economic writing, ancient, Christian and Islamic, it calls for justification. However, a study of the earlier literature will not leave the reader long in doubt concerning the claim that a radical shift of method had taken place. What we recognize in Adam Smith’s work, and what sets it apart from that which had gone before, is the characteristic imprint of the eighteenth century in which the Grand Idea finds its expression in the language of exact scholarship. We recognize the same spirit in reading Gibbon’s History.
Adam Smith’s writing represents the source of a stream which runs to the present day. This is true of modern economics in general but more particularly of a style of approaching the subject which was his own. Its distinguishing characteristic is its limited use of the method of simplification and abstraction. The strengths of the method are obvious, but experience has revealed its weaknesses. Description needs a strong guiding principle if it is not to deteriorate into the unenlightening elaboration of a mass of incoherent fact. One could illustrate this point from The Wealth of Nations itself, where illustrations are sometimes developed to the point of tedium, but that would do less than justice to a writer whose genius generally enabled him to surmount this problem. Better illustrations of the point might be provided from much later work by the Institutionalist School which made its influence felt in Germany and in the United States in the late nineteenth and early twentieth centuries.
A problem inherent in Adam Smith’s method is that it provides no guidance concerning the resolution of disagreements. The arguments make use of persuasive reasoning and examples to back them up. If the number and quality of these is overwhelming there will clearly be no difficulty, but such cannot always be the case, and as economics grew the triumph of ideas by acclamation was far from being the rule. What was required were more refined methods of economic reasoning and more powerful methods of evaluating the kinds of claim to which that reasoning gave rise. The first development preceded the second but they were ultimately seen to be closely related.
The method of studying economic questions by means of simplification and abstraction was developed, and even taken to extremes, by David Ricardo. So important was his innovation of method that writers for two generations acknowledged his influence even when they propounded conclusions quite contrary to his own. The kind of abstraction that Ricardo developed took the form of what today would be called an ‘economic model’. This consists in a formal, more or less simple, invented economy which is claimed to illustrate a point or to capture the essence of the true, and of course more complicated, economy of real life. One illustration would be a numerical example, Another would be the stylized story, such as the Tribe of Hunters by means of which Adam Smith illustrated his theory of the division of labour. The numbers of an example are not taken by their inventor to be the values of real life, while stories can be taken to be schematic accounts of true history. For the present purpose, however, this distinction is less important than the fact that both are examples of model building.
Ricardo was not the first or the only economist to employ a model in his work. What makes him stand out in that modelbuilding was not a method to which he had occasional recourse: it was his typical and usual method of reasoning. Moreover, an examination of his arguments will show that the model is essential to the argument; it is not there to add colour or verisimilitude. Thus Ricardo’s work sometimes reveals an almost mathematical quality, being concerned with the development of the logical implications of certain postulates. The apparent power and objectivity of this kind of reasoning could not fail to impress those who came to it anew.
From the beginning of the modern subject, then, certain important distinctions are already apparent, notably that between realism and abstraction, and between description and model building. The method of economics for another hundred years was to be very largely historical (historical, that is, in the sense that the kind of evidence employed and the manner in which it was made use of were both the same as would characterize historical enquiry). Ricardo used invented numbers, partly because his argument was general and not dependent upon the particular values selected, but also because the availability of statistics in his time was extremely limited and haphazard. But it would be wrong to suppose that this made economics a non-empirical subject. Malthus, for example, was certainly influenced by the observation that population was growing at an unprecedented rate in the England of his time, and the correctness of that observation cannot be questioned. He estimated that population unchecked by restraints would double every 25 years, which corresponds to an annual rate of increase of 2.8 per cent per annum. The latter estimate has stood up well for a population which is balanced in age composition at the start and then accelerates in its growth.
The work of Petty in gathering statistics is frequently cited, but it stands out more for being pioneering than for being representative. It was government that was to collect statistics, and government was still exceedingly small by later standards. A growing science normally demands measurement, if not experiment, as a young child calls for food. Economics, however, was nourished for a long time by such observations as were available to the informed citizen and chiefly by its own ideas. In this respect it resembled Greek science or modern physics when the latter has outreached the possibility of experiment. Most of all, it resembled philosophy to which its close affinity was recorded in the term ‘moral sciences’ for long in use in the ancient universities of Britain. One could characterize the 150 years and beyond following the publication of The Wealth of Nations as having been preoccupied with working out the logical implications of certain assumptions about economic reality, while at the same time those assumptions themselves were in the process of being changed and influenced by far-reaching alterations in economic institutions. This was no small task. The logical implications of economic assumptions can be rich and complex, and they readily give rise to controversy. Some have attributed these problems to the inherent difficulty of the subject, others to the powerful ideological content of the questions involved—both are partly correct.
