Introduction
(The page ends with a summary, here)
This page will look at what is known of the development of western economic theory from the earliest thoughts of the Greeks, up to the 17th century – the eve of modern economics.
Before embarking on this consideration of economic thought it is worth emphasising the need to remain aware of the almost inevitable influence of preconceived ideas in this field.
For example, this Page – ‘Older Economic Thought’, and the next ‘Pre Political Economy’ – are drawn very largely from the lectures of Lionel Robbins; and the editors to Robbins series of lectures warn that the design and content of the lectures reflect Robbins’ conception of what economics, as well as the economy, is all about.
They go on to warn that Robbins treats pre modern economic thought as anticipations of modern thought, where his theme is a solidly ‘Whig History’. The ‘Whig’ approach sees the development of economic thought as a progression from error to truth; and of course Robbins ‘truth’ was support for the dominant economic theory that drives today’s global capitalist economy.
This is not to accuse Robbins of overt bias. It is simply to point out that, like most of us, he operated from a base of taken for granted assumptions.
These matters will be looked at more closely on the Social Theory page but for now, whenever possible, an indication of an author’s ideological leaning will be noted, when it is relevant to their contribution.
The Development of Western Economic Thought
It all began with the Greeks (as usual)
The title of this section has been stolen from Rothbard (2006), where the author traces the beginnings of what is today known as economics to the ancient Greeks.
Usefully his article outlines the structure of ancient Greek society, and of their modes of thinking. Greek life is described as being organized in a network of small city states – the polis – fluctuating between authoritarianism and democracy. The largest of these, Athens covered an area of only 1000 square miles. In the 5th century BC Athens had a total population of about 400,000, of whom a tight oligarchy of 30,000 privileged citizens governed the remainder who were either slaves or resident foreigners engaged in commerce.
The privileged citizen class, living off taxes and the labour of slaves, had the leisure to engage in the arts, in discussion and voting and in the development of knowledge. It was in this context that Rothbard credits the Greeks with being “the first philosophers ….. the first people to think deeply and to figure out how to attain and verify knowledge about the world” (Ibid; p3). Whilst previous civilisations had attributed, say, violent weather events to the whims and fancies of the gods, the Greeks began to worry less about the gods and to try to understand for themselves the natural causes of such phenomena.
The significant philosophical contributions from amongst the Greeks are attributed to Plato – a student of Socrates – and Aristotle – a student of Plato.
Here, and for some time below, it will be useful to follow Robbins (1998), a record of a series of lectures on ‘The History of Economic Thought’, given at the London School of Economics during 1979-1981, when the lecturer was in his eighties.
In their introduction the publications editors remind readers that all histories of economic thought are social constructions, and that the design and content of the lectures – which they describe as ‘magisterial’ – reflect Robbins conception of what economics is all about.
Moreover they point out that he adopts an approach which analyses the history of economic thought as a progression from ‘error to truth’, with past thought being important only or largely as measured against the modern mainstream; and Robbins was of course a mainstream economist, that is one positioned broadly in the ‘marginalist’ tradition.
Accepting that, they describe him as a courteous, civil lecturer who is careful to point out value judgements (his own and those of others) and ‘tendentious’ statements or remarks when he comes across them, or makes them himself. Throughout he adopts a policy of revealing his own bias whenever he is aware of it.
Turning to Robbins lectures (Ibid, P 11-25) he feels that both Plato and Aristotle were “among the most superior minds that ever existed” whose thought has been a tremendous influence, but that not too much should be expected of them. Of Plato it is said that he was a hater of democracy with a dislike of change, and of Aristotle that there is nothing in his work that suggests the world could change – despite his tutoring of Alexander the Great who went on by conquest to do just that.
[NB: until further notice on this page, all references with only a page number – such as (P 25) – will be referring to Robbins (1998).]
Nonetheless, Robbins says, through their concerns with ‘the good State’, both made anticipations of economics that were extremely important, especially in the case of Aristotle, who was known simply as ‘The Philosopher’ throughout the Middle Ages.
Turning to the relevant contributions of both men, those of Plato were made in the form of dialogues between a leading speaker with surrounding contributors – a method intended to home in on the truth – and those of Aristotle have survived only in the form of notes made by his students.
