From Political Economy to Economics

Method, the social and the historical in the evolution of economic theory

Dimitris Milonakis, Ben Fine

• Publisher: Routledge
• Year: 2009
• Print ISBN: 9780415423229
• eBook ISBN: 9781134099436
• Topic: Business
• Subtopic: Business General
• Index: Business

Economics has become a monolithic science, variously described as formalistic and autistic with neoclassical orthodoxy reigning supreme. So argue Dimitris Milonakis and Ben Fine in this new major work of critical recollection. The authors show how economics was once rich, diverse, multidimensional and pluralistic, and unravel the processes that lead to orthodoxy's current predicament. The book details how political economy became economics through the desocialisation and the dehistoricisation of the dismal science, accompanied by the separation of economics from the other social sciences, especially economic history and sociology. It is argued that recent attempts from within economics to address the social and the historical have failed to acknowledge long standing debates amongst economists, historians and other social scientists. This has resulted in an impoverished historical and social content within mainstream economics.

The book ranges over the shifting role of the historical and the social in economic theory, the shifting boundaries between the economic and the non-economic, all within a methodological context. Schools of thought and individuals, that have been neglected or marginalised, are treated in full, including classical political economy and Marx, the German and British historical schools, American institutionalism, Weber and Schumpeter and their programme of Socialökonomik, and the Austrian school. At the same time, developments within the mainstream tradition from marginalism through Marshall and Keynes to general equilibrium theory are also scrutinised, and the clashes between the various camps from the famous Methodenstreit to the fierce debates of the 1930s and beyond brought to the fore.

The prime rationale underpinning this account drawn from the past is to put the case for political economy back on the agenda. This is done by treating economics as a social science once again, rather than as a positive science, as has been the inclination since the time of Jevons and Walras. It involves transcending the boundaries of the social sciences, but in a particular way that is in exactly the opposite direction now being taken by "economics imperialism". Drawing on the rich traditions of the past, the reintroduction and full incorporation of the social and the historical into the main corpus of political economy will be possible in the future.

1 Introduction

‘A person is not likely to be a good economist who is nothing else. Social phenomena acting and reacting on one another, they cannot rightly be understood apart’.

J. S. Mill quoted by Marshall (1959, p. 637)¹

‘The papers by Arrow, Davis, Solow and Temin all reach the same conclusion, that knowledge of and appreciation for history is important for economics and ought to be an integral part of the discipline’.

Gavin Wright (1986, p. 77)²

1 General Outline

If we were to describe the essence of this book in two words, they would certainly be political economy. If we were to use four words, they would be economics as social science. In short, the book is about the shifting boundaries between the economic and the non-economic, all set within a methodological context. It deals with the process by which political economy became economics, through the desocialisation and dehistoricisation of the dismal science, and how this heralded the separation of economics from the other social sciences at the beginning of the twentieth century.

In part, this development is explained through the identification of two great schisms in economic thought which played a decisive role in the process. The first is the schism between the abstract/deductive and the inductive/historical methods, which is diachronic in content. Although this begins in classical political economy with the first skirmishes between Ricardo and Malthus, it cuts across the whole time horizon up to the Second World War, reaching a climax in the 1880s with the famous Methodenstreit, between the marginalist, Carl Menger, and the leader of the German Historical School, Gustav Schmoller. The second rupture exists primarily in the movement from classical political economy to neoclassical economics, via the marginalist revolution, and is both methodological and substantive in content.

All classical writers wrote at a time when political economy was the only identifiable social science, with the fragmentation of the latter lying far ahead in the future. As such, most of them were able to range freely across the economic and the non-economic, to incorporate the social and the psychological into their analyses, and to move from historical narrative to theoretical discourse without apology. Indeed, for most classical writers, especially Smith, Mill and Marx, political economy was seen as a unified social science, rather than simply as the science of the economy.

