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Economic theory in retrospect

Economic theory in retrospect
This is a history of economic thought from Adam Smith to John Maynard Keynes – well, actually from
David Hume to Milton Friedman – but it is a history with a difference. Firstly, it is history of
economic theory, not of economic doctrines, that is, it is consistently focused on theoretical analysis,
undiluted by entertaining historical digressions or biographical colouring. Secondly, it includes
detailed Reader’s Guides to nine of the major texts of economics, namely the works of Smith,
Ricardo, Mill, Marx, Marshall, Wicksteed, Wicksell, Walras and Keynes, in the effort to encourage
students to become acquainted at first hand with the writings of all the great economists.
How should this book be read? ‘From the beginning to the end’ is the answer. Nevertheless, this
answer never satisfies readers who love to dip into books, sampling a page here and a page there. To
those readers, it must be emphasised that the argument builds up cumulatively and that later chapters
take for granted knowledge conveyed in earlier ones: numerous summaries are provided of what has
gone before but, nevertheless, no chapter is totally self-contained. In short, this is a book for learning
economics, the economics of yesterday but also the economics of today, and the incorrigible browser
pays a heavy price.
This fifth edition adds new Reader’s Guides to Walras’s Elements of Pure Economics and
Keynes’s General Theory of Employment, Interest and Money to the previous seven Reader’s
Guides of other great books in economics. There are significant but minor additions to the chapters on
Smith, Ricardo and Marx but major additions to the chapters on marginal productivity theory, general
equilibrium theory and welfare economics. The treatment of modern macroeconomics has been
extensively revised and the Notes on Further Readings have been both pruned and up-dated.



Economic theory in retrospect
Fifth edition
Mark Blaug
Visiting Professor of Economics
University of Exeter


CAMBRIDGE UNIVERSTIY PRESS

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CambridgeUniversityPress
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Published in the United States of America by Cambridge University Press, New York
www.cambridge.org
Information on this title: www.cambridge.org/9780521571531
First edition © Richard D. Irwin, Inc. 1962
Second edition © Richard D. Irwin, Inc. 1968
Third edition © Mark Blaug 1978
Fourth edition © Mark Blaug 1985
Fifth edition © Mark Blaug 1996
This publication is in copyright. Subject to statutory exception and to the provisions of relevant
collective licensing agreements, no reproduction of any part may take place without the written
permission of Cambridge University Press.
First published by Richard D. Irwin, Inc. 1962
Second edition 1968
Third edition published by the Cambridge University Press 1978
Fourth edition published by the Cambridge University Press 1985
Reprinted 1986, 1987, 1988, 1990, 1992
Fifth edition 1997
9th printing 2012
Printed and bound in the United Kingdom by the MPG Books Group
A catalogue record for this publication is available from the British Library
Library of Congress Cataloguing in Publication data
Blaug, Mark
Economic theory in retrospect.
Includes bibliographical references and indexes
1. Economics – History. I. Title.
HB75.B664 1977 330.1′09


ISBN 978-0-521-57701-4 paperback
Cambridge University Press has no responsibility for the persistence or accuracy of URLs for
external or third-party internet websites referred to in this publication, and does not guarantee that any
content on such websites is, or will remain, accurate or appropriate. Information regarding prices,
travel timetables and other factual information given in this work are correct at the time of first
printing but Cambridge University Press does not guarantee the accuracy of such information
thereafter.


To my son, David Ricardo


CONTENTS
Preface to fifth edition
Acknowledgements
Glossary of mathematical symbols
Abbreviations
INTRODUCTION
HAS ECONOMIC THEORY PROGRESSED?
NOTES ON FURTHER READING
PRE-ADAMITE ECONOMICS
MERCANTILISM
1 The balance-of-trade doctrine
2 The specie-flow mechanism
3 The defence of mercantilism
4 Precursors of Keynes?
5 Realistic elements in mercantilist theory
THE EIGHTEENTH-CENTURY PREDECESSORS
6 The mercantilist dilemma and the quantity theory of money
7 The theory of creeping inflation
8 Cantillon’s essay
9 Money analysis
10 The real rate of interest
PHYSIOCRACY
11 The meaning of physiocracy
12 The Tableau Economique
13 The single tax
14 Say’s Law
15 Scholastic influences: an afterthought
NOTES ON FURTHER READING
ADAM SMITH
1 Adam Smith and the Industrial Revolution
READER’S GUIDE TO THE WEALTH OF NATIONS
2 Division of labour
3 The measure and cause of value
4 Cost-of-production theory
5 Supply-determined prices
6 Wages
7 Profits
8 Relative wages
9 Rent
10 A social unit of accounting
11 The trend of prices
12 Capital and income
13 Banking
14 Productive and unproductive labour