First Plato, in the second book of the ‘Republic’ during a discussion of justice, lays out “… the sum of the principles, more or less accurately stated, of the division of labour” (P 14, underline added). Whilst Plato’s division was based upon the ‘natural’ differences between individuals, whereas modern conceptions are based on the education and training of individuals for specialist roles, this does not detract for Robbins from the fact that this was the first known account in known literature of the advantages of a division of labour.
Next, Robbins feels that it is very difficult to overestimate the contribution of Aristotle to the history of economic thought. He first describes Aristotle’s views on material property, before going on to his more famous remarks regarding economic analysis.
In contrast to Plato who banned material property from the Guardians in his Republic, “Aristotle thought that property would be more likely to be looked after if someone owned it and profited from it than if it were all treated as common” (P18).
And Aristotle himself is quoted as saying that the evils said to arise from private property – disputes about contracts, convictions for perjury, flattering of rich people – in fact arise from “..the wickedness of human nature. Indeed, we have seen that there is much more quarrelling among those who have all things in common, though there are not many of them when compared with the vast numbers who have private property” (Aristotle, 1948. Quoted by Robbins P. 18).
These views are said by Robbins to have had considerable influence through history, and to have anticipated the philosophers and economists who have argued for the importance of the institution of private property in the maintenance of law and order and of society.
Aristotle’s important contributions to economic analysis, covered by Robbins, are contained in two works, ‘Politics’ – where ‘economy’ refers to the management of households, large and small – and ‘Ethics’ – where Aristotle is concerned with justice, and justice in exchange.
In ‘Politics’, says Robbins, Aristotle lays out for the first time in known history a theory for the origin of money, one that contains the essential propositions that are still taught. Thus barter, that sufficed for small households, gave way in larger and more complicated households to systems of indirect exchange. In such arrangements money was used, allowing items to be traded for money, that itself could be traded – perhaps at a later date, for other items.
Considering trade between countries, at first quantities of iron or silver were used to facilitate the exchange of large bulky items difficult to transport back and forth. In time it became accepted that specific quantities were stamped with a certain value for even more convenience. Once the use of coin was discovered, claimed Aristotle, out of the exchange of necessities arose the ‘art of money making’ where exchanges were aimed at making the greatest profit.
Aristotle had clear views on all these matters and thought that the ‘natural’ use of a household item such as a shoe is that it should be worn; however a shoe could be used for exchange – for money or food – and he saw this as an ‘unnatural’ or secondary use of such items. Robbins here points out the word ‘natural’ entering economics at a ‘very, very’ early stage.
He similarly frowned on the practices of indirect exchange, of commerce, the ‘art of money making’ and the practice of making gain from money itself by charging interest. All of these practices he saw as boundless and without limits.
It was, says Robbins, Aristotle’s influence in the middle ages, and his views on interest that were used to justify ‘ferocious’ medieval laws against usury, the charging of interest on loaned capital (P 23).
Thus far then we can see that Aristotle has anticipated modern economics in the identification of use-value, of exchange-value and in the origin of money.
Robbins then turns to Aristotle’s ‘Ethics’ where, notwithstanding his dislike of commerce and indirect exchange, he proceeds to expound on the functions of money and money making.
Thus, quoting Aristotle, “Money is a sort of medium or mean; for it measures everything and consequently measures among other things excess or defect, e.g., the number of shoes which are equivalent to a house or a meal. As a builder is then to a cobbler, so must so many shoes be to a house or a meal; for otherwise there would be no exchange or association. But this will be impossible, unless shoes and the house or meal are in some sense equalised. Hence arises the necessity of a single universal standard of measurement, as was said before. This standard is in truth the demand for mutual services, which holds society together.” (P 23)
Robbins repeats that Aristotle feels that money is a sort of recognised representative of the demand for mutual services, and it is this demand which holds society together.
Then comes the famous quotation from Aristotle that “Money therefore is like a measure that equates things; for association would be impossible without exchange, exchange without equality, and equality without commensurability.” (P 23)
Aristotle has by now argued for the importance of private property, and has laid down economic principles on use-value, exchange-value, the origin and functions of money, and on the need for commensurability and equality in exchange.
It was not, says Robbins, until the political economists at the end of the 18th century that anyone said anything more concise on the functions of money.
