Published by EH.NET (June 2006)

Alessandro Roncaglia, The Wealth of Ideas: A History of Economic Thought. New York: Cambridge University Press, 2005. xiv + 582 pp. $110 (cloth), ISBN: 0-521-84337-5.

Reviewed for EH.NET by Ingrid H. Rima, Department of Economics, Temple University.

Allesandro Roncaglia’s very readable history of economic thought book, entitled The Wealth of Ideas, begins by noting that even before the close of the prehistoric era of political economy, two distinctly different (and incompatible) views about the functioning of economies had become articulated. On the one hand, there was the perspective traceable to Greek ethics and philosophy that reemerged in the writings of twelfth- and thirteenth-century Church scholars whose teachings about moral behaviors included buyer and seller transactions intended to serve the common good. This prescriptive outcome was effectively “Church directed,” and is interpreted by Roncaglia as equating exchange values with the “need satisfying” (i.e., utility yielding) capabilities of scarce commodities. With the gradual decline of feudalism beginning in the thirteenth century, and the subsequent rise of the nation-state, the focus of intellectual inquiry shifted, which Roncaglia interprets as a “transfer of the economic problem from the field of ethics to that of scientific thinking” (p. 40). Sixteenth- and seventeenth-century thinkers became preoccupied with the stock of metallic money (treasure) as an index of national wealth, holding that management of the gold stock is, or should be, the primary responsibility of the state. While historians of economics are well acquainted with the writings of Thomas Mun and other English and French mercantilists, Roncaglia also sketches out the contributions of some early Italian thinkers, in particular Antonio Serra, who is credited with a more sophisticated understanding than others of the interdependence between financial and real variables in enhancing the productive capabilities of the kingdom of Naples vis a vis other Italian cities. Thus economic thought shifted from the subjective concept of utility and scarcity to the objective perspective of physical costs and the economy’s ability to generate a surplus.

To put the conflict between these competing perspective into context, The Wealth of Ideas traces the history of economic thought with chapter titles that are identified with the names of the leading contributors, beginning with William Petty (chapter 3), and concluding with a trilogy (chapters 14-16) devoted to J. M. Keynes, Joseph A. Schumpeter, and Piero Sraffa, whom he regards as the intellectual giants of the twentieth century, along with their leading associates. Inclusion of in-depth chapters on Schumpeter and Sraffa reflects the influence of a negative assessment of the methodology of neoclassical theory and anti-equilibrium analysis on Roncaglia’s thinking.

The history in Chapter 2 of the nexus between precious metals, trade and a nation’s ability to generate a surplus is thus an important point of departure for Roncaglia’s inquiry into the foundation of the surplus approach of modern day Sraffians. While the Physiocrats identified Nature and land-based activities as the source of the surplus, Adam Smith’s Wealth of Nations attributed the origin of surplus to “the annual labor” of every nation as the source of its wealth, which grows with increasing division of labor and the expansion of markets. Labor effort (enhanced in its effectiveness by its division) and Nature are the twin sources of a nation’s surplus, and through it the source of accretions to its wealth, and its division among the three great social classes of society: workers, landlords, and capitalists, whose utilization of profit to support productive labor underlies the “virtuous spiral” that is the essence of The Wealth of Nations.

Smith’s distinction between a commodity’s value-in-use versus its value-in-exchange is central to his rejection of the possibility of explaining the exchange value of a pair of commodities in terms of use value. His labor-value theory encompassed both the notion of embodied labor and the labor a commodity can command in exchange. The “embedded labor” explanation of exchange value is valid only in “the early and rude state of society,” which precedes the acquisition of private property and capital accumulation from which Smith infers a theory of “natural price,” which determines the distributive shares. However, Roncaglia maintains it is only with Ricardo that the theory of value “in its modern meaning of a theory of relative prices comes into centre stage” (p. 139). Nevertheless the Ricardian edifice underwent a progressive decay, which opened the way for Alfred Marshall’s demand and supply synthesis, even though his predecessor J. S. Mill rejected the elements of “scarcity and utility upon which the subjective approach relied” (p. 243). The emergence and mounting influence of subjectivism is detailed in Chapters 10 (The Marginalist Revolution), 11 (The Austrian School and Its Neighborhood), and Chapter 12 (General Economic Equilibrium). Chapter 13 (Alfred Marshall) credits Marshall with distancing himself from “the extreme methodological individualism” of the first marginalist theoreticians. Marshall is also briefly credited for his appreciation of the evolutionary process of economic development, and his effort to construct supply curves for individual firms and industries that are characterized both by increasing return to scale and decreasing returns. The latter construct is weak, as elaborated in Chapter 16 on Piero Sraffa.

Joseph Schumpeter is especially credited for his dynamic theory of entrepreneurial bank-financed innovation, which initiates expansions that shift resources from traditional uses to introduce new methods of production and new goods or to open new markets. Entrepreneurs initiate changes that others swarm in to imitate with other loans that contribute to inflationary price increases that ultimately provoke credit restrictions — i.e., “forced savings” — that generate endogenous contractions. The culmination is business failures, unemployment, and unused capacity. But it is during this phase of the trade cycle that the developmental innovations of the expansion phase are “digested.” Thus, the destruction of the depression phase is economically “creative.” Yet it is also politically destabilizing, and in Schumpeter’s view capitalist breakdown is inevitable. This is the central message of Schumpeter’s Business Cycles and Capitalism, Socialism, and Democracy, which followed The Theory of Economic Development.

