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New Voices on Adam Smith

Author(s):Montes, Leonidas
Schliesser, Eric
Reviewer(s):Young, Jeffrey T.

Published by EH.NET (March 2007)

Leonidas Montes and Eric Schliesser, editors, New Voices on Adam Smith. London: Routledge, 2006. xxi + 364 pp. $145 (cloth), ISBN: 0-415-35696-2.

Reviewed for EH.NET by Jeffrey T. Young, Department of Economics, St. Lawrence University.

George Stigler began his banquet speech at the Glasgow University bicentennial of the publication of the Wealth of Nations with the now frequently quoted salutation, “I bring you greetings from Adam Smith, who is alive and well and living in Chicago.” (quoted in Meek, p. 3) Thirty odd years later the remark remains true, though ironically not in the Economics Department. Of the fourteen young scholars whose work is published in this book, five earned their Ph.D.s at the University of Chicago, none in economics. Indeed of the fifteen only four are economists, despite the book’s placement in Routledge’s Studies in the History of Economics series. This is reflective of the fact that Smith scholarship has largely moved away from seeing WN and its seminal role in the nineteenth century development of economics as a discipline as Smith’s crowning achievement. The focus today is largely on seeing Smith’s system as a whole, of which The Theory of Moral Sentiments is the foundational work. This is even true among economists who now trawl through TMS in search of interesting hypotheses in the new field of behavioral economics (see Ashraf, Camerer, and Lowenstein, 2005). However, it is even more true among philosophers, who now find TMS a rich vein of philosophical insight, whereas previously it was largely unread or misread.

These trends are amply on display in the present volume, as is Smith’s healthy status among a new generation of international academics. Montes and Schliesser are to be commended for assembling a wide-ranging and stimulating set of essays from a talented group of scholars all of whom completed their doctorate since 2000. The book consists of fifteen chapters organized into four parts, which deal respectively with Adam Smith’s sources and influence, moral theory, economics, and theory of knowledge. A book of this sort does not lend itself easily to adequate treatment in a short review. The coverage ranges widely over all aspects of Smith’s work, with particular attention to the relatively neglected essays on the arts, languages, and the history of science.

As an historian of economics, though, I was particularly interested to see what the younger generation is doing with Smith’s economics. The answer is “not much,” although I do not mean this in a negative way at all. The economics section consists of three essays on Smith’s relation to Mandeville, his interpretation and use of Newtonian method in economics, and his analysis of paper money. As the training of professional economists has long since separated itself from mastery of the classics, interest in the analytical material in WN has waned. Leon Montes’s essay on Newtonianism and general equilibrium theory is about the only place where this book touches on topics that have historically been of interest to professional economists. Here he advances the idea that modern general equilibrium theory, by which is meant the axiomatic approach to general equilibrium modeling, has its philosophical roots in French interpretations and adaptations of Newton’s scientific method. Smith, however, absorbed a Scottish Newtonianism that was empirical, inductive, and, in its application to human affairs, historical. Therefore, associating Smith’s invisible hand with the modern theory, say as an early statement of the theorems of welfare economics, reflects a fundamental philosophical misunderstanding of Smith’s application of Newtonian science.

It is not surprising to me that British empiricists and French rationalists would come up with very different readings of Newton. However, I would like to suggest that if we take a broader perspective in terms of what we classify as general equilibrium modeling, there is more under the sun than Walrasian general equilibrium models. Surely Sraffa’s production of commodities qualifies as general equilibrium modeling, as does Marx’s transformation problem. Indeed, there is plenty of general equilibrium reasoning in Smith, which is expressible in simultaneous equations models. The famous beaver and deer case of the early and rude state, which introduces a labor embodied value theory, is surely a general equilibrium model. While I agree wholeheartedly with the thrust of Montes’s paper, that Walrasian general equilibrium falsely sails under a Smithian flag, I do not think we can conclude there is no concept of general equilibrium to be found in Smith. Nor would I preclude the possibility that Smith may have inspired Walrasian modeling in some way, and that modern theories of the automaticity of the market mechanism owe at least some intellectual debt to Smith. After all, one does not need to have a deep understanding of the sources and context of Smith’s book to be stimulated and taught by it. Misunderstanding can lead to insight also.

This book will be of interest primarily to Smith specialists, both economists and non-economists. I believe that essays are perhaps a bit too narrowly focused, and cover a wide range of interesting, but off-beat, topics, that the general historian of economics may not find much of interest here. I must confess, though, that I did not find the essays to be uniformly interesting to me. At times I felt they suffered some from the young scholar’s eagerness to be original and provocative, perhaps stretching a point. It is good to know, however, that Smith is alive and well among a new generation of accomplished scholars. Their depth and breadth of understanding of a quite complex thinker, as well as their passion for Smith’s unique body of work, is very gratifying.


Nava Ashraf, Colin F. Camerer and George Lowenstein, 2005. “Adam Smith, Behavioral Economist,” Journal of Economic Perspectives, 19(3), Summer, pp. 131-146.

Ronald L. Meek, 1977. Smith, Marx and After, London: Chapman and Hall.

Jeffrey T. Young is the A. Barton Hepburn Professor of Economics at St. Lawrence University in Canton, New York. He is the editor of The Elgar Companion to Adam Smith (forthcoming) and his most recent publication is “Adam Smith and New Institutional Theories of Property Rights,” Adam Smith Review 2.

Subject(s):History of Economic Thought; Methodology
Geographic Area(s):Europe
Time Period(s):18th Century

Economics in Russia: Studies in Intellectual History.

Author(s):Barnett, Vincent
Zweynert, Joachim
Reviewer(s):Samuels, Warren J.

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Published by EH.NET (May 2009)

Vincent Barnett and Joachim Zweynert, editors, Economics in Russia: Studies in Intellectual History. Burlington, VT: Ashgate, 2008. xviii + 198 pp. $100 (hardcover), ISBN: 978-0-7546-6149-8

Reviewed for EH.NET by Warren J. Samuels, Department of Economics, Michigan State University.


This collection of neatly-defined and well-structured interpretive essays illustrates how written histories of economic thought can vary depending on several distinctions.? One distinction concerns whose thought a historian includes.? One can concentrate, following Mark Blaug, on what is understood to be economic theory, pursued by largely academic, professional economists, or, following Joseph Dorfman, also include non-academic, non-professional people.? A second distinction concerns the mutual impacts of the two mentalities on each other.? A third distinction has to do with the homogeneity or heterogeneity of each mentality.? A fourth distinction concerns the relation of the economic system, with its distinctive economic practice and system of social control, to the two mentalities.? No one of the resulting stories is necessarily correct, but one interpretation can be more accurate than another, though more than one interpretation can often relate to a particular situation.?

Accordingly, Russian economic thought of Muscovy in the sixteenth and seventeenth centuries oscillated between the doctrines of mercantilism and those of the Middle Ages.?? The ideas of some authors remained subordinated to religious, legal and political discourses, especially the vast fusion of state and church which tended to strictly limit the range of independent thinking.? Nonetheless, the principal topics were the system of land ownership, money and trade — with written texts dominated by religious discourse and political practice influenced by mercantilist concepts.

The eighteenth century manifested the conflict between the radical economic reforms of Peter the Great and Catherine II, on the one hand, and the continuing medieval social structure, on the other.? Liberal rhetoric was silenced by autocratic claims for enforcement of absolute power.? Later thinkers and statesmen helped to develop the system of finance and banking, unintentionally, one supposes, establishing some of the institutional foundations of the initial Russian industrial economy of the late nineteenth century.? Writers combined liberal ideas with a Hamiltonian state promoting economic modernization.? The targets were given by practice and the government.

Academic research and teaching was initially institutionalized in the early nineteenth century.? The teaching of political economy commenced in 1804; the first textbook in political economy published in Russia (written in French, six volumes, a compilation of Smith, Turgot, Say, et alia) appeared in 1815; and the first chair was established in 1819.? Some later academicians sought to articulate the ethical foundations of economics, some of them arriving at socialism, including Christian socialism.? Several essays serve to suggest that economics cannot be formulated independently of the concrete conditions of time and space, though that does not prevent differences of interpretation and formulation by scholars in any given time and place.? The point obviously applies to normative economics but also to positive economics.? But the story is more complex and lengthier.? Selig Perlman lectured that Marxism was (more or less surreptitiously) taught in the schools before 1917.? One school of interpreters argued that until the 1890s Russian economists largely followed, even imitated, Western economists.? Socialist ideas gained popularity first and foremost not economists among but the educated public.? In 1917 the October Revolution replaced one system of social control of belief and practice with another.? In 1927 the Communist Party line ostensibly changed from world revolution to socialism in one country coupled with praise for those early economists who had been close to Marxism and denigrated the Western non-Marxist imitators.? Within three years, the Soviet Union adopted collectivization, planning and industrialization. After 1991, Soviet economics was denigrated in favor of both pre-Soviet and especially, eventually, Western mainstream economics.? More recently, criticism of both the handling of transition to a market economy and the increasing influence of Western mainstream economics (imitation or transfer?) has emerged, along with discussion of a ?Russian school of economics.??

That is the overall account which emerges from the thirteen chapters written by twelve authors.? Each essay attempts to interpret the work of key individuals, issues or concepts of particular periods.?

Chapter 1, authored by the co-editors, is a nice six-page introduction and summary.? It is preceded by a very useful four-page ?timeline? of the major events of Russian history.?

Chapter 2, written by Danila Raskov, examines economic thought in Muscovy.?

Chapter 3 discusses the Russian version of the Enlightenment (Leonid Shirokorad).

Chapter 4 examines the ideas and contributions to institutional innovation of three reformers of the monetary system in the early nineteenth century (Alla Sheptun).?

Chapter 5 interprets what amounts to conflicts between different assertions of a ?natural order,? between rationalism and empiricism, between one or more conceptual models of the economy and one or more efforts at identifying the ?actual? economy, between German idealism and French rationalism, and between liberalism, socialism, the ideas of Friedrich List, German historicism, and conservative romanticism (Joachim Zweynert).?

Chapter 6 takes up the pursuit of an ?ethical? basis for political economy, namely, socialism, by Mikhail Tugan-Baranovsky, and Christian socialism, by Sergei Bulgakov (Natalia Makasheva).?

Noting that the co-editors distinguish at this point between the pre- and post-1917 periods and the corresponding chapters, I move on to chapter 7, which deals with the ideas and status of A. V. Chayanov, but which also misses the opportunity to compare and contrast Chayanov and N. D. Kondratiev as agricultural economists (William Coleman and Anna Taitslin).?

Chapter 8 examines Russian ?migr? economists in the U.S., and, to a lesser extent, in Europe.? It helps explain the predominance of mathematical and statistical approaches to economics taken by those who escaped Hitler and Stalin which, along with the ideas and formulations of Austrian-school economists, eventually had a marked transformative impact on the mainstream of U.S. economics.? Among the Austrian-School ?migr?s were Ludwig von Mises, Joseph Schumpeter, Gottfried Haberler, and Fritz Machlup.? Among the Russian ?migr?s were Simon Kuznets, Jacob Marschak, and W. W. Leontief (Vincent Barnett).?

Chapter 9 presents the lives and work of two Russian economists exiled in 1922, Boris Brutzkus and Sergei Prokopovich, the former a Russian Jew and economic liberal, the latter from a noble family but transformed by his investigation of West Siberian villages during the great famines of 1891-92.? The two men were later among the first students of the Soviet economy although having different careers and ideas as well as origins (Shuichi Kojima).?

Chapter 10 is on the debate in the U.S.S.R. during 1941-53 on the law of value, interpreted by the chapter?s author, Michael Kaser, to have been a serious blow to economics in the U.S.S.R., one administered by Stalin.? During 1956-1958, however, it began to be clear that ?a significant stage in the transition of Soviet economics from Marx to Marshall was complete? (p. 154).? The emergence of a relativist value theory (demand and supply theory of price) and the eclipse of an absolutist single-valued value theory (labor theory or marginal utility theory of value) came about for both political and economic reasons in both worlds.? In Europe and the United States, price theory came to be seen as both more empirically meaningful and more ideologically, i.e., politically, useful; in Russia during the period covered by Kaser, labor (the labor theory of value) was increasingly seen among economists as inadequate for planning purposes and was increasingly adversely but, writes Kaser (p. 151), not arbitrarily affected by political context.?

Chapter 11 identifies the years after Stalin?s death as, in effect, an amalgam of elements (Pekka Sutela).? It was a period of scientism, of varieties of Soviet economics, and of stages of economic reform.? The stages were: decentralization, market pricing, and incomplete transition to commodity and labor markets. The central topics of reform discussions were on enterprise self-management, and impersonal owners such as pension funds.? Not surprisingly, the authorities continued to be sensitive to anything resembling private property.

In the two-page chapter 12 the co-editors observe, first, ?that the progress of economic ideas in Russia was (and still is) inextricably connected to matters of economic policy and also to issues of governmental control? (p. 187).? They also urge recognition that ?recent developments in Russia … [include] a tendency [as in the past] toward the ?state capture? of key branches of the economy, increasing restrictions on political liberty, and a low conviction rate regarding serious crimes against persons critical of the Russian government such as journalists.? Even if no cases, so far, have been reported of economists being subject to direct political pressure, it does not take much imagination to conceive of such a case in the near future? (pp. 187-188).? The co-editors conclude with two points:? they do not believe that the mix of Western and native Russian ideas constitutes ?the existence of a ?Russian school? of economic thinking? (p. 188) in the same sense as is meant by such terms as ?Austrian school,?? ?Cambridge school,? or ?Chicago school.?? Second, they call attention to how little the economics of Marx, Engels and Lenin have been mentioned within this volume.? ?Russian economics had a long and distinguished history before 1917? and ?[Marx] was by no means a dominant figure in pre-revolutionary Russian political economy? (p. 188).

?_Economics in Russia_ can be recommended as a nicely designed and executed collection of essays which provides insight into a history of economic thought in some respects different from that of the West and in other respects rather similar.