This state of affairs changed drastically during and after the marginalist revolution and the subsequent move from (classical) political economy to (neoclassical) economics, although marginalism did not signal the end of attempts to keep the relationship between the economic and the non-economic alive. Such attempts, however, increasingly had to find refuge either in alternative schools of thought – such as the German and the British Historical Schools, American institutionalism or the Austrian School, whose members’ work was non-marginalist in principle and interdisciplinary in character – or in the efforts of individual writers like Weber and Schumpeter, each of whom emphasised multi-disciplinarity, albeit with different emphases. The end result of these processes was the establishment of neoclassical orthodoxy as the dominant school of thought within economics, and the concomitant separation of economics from other social sciences, especially economic history and sociology. Within economics, this process was rounded off through two parallel developments: the Keynesian revolution of the 1930s, and the further mathematisation and formalisation of mainstream economics following developments in microeconomics and general equilibrium theory. In short, our aim is to trace the route from political economy to economics and the corresponding, and to some extent subsequent, separation of economics from other social sciences.

2 Main Themes

The focus of this book, then, is the relationship between economic theory and the social and historical – what might loosely be termed the non-economic – all attached to a methodological context. Considerable ambiguity is necessarily involved here unless ‘the economic’ is understood in extremely narrow and specific terms. If it is simply the study of supply and demand in the framework of proximate factors defined by economic orthodoxy (such as given preferences, technology and endowments), then there would appear to be no lack of precision. ‘The non-economic’ then, would simply be everything else, and would be taken as exogenous or, more likely, irrelevant. In this case, our volume would be short (and far from sweet) and confined to the study, like much of contemporary economics, of the relationship between select exogenous and endogenous variables. Shift preferences or technology, for example, and there is a corresponding shift in demand and supply, respectively.

Matters are not so simple, however, for a number of reasons. First and foremost, economic theory as currently constituted is the exception rather than the rule as far as the history of economic thought is concerned. The way in which it handles the relationship between the economic and the non-economic is both recent and, in a longer perspective, peculiar. In the past, the relationship and the boundaries between the two have been very different. This is because the social and the historical content of economic theory, most notably symbolised in the terminology of ‘political economy’, has been substantial and, often, explicit. But we should clarify what we mean by this, as it is something that is more often claimed in criticism of the orthodoxy than it is explained.

By the social content, we mean the extent to which the nature of the particular society or societies under consideration, consciously or unconsciously influences the economic concepts deployed. Necessarily, such social content of economic theory delimits its scope of application to particular societies, those for which the theory’s concepts are appropriate (historical specificity). Thus, for example, how we construct and use the notion of capital will have a bearing on its relevance for capitalist economies as such – or not, if it is entirely inappropriate.

The historical content of (economic) theory is closely related to the social, and the two might be used interchangeably. But ‘the historical’ includes the question of how the specificity of the past affects the analysis. What is different, for example, about German capitalism as opposed to another system? To answer this, we need to know what is socially different about capitalism (itself a more general, or grander, historical question) from other forms of economic organisation, in order to highlight differences between one capitalism and another by setting aside what they have in common.

These definitional conundrums need not detain us further, and probably offer little of novel substance to the non-economist. For economics as a discipline, however, it has become commonplace to accept concepts of analysis uncritically, and not to interrogate their historical and social content. Little attention has been paid to the issue of why there should be swings in analytical content, from monetarism to Keynesianism and back again, for example. Indeed, as a discipline, economics tends to pride itself (inevitably erroneously) on being value-free and independent of external influence.

It is therefore salient to remind economists that this has not always been true of their discipline, and that the social and historical content of what they do (or do not do) now is worthy of critical attention through the prism of the past. This is especially so for two reasons. On the one hand, in its methods and technical apparatus, economics has become asocial and ahistorical, in the sense of deploying universal categories without reference to time, place or context – such is the nature of categories of analysis like production and utility functions. Further, the intellectual passage to these universal categories is one of qualified acceptance, if not total resistance. The resulting reservations over what economics was becoming – even or especially by those pushing it forward – have only too readily been forgotten, and are worthy of restoration to our attention.

This involves discussion of issues that have been neglected, if not increasingly set aside, by today’s mainstream economics. It is now commonplace to observe that discussion of economic methodology belongs to a field of study separate from economics itself, more attuned to the philosophy of science. As a result, mainstream economists not only deploy a method or methods that have long been discredited, not least by the natural sciences that they seek to emulate, they also prove themselves incapable of understanding the terms under which such methodological issues are discussed.

Critical recollection is the intention of this volume. Its subject matter will range over how the relationship between economic(s) and the non-economic has changed over time both in extent and content, why it should have changed, and it will also offer judgements over the merits of how economics has treated the historical, the social and the methodological.