15 An optimum investment pattern
16 Synoptic history
17 The invisible hand
18 Taxation and the public debt
19 Adam Smith as an economist
NOTES ON FURTHER READING
POPULATION, DIMINISHING RETURNS AND RENT
THE THEORY OF POPULATION
1 The population explosion
2 Malthus’s analytical schema
3 The empirical content of the theory
4 Automatic checks
5 The optimum theory of population and subsistence wages
6 Malthusianism today
DIMINISHING RETURNS AND THE THEORY OF RENT
7 The law of diminishing returns
8 Differential rent
9 The alternative cost of land
10 Land as a factor of production
11 Site value taxation
NOTES ON FURTHER READING
RICARDO’S SYSTEM
1 The theory of wheat profits or the corn model
2 The labour theory of value
3 Capital costs and labour values
4 The Ricardo Effect
5 The invariable measure of value
6 The fundamental theorem of distribution
7 The effect of capital accumulation
8 The trend of relative shares
9 Technical change
READER’S GUIDE TO THE PRINCIPLES OF POLITICAL ECONOMY
10 Value
11 Relative wages
12 The invariable measure of value
13 Demand and supply
14 Social accounting
15 Did Ricardo hold a labour theory?
16 Rent
17 Agricultural improvements
18 Wages
19 Profits
20 Foreign trade
21 Law of comparative cost
22 The natural distribution of specie


23 The purchasing power parity theory
24 Say’s Law
25 Pessimism?
26 Monetary theory
27 The Bullionist Controversy
28 The machinery question
29 Taxation
30 The lasting influence of Ricardo
31 Sraffa: Ricardo in modern dress
32 Ricardo in still more modern dress
NOTES ON FURTHER READING
SAY’S LAW AND CLASSICAL MONETARY THEORY
SAY’S LAW OF MARKETS
1 Say’s Identity
2 Dichotomisation of the pricing process
3 Say’s Identity and the quantity theory of money
4 Say’s Equality
5 Say’s Equality in classical writings
6 Keynes and Say’s Law
7 The direct mechanism
8 The indirect mechanism
9 Saving, investment and hoarding
10 The real interest rate
11 Forced saving
12 Conclusion
MALTHUS’S THEORY OF GLUTS
13 Malthus’s case
14 The doctrine of underconsumption
15 Exponential growth
16 What Malthus actually said
17 Ricardo and Malthus
NOTES ON FURTHER READING
JOHN STUART MILL
READER’S GUIDE TO THE PRINCIPLES OF POLITICAL ECONOMY
1 Laws of production and distribution
2 The doctrine of productive labour
3 Theory of capital
4 The wages fund doctrine
5 Advance economics and synchronisation economics
6 The machinery question
7 The rate of growth of the factors of production
8 Socialism
9 Custom and the laws of distribution
10 The distributive shares
11 The abstinence theory of interest


12 The theory of value
13 The quantity theory of money
14 Inflation
15 The loanable funds theory
16 Say’s Law
17 The currency–banking controversy
18 The real bills doctrine
19 Mill’s position on monetary management
20 Theory of international values
21 International wage and price levels
22 Hume’s Law
23 Transfer payments
24 The vent-for-surplus doctrine
25 The basis of a theory of international trade
26 Statics and dynamics
27 The falling rate of profit
28 The stationary state
29 Taxation
30 The incidence of taxes
31 The public debt
32 The scope of government
33 Education in classical economics
34 The classical economists and the Factory Acts
35 John Stuart Mill as an economist
NOTES ON FURTHER READING
MARXIAN ECONOMICS
1 Terminology
2 Value and surplus value
3 The great contradiction
4 The transformation problem
5 Solutions of the transformation problem
6 Historical transformation
7 What price value?
8 The Marxist case for the labour theory
9 Profit as unearned income
10 Marx and Böhm-Bawerk
11 Surplus value and economic surplus
12 The laws of motion of capitalism
13 The law of the falling rate of profit
14 A glance at the data
15 Capitalsaving innovations
16 The reproduction schema
17 Business cycles
18 The investment function
19 The myth of a laboursaving bias