The Middle Ages
Robbins next few lectures continue to follow what he referred to as ‘anticipatory thought’, finding in fact quite sparse contributions until more modern times.
The Romans – despite their conquests, epic building achievements, trade etc, the Romans are said to have contributed nothing to economic thought apart from the development of contracting practise.
It was not until the late Middle Ages, from about the 13th century, and the work of the Christian Scholastic Philosophers, that Robbins finds more of interest in the development of economic thought. Here, in contrast to Greek concerns with the good state, when these Christian philosophers thought about economic matters it was from the perspective of ‘what should a Christian person do?’ The two main Scholars drawn upon are St Thomas Aquinas (1225-1274), and Bernardino of Sienna (1380-1444).
Robbins begins by admitting that he relies very strongly on secondary academic sources for this period, then goes on to talk about two main areas of concern amongst these scholars; first was the question of how people could arrive at a ‘just price’ for economic goods, and secondly how should one deal with the issue of usury, the charging of interest on loaned capital.
When discussing the first of these he spends considerable time describing a controversy that occurred amongst recent economists about how the historical record should be interpreted, regarding the way in which prices were determined in commerce in this period. On the one side is a view, supported by many authoritative figures (e.g. R.H. Tawney, and Max Weber), that the just price was arrived at more or less objectively. That is, price was seen to be based on production costs, especially labour costs, linked to social hierarchy such that the producer could maintain his social status; the whole matter being regulated by the guild system.
Robbins however, points out that as far as he can judge this view is largely imaginary, carefully adding he is not dogmatic on the matter. He reaches this view by following his main source Robert de Roover (1958 and 1967), and to a lesser extent the famous economist Schumpeter, although he suggests the latter also drew on de Roover.
The ‘case’ against the labour cost position is threefold. First, almost all of the authorities supporting it are derived from a single source; second, that source, Langenstein (1327-97), was a very minor figure in the ranks of medieval moral philosophy; and thirdly, the main Scholastic authorities had different views.
It is not surprising of course that Robbins takes this view, as he was a supporter of the dominant economic view that sees any argument that prices are based on labour costs as seriously misguided.
As regards Aquinas, de Roover was unable to find in his writing any trace of the just price being based predominantly on labour costs; he finally argues that, when not just discussing isolated exchange amongst individuals, “by just price Saint Thomas means the price that is paid by common estimation in a more or less competitive market” (P 29).
San Bernardino was also looked at very fully by de Roover whom, says Robbins “… is most interesting on the theory of value and price” (P30). Here Bernardino is said to clearly develop the alternative approach to explaining price determination.
Value he says is determined by three elements,
The intrinsic usefulness of the object to the purchaser,
The scarcity of the object,
The object’s desirability.
Given this, Bernardino then argues that price is determined by collective estimation, that is, market valuation (P 31), (essentially the same position attributed to Aquinas); on wages, the rules applying to the pricing of goods are said to apply to services too.
Given Robbins’ position in the ‘marginalist’ school of thought, he unsurprisingly approves of this second view of price determination, only taking issue with Bernardino’s inclusion of ‘desirability’. Robbins feels this not a useful addition and has “no relevance when we talk about utility in the modern theory of value” (P 30).
It is worth noting, given the focus of this blog, that in this account of the disagreement among modern economists and historians regarding the source of economic price and value as it was perceived in the Middle Ages, we have some indication of the evidence and reasoning that people might use to position themselves in the same argument today.
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This section turns to a consideration of Scholastic views of Usury. While the charging of interest is an everyday feature of the modern, global, capitalist economy , it was noted above that Aristotle’s influence in the Middle Ages was used to justify ‘ferocious’ medieval laws against any interest on loaned capital.
Robbins says that Aquinas was a very active, downright supporter of the usury restrictions, and he was followed in this – at least in the beginning – by the Scholastics generally. At the same time though, they were not opposed to the profit that could be made in partnerships; indicating perhaps some inconsistency of thought.
In support of his position Aquinas quotes various texts from Old and New Testaments, though Robbins feels not all of them actually support it. Aquinas also uses a distinction, one that Robbins is not convinced by, between the loan or sale of items whose use does or does not involve their destruction or consumption. This is important he says, because if you grant someone the use of something, you are necessarily granting the thing itself, otherwise it can’t be used; you cannot separate the thing itself from is use
It follows he says that if you charge for the sale of wine, then charge for its use separately, that would be sinful because you are charging twice.