The difficulties of economic theory do not consist simply of the intellectual demands that it makes, which do not compare with those of physics or pure mathematics. It is rather that economics requires a body of analytical tools and a technique of reasoning without which even simple questions cannot be accurately answered. The uninitiated constantly demonstrate the truth of that claim. However, the development of these tools and methods took some considerable time. One need only compare the writings of John Stuart Mill with those of some indifferent economist of the turn of the century to see what a difference the accumulation of technique had made. In Mill we see one of the finest intellects of the nineteenth century struggling to cut his way through a jungle. In the plain economist of the later years we would see an unskilled craftsman no doubt, but one working with what by then had become a thoroughly useful box of tools. There are even tasks for which the latter would be better employed.
The ideological problem is ever present. Economists have sometimes seen it as a distraction, as a diversion from the important questions on which economics could speak, but there is no justification for such a simple separation. Through experience and through the application of the same apparatus that he uses to resolve other matters, the economist is uniquely placed to say useful things about the type of political conflict which is concerned with the division of economic goods. That does not mean, of course, that he should play God, or pretend to more expertise than he has, but equally he cannot push such questions aside and say that because they are not all to do with him, they are therefore not at all to do with him.
The problem is naturally not peculiar to economics. It arises in any field in which the expert must address himself to issues concerning which people, including the practitioners themselves, their students, their employers and others, have strong feelings. Certain principles are obvious if economics is not to be sucked into the political whirlpool. The pursuit of objectivity and scholarly integrity clearly belong among them. These principles are under attack from two sides. On the one side will be some who will argue that there is no detachment, no standing apart, and that science should serve progressive forces in society, however those may be defined at the time. On the other side will be those who claim to accept these principles, only to discredit them by advancing under the guise of the objective and the detached what is patently the ideological.
Economics has been assaulted to its foundations during its still short history by the claim that its doctrines are no more than ‘false ideology’. Marx attacked what he called ‘bourgeois political economy’ as mere apologetics for the existing social order. He said the most wounding thing that can be said about a science—that his opponents were concerned only with the superficial, the surface appearance of things. The importance of Marx’s contribution will ultimately be judged by what he put in the place of the economics which he attacked, and not by the attacks as such, memorable though their invective may be to anyone who has read them. It was Marx’s political activity, and his political writing, that changed the world, as indeed they did, and not his economic theory. This is to insist on making a distinction to which the master would have strongly objected, but make it we must. Within the narrow field of economic theory he retains his followers to the present day, but Marxist economics, recent revivals notwithstanding, remains a backwater and a curiosum beside mainstream economics. The fact that it has failed to propose an alternative system to orthodoxy with anything like the same reach and the same richness, and probably could not as it is formulated, may alone explain this fact.
The last third of the nineteenth century witnesses a huge burgeoning of economic theory and the beginnings of systematic empirical investigation. The theoretical movement has been unhappily named ‘neo-classical’. It was not ‘neo’ if that prefix means a revival of an earlier period, and it is difficult to see what meaning of the term ‘classical’ would usefully connect it with the early writers. Naturally, however, no movement is unconnected with the past. The use of abstraction and model-building was now freely employed, sometimes again to excess, but more fruitfully, generally speaking, than ever before. Most importantly, perhaps, the ultimately inescapable, mathematical character of economic reasoning was becoming clear. Diagrams were employed, not without resistance at first, and the concept of ‘elasticity of demand’ made its appearance. The ‘marginalism’ sometimes taken to characterize the period was more the result of the new approach than its generator. It may nevertheless be the most powerful single organizing principle that economics has yet seen.
These developments which established economics as we know it today began to change the appearance of the discipline. It came to stand apart from its neighbouring fields, not in every respect or in every part of the field to be sure, but noticeably all the same. Its employment of mathematics in particular, or mathematical-like reasoning, sometimes made it resemble physics more than it resembled law, philosophy, politics, history or sociology. On closer examination, however, economics did not seem to resemble any other discipline at all closely. The quantification of its theoretical relations, for example, without which a ‘natural’ science was not counted as having established itself, was still at a primitive stage of development. Still more, it was far from clear that the theoretical relationships of economics would ever attain to the status of those of physics or chemistry. The latter had arrived at powerful ‘laws’ which seemed to hold without exception and to a degree of approximation defined by the resolving power of the measuring instruments. True amendments to these laws were later shown to be necessary, but they were corrections and often unimportant ones. In economics, few ‘laws’ worth stating could be expected to hold except as tendencies. Science certainly could investigate weak effects or tendencies but it liked to have a great deal of preferably reliable data to undertake this task. But reliable data was in short supply and often small in quantity.
