History of Economic Ideas and Political Economy

When Deane’s article on the Industrial Revolution in Great Britain was published in 1973, her mind had already turned towards the history of economic thought. The Evolution of Economic Ideas came out in 1978, followed in 1989 by The State and the Economic System: An Introduction to the History of Political Economy. Deane felt the need to follow up the thinking on economic phenomena—value and price, distribution, employment, growth, money, and international trade— that had accompanied the evolution of industrial economies. She has indeed insisted on theory being required to understand changing socio-economic states of affairs and to set up economic policies, which, in turn, shape the evolution of economies and societies. Once again there is a remarkable continuity in her thinking: one thing evolved out of another, almost by necessity.

The Evolution of Economic Ideas puts ‘some of the current theoretical controversies into long-term perspective by tracing their historical antecedents’ (Deane 1978: back cover) and, as such, pictures how economics as a science has evolved. However, The State and the Economic System is conceived as an introduction to the history of political economy, that is,

the development of economic knowledge over the past three hundred years with particular reference to the ways in which the broader contexts of moral, scientific, and political ideas or events have influenced successive economists’ vision of the operations of the changing economic system and their views of the scope for purposive State action to shape the process of change (Deane 1989: vi).

In The Evolution of Economic Ideas, Deane starts by observing that there are basically two approaches to a study of the development of economic ideas. The first concentrates on the sequence of change in the theories, concepts, and analytical techniques which constitute the substance of the discipline; the second traces the historical process of change in the way successive generations of scientists have adapted their explanatory techniques to attempt to solve the problems they regarded as important. This book shifts the weight of its emphasis in the direction of the second approach and seeks to interpret the history of economic thought as a process of change in the ideas of successive generations of economists (see Deane 1978: ix).

The book was very well received:

Current fashion among historians of economic thought dictates an ‘internalist’ approach to the evolution of economic ideas. Phyllis Deane is most unfashionable. She refuses to consider the development of economics as simply a process of analytical refinement, a succession of research programmes subject to an internal dialectic of scientific discovery. She refuses to deny that there is an important influence of events and policies on economic theory. And she even refuses to abandon the paradigmatic perspective on the structure of scientific revolutions. We should be thankful that Deane is an economic historian, writing outside her field of professional expertise. It is a refreshing change (Stevens 1979: 790).

Deane’s originality emerges most clearly through the position she takes on the work of Adam Smith, whose fundamental theory of society is set out in The Theory of Moral Sentiments. Here, Smith argues that society is designed to a Divine Plan, which operates so as to maximise human happiness by means of the interplay of certain moral sentiments which are part of human nature. Social and individualistic, selfish and altruistic motives all play their ‘necessary part of the plan of the universe’ for social harmony. In The Wealth of Nations, the basic framework of this theory of society is taken for granted, and Smith goes on to work out a special case of its application—the economic case (see Deane 1978: 8-9).

This is highly important because there has been an extended discussion on whether The Theory of Moral Sentiments and The Wealth ofNations form a larger entity or whether they are separate works. Deane tends to find the former position more plausible as do philosophically minded interpreters of Smith. This has far-reaching implications. Most importantly, natural prices and wages are socially appropriate or socially fair prices, making sure that producers and workers get fair incomes. This in turn implies that the principle of distributive justice is broadly realised. Natural prices and wages thus constitute social-ethical centres of gravitation around which market prices and wages fluctuate, and constitute as such variants of the just price of the Scholastic doctors.

This way of interpreting Smith, pointing in the direction of Ricardo and classical-Keynesian political economy, can hardly be found in modern volumes on the history of economic ideas. Indeed, in her chapter on Smith’s theory of value (Deane 1978: Chapter 2), Deane points to the modern interpretation of Smith:

The concept of a natural price gives Smith’s theory of value a pivotal position in his general theory of a harmonious economic order in which the self-interest of individuals operating in a freely competitive market economy tends naturally to produce an optimum allocation of resources and thus to maximise total output.

At the same it connects his theory of value with his theory of distribution by linking the commodity markets to the factor markets (ibid.: 24-25).

Here, Smith appears as a precursor of neoclassical economics.

Deane’s treatment of Smith illustrates the profound knowledge she possessed of the complex works of the great economists. This enables her to bring out the essential features of these works and of the important paradigms and to sketch the process of transition from one paradigm to another. In doing so, she puts three great issues to the fore: value, growth, and money (see ibid.: xv). Deane’s treatments of monetary theory and the functioning of monetary institutions are particularly interesting, especially given her intimate knowledge of British economic history.

Deane considers the classical, neoclassical, Marxian, and Keynesian paradigms. The core of classical—Ricardian—theory is given by the labour theory of value, from which the prices of production deviate on account of the varying durability of fixed capital, the surplus, and the marginal principle of distribution and profits, with the rate of profits and the rate of growth tending towards zero as population grows as less fertile lands have to be cultivated. There were also controversies in monetary theory going on, notably the Bullionists versus the Banking School. Here, Deane is at her best. However, she goes on to explain why classical theory has taken on this shape. Although Smithian political economy had achieved a certain measure of academic recognition, its fashionable appeal and, above all, its attraction to active thinkers depended not on its academic reputation but on its immediate relevance to contemporary policy issues. The problems attracting the attention of the early nineteenth-century economists were about such basic topics as economic growth (the population explosion), commercial policy (the Corn Laws), and inflation (the high cost of bullion). Political economy was expected to provide a simple and effective method of analysing these complex problems, and hence a reasoned route to useful policy prescriptions. This brought to McCulloch’s lectures men such as the Chancellor of the Exchequer, the Lord Mayor of London, and a bevy of bank directors, and induced an acute mind such as Ricardo’s to retire from the stock exchange to write a book on the principles of political economy (see ibid.: 72).