Similarly he argues that if you grant someone your house, and it is subsequently returned whole, you can morally raise a rent charge, because you have only charged them once. But if you grant someone your wine, you cannot raise a charge (interest) even though it can’t be returned, because the wine and its use were granted together.
Despite this flawed logic, the Scholastics permitted rent charges, an implicit interest charge, whilst disallowing interest on loaned money – because money was classed as a consumable, destroyed as it was used.
There was some flexibility; no interest was allowed if:-
You loaned capital, and all was repaid
You loaned capital, all was repaid, but you lost profit without it
However, if you loaned capital, and not all was repaid you could charge for the loss.
By the time of another prominent Scholastic, Antonio of Florence (1389-1459), events came into play. Florence began to develop a significant banking business and, ‘rather grudgingly’ Antonio began to permit the charging of interest. Subsequently doubts began to creep in, and as the Reformation approached different theologies had different ideas.
Thus:-
Luther (1438-1546) – emphatically opposed to interest
Calvin (1509-1564) – supported reasonable interest
Dumoulin (1500-1566) – strongly condemned complete opposition to interest
Thereafter, although some theologians into the Elizabethan age (1558-1603) remained opposed to interest, it was a losing battle. The question became one of whether interest charges should be regulated, and whether they should be rated differently in different areas of commerce.
The issue of interest is of course an important one for this blog, as it is one mechanism whereby income and capital can be funnelled to some, perhaps at the expense of others. It is an issue that Robbins picks up again later.
Elizabethan Age to the 17th Century
The next two lectures dealt with Pamphleteering, a ‘vast literature’. This was to do with interest groups, civil servants and individuals circulating their views on taxation, subsidies, protective tariffs and so on. Although the practice started earlier, it brings time broadly up to the late 16th /early 17th centuries. This was a time of significant social change, including the rise of the nation state, increasing trade, division within the Christian church with the Reformation (nominally 1517-1648), voyages of discovery, growth in supplies of gold and silver, and the need of national monarchs for increasing taxation. Robbins concentrates on two related issues, the debasement of the official currency and the quantity of money in circulation, then discusses Mercantilism.
Debasement could be effected either by the ruling authority, or by individuals in society. In the first case, covert reductions would be made in the proportion of silver or gold in the alloy of coin issues, such that new coins of the same face value were of less actual value than those already in circulation; in effect, an underhand tax on the population. The second method involved the clipping of metal from the coin edges; the perpetrator gained a quantity of gold or silver, and again the coin kept its face value, but lost actual value. Eventually, of course the introduction of milled edges prevented this activity.
Needless to say these practices drew pamphlets complaining of its immorality, and of its economic consequences. Interestingly one of these pamphleteers was the astronomer Copernicus who, in about 1538, formulated “… a primitive version of Gresham’s law – namely, that bad money drives out good” (P 39). This modern ‘law’ refers to situations where debasement becomes known, and people and institutions hang onto (withdraw from circulation) good coins, until only the debased coins remain in circulation.
The concern about debasement fed into the second issue, money supply (P40). From the second half of the 15th century to the first half of the 17th, Western Europe experienced a major inflationary cycle, with prices on average rising perhaps six fold over 150 years. The French financial authorities, in about 1560, ordered an investigation into the rising prices by M.de Malestroict; that gentleman accordingly published his report in 1566.
He argued that the rise in prices resulted from the debasement in the value of the currency. That is, while the real values of gold and silver and other commodities had not changed, the amount of gold and silver in coinage had fallen. Coins had therefore become less valuable relative to other commodities, and prices had risen.
This report provoked a response from the jurist Jean Bodin, famous for his doctrine of state sovereignty. In 1568 Bodin published a pamphlet in direct reply to Malestroict, arguing that the real value of gold and silver had indeed fallen relative to other commodities, caused by an increase in gold and silver in circulation following the import of bullion from the New World. He therefore asserted that the rise in prices was principally caused not by debasement, but by a real fall in the value of gold and silver.