The co-editors correctly point to the centrality of the issue of ?precisely what developmental path the country should take.?? They also note ?the extensive presence of ideology in the history of Russian economic thought? and (correctly) reject the argument that it is due to the features of a ?Russian character.? They suggest that in Russia the issue of development path has been heatedly controversial since the time of Peter the Great and claim that that ?might explain (in part) why economics was more strongly politicized [in Russia] than it was in many Western countries? (p. 2).??

The view that controversy over development path explains the greater politicization of economics would likely be shared by many, perhaps most, historians of economic thought.? The matter of development path is indeed a central issue of economic policy.? It did not, however, arise in Russia with Peter the Great.? The controversy between mercantilism and medievalism, in which mercantilism was the initial stage of capitalism, was about development path and preceded Peter the Great.

The key question, however, is whether differences in degree of politicization have existed, to be explained by controversy over development path.? I do not want to overdo the point but the question of degree of politicization is not only important in itself but it casts light on how decision making on and interpretation of economic policy should be handled by the historian of economic thought.

There has been no conclusive difference in degree of politicization; any such perception is a function of one?s normative selective prior assumptions. The question of development path has not been unique to Russia.? It has been, for example, central to policy debate in the United States.? I cite the conflict between Pilgrim religious fundamentalism and money-making (trade) as rival ways of life that arose in (more accurately, was brought from England to) the Massachusetts Bay Colony in the early- and mid-seventeenth century.? The conflict continues to this day, in more complex forms and in different circumstances, most notably in presidential elections and the on-going formation of and conflict between secularism and religious fundamentalism.? One was not more politicized than the other.? Even if one or the other supporting group claims more than they actually want, expect or are willing to settle for, the approach to development path is at least expressed in terms of different discourses, each of which is political, whatever their content .

My view is based on several considerations, including:? (1) Acceptance of the underlying fact and importance of the legal foundations of the economy, and through it the normative elements in economic policy and the choice of the incidents of the development path.? Such acceptance only minimally relies on evidence founded on ideological doctrine.? It especially reflects my perception of universal pragmatic practice. (2) Such pragmatism not only accurately describes the United States (and, of course, elsewhere) but has been facilitated, protected, encouraged and, more subtly, taught by the First Amendment?s rejection of an establishment of religion and its protection of the freedom of speech and of the press, and the rights of the people peaceably to assemble and to petition the Government for a redress of grievances, as well as through the use of various other clauses of the Constitution in the ?protection of property.? (I use that trope even though in other circumstances I would insist that property is property because it is protected and not that property is protected because it is property.) Pragmatism also accurately describes the jurisprudential processes through which the meaning of the Constitutional clauses and concepts themselves, e.g., property, are worked out.? (3) The relatively greater heavy-handedness of the state in Russia has been either more salient or more selectively perceived than in the United States, which may reflect either ?reality? or the greater effectiveness of relatively light-handed social control in the latter country or the relatively small percentages of its population which thinks seriously of the federal government, state government, local government, indeed all government, as fundamentally infringing on their freedom.? (By ?seriously,? I intend to be understood to mean something different from electoral and comparable rhetoric, but not necessarily requiring the ?litmus test? of an immediate willingness if not desire to resort to armed force in open rebellion.)? (4) The multiple meanings of ?politicization? is another factor.? It has been used to signify the introduction of politics (itself multiply defined) into areas of life in which it hitherto has been absent, to refer to institutions that are political (meaning having to do with decision making, or the exercise of power) by their very nature and/or to suggest that a decision has not been made on the respective merits of the relevant alternatives but in order to insinuate considerations of political-party advantage into the process. (5) Another factor is the eclipse or obfuscation of other possible paths by the success of the path actually ?chosen? and followed, perhaps as if that path was inevitable, say, due to the absolute nature of things.

It has been only (!) two to three hundred years since the eighteenth century, in which the values and policies of the Enlightenment first prospered, in which naturalism made major explicit inroads on supernaturalism, and in which society and its institutions were relatively widely seen to be a matter of policy and neither the natural nor the supernatural order of things.? Ideological and normative propositions, typically having a complex relation to power, are operative in the making and conduct of policy and the social reproduction or alteration of socioeconomic structure.? As for politicization, I know of no conclusive way in which a mediaeval or feudal structure and its world view can be conclusively shown to be more, or less, politicized than a mercantilist, capitalist or socialist/communist system. A change in power structure may (or may not) lead to a change of ideology that is typically more important than a change in power structure generated by a change in ideology.? My key point is that no one ideology is more politicized than another.

Consider, for example, the interpretations of the United States made in the 1930s and in 2009.? Franklin Delano Roosevelt and John Maynard Keynes were seen by many as socialists and antagonistic to capitalism whereas others saw the innovations of the New Deal as saving capitalism for the capitalists, or whomever.? The amply evident present-day situation pits President Barack Obama against the Republicans of the House of Representatives.? I suggest the following as a possibility — the Republicans understand that the President?s program is geared to support business (investment) in part through bail-outs, etc., helping selected types of business rather than supporting households, especially lower- and middle-class families.? The flow of spending can work, or not work, in different ways.? Consider that consumption spending, even if financed by home bailouts of some sort, may lead to an increase in the expected rate of profit of businesses and a fall in liquidity preference by various groups, including those engaged in real or portfolio investment, or increase the distraction of the working class from recognizing or even speculating that it is capitalism that President Obama is saving while more or less increasing the possibility of upward mobility by the children and grandchildren of the masses, which is what President Obama seems at least to desire. (The reader will recall that in their concluding chapter, Barnett and Zweynert note a tendency in Russia ?toward the ?state capture? of key branches of the economy? (p. 187). It would be ironic if the bailout and stimulus packages (notice the play of metaphors) (and, to a lesser but not insignificant degree, the imposition of moral and/or legal constraints on the remuneration of corporate executives) that have become (as of April 2009) the centerpiece of the Obama administration?s anti-depression policy represented an area of Galbraithian (or other) convergence between U.S. capitalism and Russian post-Soviet organization; and possibly even more ironic if the packages represented the capture of business(es) by government in place of or in addition to business capture of government agencies and branches.)

Assume the foregoing is a meaningful account.? Joseph Schumpeter pointed out the irony of a European labor party successful at the polls yet, instead of being able to introduce socialism (whatever that might have meant to them), they became the managers of a continuing, if somewhat revised, capitalism.? In the dialectic of politics it is sometimes, perhaps often, the continuing task of each party both to abet and to limit the other, for example, in Moscovy. Performing that task transcends the vagaries of ideological perception.

If investment increases (say. due to an increase in the expected rate of profit generated by a newly optimistic psychology), income will tend to increase, as will also consumption.? The reverse will also likely happen, i.e., a story of shocks coupled with either positive or negative multipliers.? One point is the multiplier account.? Another point is that, ceteris paribus, income can change as a result of a policy-induced change in either consumption (working, through the expected rate of profit, on investment) or investment (working, through the marginal propensity to save, on consumption). Each sequence is accompanied by its heroic account.? One group of voters applauds one; another resonates with the other. Those who invoke a one-sided view of the two processes narrow the possibilities permitted by economic theory.? But neither view is more ideological or more politicized than the other.? The same applies to tax versus subsidy externality policies.

Religious people who are successful in life in their own mind, may tend to dispose of their discretionary income in a trade-expanding way; similarly, people engaged in trade who are successful may act in a religion-enhancing way.? Neither practice is more ideological or more politicized than the other.

Apropos, therefore, of this and other books, on the Russia of Moscovy, policy might have reflected Eastern Orthodoxy or mercantilism or both, but be interpreted as the opposite.? I submit, first, that any story told about the different pieces of Russian history, like that of the U.S., could stress one side or the other, yet the evidence remain incapable of conclusive affirmation of either side.? I submit, second, that neither Eastern Orthodoxy nor mercantilism is more ideological or more politicized than the other.? I submit, third, that any one-sided choice of a story is a function of sentiment or ideological position coupled with a desire to have a seemingly absolute account whose value is more important for influencing present-day policy than for interpreting the past.? I should not be understood as attributing such to the motives of either the editors or the other authors, but to the logical situation of interpretation.? There is no one complete, true history; there are interpretations.

One reader of a draft of this review suggested that by the time that the questions of politicization and of controversy over development path were largely and practically ?solved? in the Western countries, they were still on the agenda in Russia.? I believe that they have neither ever been solved nor off the agenda in the Western countries.? To that reader politicization means the entry of policy and ideology into practical solution policies and into economic theory; that it is impossible to either estimate the degree of politicization or eliminate it; and that its degree and meaning depend on political and legal arrangements, hierarchical system of power and so on.? This reader also feels that no history of economic thought can be the ?true? story, only a story bearing signs of their time, place and the views of the people who were engaged in doing economics.? This reader also believes that intellectual history cannot be reduced to one or two problems, however important they might be: intellectual history is a multi-stream process.

Another reader of the draft identifies as a missing issue differences in state attempts to control intellectual discourse.? The actions can take different forms:? the termination or intimidation of professors who challenge the dominant political ?line? or ?consensus,? government funding of economic research with a pronounced bias favoring ?mainstream? research where ?mainstream? reflects both professional orthodoxy and the economic system around which orthodoxy and the national economy is built, and so on.

All of which suggests that the work of contemporary historians of economic thought is richer and less presumptuous than the work of earlier generations.? The history of economic thought is itself a vast interpretive field with numerous opportunities for interpretation.?


Warren J. Samuels is Professor of Economics, Emeritus at Michigan State University.? He is the founding editor of _Research in the History of Economic Thought and Methodology_. His book of essays on the use of the concept of the invisible hand is in the initial stage of the production process.

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Subject(s):History of Economic Thought; Methodology
Geographic Area(s):Europe
Time Period(s):20th Century: Pre WWII

The Company of Strangers: A Natural History of Economic Life

Author(s):Seabright, Paul
Reviewer(s):Ofek, Haim

Published by EH.NET (January 2007)

Paul Seabright, The Company of Strangers: A Natural History of Economic Life. Princeton, NJ: Princeton University Press, 2004. x + 304 pp. $30 (cloth), ISBN: 0-691-11821-3.

Reviewed for EH.NET by Haim Ofek, Department of Economics, Binghampton University.

Organized along several central themes, this book is essentially a collection of self-contained short essays ranging from core economic ideas to the hazy borderlines with other fields of science, and the social sciences. The book seems to be intended (and is certainly highly accessible) to the general reader. It includes, however, a number of innovations of interest to students of economics, chief among them, the notion of “tunnel vision” (a concept closely associated, but not entirely interchangeable, with the “invisible hand”). At the core of the discussion are repeated attempts throughout this book of meeting head-on three of the most important (and perhaps most elusive) concepts in economics: division of labor, cooperation and trust. Of special interest to readers of the present outlet is the attempt by Paul Seabright (Professor of Economics at the University of Toulouse, France) to put current economic issues not only into their historical and pre-historical context but also to add an evolutionary perspective going back, it seems, to our last common ancestor with the chimpanzee. I greatly enjoyed reading sections of the book and agonized over others. On both counts, this uneven experience is reflected in the following review.

1. What’s in a Title?

The study of economic history, as I understand, deals only with agents that are in all respects people like us. Chronology changes but anatomy stays fixed and, other things being equal, so does behavior. The subject matter, understandably, must stay clear of evolution. No speciation events are permitted in history or, for that matter, in the historically conceived notion of prehistory. Confined to anatomically modern humans, the beginning of prehistory itself can thus go back only as far as the appearance of Homo sapiens (some 120,000 years ago). Some paleoanthropologists and prehistorians (e.g., Klein 1999, Mithen 2003) would probably prefer not to push the prehistoric envelope anywhere before the first appearance of undisputed evidence consistent not only with a modern human anatomy but also with a modern human mindset (50,000 or so years ago). The most skeptical may even postpone the beginning of prehistory, as they see it, to the rise of agriculture (10,000 years ago). These benchmark dates facilitate a coherent extension of history into prehistory (by separating both from evolution). On the downside, however, these dates come far too late in the record to allow prehistory any chance of accounting for some of the major developments in the human system of subsistence: the transitions from woodland to grassland and from the feed-as-you-go routine to hunting-gathering, tool making, transport and redistribution of food items, and domestication of fire — to mention but a few (and not necessarily the most important) early developments that set humans economically apart from the chimpanzees. The task of filling the gap is left to paleoeconomics: a new field of economic study best defined (perhaps) as the study of natural history in its application to economic life — to slightly paraphrase the subtitle of this book. Indeed, the subtitle helps to build expectations of a long journey into the remote past of the human experience. The author fully meets these expectations at least in one sense: the separation between history and human evolution is a requirement that does not inhibit the discussion in this book. On the contrary, it smoothly moves from history into evolution and, if there is a need for it, back to current affairs.

Inasmuch as the subtitle makes the connection to natural history, the title itself holds the key to the fundamental economic question associated with it. If you ask the fundamental question (what set humans economically apart from all other forms of life?), then the main title to this book (The Company of Strangers) provides nearly enough of an answer. Indeed, it has been recognized for some time in the literature that the single most striking feature that distinguishes humans from all other animals is the (properly defined) practice of cooperation and the division of labor among members of the species that are genetically unrelated to each other — sure enough — among strangers (Ridley 1996, Ofek 2001, now Seabright in this book, and perhaps others that I am unaware of). In its role as a uniquely human distinguishing feature the division of labor among strangers should be an argument quite compelling to any economist familiar with the unprecedented extent and intensity of division of labor in human society. I would dare to speculate, however, that the argument would be even more compelling to any biologist familiar with animal affairs and with the intricacies of kin-selection. To those familiar with both human affairs and animal affairs it should probably come as an empirically true, or nearly true, argument.

The point of an argument, however, is not to be compelling or to be true but to be testable. Arguments that use poorly defined concepts typically do not easily lend themselves to rigorous tests. Division of labor is a primary example. For all its importance in economics and in biology, division of labor remains to this very day a poorly defined analytical concept in both. As such, it is vulnerable to counterexamples for no other reason than semantically or otherwise contrived ambiguities. To devise a test free of such ambiguities requires further refinements that can be provided, in my opinion, only by economics. I will be more explicit about this issue toward the end of this review. With this understanding, we can now move beyond the extraordinarily informative title to the body of the text itself.