20 Impoverishment of the working class
21 Economic imperialism
22 The role of institutional assumptions
READER’S GUIDE TO CAPITAL
23 Value
24 Socially necessary labour
25 Commodity fetishism
26 Theory of money
27 Surplus value
28 The Factory Acts
29 Marx’s use of historical material
30 Division of labour and machinery
31 Surplus value and labour productivity
32 The accumulation of capital
33 Absolute and relative impoverishment
34 Primitive accumulation
35 The costs of distribution
36 The turnover of capital
37 The reproduction schema
38 The great contradiction again
39 The transformation problem
40 The law of the falling rate of profit
41 Capitalsaving innovations
42 Foreign trade
43 Business cycles
44 Money and interest
45 Theory of rent
46 Marx as an economist
NOTES ON FURTHER READING
THE MARGINAL REVOLUTION
THE EMERGENCE OF MARGINAL UTILITY: AN ABSOLUTIST OR RELATIVIST
INTERPRETATION?
1 The new departure
2 The maximisation principle
3 Value and distribution
4 The genesis of marginal utility theory
5 A multiple discovery?
6 When is a revolution a Revolution?
7 The slow uphill struggle
JEVONS
8 The theory of exchange
9 Bilateral and competitive exchange
10 The catena
11 Disutility of labour
12 Negatively or positively sloped labour supply curves


13 Capital theory
OTHER FORERUNNERS
14 Cournot on profit maximization
15 Duopoly theory
16 Dupuit and the French engineering tradition
17 Thünen’s marginal productivity theory
18 Gossen’s second law
NOTES ON FURTHER READING
MARSHALLIAN ECONOMICS: UTILITY AND DEMAND
UTILITY THEORY
1 The measurability of utility
2 Operational measurement of utility
3 The Bernoulli hypothesis
4 Gambling and insurance
5 The Bernoulli hypothesis and progressive taxation
6 Derivation of demand curves
7 The constancy of the marginal utility of money
8 Restatement
9 The indifference-curve approach
10 The revealed preference approach
11 Marshallian demand curves
12 The status of the subjective theory of value
WELFARE ECONOMICS
13 Consumer’s surplus
14 Restatement
15 The four consumer’s surpluses
16 Tax-bounty analysis
NOTES ON FURTHER READING
MARSHALLIAN ECONOMICS: COST AND SUPPLY
1 The short run
2 Quasi-rents
3 The long run
4 External economies
5 What are external economies?
6 Producers’ surplus
7 The asymmetrical welfare effect
8 The representative firm
9 Monopolistic competition
READER’S GUIDE TO THE PRINCIPLES OF ECONOMICS
10 Introduction
11 Scope, substance and method
12 Wants and activities
13 Marginal utility
14 Consumer’s demand
15 Consumer’s surplus


16 The law of diminishing returns
17 The growth of population
18 The growth of capital
19 The division of labour or industrial organisation
20 Equilibrium of demand and supply
21 Stability conditions
22 Short run and long run
23 Joint and composite demand and supply
24 Marginal net product
25 Rent and quasi-rent
26 Increasing returns
27 The particular expenses curve
28 Tax-bounty analysis
29 Theory of monopoly
30 The marginal productivity theory of distribution
31 The supply of productive agents
32 The peculiarities of labour
33 The theory of interest
34 The theory of profit
35 The theory of rent
36 The course of economic progress
37 The greatness of Marshall’s contribution
NOTES ON FURTHER READING
MARGINAL PRODUCTIVITY AND FACTOR PRICES
THE DEMAND FOR FACTORS OF PRODUCTION
1 Marginal productivity theory
2 The normative implications
3 Exploitation
4 Is continuous substitution possible?
5 The theory of imputation
6 Linear programming
7 The Hobson objection
8 The high-wage economy theory
9 The present status of marginal productivity theory
LINEARLY HOMOGENEOUS PRODUCTION FUNCTIONS
10 Product exhaustion
11 The formal properties of linearly homogeneous production functions
12 The economic meaning of linearly homogeneous production functions
THE OPTIMUM SIZE OF THE FIRM
13 Wicksell’s proof of product exhaustion
14 The indivisibility thesis
15 Genuine variable returns to scale
16 Diseconomies of management
17 The growth of firms
THE THEORY OF PROFIT