Robbins then quotes a ‘very famous work in English Literature’, “A Discourse of the Common Weal of this Realm England” published in 1581, most likely written by the also famous Sir Thomas Smith. This document similarly laid the cause of the rise in prices at the door of “… the infinite sums of gold and silver … from the Indies and other countries …” which had found their way into circulation.
These are the earliest statements known to Robbins of the Quantity Theory of Money, which at its simplest argues that the general price level of goods and services is directly proportional to the amount of money in circulation, the money supply. Robbins finishes by saying that while he is not a true monetarist, he does accept that the quantity of money in relation to GNP has ‘something to do with’ the purchasing power of money.
Mercantilism
This term was originated by Mirabeau (1715-1789), and later picked up by Adam Smith who talked of the ‘mercantile system’, describing an outlook that shaped policy from very roughly 1500 to 1750. Robbins points to the complexity of this whole area and to keep things as plain as possible, but still controversial he warns, he keeps to the ‘Smithian’ conception. Robbins’ account, concentrating on the economic theory aspect of mercantilism, does not go into those views that see the approach as leading to frequent wars over control of the seas and trade routes, imperial conflict and the origin of the Atlantic trade in human beings as slaves.
Smith saw this system as one in which nations pursued policies that would secure a positive balance of trade, or payments; i.e. where exports exceed imports. To secure that end governments would impose tariffs, regulations and restrictions that would encourage exports and discourage imports. Smith severely condemned this arrangement as severely damaging to free trade and commerce, a view that influenced policy discussion for 100 years after him (P 47). There were, according to Robbins, two problems with this interpretation as seen by those who followed.
Firstly, classical economists who followed in the 19th century, for example Nassau Senior (1790-1864) and Ramsey McCulloch (1789-1864), tended to see the essence of mercantilism to be the ‘belief that wealth consisted in the precious metals’ and thus that policy was aimed at amassing gold and silver. Robbins is very dubious about their real support for this belief, pointing out that it had been dismissed by Aristotle. He therefore feels safe to see the classical economists view after Smith, as one which regarded the core of Mercantile thought to be a concern with the balance of trade.
The second problem of interpretation arose in the latter half of the 19th century among the German Historical School, in the writing of the famous and influential economist Schmoller (1838-1917). Here, the essence of mercantilism was not to be found in the balance of trade, or in the accumulation of bullion, but in the total transformation of society and economy away from a local and territorial focus, and into the economy of the nation state. This view was picked up by others, respected in other work, such as Eli Heckscher (1879-1952) who argued that mercantilism represented the transformation of the Middle Ages into the system of nation states. Robbins feels this interpretation went too far as there was such variation in different parts of Europe, with little indication of common systematic thought in the disparate policies of different states at different times.
In his treatment of mercantilism he therefore stays with the narrower ‘Smithian’ view, warning that it remained controversial enough. He does this by looking at the publications of three English writers from that time; Gerard de Malynes (1585–1641), Edward Misselden (1608–1654) and Thomas Mun (1571-1641).
Malynes wrote “A Treatise on the Canker of England” in 1601, a time when there were fears of the scarcity of money, and strict regulations in force regarding trade and the movement of gold and silver. In his pamphlet Malynes advocated exchange controls; he was of the opinion that the ideal situation was of some inflow of gold and silver as it would benefit trade, industry and employment. In his view, however, bankers in the exchange markets were following their own profits rather than the national interest, such that the inflow of gold and silver was less than it should have been.
These views were not popular amongst merchants and others, and an enquiry was set up (one of others) in 1621, a ‘Commission on Exchanges’. Malynes was not part of this commission, but it did include Misselden and Mun, both of whom were associated with the East India Company. Significantly there were calls to limit the activities of that company because their trade with the Indies produced a net loss in gold and silver. Misselden wrote tracts against Malynes in 1622 and 1623, while he himself advocated inflationist policies, including debasement. He argued that even with rising prices, an increased money supply would result in more trade that would benefit all (P 51).
Robbins then turns to Thomas Mun, whose book “England’s Treasure by Foreign Trade” (1644), he sees as exceptionally important and of superior quality of argument. Adam Smith saw Mun’s book as the bible of mercantilism, although Robbins felt Smith missed some of the finer points made by Mun. The main arguments in that book can be summarised thus:-
The main way a nation can increase its wealth is via foreign trade, where exports exceed imports.