Chapter 16, simply entitled Piero Sraffa, begins by articulating Sraffa’s ambitious goal of “shunting the car of economic science” in a direction opposite to the marginalist approach introduced by Jevons, and refined by the Austrians, Walras, Marshall, and Pigou to ultimately emerge as the present day paradigm of the economics profession. Sraffa began his academic career at the University of Perugia in 1923, and by 1925 (one year after the death of Alfred Marshall and the publication in 1924 of the eighth edition of his Principles), he published a lengthy article in Italian criticizing Marshall’s attempt to reconcile the phenomenon of increasing returns at the level of the firm with the existence of purely competitive markets. Joining a debate initiated by John H. Clapham (1922) in the Economic Journal, Sraffa criticized Marshall’s attribution of long-run increasing returns to “external economies” equally available to all firms. Marshall’s error, Sraffa argued, was that the external economies concept violates the assumptions that underlie his partial equilibrium analysis. Firms experiencing increasing returns will expand in order to increase returns still further, which is incompatible with the competitive assumption of large numbers of small firms. Recognizing the predisposition of decreasing long-run cost to monopoly, Marshall conceived of economies of production that are external to individual firms, while being internal to the industry. But, Sraffa argued, it is precisely the incompatibility of economies that are external to the firm while being internal to the industry, which render Marshall’s theory of the firm’s supply curve untenable. Economies external to the firm but internal to an industry are incompatible with Marshall’s partial equilibrium approach. Sraffa’s 1925 critique of Marshall’s increasing returns analysis of the firm is thus tantamount to an anticipation of imperfect competition. Thus, Sraffa’s 1925 paper (republished in 1926) “paved the way” for the modern non-neoclassical theory of non-competitive market firms, for which Joan Robinson (1933) and Edward Chamberlin (1933) are typically credited.

Because of Italy’s political instability and the congenial intellectual environment offered Sraffa at Cambridge following the publication in the Economic Journal of his 1925 paper, he moved to the U.K. As the Secretary of the Royal Economics Society, J. M. Keynes was in a position to negotiate on Sraffa’s behalf the assignment of editing the work of David Ricardo, which ultimately resulted between 1951 and 1955 (with the assistance of Maurice Dobb) in eleven volumes of The Works and Correspondence of David Ricardo (the last being an index). The Swedish Academy of Sciences awarded Sraffa a gold medal for his achievements in 1961, anticipating the Nobel Prize in economics, which has only been awarded since 1969. The highlight of Sraffa’s interpretation of Ricardo’s contribution to economic thought was that he reconceptualized the economic system as a circular flow of production enhanced by increasing division of labor, which generates a surplus that promotes consumption and growth. Sraffa maintained that this is an interpretation of the classical tradition that reflects a “striking contrast” (1960, p. 93) to contemporary neoclassical theory, which conceives of the economy as a one-way avenue leading from “factors of production” to “consumption goods,” and whose values in exchange are established by the interaction of demand and supply forces. For Sraffa the term “value” does not mean value in exchange, because the price of one commodity cannot be conceived independently of any other. Commodity prices are established simultaneously with wages and profits, which is a theme that is further elaborated in his Production of Commodities by Means of Commodities (1960). Sraffa’s concern, therefore, is not to explain the determination of static equilibrium prices on the assumption of constant returns to scale. Rather, it is to study the conditions of reproduction in capitalistic economies on the assumption that industries tend to earn a uniform rate of profit, from which Sraffa inferred that the key to the movement of a relative price is a change in the wage cost.

Roncaglia’s chapter on Sraffa provides a logical segue to his final two chapters “The Age of Fragmentation” and “Where Are We Going?” The age of fragmentation is characterized by the presence of substantially autonomous groups of economists located internationally who ignore, or do not take into account, research areas other than their own. “Pluralism” is, in no sense, near at hand. The theory of value constitutes the “heart” of economic science (p. 514). Yet, for Roncaglia, the basic caveat is that the evolutionary approach of Sraffian/Schumpeterian/post-Keynesian/neo-Marxian/ Institutionalism is incompatible with the static view, which reflects the struggle between utility and scarcity that emerges from the demand and supply equilibriums. Thus, in no sense is Roncaglia able to see any evidence “of a clear and continuous ascent of economic science towards an ever fuller understanding of reality” (p. 505). Present day fragmentation of economic thinking therefore strengthens the case for studying the history of both the classical and marginalist approaches, between which there exists a “no man’s land,” which both Keynes and Schumpeter may have inhabited. Roncaglia himself, while clearly writing to reflect the legacy of Schumpeter and Sraffa, provides a very knowledgeable and readable account of the history of economic thought. His book is a contribution, not only to every historian of economic thought, but also to contemporary heterodox thinkers who now will have a valuable resource for understanding the historical origins of many (perhaps most) heterodox issues.

The seventh edition of Ingrid H. Rima’s Development of Economic Analysis is in progress.