18 The meaning of pure profit
19 The entrepreneur as a factor of production
20 The history of the concept of enterpreneurship
21 Profit as a return to uncertainty bearing
22 Profit as a return to innovations
23 Profit as a return to arbitrage
AGGREGATE PRODUCTION FUNCTIONS
24 The concept of micro-production functions
25 The problem of aggregation
26 Measurement of capital
TECHNICAL CHANGE AND PROCESS INNOVATIONS
27 Taxonomy
28 The automation bias in technical change
29 The inducement mechanism
30 The neglect of technical change
31 Marginal productivity once again
READER’S GUIDE TO THE COMMON SENSE OF POLITICAL ECONOMY
32 Consumer behaviour
33 The content of the maximand
34 Price formation
35 Supply as reverse demand
36 The doctrine of alternative costs
37 Alternative costs and factor prices
38 Distribution
39 The laws of return
40 The law of rent
41 Applied economics
NOTES ON FURTHER READING
THE AUSTRIAN THEORY OF CAPITAL AND INTEREST
BÖHM-BAWERK’S THEORY OF INTEREST
1 The productivity of greater roundaboutness
2 The three reasons for interest
3 The first reason
4 The second reason
5 The third reason
6 The interaction of the three reasons
7 The determination of interest
THE AVERAGE PERIOD OF PRODUCTION
8 Böhm-Bawerk’s model
9 The definition of the average period
10 The calculation of the average period
11 Is the average period infinitely long?
12 The demise of the average period of production
13 Synchronisation of production and consumption
14 The average period and the capital–output ratio


THE SWITCHING THEOREM
15 Double switching
16 The many-products–one-technique simplification
17 Is switching likely?
18 A post-mortem
FISHER’S THEORY OF INTEREST
19 Willingness and opportunity
20 Rate of return over cost
21 Diagrammatic exposition
22 Some uses of the diagram
23 The theory of investment decisions
24 The real and the money rate of interest
25 The real rate in a dynamic economy
26 Real versus monetary theories
THE RICARDO EFFECT
27 The concertina effect
28 The demonstration of the effect
29 The meaning of capital rationing
30 Conclusion
31 Money and real wages
READER’S GUIDE TO THE LECTURES ON POLITICAL ECONOMY, VOLUME I
32 Utility and value
33 Welfare economics
34 Imperfect competition
35 Production and distribution
36 Capital
37 The capital structure
38 Böhm-Bawerk’s theory of interest
39 The optimum storage period
40 The value of capital
41 The Wicksell Effect
42 Definitions of capital
43 The accumulation of capital
44 Cassel’s theory of social economy
45 Durable capital goods
46 Wicksell as an economist
NOTES ON FURTHER READING
GENERAL EQUILIBRIUM AND WELFARE ECONOMICS
WALRASIAN GENERAL EQUILIBRIUM
1 The concept of general equilibrium
2 The Walrasian system
3 The existence of general equilibrium
4 Stability and determinacy
5 The fall and rise of general equilibrium theory
READER’S GUIDE TO THE ELEMENTS OF PURE ECONOMICS


6 Preface to the fourth edition
7 Definitions of basic terms
8 Bilateral exchange
9 Multilateral exchange
10 Theory of production
11 Theory of capital formation
12 Capital formation or capital accumulation?
13 Monetary theory
14 Marginal productivity theory
15 Monopoly and taxation
16 Evaluation of Walras’s contribution
PARETIAN WELFARE ECONOMICS
17 The optimum exchange conditions
18 A Pareto optimum
19 The Scitovsky double criterion
20 Recent welfare economics
21 The marginal conditions
22 The optimal characteristics of perfect competition
23 Nonmarket interdependence
24 Public goods
25 Pigovian welfare economics
26 Second-best solutions
27 Marginal cost pricing
28 The Mislaid Maxim
29 Cost–benefit analysis
30 Back to the conflict between efficiency and equity
31 Competition as an end-state and competition as a process
NOTES ON FURTHER READING
SPATIAL ECONOMICS AND THE CLASSICAL THEORY OF LOCATION
1 The isolated state
2 Rent theory
3 The Thünen problem again
4 The theory of rings
5 Industrial plant location theory
6 The three-points problem
7 Sales areas
8 New developments in location theory
9 Weber’s theory of industrial location
10 Market area analysis
11 Isard’s general equilibrium theory
12 Linear transport functions
13 What survives of classical location theory?
14 The continued neglect of location theory
NOTES ON FURTHER READING
THE NEO-CLASSICAL THEORY OF MONEY, INTEREST AND PRICES