Like natural history itself, Seabright’s book does not exclude history in its conventional sense, nor does it exclude current economic affairs. On the contrary, it is an excellent book on both counts, and it will remain equally excellent on both even if all references to evolution are removed.

The material in this book is organized under four parts. Each part comes with its own prologue or epilogue (or both) which can be added as stand-alone chapters in their own right. Within each part, the chapters seem to wander form topic to topic with such vitality that the original outline of this book comes to serve it more as a straitjacket than as an organizing procedure. For that, if not for other reasons, the subject matter is perhaps better conceived, or at least better evaluated, not under the narrative of its original scope but under the narrative of time; that is, under each of the three separate time scales — current, historical, and evolutionary.

2. Current Affairs

In its capacity as a survey of current economic affairs this book makes an excellent job of bringing to the attention of the reader, especially the lay reader, a wide economic spectrum of public issues. Ranging from water and pollution, to auctions and unemployment, and from air travel and globalization, to suicide and laughter, it seems to include the widest possible set of applications that an economically-trained mind can be brought to bear upon in one place. The author deserves high marks for making many of these applications amiable and highly accessible by replacing otherwise tedious technical explanations, with jargon-free highly intuitive illustrations (e.g., the story of shirts (chapter 1) which is reminiscent of Rose and Milton Friedman’s (1990) discussion of pencils, the example of a better mousetrap (p. 181), the fable of a sailor in charge of a small boat in a storm (p. 25), and a community making a living by extracting strawberries from strawberry ice cream (p. 233) — to mention but a few).

The most impressive applications and most compelling arguments are those deduced from first principles (economic, evolutionary, or otherwise). These include, for instance, the treatment and elaboration of many ideas associated with the invisible hand of the market, in the first part of the book, or the treatment of information (viewed essentially as a public good) toward its end. On many occasions interesting applications are deduced from sets of first principles borrowed from other fields; e.g., repeated applications based on the law of large numbers (borrowed from statistics). Unfortunately, not all the applications follow from first principles. All too many seem actually to rely at least in part on ad hoc explanations. Consequently, the overall quality of the argument shifts occasionally without prior notice from the discourse level of ideas to the discourse level of mere opinions — albeit, for the most part, very interesting ones.

The approach to many issues discussed in this book is not only descriptive but, notably, also prescriptive. Policy recommendations typically invoke the government as part of the solution to problems resulting from market failure. The role of government is a subject of economic interest for two partly unrelated reasons. First, there is the general interest in the role of government as a political institution per se. As such, the role of the government is fairly well covered in this book (toward the end of Chapter 13 and elsewhere). In addition, however, there is also an economic interest in the role of government purely as an instrument, or as a set of instruments, in the service of specific economic policies. Any given economic policy can probably be implemented under one branch of government at lesser cost and with better results than under another. It is incumbent, therefore, on any policy recommendation to make clear to what branch of government (administrative or legislative) and to what level (central or local) it is best addressed. Broadly defined, the Coase theorem helps, for instance, to draw attention to a typical situation in which the legislative branch outperforms the administrative branch simply because unlike the intrusive style of the latter, the former keeps much of the action in the private sphere. Seabright considers the Coase theorem to be too optimistic (apparently because negotiations are not always costless and bargains may not be credible, pp. 132-33). Readers of his book are often left to wonder, however, to what level of government and to what branch he would relegate the responsibility for many of his own recommendations.

3. Historical Affairs

The historical dimension of the discussion in this book cuts across four or five major topics: the rise and spread of agriculture, warfare, city-states and ancient civilizations, and the urban environment (especially in medieval Europe). For lack of space I will review here only the last: the urban environment in relation to the medieval city. The discussion on the urban environment in Chapter 7 deals with the devastating effects of urban externalities on city dwellers, their quality of life, their health, and their property. The general approach that Seabright takes is focused more on cultural and environmental implications than on economic explanations. Largely overlooked, for instance, is the role of the urban real estate market, to say nothing about optimal location decisions in response to it. The primary example is the medieval European city.

A brief passage (pp. 114-18) under the title “Stench and Waste” depicts the plight of a typical city in medieval Europe. As the title suggests, the depiction is graphic and its effect on a reader may be staggering. However, if true, it certainly sounds like a golden opportunity for the real estate market (as shown shortly). I have little doubt that the situation as described could have come to pass at one time or another in almost any city (especially during periods of great economic or demographic transitions, in time of plague, or in the aftermath of natural disasters). I also have little doubt that the situation could have persisted in particular quarters of a city for decades, if not for generations at a time. I do have some doubts, however, about the possibility that such a situation could have come to be endemic; namely, that it could have endured for long throughout the entire space of any city. First, the evidence in support of this description is not beyond dispute. Alternative largely contradicting evidence on almost all counts can be found in the literature dealing with urban history (see for instance, Mumford, pp. 288-93).

Another source of doubt, as already indicated, is the existence of an active urban real estate market. As waste (presumably) piles up and the stench is no longer bearable, property prices are bound to reach rock bottom. It is then high time for professional land owners, developers, and speculators of all kinds to get into action and do what they do best; buy the affected properties by the block, remove the neighborhood disamenities, renovate or rebuild and then, of course, resell at great profit (perhaps even to the original owners). Indeed, starting with Crassus and his likes in ancient Rome, and perhaps long before, the real estate market served always as a great mechanism for the internalization of (certain) urban externalities. The end result is a balance between amenities and disamenities that produces, at equilibrium, certain predictable patterns – not necessarily pretty ones, to be sure, but if they are ugly, they must be ugly in ways quite different from the depiction relayed in this book..

4. Evolutionary Affairs

As already indicated, the phrase “the company of strangers” serves both as the main title to this book and as the answer to the fundamental paleoeconomic or, for that matter, bioeconomic problem: what set humans economically apart from all other forms of life? The author undoubtedly puts great effort both in the attempt of establishing this answer and in the attempt of extracting from it the maximum possible implications. The approach Seabright takes, if I understand correctly, is to break down the phenomenon under investigation (essentially, the interaction between unrelated members of the same species) into its three conceptual components — division of labor, cooperation, and trust — and then he tries to gain the most insights from each. This approach is undoubtedly a natural and perfectly logical course of action to take, though, I am not sure it is the easiest to follow.

Any attempt to meet head-on concepts such as division of labor, cooperation, and trust may take us back to Adam Smith who dealt with many of the same concepts in his own time and by his own devices. One of the first things that Adam Smith does in the opening pages of the Wealth of Nations, however, is to represent, if not replace, the concept of division of labor with the concept of exchange. Exchange, he tells us, facilitates division of labor. Exchange, in other words, is a necessary (if not sufficient) condition for division of labor and thus can serve as a proxy for it (and by extension, for cooperation and for trust, as well). Unlike division of labor, exchange is a semantically, and analytically, well defined concept. It can be measured and can serve both as a quantitative or qualitative variable, it can be aggregated or disaggregated, it can be estimated and can be used as an estimator and, above all, it can be used as a null hypothesis. Specified in terms of exchange (the existence or volume of transactions), the null against the company-of-strangers’ hypothesis is unequivocally as clear as your last paycheck (your personal share in the division of labor among strangers in society). Now, try to specify the same hypothesis directly in terms of division of labor.

The extent of division of labor, further argued Adam Smith, is limited by the size of the market. This is particularly true of division of labor among strangers because the market is where strangers make exchanges. The entire argument from division of labor among strangers boils down, I argue (here and elsewhere), to the existence or nonexistence of market exchange (Ofek 2001). What I am trying to suggest, in conclusion, is that the judicious use of exchange as a measure or as a proxy for division of labor could have improved the overall discourse in many parts of this book, and could still do so (assuming a second edition).

Moving from methodology to substance, it should be noted that despite its title, this book in not a comprehensive discussion of human evolution or a complete picture of the human place in natural history, nor is it intended as such. Aside from the considerable amount of attention paid to the evolutionarily pivotal issue of interaction among strangers, the total amount of space allocated to the course of human evolution hardly exceeds a dozen of pages and comes for the most part in the form of brief unrelated comments scattered throughout the entire book in no particular order. Overall, it may leave in the mind of the general reader an image of human evolution that is, in my opinion, somewhat distorted at the very least in two or three ways.

First, the transition to agriculture is overly emphasized. The reader may be left with the impression that the major features that makes us economically most distinctly human evolved in the span of the most recent 10,000 years — the age of agriculture — a blink of the eye in the evolutionary time scale. The appearance of agriculture is undoubtedly an exceedingly important transition in the course of human evolution. However, it is only one of five or so major transitions and, in that, it is hardly equivalent to some, let alone the most important of all (see Ofek, 2006). Second, the role of hunting-gathering as a pivotal economic innovation in human evolution is largely overlooked. Hunting-gathering is much more than a pair of outdoor activities. It is a complete and self-contained system of subsistence that introduced, for the first time, into the human (and primate) repertoire such activities as food redistribution, food transport and, by all indications, division of labor among strangers in the acquisition of food. In fact, it already included almost all the fundamental economic elements of modern industrial society, albeit in embryonic form, going back nearly two million years before agriculture. Finally, I should add a correction in relation to timing in the process of encephalization: the process of brain expansion. The discussion at the bottom of page 58 leaves the impression that this process was at work starting six or seven million years ago. That is far too early. For the first four or five million years of that time our remote ancestors apparently managed to survive with a brain no larger than a chimpanzee’s. Almost all anthropologists would agree that the expansion in the human brain commenced only as late as two million years ago, or even slightly later.


Klein, R. G. (1999). The Human Career: Human Biological and Cultural Origins. Second edition. Chicago: University of Chicago Press.

Mithen, S. (2003). After the Ice: A Global Human History, 20,000-5000 BC. London: Phoenix.

Mumford, Lewis (1961). The City in History, its Origins, its Transformations, and its Prospects. New York: MJF Books.

Ofek, H. (2001). Second Nature: Economic Origins of Human Evolution. Cambridge: Cambridge University Press.

Ofek, H. (2006). “Ape to Farmer in Five Uneasy Steps: An Economic Synopsis of Prehistory.” A paper presented at the First Conference on Early Economic Developments, The University of Copenhagen. Copenhagen, Denmark. Downloadable from

Ridley, M. (1996). The Origins of Virtue. Harmondsworth, U.K.: Viking Penguin.

Haik Ofek is author of Second Nature: Economic Origins of Human Evolution (2001).

Subject(s):Markets and Institutions
Time Period(s):Prehistoric

Nations, Markets, and War: Modern History and the American Civil War

Author(s):Onuf, Nicholas
Onuf, Peter
Reviewer(s):Flaherty, Jane

Published by EH.NET (October 2006)

Nicholas Onuf and Peter Onuf, Nations, Markets, and War: Modern History and the American Civil War. Charlottesville, VA: University of Virginia Press, 2006. xii + 362 pp. $45 (hardcover), ISBN: 0-8139-2502-9.

Reviewed for EH.NET by Jane Flaherty, Department of History, Texas A&M University.

The brothers Onuf move the American Civil War from a national struggle to the “larger context of conceptual change” in the Western development of liberalism and nations. Modernity, and the modern concept of nations and markets, led to the conflagration, according to the authors. “The outbreak of war between great and expansive nations is a much more predictable outcome in the modern history of the ‘civilized West,'” they suggest (pp. 179-180). Thus the American Civil War represents not just a “war between the states” but the culmination of this trajectory. “Our contention,” they declare, “is that these developments were not only historically contingent but that they could only have taken place at a specific moment in the rise of a liberal world of national markets and international exchange, of an international society of bellicose yet civilized nations” (p. 177). Far more than a study of Civil War causation, this book reflects deeply upon the forces that shaped this “modern history.” This masterful book moves the American Civil War from a national tragedy to part of the broader development of western, liberal nations, and the markets that served, and were serviced, by these nations.

Nicholas Onuf, Professor Emeritus of International Relations at Florida International University, and Peter Onuf, the Thomas Jefferson Memorial Foundation Professor of History at the University of Virginia, are two of the most respected scholars in their respective fields. This book represents their second collaboration, “as equals in ignorance,” focusing on the impact of the American republic on the “liberal world order in the nineteenth century” (p. ix). They unleash a tremendous wealth of knowledge in this study, and students of both American history and European economic thought and intellectual history will find much to digest on each page.

They have divided the manuscript into two parts. Part I traces the development of “Liberal Societies” (Chapter 2) and “Civilized Nations” (Chapter 3). “Europeans told themselves that engaging in commerce and war had made their nations more advanced — more civilized,” the Onufs argue (p. 95). Yet, this concept of what constituted a civilized nation exacerbated the sectional tension in the United States. “Two nations [within the U.S.] developed because of slavery. One defined itself as civilized because slavery gave it a prosperous economy, a genteel ruling elite, and a secure place in the liberal world. The other defined itself as civilized because commercial and industrial prowess secured its place in that same world” (p. 81). For this reason, they digressed into war, “the one to save the union and the other to save itself” (p. 108). In Chapter 4 they link this development to Adam Smith and other European enlightenment thinkers’ concept of “Moral Persons.” Finally, in Chapter 5, they show how northern and southern Americans expanded this concept into the intellectual framework of “think[ing] themselves a people” (p. 145).