Foreign trade can best be supported by the development of a nation’s natural resources and industries, such that there is less need to import.
Trade should not be assessed from a narrow perspective; the ability to import goods then re-export them can be a profitable means to increase the inflow of wealth.
He then goes on to say that if the inflow of wealth is great the ‘Prince’ can with care put some of it aside: putting too much aside though, could produce deflationary pressures and too much of it spent could be inflationary (modern terminology added by Robbins).
Summing this section up Robbins still feels that the contemporary mercantile texts do not indicate a view that gold and silver were the only forms of wealth. There were however indications of the thought that some protective measures might be beneficial to trade and prosperity, and there was certainly a view that a ‘war chest’ should be accumulated to cover both defensive and offensive wars. He concludes that “… chiefly, I think … (mercantilism) … was actuated by the fear of the downward pressure on employment caused by an outflow of the precious metals” (P54).
Although Robbins does not bring out this point, it is important for this blog to note that the importance attached to a positive balance of trade was, for most commentators, associated with the belief that trade is a ‘zero-sum’ activity. That is, in the long run, exchange of goods for other goods or for money takes place at equal values; neither party loses or gains. Therefore, in order to add to a nation’s wealth via trade, the nation’s traders must cleverly exchange things of a lower value than the value of the things they receive in return; but any gain by one side requires a loss by the other side.
Pincus (2012), however, takes a different view. He accepts that many mercantilist writers and traders did hold to the zero-sum belief, but says many others did not. There was, he points out, a “highly politicized debate between those who thought trade was in fact a zero-sum game based on landed wealth, and those who felt substantial worldwide economic growth created by human labor was possible and desirable” (Ibid P 21).
Central to this blog, Pincus shows that there were two competing theories at play during this period regarding the source of economic wealth. The zero-sum camp, believed that wealth was finite and tied to the land and to the products of the land, be they mineral or agricultural. The opposing camp, alternatively, argued that wealth was potentially infinite and depended on the product of human labour (Ibid P 24).
Robbins’ next two lectures conclude his ‘anticipations’ by looking at the economic contributions of Sir William Petty, Josiah Childe and John Locke. This moves things firmly into the 17th Century, which Robbins calls ‘one of the great centuries’ for humanity for the establishment of natural science and the origin of the Royal Society, as well as the emergence of a truly modern style in the written word. He tempers that by remembering the Thirty Years War, which killed an estimated 8 million people; the Century also saw such things as the English Civil War, the peaking of the trial, torture and burning of people accused of witchcraft, and the acceleration of the Atlantic Slave Trade.
William Petty
William Petty (1623-1687), who is thought of very highly by Robbins, was born into a middle income tailor’s family, became a cabin boy at 14, and was put ashore at Caen after breaking his leg. He was taken in by the Jesuit College, where he studied Latin, Greek, French, Maths and Astronomy. He returned to England after one year, but in 1643 left again for the Netherlands, during the first English Civil War.
In the Netherlands he studied Anatomy, became private secretary to Thomas Hobbes and met Rene Descartes and other influential people. In 1646 Petty again returned to England where studied medicine at Oxford University. While there he befriended Samuel Hartlib and Robert Boyle, and joined the Oxford Philosophical Club. By 1651 he was Anatomy Instructor at Oxford and Professor of Music in London.
In 1652 his career took another turn when he travelled as Physician General with Cromwell’s Army in the infamous campaign in Ireland. In 1654 he secured the contract for charting Ireland, this being necessary for Cromwell to pay the Army’s creditors with land. Petty designed a methodology, recruited and trained a team of about a thousand, largely drawn from the now unemployed soldiers. The task – known as the Down survey – was completed by 1656. He was rewarded with £9000 and 30,000 acres of land.
He went on carry out a survey of mortality in London, with his friend John Graunt, and various economic surveys in Ireland and in England. He became known as one of the founders of systematic statistics – or as he called it ‘political arithmetic’. Subsequently he was a founder member of the Royal Society, became an MP, received a knighthood and founded the Lansdowne Family.
Turning towards Petty’s economic contributions, Robbins notes the importance of quantitative measurement in his approach, as well as his adherence to the philosophy of Francis Bacon, but then suggests this may not have been so (P 58). Robbins, most interested in Petty’s economic insights, leaves it at that, but it is interesting for this blog to look a little closer at his methodology; (Ullmer, 2011) does just that.