1 What is the quantity of money?
2 Fisher and Marshall
3 Wicksell’s rehabilitation of the indirect mechanism
4 The cumulative process
5 Monetary equilibrium
6 Saving–investment concepts
7 Price stabilisation
8 Expectations
9 Keynes and Wicksell
10 The demand for money after Keynes
READER’S GUIDE TO WICKSELL’S LECTURES, VOLUME II
11 Velocity
12 The demand curve for money
13 The direct and indirect mechanisms
14 The two rates
15 Business cycles
16 Currency reform
17 Is the money supply exogenous?
18 Is the demand for money stable?
19 Is money neutral?
NOTES ON FURTHER READING
MACROECONOMICS
THE KEYNESIAN SYSTEM
1 The Keynesian Revolution
2 Why did it succeed?
3 Leading elements in the success story
4 Keynes’s principal novel predictions
5 Other Keynesian predictions
READER’S GUIDE TO THE GENERAL THEORY OF EMPLOYMENT, INTEREST AND MONEY
6 Preface
7 The postulates of classical economics
8 The principle of effective demand
9 Definitions of terms
10 The propensity to consume
11 The inducement to invest
12 The rate of interest
13 The properties of capital, interest and money
14 The General Theory restated
15 Money wages and prices
16 An apologia for Pigou
17 The aggregate supply curve
18 Afterthoughts to the General Theory
19 What did Keynes mean?
20 The IS–LM reading
21 Dynamic readings


22 Rereading Keynes
23 Keynes’s contributions to economics
MACROECONOMICS SINCE KEYNES
24 The Phillips curve
25 The natural rate of unemployment
26 How expectations are formed
27 Rational expectations
28 Real business cycle theory versus neo-Keynesianism
NOTES ON FURTHER READING
A METHODOLOGICAL POSTSCRIPT
1 Falsifiability in classical economics
2 Falsifiability in neo-classical economics
3 The limitations of the falsifiability criterion in economics
4 The role of value judgements
5 American institutionalism
6 Why bother with the history of economic theory?
NOTES ON FURTHER READING
Index of names
Index of subjects


PREFACE
Fifth edition
This is the fifth edition of a book that has been out now for more than thirty years. Why on earth
should there be a new edition of a history of economic thought? Surely, the history of economic
thought is not a subject like macroeconomics or industrial organisation in which the growth of new
knowledge necessarily requires the periodic updating of textbooks? Surely, the interpretations of the
great thinkers of the past have long ago been set in concrete?
To ask such a question is to suggest that the history of economic thought is mere antiquarianism, so
that only the discovery of forgotten manuscripts or the re-examination of previously neglected works
could possibly add anything new to the corpus of received interpretations. But, on the contrary, every
new development in almost every branch of modern economics is liable to make us think again about
some old familiar text in the history of economics or to revise the standard version of what the great
thinkers of the past really meant to say.
The collapse of communism in Eastern Europe makes us read Marx afresh and casts a new light on
the socialist calculation debate of the 1930s. The emergence of public choice economics in the 1960s
reminds us of how much of the economics of politics in Adam Smith’s Wealth of Nations was
ignored by his immediate followers. Similarly, the emphasis on entrepreneurship and processcompetition in modern Austrian economics brings home to us the price that modern economics has
paid for its obsessive preoccupation with static equilibrium theory. In a hundred different ways, the
history of economics reacts to, but also acts on, every new current of thinking in modern economics.
In short, this (or any other) edition will never contain the last word on the meaning and significance of
past economic ideas.
The first edition of this book started with a statement of two diametrically opposed points of view
to the study of the history of economic thought – relativism and absolutism – and held out
programmatically for the latter view over the former. In due course I have had second thoughts about
both the choice between these two viewpoints and the terms in which I posed that choice. In
consequence, ‘relativism’ and ‘absolutism’ become ‘historical reconstruction’ and ‘rational
reconstruction’ and I now see merits in both standpoints. This has led to changes in the treatment of
many of the controversial questions in the history of economic ideas – as this fifth edition will show.
There are other changes in this edition, reflecting my changing view of the relative strengths and
weaknesses of the great economists themselves. Archilochus, a Greek poet of the third century AD,
once said: The fox knows many things but the hedgehog knows one big thing.’ Isaiah Berlin once used
that quotation to distinguish complex, multi-faceted thinkers from those who are single-minded and
narrowly focused. Applying that distinction to the great economists of the past, it would seem that
Adam Smith was clearly a fox and so were John Stuart Mill and Alfred Marshall; indeed, Marshall
was the very paragon of foxes. Ricardo, however, was a hedgehog through and through and so were
Jevons, Walras, Böhm-Bawerk and Wicksell. That leaves us with Keynes, who was a fox that grew
into a hedgehog, and Marx, who alone among all the great economists of the past, was sometimes a
fox and sometimes a hedgehog. I used to love hedgehogs but those were ‘my salad days when I was
green in judgement’. Now I prefer foxes – Smith over Ricardo, Mill over Senior, Marshall over
Walras – and from that preference followed a whole series of re-appraisals that at times threatened to
become a wholly new book. But I think that I have successfully resisted that temptation.
What then are the major concrete changes in this fifth edition? I have retained all the Reader’s
Guides to seven great classics of economics in an effort to encourage the study of primary rather than