Peter Onuf’s very visible hand is seen in Part II, which traces how “nationalist thinking” and the “consciousness” about “nationhood” pushed the United States to secession then war (p. 181). Chapters 6 and 7 examine how Adam Smith’s ideas of trade and markets influenced American political economy, most notably Thomas Jefferson and the National Republicans’ “oscillation between his republican optimism … and geopolitical realism” regarding trade and national economic development. “Could Americans trade freely with Europeans without compromising their independence?” the Onufs ask. “This simple question divided Americans along sectoral and sectional lines in the antebellum years and ultimately eroded the foundations of their union,” they suggest (p. 224-25). Chapter 8 chronicles the debates that followed over protection and free trade, with the authors noting the symbiotic relationship between protection and warfare. “Protectionists would prepare for war in order to secure true national independence and a more durable peace,” (259) whereas “free traders inverted protectionist logic at every point,” arguing that “protectionism was the second coming of mercantilism” (p. 272). In Chapters 9 and 10, the authors chart the development of the national identities of the North and South. “On the eve of Civil War, Americans no longer shared the founders’ fears of descending into a Hobbesian war of all against all,” the authors posit (p. 312). For Northerners, “preservation of the union meant war and success in war required the development of the modern, protective, war-making state protectionists had long advocated” (p. 303). Southerners “relocated the national ideal,” in part by moving towards commercial expansion in the late antebellum, and less surprisingly, by allowing “slavery to define the emergent southern nation” (p. 337). Thus, the brothers conclude, the “first fully modern war was the Civil War fought within the boundaries of the United States” (p. 345) yet with roots that stretched deeply into western concepts of nations, markets and war.

This book has some flaws. Primarily, it reads like a collection of essays rather than one narrative. The authors describe the book as “an essay in modern history” (p. 21). However, the overall package seems disjointed in places. Second, their thesis would need further buttressing if brought back into the broader discussion of nineteenth-century European history. For example, could not the Crimean War, which preceded the American Civil War and pitted national commercial interests of Britain and France against those of Russia, also fit the authors’ rubric of nations, markets, and wars? Finally, how could a book so rich in intellectual resources be published without a bibliography? Graduate students in particular will sorely miss not having a list of the rich bibliographic resources the authors use throughout.

What does this book offer the economic historian? First, it provides a thorough analysis of the development of transnational economic thought in the eighteenth century, and how this influenced antebellum American political economy. Their vigorous discussion of protectionism and free trade beliefs will challenge future writings on American tariff policy. Finally, they provide an economic context to the American Civil War that goes far beyond the Beardian determinism.

Jane Flaherty is the Assistant Director of Graduate Studies in the Department of History at Texas A&M University. Her book, The Revenue Imperative: Union Financial Policy during the American Civil War, will be published by Pickering and Chatto in 2008.

Subject(s):Military and War
Geographic Area(s):North America
Time Period(s):19th Century

The “Vanity of the Philosopher”: From Equality to Hierarchy in Post-Classical Economics

Author(s):Peart, Sandra J.
Levy, David M.
Reviewer(s):Hammond, J. Daniel

Published by EH.NET (October 2006)

Sandra J. Peart and David M. Levy, The “Vanity of the Philosopher”: From Equality to Hierarchy in Post-Classical Economics. Ann Arbor: University of Michigan Press, 2005. xviii + 323 pp. $40 (cloth), ISBN: 0-472-11496-4.

Reviewed for EH.NET by J. Daniel Hammond, Department of Economics, Wake Forest University.

Peart and Levy’s book takes the reader well off the beaten track of histories of classical and neoclassical economics. In place of laws of production and distribution, the marginal revolution, and other standard topics for historians of economics, Peart and Levy take us on a historical tour of the struggle over one of the most basic premises of social analysis, what sort of creature it is that economists study. In the beginning was Adam Smith, who believed that:

The difference of natural talents in different men is, in reality, much less than we are aware of; and the very different genius which appears to distinguish men of different professions, when grown up to maturity, is not upon many occasions so much the cause, as the effect of the division of labour. The difference between the most dissimilar characters, between a philosopher and a common street porter, for example, seems to arise not so much from nature, as from habit, custom, and education (Wealth of Nations, I.2.?4).

Smith’s belief that humans are born with capacities more equal than unequal led him to build his analysis on the premise of human equality in the capacity for making decisions (analytical egalitarianism) and to look for the causes of observed differences across people and populations in the effects of institutions, incentives, and chance. Classical economists who followed Smith as analytical egalitarians included, among others, Thomas Robert Malthus, David Ricardo, Robert Torrens, Harriet Martineau, Nassau Senior, and most importantly for Peart and Levy’s account, John Stuart Mill.

By the time neoclassical economics and other varieties of post-classical economics appeared in the late nineteenth century, analytical egalitarianism was being supplanted by a belief that human beings differ in their capacities in ways that render the assumption of human homogeneity unrealistic and inappropriate. Thus, William Stanley Jevons worried that working-class consumers made poor choices and Irving Fisher compared the Irish unfavorably with the Scots in terms of their capacity for foresight. F.Y. Edgeworth argued that for analytical and policy purposes the principle “every man, and every woman, to count for one” should be used with caution. Shifting from analytical egalitarianism to a working hypothesis of heterogeneity and hierarchy led the post-classical economists to jettison another of Adam Smith’s presuppositions, that sympathy should have a role in social analysis. Smithian self-interest and the invisible hand were cleaved away from his notions of sympathy and the impartial spectator.

Peart and Levy’s objective is to explain why this transformation of economics took place. Their story is one of external forces from the scientific and literary cultures, particularly the influence of Charles Darwin. In nineteenth century England evolution was in the wind, and this fueled racist reactions to the Irish immigration in the 1840s and 1850s and the Jamaican revolt of former slaves in 1865. These events were context for the alignments of competing coalitions, classical economists and evangelicals on the side of human equality, and literary figures, anthropologists, and ethnologists on the side of human hierarchies. By the end of the nineteenth century, economics had gone over to the other side, with many economists joining “progressives” in their enthusiasm for eugenic state control of human fertility.

The historical accounts in this book are colorful and riveting, not the least because of abundant attention to the literary and scientific figures who were the classical economists’ critics, and to Victorian England’s popular culture. There are numerous illustrations from Punch magazine and other periodicals of the era and outlines of what today seem quirky ideas such as John Ruskin’s chemical political economy and the related Victorian idea that a person’s choices might actually transform their racial identity. Both are instances of malleable human nature. This is relevant for our time because the same questions with which the Victorians struggled are manifest in the popularity of books such as Steven Pinker’s The Blank Slate (2002).

Peart and Levy’s history has a moral, which is that economists’ turn from the human homogeneity assumption to heterogeneity and hierarchy need not and should not have occurred. Classical economists’ assumption that humans share the same innate capacity for making prudent choices was well grounded, even if subsequent scientific opinions indicated otherwise. They argue that classical economists had good scientific reasons for taking institutions seriously, and that economists went awry when theory was shorn of institutions. Also, implicit in Peart and Levy’s account is the notion that the best science of any era can be an insufficient if not faulty guide for social and political life.

But where does one turn apart from science? For Peart and Levy the answer is to morals. They are repulsed by the history of Victorian science which they report. It is not on scientific but on moral grounds that they disapprove. They quote Lionel Robbins on the facts and morality of the presumption of differential capacities for happiness across human populations:

I have always felt that, as a first approximation in handling questions relating to the lives and actions of large masses of people, the approach which counts each man as one, and, on that assumption, asks which way lies the greatest happiness, is less likely to lead one astray than any of the absolute systems. I do not believe, and I have never believed, that in fact men are necessarily equal or should always be judged as such. But I do believe that, in most cases, political calculations which do not treat them as if they were equal are morally revolting. (Economic Journal, 48: December 1938, 635)

Having brought the history of analytical egalitarianism forward in time from classical economics into post-classical economics in this book, Peart and Levy are now exploring Adam Smith’s sources in Stoic philosophy. Their historical project is a reminder that whether we recognize it or not, economics is and always has been grounded on visions of human nature that are not exclusively scientific. Theirs is a worthy effort to recover some of the understanding of human nature that was lost in the nineteenth and twentieth century romance with science.

J. Daniel Hammond is the editor, with Claire H. Hammond of Making Chicago Price Theory: Friedman-Stigler Correspondence, 1945-1957 (Routledge, 2006).

Subject(s):History of Economic Thought; Methodology
Geographic Area(s):Europe
Time Period(s):19th Century

The Emergence of Modern Business Enterprise in France, 1800-1930

Author(s):Smith, Michael Stephen
Reviewer(s):Hautcoeur, Pierre-Cyrille

Published by EH.NET (May 2006)

Michael Stephen Smith, The Emergence of Modern Business Enterprise in France, 1800-1930 . Cambridge, MA: Harvard University Press, 2005. x + 575 pp. $60 (hardcover), ISBN: 0-674-01939-3.

Reviewed for EH.NET by Pierre-Cyrille Hautcoeur, Ecole des Hautes Etudes en Sciences Sociales.

Michael S. Smith, associate professor of history at the University of North Carolina, proposes a synthesis on the emergence of big business in France in the tradition of Alfred Chandler. The book “seeks to explain how and why France acquired the roster of large corporate enterprises that would come to dominate France’s domestic economy and project French economic influence throughout Europe and the world over the course of the twentieth century” (p. 1). It “argues that the same forces that were giving rise to a new kind of very large, very complex business organization in the United States, Germany, and Great Britain between 1880 and 1930 were also at work in France” (p. 2), contrary to the idea of a special or a backward path for French economic development.

The book is well written and structured, revealing an exceptional knowledge of a large historiography and a capacity to organize it in a simple and mostly convincing narrative. It is also well presented, with minor typographical errors (usually in references to French names or publications, e.g. note 6, p. 501). The index includes all personal and firms names mentioned in the main text (not including the notes), as well as some analytical categories.

The book is divided into three parts and sixteen chapters, plus an introduction and a conclusion. Part one deals in less than one hundred pages with commerce, banking and transportation, in three chronological chapters (1800-1840s; 1850s-1870s; 1870s-1900s), with no discussion of the twentieth century.

Part two deals in two hundred pages with “the flowering of industrial capitalism.” It starts with seven chapters on particular industries (textiles, coal, iron and steel, “hardware, machinery and construction,” consumer goods, chemicals, “glass, paper and print”). It ends with a transversal chapter on “the new world of industrial capitalism” that deals with problems common to many industries and not dealt with elsewhere.

Part three analyzes in 160 pages the second industrial revolution and the beginnings of managerial capitalism, from 1880 onward. It includes four “industry based” chapters on the steel, electrical, automobile and “chemicals and materials” industries, and ends with a transversal chapter on “the new world of managerial capitalism.”

In order to make visible the method followed by the author, I will discuss a few chapters in more detail.

After an introduction in which the author presents a well-balanced (although not always up-to-date) synthesis on the “foundations for modern capitalism” before 1800, the first chapter centers on merchant capitalism, which it studies on a local basis and on an individual basis more than in terms of formal organization. It then follows the traditional historiography, sometimes missing the most recent works (even if it would be more consistent with its overall thesis, e.g., J.P. Hirsch, C. Lemercier). The role of the Haute-banque is presented in the conventional way.

Chapter two describes the interrelated revolutions in banking and transportation, which were grounded in Saint-Simonian ideas and networks during the Second Empire. The chapter clearly shows the role of the relationship between the government and these networks in these changes. It does not discuss the conventional wisdom, nor look at the organizational consequences of these relationships (government administrations were structured, not only business ones). The organization of the railroads is not really discussed, except for its “grande politique” dimensions. The internal organization of the banks is not discussed either, and the concept of a financial system is not introduced.

Chapter eight presents the chemical industry. Like most industry-based chapters, it is mostly organized as a succession of firms’ histories in relation with the invention of new products and processes, but says almost nothing of firm or market organization. Technological innovation seems the only important way to success, and its origins are not much discussed.

The transversal chapter 11 discusses three major themes: how industrial enterprises were financed, how they recruited and managed their labor force, and how they managed their external environment, especially the state. Finance and accounting practices are briefly described, but they are not analyzed as strategic choices and/or major explanations with responsibility for the varying success of firms or industries. The main conclusion is “the normality of the French industrial experience — that is, its similarity to the British experience” (p. 303) in finance, accounting and labor relations. As concerns the management of the external environment, the author concentrates on three subjects: tariff policy, competition policy and railroad policy (network subsidies and rate regulation). The precise organization of business and the instruments of its intervention in policymaking or in policy application (industry-level or local-level organizations, such as the chambers of commerce) is not examined (except, briefly, for the iron and steel, chemical and textiles industries, mostly in terms of restriction to competition). In the view of this reviewer, this chapter is too brief and comes too late in comparison with its strategic importance in understanding the rise of big business as a major economic phenomenon.

The third part focuses on those few industries in which French firms underwent a true Chandlerian revolution from the point of view of the author. Chapters on iron and steel, the electrical, automobile and chemical industries show how concentration, both through vertical and horizontal integration, allowed for the creation of important and complex organizations (although the internal organization is always treated only briefly).

One important question is whether the factors behind the smaller size of French firms had an impact on their efficiency and their ability to develop all the economies of scale and scope favored by Chandlerian business historians. These factors certainly included market sharing (in iron and steel), interlocking directorates and participation, and family firms’ preoccupation with secrecy and family control, all elements mentioned by the author but without providing a satisfactory answer to the above question.

Like chapter 11, chapter 16 has a crucial role and could well have been extended beyond its twenty pages. It discusses the creation of complex organizational structures, the growing role of professional managers and the new challenges in corporate policies that made them necessary. After a rapid presentation of the railroad’s pioneering role in organization, it presents the changes in management in industrial firms. It describes examples of divisional organization as early as the late nineteenth century, and emphasizes rightly the importance of holding structures from the 1920s onwards. It mostly insists on the rise of engineers as the main managers of French industrial firms, but discusses little their education, their efficiency, or the importance for their management style or their links with public administration. Overall, it suggests that new techniques of management or organization (including assembly lines) were already well developed in France prior to World War II.

The conclusion describes briefly the evolution of French big business in the second half of the twentieth century.

As a whole, the book gives a quite complete picture of French big (mostly manufacturing) firms in the nineteenth and early twentieth centuries. It reflects the many and important developments in the recent historiography of French business, and also its shortcomings, which explain most of the quibbles mentioned above.