There was a great confidence in science to solve problems among the classical economists to which Ricardo greatly contributed not least through his very clear way of arguing.

In Chapters 7 and 8 of The Evolution of Economic Ideas, Deane sketches in a masterly way the transition from classical political economy to neoclassical economics. In the former, decisively shaped by Ricardo, the social process of production stands at the centre of analysis. The fundamental prices are cost based, whereby the prices of production deviate from labour values; the surplus principle of distribution determines wages and profits, which are saved and invested, implying that growth is of primary importance. Now, Ricardo had been concerned by two shortfalls in his theory of value. The first was that a labour theory of value did not seem able to explain changes in value through time: for as one admits the possibility of capital with different degrees of durability being involved in the production process, then a rise in the real wage rate could alter relative prices independently of relative labour inputs by raising the prices of labour-intensive products relative to capital-intensive products. The second was that he had no answer to the question of what determined absolute value, for there was no commodity whose value was not independent of distribution, that is, the real wage rate or the rate of profits (see ibid.: 115).

As a consequence, the founders of the marginal revolution concluded that Ricardo’s ‘labour-embodied theory of value had led English classical economics into a cul de sac from which there was no escape unless one were prepared to start from a new set of premises and with a new set of analytical tools’ (ibid.).

The great marginalist systems created by Jevons, Menger, Walras, and Marshall came into being between 1870 and 1890. The marginalists shifted the whole emphasis of economics from the social process of production and cost-determined natural prices, sometimes called prices of production, to the market and market prices, determined by supply and demand (Marshall), with supply being governed by marginal costs and demand by marginal utility. Marshall became the new leader of the neoclassical school, although he ‘did not publish his Principles of Economics, the bible of the English neoclassical school, until 1890; but by then he had been teaching economics for twenty years in Cambridge, Bristol and Oxford, and he had indoctrinated the inhabitants of half the economic chairs in England’ (ibid.: 102). As Deane continues, the fact that the neoclassical economists were able to retain unimpaired the classical bias towards economic individualism and laissez-faire up to 1914, and the ideological overtones implied in the policy conclusions deducible from their analyses, may have been mainly due to the success of the neoclassical paradigm, not to its problem-solving qualities. The problems of value and distribution which had preoccupied the Ricardians were solved, or, more accurately, swept under the carpet, by a simple process of definition. The problems of growth were outside the effective range of marginal analysis and further consideration of them was consciously postponed. Moreover, the very jargon of pure economic theory, for example, the notions of ‘rationality’, or ‘perfect’ competition, of an ‘optimum’ allocation of resources, helped to accentuate its ideological overtones and to lend ostensible ‘scientific’ support to a political status quo which depended on accepting a philosophy of economic individualism and harmony (see ibid.: 101).

This important statement is still valid today, and, yet, in between, there is the Apocalyptic Age spanning 1914-1945 with two world wars and the Great Depression, plus the financial crisis which started in 2007-2008.

Hence, in spite oftwo powerful paradigms, the Marxian alternative (Chapter 9) and the Keynesian revolution (Chapter 12), of which Deane provides excellent presentations, the neoclassical paradigm is still there, even growing in strength after her Evolution of Economic Ideas. Unimpressed by this fact, she went on working on the subject and published in 1989 The State and the Economic System: An Introduction to the History of Political Economy. The book immediately received favourable reviews. Thus, Cohen states:

This slim volume ‘on the interface between what seventeenth-century writers... would have called the polity (the civil order of society) and the economy’ (p. v) sketches admirably ‘the ways in which in the broader context of moral, scientific, and political ideas or events have influenced successive economists’ vision of the operations of the changing economic system and their views of the scope for purposive State action to shape the process of change’ (p. vi). While others often explain the interface between economic history and theory simplistically in terms of the historical or ideological determination of theories, Deane provides a exceptionally balanced descriptive narrative which reveals the richness and the complexity of the interface (Cohen 1990: 240).

A good example is Chapter 5, which sets out the

ways in which changing historical conditions led to changing policy concerns ... A demographic surge is linked to Malthus’s work. The need for monetary policy to manage the financing of the Napoleonic Wars is seen as a stimulus for the monetary theories of Thornton and Ricardo. Accelerated industrialization in Britain and associated changes in income distribution are used to explain Ricardo’s concern for distribution and its impact upon growth (ibid.).

Significantly, in Chapter 6, Deane presents Mill, who managed to establish a great synthesis, reconciling contradictions, which ‘effectively absorbed the weight of the Romantic onslaught on Ricardian political economy and justified the hard core of economic liberalism in epistemological, philosophical and political terms’ (Deane 1989: 101). In the same chapter, there are also most insightful passages on Marx who forcefully opposed the growing ‘consensus that the fundamental theories and laws of political economy must be detached from moral principles and value judgements [and his] analysis of the way the modern industrial economy operated was simultaneously a moral indictment of its monumental injustices’ (ibid.: 108). The concluding chapters are on most relevant and challenging topics: ‘From Political Economy to Economic Science’, ‘Economic Science in an Unstable World Economy’, and ‘The Rise and Fall of Economic Management’.

One can hardly imagine a more appropriate book to introduce the general reader, the teacher, and researcher as well as the student to political economy. There are many surprising, sometimes puzzling and contradictory, statements that are nevertheless thought-provoking, confirming thus Keynes’s observation that the serious study of the history of economic thought leads to the emancipation of the mind.