secondary sources, and have added two new ones, a guide to Walras’s Elements of Pure Economics,
if only because few modern economists recognise that contemporary general equilibrium theory owes
more to John Hicks than to Léon Walras, and a guide to Keynes’s General Theory of Employment,
Interest and Money because everyone thinks they know what Keynes said but almost no one reads
him any more. There is a more extensive treatment of Austrian business cycle theory in chapter 12
because this was the major rival of Keynesian economics in the 1930s. Chapter 15 on the neoclassical theory of money, interest and prices has been both revised and lengthened but the most
thorough rewriting has come in the penultimate chapter 16 on macroeconomics.
I have tried to reduce the length of this too-long book and one way has been to cut the Notes on
Further Reading to the bare bones. When I wrote this book in 1962, bibliographies in the history of
economic thought were few and far between and my extensive ‘Notes on further reading’ at the end of
every chapter may be said to have filled a real need. Since then, however, H.W. Spiegel has left me
standing, adding 160 pages of bibliographical notes to his Growth of Economic Thought (3rd edn.,
1991), which includes almost everything that I cited and much more besides. In addition, J.H. Wood
has edited a series of Critical Assessments of Leading Economists, namely, multi-volumed
anthologies of reprinted articles on Smith, Ricardo, Malthus, Mill, Marx, Jevons, Walras, Marshall,
Hayek, Schumpeter, Wicksell, Veblen and Keynes, and I have supplemented these by my own series
of 46 volumes of reprints of commentaries on the major and minor economists of the past. In short, the
average reader who wants to read further in secondary sources is not at a loss where to find them, and
all this makes it unnecessary to waste space on annotated bibliographical guides. Nevertheless, I have
not entirely discarded the ‘Notes on further reading’ if only to indicate those ideas that I have
borrowed (or stolen) and, sometimes, to point the reader to interpretations diametrically opposed to
mine.
I want to thank Elke Kohler for her dedicated typing of the manuscript and the Department of
Economics at Exeter University for assistance in preparing this new edition. Roger Backhouse gave
valuable comments on the new chapter 16.
Mark Blaug
Exeter, Devon
September 1995


ACKNOWLEDGEMENTS
Acknowledgements to the first edition (1962)
I wish to express my gratitude to H. Barkai, B. Balassa, W. Fellner, T.W. Hutchison, R.L. Meek and
G. Shepherd, who read parts of the manuscrtipt and made many helpful suggestions. I am also grateful
to my graduate students, too numerous to mention, who from time to time argued me off some of my
pet hobbyhorses. Further, I must thank Margaret Lord for her stylistic improvements and Ann Granger
for the efficient typing of the manuscript.
I am indebted to the following publishers for permission to quote from works published by them:
Harper and Brothers – J. Viner, Studies in the Theory of International Trade, copyright 1937;
University of Chicago Press – Adam Smith, 1776–1926, ed. J.M. Clark, and others, copyright 1928
by the University of Chicago, and G.J. Stigler, The Development of Utility Theory, II’, Journal of
Political Economy, October, 1950; Harcourt, Brace and World – J.M. Keynes, The Economic
Consequences of the Peace, copyright 1919; Review of Economic Studies – O. Lange, ‘Marxian
Economics and the Modern Economic Theory’, Review of Economic Studies, June, 1935; The
Macmillan Company – A. Marshall, The Principles of Economics, copyright 1930, and K. Wicksell,
Lectures in Political Economy, copyright 1934; and Routledge and Kegan Paul – P. Wicksteed, The
Common Sense of Political Economy, copyright 1934.
Acknowledgements to the second edition (1968)
I wish to thank K. Kubota, E. Kuska, and R.M. Olsen for making specific suggestions that have
entered into this revision. I owe a particular debt to Ruth Towse and Maureen Woodhall for their
ruthless combing of the entire manuscript: we were friends when we started and, surprisingly enough,
we are still friends.
Acknowledgements to the third edition (1978)
Over the years I have had many unsolicited but welcome reactions from various readers, some of
whom have pointed to errors, misprints, and downright mistakes in the text. Their names are too many
to mention but I owe a particular debt to D. Hamblin for his careful reading of the previous edition
and to S.P Hersey for similar diligence applied to the present one.