Nevertheless, the reader (especially if he is an economic and not a business historian) could have expected something more. Although in the prologue, the author presents a short survey of (English-speaking) macroeconomic interpretations of French development, he is not really in a position to discuss the views expressed at the macroeconomic level. Some assertions such as “firm-level research demonstrated that French industry was more expansive and technologically advanced … than once thought” (p. 4), or “by the end of the nineteenth century, the activities [of the big firms] had become the focal point of economic life in France” (p. 324), suffer from a methodological bias, since the overall importance of big business in the economy is neither discussed nor compared to that in other countries. The book focuses on firms, not economic development, with an ambiguity since the only reason to discuss French firms separately is their link with French economic development. Bringing in more data comparing big firms with macroeconomic data (which exist at the industry level at least for the period after 1890) could have helped solve that problem. A short discussion of industries where big firms did not develop — and why — would also have been useful.

A second, related quibble: the international position of French firms is mentioned but little discussed, even though some of them had major international operations. If “it is with an eye to France’s eventual success in the late twentieth century that this book tells the story of the modernization of French business” (p. 5), one cannot but point out to the author that today’s big firms make most of their business abroad (not only by exports, but also by producing abroad), so much so that their impact on the French economy is sometimes questioned.

A third point, related to the two previous ones: the book is not very quantitative. It deals with a great number of firms, but provides little quantified comparisons among them (which could give way to typologies, for example) or between them and the rest of the economy or their foreign equivalents. The few tables (eight for the entire book, no figures) list the biggest firms in a given industry at a particular date; only the last two give some international comparison, and they provide few elements of comparison (total assets in general).

Fourth point: the relationship between French firms and the state is discussed in the very first chapters for the early nineteenth century, and somewhat in chapter 11, but almost never thereafter, although discussions of nationalization are widespread in the interwar period. The relationships between government and big business people or organizational practices are worth more discussion. The role of governments regulations (major in the 1930s), but also of semi-public bodies such as the chambers of commerce (important during the all period), is under-appreciated. (Actually neither the Code de commerce, nor the chambers of commerce, the commercial courts, nor the commerce minister appear in the index, even if some of them occasionally appear in the text.)

In conclusion, the book is a very useful synthesis for American students or scholars (French readers will find it strange that the discussion centers only on English-language historiographical debates, even if they are mostly based on French scholarship), more than an original contribution to our knowledge.

Pierre-Cyrille Hautcoeur is Professor of Economic History, Ecole des Hautes Etudes en Sciences Sociales and Research Fellow, Paris Jourdan Sciences Economiques (PSE) (joint research unit, CNRS-EHESS-ENPC-ENS). He specializes in monetary and financial history. His recent publications include “Efficiency, Competition and the Development of Life Insurance in France (1870-1939); or: Why Some People Don’t Trust Pension Funds,” Explorations in Economic History 41 (2004): 205-32; “Was the Great War a Watershed? The Economics of World War One in France,” in S. Broadberry and M. Harrisson, editors, The Economics of World War One (2005); and “Why Didn’t France Follow the British Stabilization after World War One?” (with M. Bordo), NBER Working Paper 9860, forthcoming in the European Review of Economic History.

Subject(s):Business History
Geographic Area(s):Europe
Time Period(s):20th Century: Pre WWII

Private and Public Enterprises in Europe: Energy, Telecommunications and Transport, 1830-1990

Author(s):Millward, Robert
Reviewer(s):Toninelli, Pier Angelo

Published by EH.NET (February 2006)

Robert Millward, Private and Public Enterprises in Europe: Energy, Telecommunications and Transport, 1830-1990. New York: Cambridge University Press, 2005. xix + 351 pp. $90 (hardback), ISBN: 0-521-83524-0

Reviewed by Pier Angelo Toninelli, Department of Economics, University of Milano-Bicocca.

Robert Millward, professor of economic history at the University of Manchester, has written extensively on the history of infrastructures and public ownership in Britain. In this volume his attention is addressed towards a wider and more ambitious objective, the comparative history of the economic organization of energy, transport and communications in a large number of European countries in the nineteenth and twentieth centuries.

The book is divided into five parts. The first is devoted to an introductory discussion of the basic hypothesis of the volume: the actual pattern of regulation and public ownership that has characterized infrastructure and public utilities has to be explained primarily by economic and technological factors or by strategic reasons, rather than by socio-ideological aspects.

The second part analyzes the years from 1830 to 1914, when the new European system of infrastructure was constructed, but no homogenous pattern of government intervention in services and infrastructure emerged: private, municipal and state ownership were mixed up apparently without any uniform criteria or ideological bias. Private enterprise dominated the early growth of networks, when municipal government was fragmented or weak, whereas municipal or state involvement — which required the presence of a well structured and autonomous authority — was motivated by the desires to expedite rights of way, to control monopolies, to secure a reliable supply and by fiscal constraints, as well. For instance, while gas services in Denmark, Germany and Britain were municipalized because of the revenues they could guarantee to the town councils, in several other countries they heavily relied on the private sector — public authorities being content to continue with arm?s length regulation of supply and tariffs. In the case of railways, the state took over the initiative when no subsidiary system could possibly induce the private sector to operate lines not sufficiently profitable, or to quickly build lines that were reputedly strategic. Telegraph services, on the other hand, were soon fully nationalized everywhere, and this depended on the critical and strategic interests of governments in controlling information for civil and military purposes. Therefore government ownership of the nineteenth century can be hardly associated with political or ideological stimuli. Municipal socialism flourished later, after the 1850-1870 spread of municipalization of gas and water services, soon followed by the municipalization of tramways and electricity.

The third part is dedicated to the 1914 to 1945 period, when a tendency towards a more common and homogenous pattern of behavior emerged: ?the road to state enterprise.? Emphasis here is more on the action of central governments than of municipal authorities as a consequence of the stronger interventionist stance by the state in the infrastructure sector. This was motivated mainly by a) the move towards system integration into national networks in electricity supply and telephone services, b) an increasing involvement in railroads by governments which had not yet nationalized trunk lines (as Prussia and Italy had already done), and c) the increasing state presence in the ownership and management of key strategic natural resources like coal and oil. These developments were not so much a product of political-ideological forces nor of wars and Depression, as of specific technological and economic changes. In electricity, for instance, although network integration was a potentially large source of economic benefits, where ?a nationally integrated network was not necessarily an economic proposition? (p. 119) integration could wait, as happened for different reasons in Norway and Italy. In railroads increased state intervention was explained primarily by their ?desperate financial straits? induced by overlapping causes such as wage rises, increases in coal prices and hard competition by petrol-driven coaches, trucks and cars.

Part four discusses the 1945 to 1990 period. It embraces the phase of the maximum expansion of state ownership, when large sectors of economic activities passed into government hands, even in countries previously less affected by the phenomenon, such as France and Britain. The focus here is particularly on coal, oil and airlines. State ownership — together with attempts at economic planning, which yielded a range of successes and failures — characterized the economic policy of recovery and reconstruction of the golden age. Here Millward raises the fundamental question: how to evaluate in a historical perspective the performance of state enterprises in order to take into account additional ?non-economic? aims (that is ?public interest?) increasingly assigned to them by governments? A correct measure should not reckon so much with profitability as with measures of x efficiency, i.e. the difference between maximum and actual effectiveness in the utilization of inputs — such as, for example, output per employee/hour or total factor productivity. These measures are difficult to calculate, given the lack of specific data differentiating private from public firms, but can be approximated by comparing results within the same sectors before and after eventual change of ownership, or across countries in case of different property regimes (i.e. private vs. public). Interestingly enough, no evidence of a poor productivity growth for state enterprises emerges from the examples considered by Millward.

In the fifth part of the volume Millward draws a few conclusions on the findings of his research: here the focus is on the moves towards the privatization and deregulation of the recent decades, in order to evaluate to what extent these were prompted by economic and technological change and/or supported by the prior economic history of the infrastructure sector. According to Millward, such moves did not lie so much in the inefficiencies of public undertakings as in the vanishing of the rationale of state enterprise. On the one side the motives which prompted such institutional format had increasingly weakened — for instance technological change of the last decades had greatly downgraded the issue of natural monopolies; on the other, state enterprises fundamentally failed to break even in the post war period, since the non-economic objectives were financially not supported enough by governments. Therefore the less visible mode of state intervention, arm?s length regulation, has been increasingly replacing the most visible one, ownership.

The major qualities of Millward?s quite stimulating and innovative book lay in its large comparative approach, in its meritorious effort to take into consideration both levels — the central and the municipal — of state intervention, as well as in its deep and not prejudicial discussion about the role and performance of public enterprises. These merits get the better of a few minor shortcomings which I noticed in the treatment of the Italian case: errors in spelling proper nouns and some historical imprecision (e.g. the SIP company was never re-privatized), while the prevailing identification of ideology with socialism is likely to lessen the impact of fascism and autarchy on the still persisting fortunes of statism.

Pier Angelo Toninelli is professor of history at the University of Milano-Bicocca. His latest book is Storia d?impresa (Bologna, Il Mulino, 2006)

Subject(s):Transport and Distribution, Energy, and Other Services
Geographic Area(s):Europe
Time Period(s):20th Century: WWII and post-WWII

Essays on the History of Economics

Author(s):Samuels, Warren J.
Henderson, Willie
Johnson, Kirk D.
Johnson, Marianne
Reviewer(s):Paganelli, Maria Pia

Published by EH.NET (January 2006)


Warren J. Samuels, Willie Henderson, Kirk D. Johnson and Marianne Johnson, editors, Essays on the History of Economics. New York: Routledge, 2004. xiii + 340 pp. $165 (cloth), ISBN: 0-415-70006-X.

Reviewed for EH.NET by Maria Pia Paganelli, Department of Economics, Yeshiva University.

The unifying theme of Essays on the History of Economics may not be obvious from simply looking at its table of contents. The volume has four essays. Willie Henderson and Warren Samuels write on “The Etiology of Adam Smith’s Division of Labor: Alternative Accounts and Smith’s Methodology Applied to Them” with an appendix by Henderson on “How Does Smith Achieve a Synthesis in Writing? Evidence from His Propensity to Truck, Barter and Exchange.” Warren Samuels, Kirk D. Johnson and Marianne Johnson write the second essay, titled “Should History-of-Economic-Thought Textbooks Cover ‘Recent’ Economic Thought?” as well as the third essay, “What the Authors of History-of-Economic-Thought Textbooks Say about the History of Economics.” The last essay is a solo by Samuels on “Thorstein Veblen as Economic Theorist.”

What connects these four essays is summarized by Samuels in the introduction: “If John R. Hicks is correct that no one theory can answer all our questions, then perhaps there is room for multiple theories of capital, of cost, and so on, each devoted to inquiring into different questions. As it stands, most economists seem compelled to believe that only one correct theory of capital or of cost, etc. can exist and then adopt their favorite one — all the while using it as a tool or element of design strategy. Historians of economic thought can enrich economic theory by educating future economists along the lines of theoretical pluralism” (p. 6).

If a goal of history of economic thought is to show that economics and its history is not a monolith, but rather a discipline with a plurality of socially constructed theories and concepts, this is a successful work of history of economic thought.

The first essay deals with the plurality of interpretations of Adam Smith’s sources of the division of labor. Through a meticulous textual analysis, the authors show that in addition to the oft-mentioned propensity to truck, barter and exchange and reason and speech, four additional sources for the division of labor can be argued for. Division of labor may emerge because individuals take advantage of opportunities, because of the presence of a commercial society, because of the “nature of human nature” or because of human desire for approbation. The interpretative conflicts and paradoxes associated with the language are numerous.

The second essay is explicitly meant to challenge Joseph Dorfman’s answer to the question: Where does history of economic thought end? In The Economic Mind in American Civilization (1959) Dorfman claims that time must pass for us to gain knowledge and perspective. The authors show that history of economic thought is able to handle recency in a more variegated way than Dorfman is willing to admit. The authors go though 73 textbooks in their various editions (a total of 124 textbooks) to see how recency is handled. They report for each whether the problem of recency is explicitly discussed, how the design changed over the years to account for recent materials, the extent of coverage of recent materials, and the frequency of citations and references to prominent post-war economists. The results are mixed: there is no clear end of history of economic thought, which contradicts Dorfman’s rule, and supports the idea of pluralism in the history of economic thought. Dealing with recency may reduce the risks of a history written by the survivors or by the winners. Also, the multitude of histories of economic thought seems to dispute Dorfman’s assertion that the one correct story will be revealed with the full knowledge generated by the passage of time. Another conclusion from this chapter seems a challenge to trained historians of economic thought: “most of recent history-of-economic-thought work is undertaken by economists (and others) who are not historians of economic thought” (p. 179) through survey articles, literature reviews, specialized encyclopedias, biographies and the like. Pluralism in the discipline comes also from the diversity of writers of the history of the discipline.

The third essay reports the historiographic position of 63 textbooks. It successfully shows that “the history of economic thought does not write itself” (p. 264) but is filtered through the interpretive eyes of the textbook writer. By analyzing the design strategies of the textbooks, this chapter is a testimony to the pluralism of the discipline. The diversity of interpretations is visible in the choice of starting and ending time, in the individuals and schools covered, and especially in the focus on theories or on ideas. The work presented seems immense, as for each historiographic question there is a list of authors who provide an answer and the answer itself. Given the amount of information presented, it seems like an electronic version of this chapter, with the option of electronically searching it, would be useful as a working tool for a scholar interested in this kind of research.

The last essay challenges the hegemony of neoclassical economics in defining theory. The interpretation of the work of Thorstein Veblen is used to demonstrate the limits of such supremacy. The same author (Veblen) can be interpreted as an anti-theorist as well as a theorist, depending on how theory is defined. If by theory we understand only neoclassical theory, a la Blaug, then Veblen is an anti-theorist and offers no theory. By expanding the definition of theory to include non-neoclassical theories, Veblen is a theorist (a non-neoclassical one) and is not anti-theory (while he is anti-neoclassical).

The volume is an immense work of scholarship, as shown by the rich twenty-five pages of bibliography. It is a dense picture of the state of the discipline today, a picture that shows a dynamic cacophony of different voices, rather than a unified but maybe more monotonous tune.