Had economists reached the point at which they demanded a testable implication of every new theory, they would undoubtedly have become completely discouraged by the formidable difficulties which confront the testing of economic hypotheses. Fortunately, perhaps, they have not yet arrived at that point. Many economic models are seen as following in the tradition established by Ricardo and illustrated by his model of comparative advantage. They are not designed to produce a hypothesis to be compared with the observation of reality, so much as they aim to explore the implications of making a set of assumptions, simplified by intention but equally meant to be realistic enough to capture something of reality. The ultimate aim of such an exercise is to influence the way in which people think about the world. There are so many examples of what such reasoning might be doing that it is not easy to find an instance that stands for more than its own type. However, the following case is certainly encountered rather frequently. An economist, drawing on observation formal or informal, says to himself: ‘I think that people behave in such and such a way. What would follow if I was right in that belief?’
Why should the economist worry about the subsidiary question, which may very well involve him in a lot of work? The answer is that it is a check on the reasonableness of his initial assumption. It is no different in kind, though surely less monumental in import, than Newton asking himself what would happen if bodies moved in straight lines at constant velocity unless acted upon by a force. Interesting assumptions need to have their plausibility tested in a thoroughgoing manner. Otherwise people who believe that the wealth of a nation is measured by its balance of payments surplus, have too much influence.
Economic theory in the twentieth century has been altered by a major intellectual revolution, associated with the name of Keynes, of which more will be said below. However, the effect of the Keynesian revolution, important though it has been, should not be allowed to detract from certain advances which have gone on more or less continually, and not directly influenced by the new ways of thinking. Nineteenth-century economic theory was based on abstraction and on bringing economic concepts to bear on practical questions. These tendencies were continued in the twentieth century, which has witnessed some of the greatest successes of formalization and generalization which the subject has known, at the same time as it has seen a growing interest in bringing economic theory to bear directly on important real matters. In an age in which econometrics was increasingly available as a research tool, the old presumptions about realism and unrealism have sometimes been upset. Mathematically rich models have sometimes, though not always, lent themselves better to empirical implementation than have homely and realistic ones. An important example of this is the new mathematical method of linear programming, which has made complex maximization problems, even of large size, highly soluble.
Nineteenth-century economic theory borrowed from ethics the notion of ‘utility’ as measuring or representing the level of satisfaction or well-being of the household or consumer. It no doubt struck the students of the time as reasonable and sensible, as did Marshall’s assumption that the marginal utility of income would be approximately constant, and it was useful in deriving simply the so-called ‘law of demand’. Eventually this was too out of touch with reality for the twentieth-century taste, which had become more positivistic. How was utility to be measured? The outcome of these doubts was the realization that utility could only be an ordinal quantity, that this was all that was required to derive the consumer’s behaviour, and the eventual understanding of income and substitution effects in a general framework.
The implication of this change of view did not stop with demand theory. Economic policy, or welfare economics, had previously been conceived as an application of utilitarian principles to economic questions. The application concerned, however, was a quantitative one; it supposed the measurability of utility. If that was now called into question, how were policy recommendations to be justified? A radical sceptical view said that they could only be justified as value judgements, that any claimed scientific basis to economic recommendations was unfounded. A more constructive approach set out to delineate which properties a recommendation would have to fulfil so as not to require value judgements for its validation. It was not so much that many interesting recommendations could be valuefree that made this exercise of importance; rather the whole investigation greatly clarified how value judgements enter into economic reasoning and for the first time put welfare economics on a sound basis.
The earlier welfare economics of the nineteenth century was now seen to be, to a great extent, the economics of efficiency. The problem of distribution, of equity, one could say, had been treated as something separate, independent of efficiency. One of the major advances of the twentieth century, particularly the period following the Second World War, has been the development of a theory of economic policy, much closer to reality in its conception and in its method than traditional welfare economics. Efficiency has not been shown to be an irrelevant consideration—far from it—but the role that efficiency plays in a system constrained by perhaps a bad distribution of incomes, or constrained to depart from efficiency in certain directions, has been clarified. Economic policy has become the art of maximizing the possible, secondbest optimization, in the jargon of today’s economics.
A settled interpretation and assessment of the contribution of Keynes is still elusive nearly fifty years after the publication of his great work, The General Theory, in 1936. That this should be so is a measure partly of problems and obscurities in that work, and partly of the value which has been conceded to its ideas even by those who have undertaken to attack them. Only recently have wholehearted rejections arisen in the main countries of economic research, rejections not based simply on ideological revulsion. Many earlier critiques, notably that associated with Milton Friedman’s monetarism, were more revisionist than completely counter to Keynes’s method as well as to his conclusions. One reason is that Keynes posed some sharp and important questions to the then orthodoxy which it was at the time wholly unable to answer. To these questions Keynes provided answers. There are no more potent ingredients for an intellectual revolution and its rapid dissemination.