GLOSSARY OF MATHEMATICAL SYMBOLS IN ORDER OF APPEARANCE
M = the stock of money
V = the number of times M turns over per time period
T = the volume of trade per time period
P = the average level of prices in a time period
Xi = the annual output of an industry or sector
aij = the input–output coefficient
Y
N
W
w
r
pi

π
AP
MP
ε
η
Di

=
=
=
=
=
=
=
=
=
=
=
=
=
=
=
=
=
=

money income
the number of workers
total money wages
the money wage rate
the rate of profit or the rate of interest
money prices of goods and services
time
total real wages
the real wage rate
the stock of physical capital
total real rentals of land
total real profits in an industry or sector
total money profits
the average product of a factor
the marginal product of a factor
the elasticity of a production function
the elasticity of an average product function
the demand for goods and services

Si

=

the supply of goods and services

Dn

=

the demand for money

Sn

=

the supply of money

EDi

=

excess demand for commodities

ESi

=

excess supply of commodities

EDn

=
=
=
=
=

excess demand for money
an arbitrary positive constant
the degree of a homogeneous function
the demand for cash balances as a fraction of total transactions or total income
the transactions demand for active money balances

t

K

λ
m
k
M1


M2

=

the speculative demand for inactive money balances

S
I
s′
z
G
u
ω
AR
MR
ci

=
=
=
=
=
=
=
=
=
=

planned saving
K = planned investment
the average propensity to save
the incremental capital–output ratio
the actual rate of growth of income
the fraction of the real wages bill spent on luxuries and personal services
elasticity of the average revenue function or price elasticity of demand
the average revenue of a product
the marginal revenue of a product
‘constant capital’

vi

=

ki

=

‘variable capital’
ci + vi

tc,v

=

turnover rate of ‘constant and variable capital’

dc,v

Q
oi

=
=
=
=
=
=
=
=
=

durability of ‘constant and variable capital’
fixed capital
working capital
‘surplus value’
‘rate of surplus value’ per time period
‘organic composition of capital’
the average organic composition in the economy as a whole
capital–labour ratio
output of a sector in Marx

tr

=

turnover rate of raw materials

tf

=

turnover rate of fixed assets

sv

=

proportion of ‘surplus value’ spent on consumer goods

sk

=
=
=
=
=
=
=

proportion of ‘surplus value’ spent on capital goods
disposable ‘surplus value’
‘variable capital’ minus salaries
‘rate of rent’
total utility
marginal utility
marginal utility of money

=
=
=

marginal utility of expenditures
marginal rate of substitution of pairs of commodities or factors
marginal product of labour

C
V
s
σ
q
q0

e′
U
MU
MUn
MUe
MRS
MPN


MPK

=

marginal product of capital

pN

=
=

the rate of change of wages per time period
price of a unit of labour

τ
γ
a
f
Vy

=
=
=
=
=
=
=
=
=
=
=
=
=
=
=
=

price of a unit of capital
marginal cost
total factor productivity
elasticity of the production function with respect to labour
elasticity of the production function with respect to capital
the real rental per unit of capital
the money rental per unit of capital
elasticity of substitution between factors
total revenue
total cost
elasticity of total costs
elasticity of average cost
units of product per unit of land area
supply area of a product
average freight rate
income velocity of money

Ye

=

earned income

Yd

=

disposable income

Yp

=

planned income

Yr

=
=
=
=

realised income
hoarding
the rate of change of prices per time period or inflation rate
the rate of change of inflation per time period