Maria Pia Paganelli is an Assistant Professor of Economics at Yeshiva University. She works on eighteenth-century money theories and on Adam Smith.


Subject(s):History of Economic Thought; Methodology
Geographic Area(s):General, International, or Comparative
Time Period(s):20th Century: WWII and post-WWII

Russia’s Economic Transitions: From Late Tsarism to the New Millennium

Author(s):Spulber, Nicolas
Reviewer(s):Leonard, Carol

Published by EH.NET (March 2005)

Nicolas Spulber, Russia’s Economic Transitions: From Late Tsarism to the New Millennium. Cambridge: Cambridge University Press, 2003. xxiv + 420 pp. $80 (hardcover), ISBN: 0-521-81699-8.

Reviewed for EH.NET by Carol Leonard, Interdisciplinary Area Studies, Oxford University.

This is a lucid and richly detailed history of Russia’s transformation in the tsarist, Soviet and post-Soviet eras. Written by a distinguished economic historian and drawing on a large range of sources, the book is a survey that embraces policies, population movements, state institutions and sectoral developments in each of three periods. The three transitions include two periods of roughly seventy years each, after the abolition of serfdom in 1861 and after the revolution of 1917, and the shorter period after the introduction of markets in 1991. The data presentation stops at 1998, but this is far enough into the last transition to justify his comparison of periods.

As defined by Spulber, transition refers to “the period of transformations through which a country passes while experiencing the impact of newly emerging ownership and production relations” (p. xix). Transitions embrace background conditions, policies, population movements, sectoral dynamics and social accounting (banking and state finance). Despite their enormous reach, the transition themes are nevertheless clear, since they are carefully laid out in section summaries and lengthy overviews. This book ventures into almost impassable terrain, but it never loses the reader.

The bundling of transitions focuses the reader’s attention on the background and consequences of policies that resulted in vast structural displacement. The cultural and political features of transition, covered as “issues,” show the author’s considerable knowledge of literature, including memoirs, and there is much social history in this account of “the exaltations and the grieving” of Russia (p. xxiii). The author sketches for the reader the original debates that were central to popular movements as well as to economic outcomes. Indeed, this history essentially unfolds within and around issues. For example, in part 1, Chapter 2, Spulber describes the strains of Marxism affecting views of the development of capitalism. The introduction to Plekhanov, Lenin and others serves effectively to prepare the reader for an even more condensed and incisive summary of the “principles and rules of organization of the Soviet state … the concepts on the basis of which the economy was supposed to be reorganized and managed” (p. 174). Such broad coverage of institutional and cultural features of history suggests that the book will be of use to the general reader as well as to researchers on all periods of this history.

The first transition is from the abolition of serfdom in 1861 to the revolution in 1917. The abolition is loosely attributed to Russia’s military defeat in the Crimean War. Spulber gives no space to the enormous literature on how this reform was planned, timed and implemented. His concern in part I is, rather, to explain and demonstrate continuing rural backwardness and problems in industrial development, and he succeeds with a breadth similar to that in Peter Gatrell’s The Tsarist Economy, 1850-1917 (1986). There is a striking difference between Spulber and Gatrell, however. For the pre-revolutionary period he shows the contrast between the country’s overall and per capita achievement, emphasizing Gerschenkron’s interpretation (1962), even though his data are largely from Paul Gregory’s more positive work on Russian national income (1982). Relative backwardness is the salient feature he finds in the pre-revolutionary regime; Russia remained a semi-feudal country through the era of revolution. He does, however, closely assess the critiques. On the question of whether the state actually had an industrial policy, for example, his summary (pp. 134-137) is highly useful. On the whole, he tends to follow the views of the classic economic writings on the tsarist era, including by Margaret Miller (1926) and Raymond Goldsmith (1961), with few references to the voluminous historical works written over the past three decades.

Russia’s second transition is from 1917 through the Gorbachev era. Spulber highlights the crucial events, including collectivization, and their aftermath, and he lays out with clarity the economic bottlenecks of the ambitious Soviet experiment. The emphasis falls on the large discrepancy between policy objectives and actual results, particularly for the period from 1960 to 1989. His discussion of the attempted economic and social changes introduced by Gorbachev closes this part. He underscores that Gorbachev’s efforts failed to resolve problems of agricultural backwardness, a problem visible for many years in net imports of grain. In addition, there were “multiple, complex and internal dislocations” that became “increasingly hard to handle” (p. 192). His view of the end of Communism is that it was due to problems of maintaining essentially a war economy over seventy years, a task that proved insuperable. The data are presented in extensive tables, and they are used mainly to illustrate the character of the economy’s capital stock, the poor productivity of most sectors, and “manifest underdevelopment outside of the main urban centres” (p. 284). Despite reforms, in other words, according to Spulber, Gorbachev was unable to stop the disintegration of the economy.

The last section is the transition to markets. He begins with the power struggle between Gorbachev and Yeltsin and the social consequences of severe recession early in transition. He traces the deepening of influence over the media, the economy and the power structure by the seven top bankers and businesspeople and the uncertainties produced by the drift in reform. Sector by sector he argues that there was an economically devastating impact of contradictory policies. He finds that the government constructed interconnected, bureaucratically organized and directed markets rather than a foundation for real competition and democratization (p. 327).

In summary, the first two parts of this book are particularly useful. Spulber’s inclusiveness and his balanced presentation make this book a major contribution on both periods. Social and economic historians will find important linkages across the century and a half. The third part is also well conceived, but it is inconclusive, due to the continuing course of market development.


A. Gerschenkron (1962), Economic Backwardness in Historical Perspective. Cambridge, MA: Harvard University Press.

R. Goldsmith (1961), “The Economic Growth of Tsarist Russia,” Economic Development and Cultural Change 9: 441-475.

P. Gregory (1982), Russian National Income, 1885-1913. Cambridge: Cambridge University Press.

M.S. Miller (1926), The Economic Development of Russia, 1905-1914: With Special Reference to Trade, Industry, and Finance. London: P. S. King & Son.

Carol Leonard is University Lecturer in Regional Studies of the Post-Communist States at Oxford University. Her recent projects and publications focus on agrarian reform in transition Russia and general technological advancement in Russia and Central and Eastern Europe. Her publications include Reform and Regicide: The Reign of Peter III of Russia (1993) and Agrarian Reform in Russia: The Road from Serfdom (forthcoming).

Subject(s):Social and Cultural History, including Race, Ethnicity and Gender
Geographic Area(s):Europe
Time Period(s):20th Century: WWII and post-WWII

Keynes, Chicago and Friedman

Author(s):Leeson, Robert
Reviewer(s):Samuels, Warren J.

Published by EH.NET (February 2005)

Robert Leeson, Keynes, Chicago and Friedman. London: Pickering & Chatto, 2003. xi + 381 pp. and vii + 534 pp. $325 (cloth), ISBN: 1-85196-767-2.

Reviewed for EH.NET by Warren J. Samuels, Department of Economics, Michigan State University.

I. The Controversy and its Possible Resolution Was there a “Chicago” Quantity-Theory oral tradition, or not; and if so, what was it?

Robert Leeson, of Murdoch University, has collected some fifty contributions to a narrow but intriguing topic in the history of the Chicago School and monetary economics: whether or not, prior to Milton Friedman’s publication in 1956 of his restatement of the quantity theory, there had been (as he claimed) an oral tradition at the University of Chicago of the quantity theory; and, if there was, of what did it consist? Friedman attributed to that oral tradition a model in which the quantity theory was “in the first instance” (vol. 1, p. 1, Leeson quoting Friedman) a theory of the demand for money; indeed, a stable demand for money. Friedman claimed that the tradition was spawned by Henry Simons and Lloyd Mints directly and by Frank Knight and Jacob Viner at one remove. Thirteen years later, Don Patinkin questioned the validity of Friedman’s interpretation of the quantity theory and his “Chicago” version (vol. 1, p. 87). Patinkin identified “The Other Chicago” version thusly: “The quantity theory is, first and foremost, not a theory of the demand for money, but a theory which relates the quantity of money (M) to the aggregate demand for goods and services (MV), and thence to the price level (P) and/or level of output (T); all this in accordance with Fisher’s MV=PT” (vol. 1, pp. 89, 91). After a further twenty-two years Patinkin held that the disagreement was not about “whether or not there was such an oral tradition, but what the nature of that tradition was” (vol. 1, p. 381). Friedman also has modified his position.

Leeson has gathered the important material pertinent to the questions about the Chicago “oral tradition.” He has mastered both that material and the intellectual environment in which the controversy took place, an environment dominated by Keynes’s General Theory. Of the two volumes’ total of 915 pages, some 180-plus pages contain Leeson’s essays on the contents of his four parts: The Initial Controversy, The Debate Widens, How Unique was the Chicago Tradition?, and Towards a Resolution of the Dispute. What does Leeson conclude?

Leeson places a great deal of interpretive weight on Friedman having taken Mints’s graduate course in money and banking (Economics 330) during his first year as a graduate student at Chicago in 1932-33. Leeson has been fortunate in having been given access by Friedman to his notes from Mints’s Economics 330. Leeson notes that “Friedman’s lecture notes are currently in his possession and have not been processed into his archives at the Hoover Institution” (vol. 2, p.515n.1). The next important round may well center on the notes. The course was organized around Keynes’s Treatise, one feature of which was “an increased emphasis on money demand in a revised quantity theory framework” (vol. 2, p. 486).

Additional interpretive weight is placed by Leeson on a private seminar held by graduate students; quite a group, for they included Friedman, Albert G. Hart, George Stigler, Allen Wallis, Kenneth Boulding, and others, as well as a stream of visiting economists.

Leeson concludes:It therefore seems likely that Friedman took the ideas he was exposed to in Economics 330 and used them as an organising framework with which to understand the ‘macroeconomic’ dislocation of the 1930s. If intense student discussion is admissible as an ‘oral tradition’ then Friedman’s assertion has some validity. A version of the quantity theory which was ‘in the first instance a theory of the demand for money’ was apparently ‘a central and vigorous part of the oral tradition’ at Chicago at least among graduate students in 1932-3 (and possibly until the General Theory made Keynes a suspect figure). (Vol. 2, p. 488)

One difficulty with Friedman’s initial position has to do with the concept of an “oral tradition.” Friedman was part of the 1932-33 (and beyond) discussion; the “oral” part of the concept is unobjectionable. But the “tradition” part is highly suspect, on which more below.

A second difficulty is that many different readings were given the Treatise (not unlike the later General Theory), each reading stressing different combinations of variations within a general quantity theory framework. This meant, on the one hand, that a variety of oral “traditions” likely co-existed throughout the discipline and, on the other hand, that some or many of them included significant attention to the demand for money. Leeson stresses the latter: “Friedman’s initial assertion about Chicago uniqueness in this context must now appear unreliable. … It is therefore improbable that the Treatise — with its emphasis on money demand — informed ‘macroeconomic’ discussions in Chicago only. Indeed, Friedman in the preface to these volumes has retreated from his initial assertion about Chicago uniqueness” (vol. 2, pp. 488, 489). In his preface, Friedman begins his defense saying that he early “was baffled … at what all the fuss was about. … very little was at stake.” He then takes, correctly but irrelevantly, the position that if he has been “confused about the origin of the ideas … it would not affect by an iota the validity or usefulness of those ideas.” He concludes that he remains “persuaded that I was the beneficiary of a Chicago oral tradition, but this evidence convinces me that I gave Chicago more credit for uniqueness than was justified. “The issue,” he repeats, “is entirely about the origin of ideas, not about the validity of content” (vol. 1, p. x). Friedman seems to have taken too much for granted; Chicago was no more homogeneous than was the discipline as a whole on the quantity theory.

Leeson is claiming, therefore, only that Friedman’s assertion had “some” validity — in the sense that much “macroeconomic” discussion at Chicago and elsewhere in the early 1930s resembled his 1956 restatement, that “tradition” is too strong, and the uniqueness claim is wrong and must be dropped.

II. Historiographical Considerations

The collection bears on several historiographical considerations.

1. The historical record is uneven. Political history leaves many documents. Social and economic history, until relatively recently, left few lasting markers, but often sufficient indirect evidence to enable imaginative scholars to intuit larger patterns. With only sparse materials bearing on an interpretive problem, historians of thought and others may well find it easy to leap to conclusions. But where one has a vast body of evidence, such leaps seem presumptuous. With sparseness, the world may seem simpler than it actually was; with plentitude, the big, bloomin’ confusion is amply evident. So it is with the problem of the Chicago “oral tradition.”

The existence and content of an “oral tradition” plus our ability to discern them are highly problematical. Until very recently, as historical time goes, the technology to record oral communication did not exist. Even now, absent mechanical recording, the oral, once uttered, no longer endures (vide Adam Smith on unproductive labor). One result is false and/or biased memory.

Clarence E. Ayres, a long-time friend of Frank Knight, was like Knight an imposing and convincing lecturer. It turns out that institutionalists trained by Ayres had different views of institutionalist doctrine (such as the so-called Veblen-Ayres dichotomy) depending on when they sat in Ayres’s classes. There was an oral tradition at Texas centering on Ayres, but for that reason it registered important variations over time. I would expect the same at Chicago, the notable difference being that Friedman, Stigler et alia were more successful.

2. Schools of thought, one surmises, once were loosely and partly non-deliberately and partly deliberately formed. As schools became obvious vehicles for promoting ideas and reputations, they became more highly, if still loosely, organized. Friedman and Stigler, as part of their professional activity, engaged in the role of cheerleader for “Chicago.” Friedman’s claim may well have been an example of the Chicago propensity to promote itself by self-publicizing its beliefs. Stigler was the premier practitioner but rare is the public presentation — e.g., papers given at professional meetings — by a Chicagoan that does not make some claim for the unique brilliance of the Chicago point of view. Leeson aptly quotes Stigler “that it was both ‘true, and necessary to their survival’ that ‘learned bodies are each run by a self-perpetuating inner clique'” (Leeson, vol. 1, p. 296). The twin objectives were the promotion of ideas, a certain definition of reality with which to influence policy; and the quest for power in both the economics profession and the larger world. Such constitutes the deliberate invention of tradition, and the members of the Chicago School have much company, in the world of academic public relations, in constructing suitable advertisements for themselves and their ideas. With the Chicago School on the cutting edge of theoretical development, such promotion is to be expected.