These are surely ambitious tasks, but – however well and fully we have grappled with them – do they warrant close attention? Although the book is primarily about economics, the topics treated here are anything but fashionable within the profession. In this respect, our book fills a huge gap in the relevant literature, with Hodgson’s How Economics Forgot History (2001) being the only major exception. This is not because the central issue of the relationship between economics and the social and the historical has been explicitly and fully settled as far as the orthodoxy is concerned. On the contrary, as Solow (1986, p. 21) puts it, ‘economic theory learns nothing from economic history’. It is arguable that the vast majority of today’s academic economists, especially the younger generations, are unaware that there might be an issue over the appropriate contribution to be made to their endeavours by the historical or the social. For the vast majority, even to try to explain the problem would prove futile. There is a sense in which, whilst economics profoundly reflects historical and social processes both materially and ideologically, it is blissfully ignorant of them and wishes to remain so. If this book helps in redressing this balance, even by a little, it will have achieved its aim.

This points to some remarkable features of economics as a discipline that set it apart as not only separate from but also alien to the other social sciences. First and foremost – for otherwise the disregard for the historical and the social could hardly be sustained – economics has become totally intolerant of approaches other than its own mainstream. It has become dominated by the neoclassical approach, taught almost exclusively as standard, and often without reference either to irrefutable criticism or to alternative approaches that at most cling for survival upon its margins. Variously referred to as autistic, as monoeconomics, or as subject to Americanisation, homogeneity of thought and approach within the discipline has since the Second World War been strong, but it has also intensified over the past decade or so. Paradoxically, within the UK, heterodoxy within economics is increasingly to be located in burgeoning schools of management, business studies, marketing and (tellingly) accountancy. These previous bastions of orthodox economics as supply and demand, of the firm and the consumer, have been far more open to root economic considerations in a more rounded approach than economics itself. This is both in method and by incorporating the insights of other social sciences and the historical. Even accountancy has begun to recognise that economic calculation is socially constructed in response to material and ideological practices!

A second fundamental feature of economics that allows it to disregard (the issue of) the historical and the social is its method. It has strengthened its commitment to falsifiability (or to close consistency with empirical evidence through statistical methods), to axiomatic deduction from abstract assumptions, to methodological individualism of a special type (utility maximisation), and to equilibrium (and efficiency) as an organising concept. It is a moot point whether these principles are more observed selectively for convenience in the practice of mainstream economics, and whether they are mutually compatible with one another in any case. Be this as it may, the conventional wisdom about its own principles and practices tend to prevail without question despite debates over methodology over the past few decades (let alone those of longer standing) that have long since departed from and shown such nostrums to be invalid. As a result, economics has been marked by an almost exclusive reliance, at least in principle, upon abstract mathematical formalism married to statistical testing or estimation against given evidence, i.e. data. Anything within the discipline that does not conform to these dictates is dismissed as lacking science and rigour (with the same attitude that has been imperiously adopted towards other social sciences).

As already indicated, though, the early chapters of this book establish that economics has not always been like this. Classical political economy, from before Adam Smith, had a profound sense of the historical and the social, and consciously incorporated this both in its concepts and its theory, as we will see in Chapters 2, 3 and 4. Not only was Adam Smith a great virtuoso in combining the economic with the philosophical, the psychological, the social and the historical, but in his Wealth of Nations can be found the sperm of most subsequent developments in economic theory related to these issues. Deduction and historical narrative were combined with individualistic and collective modes of reasoning, sometimes in a dynamic way, at other times in a comparative static analysis of the capitalist economy.

On the other hand, despite their presumed common adherence to the labour theory of value, Ricardo and Marx lie at opposite extremes in the historical content of their economics. Ricardo pioneered the deductive method within economics by seeking to explain the categories of capitalism by appeal to the labour theory of value. By contrast, Marx understands the labour theory of value in terms of concepts that consciously correspond to the material conditions and organisation of the capitalist economy itself.