pK
MC
A
α
β
n
TR
TC

H


ABBREVIATIONS: JOURNALS AND ANTHOLOGIES
AEPX
Australian Economic Papers
AER
American Economic Review
APCE
Annals of Public and Co-Operative Economy
CAMJE Cambridge Journal of Economics
CJE
Canadian Journal of Economics
EC
Economica
EET
Essays in Economic Theory, eds. J.J. Spengler and W.R. Allen (1960)
EHR
Economic History Review
EJ
Economic Journal
Evolution of Modern Demand Theory, eds. R.B. Ekelund Jr., E.G. Furnbotn and W.P.
EMDT
Gramm (1972)
EQ
Economic Inquiry
ER
Economic Record
ERV
Economic Review
EJHET
European Journal of the History of Economic Thought
HER
History of Economic Review
HOPE
History of Political Economy
IEP
International Economic Papers
IESS
International Encyclopedia of the Social Sciences, ed. D.L. Sills (1968)
ISSB
International Social Science Bulletin
JEP
Journal of Economic Perspectives
JES
Journal of Economic Studies
JHB
Journal of the History of Biology
JHET
Journal of the History of Economic Thought
JLE
Journal of Law and Economics
JME
Journal of Monetary Economics
JPE
Journal of Political Economy
JRS
Journal of Regional Science
KYK
Kyklos
MEC
Metroeconomica
MME
Marx and Modern Economics, ed. D. Horowitz (1968)
MS
Manchester School of Economic and Social Studies
The New Palgrave. A Dictionary of Economics, eds. J. Eatwell, M. Milgate and P.
NPDE
Newman (1987)
NYER
New York Economic Review
OEP
Oxford Economic Papers
PPA
Philosophy and Practical Affairs


QJE
REA
RES
RRPE
SEJ
SJPE
UT

Quarterly Journal of Economics
Readings in Economic Analysis, ed. R.V. Clemence (1950)
Review of Economic Studies
Review of Radical Political Economics
Southern Economic Journal
Scottish Journal of Political Economy
Utility Theory. A Book of Readings, ed. A.N. Page (1968)


INTRODUCTION
HAS ECONOMIC THEORY PROGRESSED?
This is a critical study of the theories of the past: it concentrates on the theoretical analysis of leading
economists, neglecting their lives, their own intellectual development, their precursors, and their
propagators. Criticism implies standards of judgement, and my standards are those of modern
economic theory. This would hardly be worth saying were it not for the fact that some writers on the
history of economic thought have held out the prospect of judging past theory in its own terms.
Literally speaking, this is an impossible accomplishment for it implies that we can erase from our
minds knowledge of modern economics. What they have meant to say, however, is that ideas should
be weighed sympathetically in the context of their times, lest the history of economic thought
degenerate into a boring exercise in omniscience. The danger of arrogance toward the writers of the
past is certainly a real one – but so is ancestor worship. Indeed, there are always two sorts of dangers
in evaluating the work of earlier writers: on the one hand, to see only their mistakes and defects
without appreciating the limitations both of the analysis they inherited and of the historical
circumstances in which they wrote; and, on the other hand, to expand their merits in the eagerness to
discover an idea in advance of their own times, and frequently their own intentions. To put it
somewhat differently: there is the anthropomorphic sin of judging older writers by the canons of
modern theory, but there is also what Samuelson once called ‘the sophisticated-anthropomorphic sin
of not recognising the equivalent content in older writers; because they do not use the terminology and
symbols of the present’. For an example of the former, take Pigou’s reaction when asked to review a
work on the Theories of Value before Adam Smith: ‘These antiquarian researches have no great
attraction for one who finds it difficult enough to read what is now thought on economic problems,
without spending time in studying confessedly inadequate solutions that were offered centuries ago.’
For an example of the latter, take the opening page of any doctoral dissertation on the works of a
neglected forerunner.
The conflict between those who regard earlier economic doctrine as simply ‘the wrong opinions of
dead men’ and those who view it as the repository of a series of prescient insights goes deeper than
economics. It is a fundamental division of attitude toward intellectual history as such. With a little
training in German philosophy it is possible to represent the conflict in terms of two polar opposites:
absolutism and relativism. The relativist regards every single theory put forward in the past as a more
or less faithful reflection of contemporary conditions, each theory being in principle equally justified
in its own context; the absolutist has eyes only for the strictly intellectual development of the subject,
regarded as a steady progression from error to truth. Relativists cannot rank the theories of different
periods in terms of better or worse; absolutists cannot help but do so. Now, of course, few
commentators have ever held either of these positions in such an extreme form, but almost every
historian of economic thought can be placed near one or the other pole of what is in fact a continuum
of attitudes to the theories of the past.
Either of the two positions is capable of further subdivision. One version of the relativist position,
for example, is that the ideas of economists are nothing more than the rationalisation of class or group
interests, or, to go one step further, the motivated pleadings of people with a political axe to grind.
This is the doctrine of ‘ideology’ or ‘false consciousness’ which in its Marxist form is forever
equating ideological bias with apologetic intent, though the two are by no means equivalent. The first
edition of E. Roll’s History of Economic Thought (1939) perfectly exemplifies this approach,
although in later editions the author goes no further than claiming that changes in economic institutions


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