When it comes, therefore, to “Friedman’s motives” — I would prefer “style” — Leeson opines that “If his ‘Restatement’ [of the quantity theory] exaggerated the degree of continuity with respect to earlier Chicago versions of the quantity theory this may have been a rhetorical flourish designed to provide an additional motivational stimulus to his students” (vol. 2, p. 490). True enough, as far as it goes; Leeson has gone further (Leeson 2000a and 2003, both dealing with Friedman’s and Stigler’s struggle for influence). The Stigler-Friedman strategy was directed not only to motivate students but to influence the discipline of economics and its world of policy. That Keynes and others also practiced this strategy (vol. 2, p. 491), enables us to identify and put it into perspective.

Moreover, Friedman’s methodological position served the purpose of erecting his economic theory, here his monetary theory, as the maintained hypothesis under the guise of “predictive power.”

In any event, the quantity theory in any form is no substitute for a comprehensive macroeconomics. There is more to history of the quantity theory than the price level as a function of either the supply of money or the demand for money. There also are several different “monetary theories of production.” There is less to the quantity theory than its devotees often would have us believe. The quantity theory is not alone in deriving its attractiveness from its utility for mobilizing political psychology.

3. Significant differences existed over what is “absolute truth” in monetary economics, whether such existed, and if it did, what it was; over the relative weight to be given to inflation and unemployment as policy goals; over what is “sound” or “proper” monetary policy; and the evaluation of current policies and current events.

Some authors treated the quantity theory as a matter of causal relation and explanation, often differing as to the content and direction of explanation, whereas others saw it as a truism, identity or tautology.

The epistemological nature of much discussion of the quantity theory was mixed. Some of it was theory as hypothesis. Some was comprised of declarative statements without supporting evidence or with carefully constructed evidence. Who is to say which version of the quantity theory is correct? Is there one correct version? What are the criteria of correctness — and the meta-criteria by which to chose from among the criteria, et seq.?

These questions are difficult to answer, for two reasons. First, consider W. H. Hutt’s distinctions between “rational-thought,” “custom-thought,” and “power-thought.” “Rational-thought” is disinterested objective inquiry leading to the accumulation of undisputed social-science knowledge (once class-driven ideology has been removed). “Custom-thought” is modes of thinking infused with implicit premises derived from tradition and customary ways of doing and looking at things. “Power-thought” is modes of thought and expression that are constructed to influence power, politics, and policy, through their service in psycho-political mobilization (Hutt 1990, p. 3 and passim). All three types of thought, especially the latter two, are found in the literature collected by Leeson. Second, inasmuch as no theory, or no version of a theory, can cover all pertinent variables and answer all our questions, correctness by any definition is elusive — especially when various versions of the quantity theory have been adopted to weaken if not destroy the targeted opponent, Keynesian economics. Here, power and persuasion rank well above scientificity (amply developed in Leeson 2000a and 2003).

Economic arguments are used to manipulate political psychology and political psychology is used to manipulate economic policy. Ideology and wishful thinking have relatively easy entry, especially for economists and politicians who favor creation of a certain felicitous picture in the public’s mind as part of the process of creating/manipulating public opinion.

Monetary theory and policy (like many other fields in economics) were characterized by over-intellectualization and economic politics, treated as if conducted cognitively and in sterile environments, whereas they existed in a real world of power play, selective perception, psychology, uncertainty, the quest for wealth and prestige, and efforts to influence the economic role of government. Monetary policy is a function of power, ideology, tradeoffs, power play over the distributions of opportunity, income and wealth. Each model of monetary theory was more or less attractive to particular ideologies and invoked as a weapon in support of policies based on ideology, practical politics, etc.

III. How Different Versions of the Quantity Theory Could Exist

The question of the existence of a Chicago oral tradition and its possible content must confront the variety of forms given the quantity theory. Many individual quantity theorists had their own positions to advance; they had different perspectives, and monetary theory comprised many different considerations on which their different, and changing, perspectives could be brought to bear. Quantity-theory formulations could vary among theorists and each was nested in a larger and variegated model of the money economy. It is impossible to cover all this in a short review but at least the following can be said in abbreviated form.

Sophisticated versions of the quantity theory were possible but because of the vast number of possible complications, advocates were often interested in simple versions easily discussed and taught. The quest for singular explanations of macroeconomic phenomena — real balance effects, sticky or inflexible prices, etc. — was also relevant. Notice the phrases “in the first instance” (Friedman) and “first and foremost” (Patinkin). What, if anything, comes afterward? The problem is, in part, that economists tend to adopt the simplest and most highly stylized versions of their theories, often caricatures of the sophisticated versions held by at least some leading theorists. Advocates were either unaware of the magnitude of possible complications or had their perception thereof narrowed and/or finessed by ideologically driven a priori beliefs, and so on.

The quantity theory exhibited highly variegated content. The quantity theory was ubiquitous. One formulation or another constituted the core of what most individual economists seem to have understood as monetary theory. While the quantity theory was its most conspicuous component, monetary theory included more than the quantity theory. Disagreements centered in part on different versions of the quantity theory using different elements of monetary theory. Ralph Hawtrey’s pure monetary theory of the business cycle had widespread impact for many years. Dennis Robertson, Irving Fisher, John H. Williams, Alfred Marshall, and pre-General Theory John Maynard Keynes, among others, were more conspicuous than any Chicagoan — with the exception of James Laurence Laughlin, who opposed the quantity theory.

It took centuries for the Fisherian and Cambridge versions of the quantity theory to become increasingly the analytical norm. Neither version emerged fully grown. When velocity of circulation (V) is used, attention is drawn to such technical matters as the facility with which the banking system transfers balances between accounts. When 1/K is substituted for V in Fisher’s version, it both resulted from and reinforced attention to the reasons for holding money. What looked to some to involve only a mathematical change, for others now meant that attention was directed to the reasons why people might want to hold money. What we now call real balances (or real balance effect) or liquidity preference was long appreciated and treated as hoarding.

The money economy could be examined in pure abstract terms, independent of monetary, banking and other financial institutions, or with an emphasis on the institutions that helped form and operated through the money economy. Significant disagreements existed as to the nature and substance of fundamental monetary and other macroeconomic processes, the nature and origin of actual monetary and macroeconomic problems, and the solutions to those problems. Considerable confusion results from some economists’ claims that their agenda for government monetary/macroeconomic policy constitutes non-interventionism whereas all other agendas are interventionist.

Major controversies were waged over what is money, the monetary standard, the role of reserves, what commercial banks do, the nature and role of a central bank; fractional reserves and the money multiplier; the Cambridge cash-balance approach, Wicksell’s monetary theory, and so on.

Some work postulated the economy to be fundamentally stable (e.g., through great weight given to Say’s Law); others postulated particular combinations of quantity-theory and business-cycle models. Changes in M could be deemed to affect only changes in P and nominal Y (i.e., T). Changes in Y (or T) could be seen as leading to changes in M and thence in P; or changes in Y (or T) could be seen as leading to changes in P and thence in M. Different supplementary assumptions might lead to changes in the direction of flows of causation or influence. Especially critical was whether an increase in Y (or T) was possible: whereas an increase in M and thence P could lead to an increase in Y (or T) at less than full employment, at full employment an engineered increase in M could not lead to an increase in real Y (or real T).

Much work seemed directly or indirectly influenced by monetary and banking arrangements existing within some form of gold standard. A monetary system predicated upon gold meant that changes in either gold or money meant a change in the other and in the price level. Currency and credit could be treated differently (as was done by Fisher, for example), influenced by differences in view of specie, paper and bank balances.

The relation of reserves to M could vary, as could the money multiplier, reasons for holding money or spending on consumer and/or capital goods, the respective roles of commercial banks and central banks (including targets), the relation of interest rates to the quantity theory variables, neutral versus non-neutral money, and so on.

Friedmanian monetarism — to the extent it can be meaningfully generalized — proposed that the private sector is stable, or would be stable in the absence of monetary and fiscal policy; that changes in the supply of money, vis-a-vis a stable demand for money (expectable in a stable economy) lead to changes in the interest rate and, especially, the price level; that changes in the supply of money generate changes in spending; that prices are generally flexible; and that vis-a-vis all other factors only money matters or money matters most (hard versus soft monetarism). The Keynesian fiscalist alternative — to the extent it too can be meaningfully generalized — proposes that the private sector is unstable, and that government can reinforce this instability, introduce its own instability, or counter instability; that changes in spending are governed by more than changes in the supply of money; that changes in the supply of money are the consequence, not the cause, of changes in spending — in part, the supply of money is a function of the demand for money; prices are generally inflexible; inflation is largely or typically a function of aggregate demand increasing beyond the full employment level; that increases in the supply of money can generate inflation but changes in the supply of money are not the critical factor governing changes in spending; that price-level instability is not the only monetary/macroeconomic problem, because full employment is not guaranteed and the supply of money is key to neither the price level nor the level of real income.

In addition, the two schools — monetarism and fiscalism — identify different transmission processes applicable to changes in the supply of money leading to increased spending. The fiscalist argues that increases in the supply of money are endogenous, resulting from increases in the demand for money by borrowers in order to spend more, and that the increases in the supply of money limit increases in interest rates (generated by the increased demand for money) and thereby increases investment and income. The monetarist argues that increases in the supply of money are exogenous (generated by the central bank), leading to excess money balances which leads to greater spending, to return monetary balances to desired levels. The differences turn on whether the increases in the supply of money are endogenous or exogenous, whether the increased supply of money is felt through the lowering of the interest rate or the creation of excess balances, and whether a stable economy and a stable demand for money is a suitable or a utopian premise.

Furthermore, modeling the demand for money is no simple matter. Even putting aside (and there is no conclusive reason to do so) the fiscalist-Keynesian model of transaction, speculative and precautionary motives, the monetarist demand for money has been modeled differently by different people and even by Friedman himself. The demand for money most generally is said to be a function of permanent income, wealth, price level, expected rate of inflation, and liquidity preference; more narrowing, it is a function of permanent income, wealth, and price level, all felt by Friedman to be relatively stable in the short run (i.e., if the economy is left to run well on its own), plus the interest rate.

Anyone not permanently wedded to either monetarism or fiscalism likely might consider a much more complex interplay of monetary and spending variables and relationships, including structural and expectational factors. Keynesian fiscalism is likely more capable of encompassing a wider range of variables than is the quantity theory. A major point, however, is that there are a multitude of possible complex interplays of all such variables, relationships and factors. An even more important general point is that all of the foregoing constitutes the social construction of economic theory. The argument over the content of the Chicago oral tradition is part of that process. Only in part is the argument a controversy about the actual economy. It is primarily, albeit not solely, a quest for a theory with which to successfully challenge Keynes and fiscalist economics and its policies. In very large part, the argument is about the control of government policy. It is the quest to define and then to enlist a Huttian custom-thought in the service of a Huttian power-thought. The quest for power and control over policy thus drives economic theory (a quest that pervades Friedman’s work; see Samuels 2000; Leeson 2000a and 2003).

The question thus arises as to whether the quantity theory — in whatever form — is itself (1) a definition of economic reality, (2) a tool of analysis with which to investigate economic reality or (3) an instrument of rhetoric with which to mobilize and manipulate political psychology. For example, Leeson says that James W. Angell (who taught Friedman monetary theory at Columbia) “used the quantity theory to advance the proposition that the principal cause of unemployment was ‘excessive variations in the volume of bank credit.’ Angell also prefaced his analysis with a statement about his preference for ‘planned economies …'” (vol. 1, p. 290). Economists of my generation will recall how Samuelson and Friedman, in their televised debates in the 1960s, each invoked aggregate demand and the supply of money; but Samuelson had changes in aggregate spending drive changes in the supply of money, whereas Friedman had changes in the supply of money drive changes in aggregate spending. More is at stake than a conflict about direction of causal flow, just as when advocates of both under-consumption and over-investment theories of the business cycle pointed to the same data to prove their case: unsold goods.

Perusal of several standard reference works confirms the foregoing argument that the quantity theory is not something given but a matter of social construction, a work in progress, and thus characterized by multiple specifications and interpretations. The entry in the Elgar Companion to Classical Economics indeed opens with the caution One of the conclusions drawn by Hugo Hegeland … from his thoroughgoing study of the historical development and interpretation of the quantity theory of money was that “the interpretation of the quantity theory shows almost as many variations as the number of its interpreters.” This assertion is hardly an exaggeration and even after half a century of further intensive research in this field it is probably as valid now as then. … the theory is like a chameleon. From the outset writers on the subject have understood [the] quantity theory of money to mean sometimes very different things …” (Rieter 1998, p. 230)

Why should the Chicago tradition, oral or otherwise, be different?

The opening of the entry in the Penguin Dictionary of Economics asserts that the theory states the relationship between the quantity of money and the price level. The entry goes on to mark the importance of what is or is not assumed, and says of Friedman that the theories of the demand for money, “based on a quantity theory of money approach, do not differ a great deal from the theories based on the Keynesian framework” (Bannock, Baxter and Rees 1972, p. 339). Is the Chicago tradition, a la Friedman, different (from Keynesian treatments)?

The Routledge Dictionary of Economics has Friedman reviving “interest in the [quantity] theory by expounding it as a theory of demand for real balances” (Rutherford 1995, p. 379). The MIT Dictionary of Modern Economics has the theory be one of the demand for money, saying that it “formed the most important component of macroeconomic analysis before Keynes’ General Theory …” (Pearce 1992, p. 356).

A careful reading of all the cited reference works will reveal different positions on whether full employment is an assumption or a conclusion, what else has to be assumed, and so on.