These differences between Ricardo and Marx in part reflected, but were not reducible to, a difference in emphasis on the deductive as opposed to the inductive method, respectively. Nonetheless, Marxism apart, Ricardo’s deductivism offered a focus for the emergence of alternative schools of thought in support of, or reacting against, this method not least as Ricardianism lost its intellectual stranglehold in the later part of the nineteenth century. The most prominent early reaction against Ricardianism, pre-dating but surviving beyond the marginalist revolution, was provided by the German Historical School with its emphasis upon historical study, as we will see in Chapter 5. Its presumed antipathy to theory in general and marginalism in particular provoked the Methodenstreit or ‘Battle over Method’, which is covered in Chapter 6. The relative merits of induction and deduction were heavily debated on a broader front across the positions adopted in the Methodenstreit, highlighting a long-running controversy that is itself inevitably and explicitly concerned with the historical content of economics. In particular, in the context first of Ricardo’s deductivism and, subsequently, the axiomatics of marginalism, attention focused on the extent to which universal, abstract theory could prevail independently of the cultures, nations and traditions of the economies under consideration.

In a wonderful illustration of the history of the subject being written by the victors – and, it should be added, subsequently forgotten – it is commonly claimed that the marginalists and deductivism won the debate, with the fatal flaw in the Historical School being its lack of theory (rather than their opponents’ lack of history). This is only true in the sense that the marginalists prevailed. Indeed, at least from the 1870s until the 1950s, marginalist economics continued to be marked by its failure to vanquish those committed to the historical and social as a part of, but increasingly frequently as an adjunct of, economics. For the marginalist revolution was attached to a huge intellectual compromise. On the one hand, its analytical principles are universal, not historically or conceptually rooted by time, place, activity, stage of development, etc. Such is the nature of abstract appeal to utility, production function and other categories that survive, primarily unmodified, to the present day. On the other hand, economics detached itself from the other social sciences and confined its subject matter to the science of the market. Thus economic history itself – an offspring of the historical economics of the German and the British Historical Schools – emerged as a separate discipline, as a reaction against the inadequacy of the historical content of marginalism, as charted in Chapter 8 and to be covered in detail in a subsequent book.

Thus, paradoxically, one of the outcomes of the marginalist revolution, and its confrontation with classical political economy and the Methodenstreit, was to limit the scope of application of its universally applicable concepts. Instead, social science was fragmented into separate disciplines. This process, however, involved a number of different aspects beyond those for which the Methodenstreit is usually remembered (if it is remembered at all). These include not only the relative merits of induction and deduction, but also the relationship between the separate disciplines, the nature and significance of economic rationality, individualism versus holism, and the nature and origins of (modern) capitalism as an economic and social system. The discussion in later chapters is guided by two elements that are characteristic of the results of the marginalist revolution, but which can also be shown to precede it. These are: a shift in emphasis from more synthetic methodological approaches to purer and more deductive methods, and the narrowing of the scope of economic enquiry. As already suggested, with the shift from (classical) political economy to (neoclassical) economics, not only has there been a shift of method but there has also been a gradual loss of discussion of methodology itself.

Looking forward from this time, it is easy to recognise how such concerns have been set aside or reduced to simplistic nostrums around mainstream neoclassical economics. Looking back, however, not least through the economic and social theorists of the time, such issues had to be addressed as part of their intellectual heritage; not surprisingly, there was by no means universal agreement upon, or response to, the various conundrums involved. This is illustrated through Chapters 7 to 13 by reference to a range of contributors, across the various strand...

Table of contents

• Cover
• Half Title
• Title Page
• Copyright
• Contents
• Preface
• 1. Introduction
• 2. Smith, Ricardo and the first rupture in economic thought
• 3. Mill’s conciliation, Marx’s transgression
• 4. Political economy as history: Smith, Ricardo, Marx
• 5. Not by theory alone: German historismus
• 6. Marginalism and the Methodenstreit
• 7. The Marshallian heritage
• 8. British historical economics and the birth of economic history
• 9. Thorstein Veblen: economics as a broad science
• 10. Commons, Mitchell, Ayres and the fin de siècle of American institutionalism
• 11. In the slipstream of marginalism: Weber, Schumpeter and Sozialökonomik
• 12. Positivism and the separation of economics from sociology
• 13. From Menger to Hayek: the (re)making of the Austrian School
• 14. From Keynes to general equilibrium: short- and long-run revolutions in economic theory
• 15. Beyond the formalist revolution
• Notes
• References
• Indexes