At least one reference work indicates how far the rationality assumption has come in monetary theory: “The underlying premise of the basic quantity theory is that no rational person holds money idle, for it produces nothing and yields no satisfaction,” adding some pages later, “that is, people demand money only for transaction purposes” (Johnson, Ley and Cate 1997, pp. 518, 525). These authors also write that “In the area of policy it would be easy to exaggerate the differences between the Keynesian and monetarist positions. … However, in general, the notion of policy ineffectiveness as elaborated and expanded over the past 30 years by Friedman and others may represent the monetarists’ greatest challenge to the Keynesian heritage. For good or ill, it is an opinion which has come to enjoy considerable support. Moreover, whether monetarism and the modified quantity theory represents a theory of money at all, or a monetary theory of trade and the business cycle, is an open question, one that in part depends on one’s macroeconomic perspective, of which they are certainly a number in fashion” (idem, p. 525). The Chicago tradition, oral or otherwise, is not alone in its attitude of pushing its perspective.

This book must be read, therefore, with cognizance of its elusive background. If a reader is tempted to agree with some statement made by an author included in Leeson’s collection, that reader must ask, on what narrowing premise(s) does this statement rest? The hermeneutic circle is involved between orienting perspective and conclusionary position. However, I am also convinced that my stricture about the hermeneutic circle is and must be self-referential.

IV. A Contribution to the Resolution of the Dispute

Mints was not the only instructor in Economics 330. In volume 23-C (2005) of Research in the History of Economic Thought and Methodology, I am publishing F. Taylor Ostrander’s notes from Charles O. Hardy’s course in Economics 330 given in 1933-34, the next academic year following Friedman’s enrollment in Mints’s course. The notes indicate that Hardy discussed the work of Hawtrey, Frederic Benham, Fisher, Keynes and Laughlin and suggest that the demand for money was part of the course but by no means as central as the notion of an oral tradition centering on the demand for money would have it be.

At the time Hardy taught the course taken by Ostrander during 1933-34, Friedman was a fellow student, and monetary economics was represented by Melchior Palyi and Lloyd Mints as well as Simon, Viner and Knight, in addition to Hardy. Hardy was clearly a leading student of monetary policy. Though apparently not regarded as a leading monetary theorist, he evidently knew his theory, as he easily grounded policy in theory and was respected for his contributions to policy analysis.[1] Each of the Chicago economists specializing, at least in part, in monetary economics went his own way, concentrating on some combination of what interested them and what they considered important. Peering over all their shoulders was the well-known anti-quantity theory orientation of the long-time chair of the Department of Economics, Laughlin.

Among Ostrander’s notes are the following statements:

  • The quantity theory is a truism …
  • For Fisher — V was fixed, any change in M forces a corresponding change in P.
  • T being unchanged — the habits of the people with respect to the money they will hold being unchanged — the Keynes formula is convertible into the Fisher formula.
  • Hardy has a preference for a commodity standard, but can not find a suitable commodity. – Even such a commodity theory would not invalidate the Quantity Theory. – Laughlin’s doctrine is essentially that of the 19th century English “Banking School;” the Quantity Theory is that of the “Currency School.”

The following are Ostrander’s notes bearing on the demand for money:

Problem of the Value of Money

  • Money defined by means of its functions – Classical theory emphasized medium of exchange — brings up turnover. But if exchange were always instantaneous, there would not be much need for money — it is not instantaneous. * Thus the function of money as a store of value. – Suspended purchasing power. – Where the real demand for money comes from. * The classical approach does not allow of any good connection between value theory and monetary theory. – Distinction between this use of money and hoarding is only one of degree. [In margin: “?”]

Big changes in prices over short periods are never the result of changes in the supply of money or the supply of goods — but of changes in the demand for money (or goods).

The prospect of a decline in value of money does not of itself overcome the desirability of money as a liquid factor in unsettled conditions. * Liquidity attained by holding goods — expecting price rise — attained by holding money — expecting price fall. – Why is it that people are still speculating on a price fall? The issue is whether the strongest government in the world is strong enough to devaluate its own currency. * Governments can raise prices by issuing greenbacks or by issuing bonds. – [Greenbacks] may be held as an investment — hoarded – no change in prices. – Bonds may be held as investment-no change in prices. – I.e., both bonds or money may be spent, and may be held as investment — only difference between gold and bonds is one of degree.

– Keynes assumes hoards to be unchanged if the demand schedule for hoarding remains unchanged. (Hardy, Hayek, Robertson had assumed the quantity of hoards to be unchanged.) – Thus there is a change in velocity.

This is Wicksell’s theory. Keynes enlarges it, saying it would be true only in a barter economy. In a monetary economy, there are 3 variables. The willingness to save, the willingness to borrow to produce new capital, the relative attractiveness, as a store of value, of monetary funds and of other investments. * Savings made by purchase of new securities, or hoarding. * Investment made by borrowing from investors, or drawing on investors’ hoards. – Equilibrium requires I = S, also — demand for cash balances to be in equilibrium to [sic: with] demand for securities.

Economics 330 was not the only monetary course given at Chicago. Taylor Ostrander also took Economics 332, Monetary Theory, from Melchior Palyi during his year in residence at Chicago. His notes from the class are published in Archival Supplement 23-B (2005). Among conclusions stated in my introductory comments are these: One facet of the lectures is Palyi’s general attitude toward the quantity theory, indeed substantially all monetary theory, as a theory of control. The aspect of quantity theory discussion that loomed so large, namely, automaticity, especially after World War Two, when the quantity theory (properly applied) was lauded as the non-interventionist alternative to Keynesian fiscal and monetary policy, is subdued, but not altogether absent.

Another is the evident variety of ways in which the quantity theory was operationalized, i.e., how M, V, and T were conceptualized and handled. This also contrasts somewhat with post-War usage, when the policy choices, hence exercise of control, latent in the different versions would have been conspicuous — though eclipsed by the lauded automaticity, even though conservatives like Frank Knight pointed out the inevitable non-automatic, non-rule, elements of administering the quantity theory.

Among other things we read that the quantity theory was * A form of approach to supply such as set forth by Bodin and Davenant. * Value of money not a function of demand, but of factors such as velocity, interest rate, or, if ruled by demand, then demand is ruled by something else.

More recently came * Marshall, Fisher [indecipherable words] – Renewed the old control approach, and united it with the Neo-Nominalist approach. – Then came in Keynes, Robertson, Pigou, Fisher. * Velocity stressed — (l’enfant terrible of previous monetary theory) becomes center of interest. – Reformulation of quantity theory in light of Velocity. – Dozens of reformulations due to differ concepts of velocity. – Changes in it, measurement, causes. * Does velocity have a life of its own — or is it a function of other things, or a constant. * Most difficult to approach from statistical, descriptive or theoretical points of view.

Earlier * The old quantity theory approach looked to money and goods (asked or assumed which is variable which is independent). * The new quantity theory looks to the ratio of savings and investment. – First appeared in a paper of Jevons, in [18]70’s.

Generally, Two types of Quantity Theory: (1) Mere functional relationship; algebraic * A formal expression for the demand for money (Pigou). * On one side is money, on the other side is the physical aspect — no causal explanation. [Single vertical line alongside in margin from (1) to here] – Banking School — there can not be an excess or deficiency of money. Price level is influenced by physical side only. (2) An explanation of the cause of exchange.

On the demand for money, we find the following:

The demand for money. * The “Banking School” of Thought — but underlies the “Currency School” too — the difference between them is on another line. * The velocity of circulation is a passive factor, or a non-changing factor. * Cost of production theory of value of metals, and of money generally. * In case of paper money, it substitutes some psychological factor for quantity — or considers quantitative changes a result of psychology. * Policy of this approach is “sound banking based on commercial paper” –“automatic control.”

This approach is more developed by businessmen than by scientists. * Men of not-systematic methods, bankers. – Tooke — descriptive, not abstract. – Adolph Wagner (Germany) – Laughlin (U.S.) — never tried to be systematic. [“!” to left of name]

This approach became that of the 19th century up to the War. * In spite of Marshall and others. * Bankers and Central Bankers wouldn’t listen to any others. * Keynes (Indian Monetary Policy — 1912) * Robertson (Industrial Fluctuation, 1915) [Bracket connects the two lines, Keynes and Robertson, with arrow pointing to next line.] – Both, at this early date, had tendencies more to the anti-quantitative than to quantitative approach. – Mill — could approach the transfer problem from an entirely different point of view from his approach to bank credit — foolish.

Writing about the Banking School, * Money a matter of quantity which can be regulated by control of its quantity by issue. – By affecting demand for money by: – Discount rate – Open market operations – Public works (governments).

As for Adam Smith, * Implies (by not discussing it) a constant elasticity of demand for money.

We also read * In the single country, value of money is based on interaction of supply of and demand for money.

There is more but altogether what is shown (1) indicates more or less conventional attention to the quantity theory as the core of monetary theory and (2) does not indicate a distinctive Chicago approach centering on the demand for money, a claim no one now seems to be making. The earlier negative position of Laughlin has fallen prey to the selective memory of any oral tradition (Friedman wrote the entry on Laughlin for The New Palgrave). Laughlin, who opposed the quantity theory, was chair of the Department of Economics for many years and was a conspicuous person in the profession. Any complete rendition of Chicago “tradition” presumably would have to include his anti-quantity theory position. Perhaps he was an embarrassment treated largely in silence. Mints may or may not deal with his view; Palyi seems to deal with it only in passing. And Friedman seems not to, as well. He is too busy inventing what he wants that tradition to be.

In partial summary, therefore, Leeson is correct that no oral tradition existed at Chicago by 1932-33 with the substance initially identified by Friedman. If one clearly existed (and it is not certain that one did), it likely was different from and more complex, and likely more ambiguous, than what Friedman proposed. And surely the conversation of one year’s graduate students, by itself, is no “oral tradition.” As Leeson shows, they most certainly did not all agree on issues, though this was the framework that they, and Mints, apparently employed to inform their arguments. Graduate students discussed “macroeconomic” issues using a framework that was in some ways similar to Friedman’s 1956 restatement. Friedman’s assertion only has “some validity” if “intense student discussion is admissible as an ‘oral tradition’…” Friedman’s assertion has more validity than Patinkin gave it credit for, but calling it a “tradition” vastly overstates the case (see Leeson 2000b). Both Friedman and Patinkin exaggerated their case. Friedman was a polemicist who sought influence; Patinkin was an historian whose framework was losing influence. There was an element of justification for Friedman’s assertion — he had not invented it in the 1950s, as some detractors suggested. “Traditions” are potent rhetorical devices, and Friedman sought to make the most of this rhetorical device to serve his counter-revolution.


1. Robert Dimand comments in re Hardy as follows: “With regard to F. Taylor Ostrander’s notes on Charles O. Hardy’s lectures in Economics 330 (graduate money and banking) in 1933-34, I suspect that Hardy (whose maintained a Chicago connection even though he was primarily at Brookings) was central to bringing Keynes’s Treatise on Money into Chicago monetary economics. Hardy reviewed the first volume of Keynes (1930) in AER (1931) and wrote a review-article in JPE (1931) about the second volume. Hardy was a particularly enthusiastic and perceptive reviewer of TM (perceptive enough that his enthusiasm did not extend to the “fundamental equations”), so if demand for money entered Chicago monetary economics from TM, Hardy’s lectures may well have been the conduit. In addition, Keynes had expounded the central message of TM at the University of Chicago in three Harris Foundation Lectures on “Economic Analysis of Unemployment” in May and June 1931.Chicago was not isolated from such British developments: Sir William Beveridge presented what became Part II of his Unemployment: A Problem of Industry, 1909 and 1930 (1930) as a series of lectures at the University of Chicago in autumn 1929.”

Dimand continues, saying, “Another stimulus at that time would have been Irving Fisher’s Theory of Interest (1930). Hardy’s review of TM chided Keynes for misunderstanding Fisher’s real/nominal interest distinction, and Frank Knight’s 1931 JPE review-article shows that Fisher (1930) received attention at Chicago (although Knight concentrated on Fisher’s real rate analysis). McCallum and Goodfriend, in their New Palgrave article on money demand, identify (as Patinkin did) Fisher (1930, p. 216) as the first unambiguously correct statement of the marginal opportunity cost of holding money.” (Dimand to Samuels, January 13, 2005)


Graham Bannock, R. E. Baxter, and R. Rees, 1972. The Penguin Dictionary of Economics, Hamondsworth, pp. 338-9.

L.E. Johnson, Robert D. Ley, and Tom Cate, 1997. “Quantity Theory of Money,” in Thomas Cate, Geoff Harcourt, and David C. Colander, editors, An Encyclopedia of Keynesian Economics, Cheltenham, UK: Edward Elgar, pp. 517-526.

Robert Leeson, 2000a. The Eclipse of Keynesianism: The Political Economy of the Chicago Counter-Revolution, New York: Palgrave.

Robert Leeson, 2000b. “Patinkin, Johnson, and the Shadow of Friedman,” History of Political Economy 32, no. 4, pp. 733-763.

Robert Leeson, 2003. Ideology and the International Economy: The Decline and Fall of Bretton Woods, Basingstoke: Palgrave Macmillan.

David W. Pearce, editor, 1992. The MIT Dictionary of Modern Economics, Cambridge, MA: MIT Press, pp. 356-7.

Heinz Rieter, 1998. “Quantity Theory of Money,” in Heinz D. Kurz and Neri Salvadori, editors, The Elgar Companion to Classical Economics, Cheltenham, UK: Edward Elgar. Volume 2, pp. 239-248.

Donald Rutherford, 1995. Routledge Dictionary of Economics, London: Routledge, p. 379.

Warren J. Samuels, 2000. Review of Milton and Rose D. Friedman, Two Lucky People: Memoirs. Chicago: University of Chicago Press, 1998. Research in the History of Economic Thought and Methodology 18A, 2000, pp. 241-252.

Warren J. Samuels is Professor Emeritus at Michigan State University. He is working on the use of the concept of the Invisible Hand in economics. He acknowledges with thanks comments on an earlier draft by Robert Dimand and Robert Leeson.

Subject(s):History of Economic Thought; Methodology
Geographic Area(s):North America
Time Period(s):20th Century: WWII and post-WWII