By examining Petty’s major written works, and considering the existing views of others, Ullmer concludes that Petty’s method was a combination of the scientific approaches of both Bacon, and of Thomas Hobbes. Bacon insisted on the need for empirical evidence in science, but thought that if one avoided prior assumptions, and gathered enough factual information then patterns and series would emerge giving, the scientist – by inductive reasoning – access to scientific knowledge. Hobbes on the other hand thought that one should proceed from a ‘proposition we suppose to be true’, then compare the proposition against evidence in order to establish it’s truth or falsity – a deductive process.
Ullmer concludes that Petty took from Bacon the need for empirical evidence, but took from Hobbes the need for deductive thinking; this was a revolutionary, essentially modern, method of investigation. Ullmer feels too, that Petty’s decision to apply his scientific approach to economic matters was also inspired by Hobbes (Ibid P16-17).
Returning to Robbins, he outlines Petty’s relevant economic insights by looking at his ‘A Treatise of Taxes and Contributions’ published in 1662. It contained numerous proposals for tax reform and trade policy – for the purpose of increasing royal revenues – and also suggested the establishment of a royal statistical agency.
In Petty’s Chapter 4, ‘Of the Several Ways of Tax’ we reach a section which Robbins calls ‘critically important by all standards’, admired by both neoclassical economists and Karl Marx (P 60). Here is found Petty’s articulation of the idea of an economic surplus and of the labour theory of value, which he reached via an examination of the ‘mysterious nature’ of land rents.
Robbins then quotes from Chapter 4, Petty first discussing rent as a surplus;
“Suppose a man could with his own hands plant a certain scope of Land with Corn, that is, could Digg, or Plough, Harrow, Weed, Reap, Carry home, Thresh, and Winnow so much the Husbandry of this Land requires; and had withal Seed wherewith to sowe the same.
I say, that when this man hath subducted his seed out of the proceed of his Harvest, and also, what himself hath both eaten and given to others in exchange for Clothes, and other Natural necessaries; that the remainder of the Corn is the natural and true Rent of the Land for that year”
Then, to establish the worth of this corn or rent;
“Let another man go travel into a Countrey where is Silver, there Dig it, Refine it, bring it to the same place where the other man planted his Corn; Coyne it, &c. the same person, all the while of his working for Silver, gathering also food for his necessary livelihood, and procuring himself covering, &c.
I say, the Silver of the one, must be esteemed of equal value with the Corn of the other: the one being perhaps twenty Ounces and the other twenty Bushels. From whence it follows, that the price of a Bushel of this Corn to be [equal to] an Ounce of Silver”
This, says Robbins, is a “premonition of the labour theory of value” (P 62).
Ullmer adds that these passages represent an objective theory of value, based on two assumptions. Firstly, all goods have an intrinsic value; secondly the relative value of goods could be measured by the surplus value – over and above the costs of raw materials and living costs of the labourer – created by labour in their production (Op. Cit. P 14).
Robbins then describes how Petty goes on to say that all things should be valued by two natural inputs, Land and Labour – as both are necessary in the production of things – and that ideally a ‘natural par’ could be found between the two, so that value could be expressed by either alone. Then, asks Petty, having established the rent or value of the land for one year’s use, how many years use is the ‘Fee simple’ – the capital value of the land naturally worth.
Here says Robbins, having moved to the capital value of land Petty “… has moved – as Walras did – from the exchange value of commodities, and he has tried to find the value of the services of land and labour and find a natural path between them, and he is now moving on to the capitalisation problem – the value of rents stretching indefinitely into the future” (P 63). [Walras will be discussed under ‘Recent Economic Thought’]
The capitalisation problem is that of determining the rate of rent for land (or interest on a loan), relative to its capital value; there has to be some lower limit below which it is not worth renting it out (or loaning the cash) – it becomes more sensible just to use the capital as income.
Petty reasoned that if there is no discounting of future years rent or value in your calculation, then an acre of land could be valued at say a thousand acres. He therefore proposed the number of years to be counted should be around those pertaining when three generations of the same family might all be alive together; this would vary, but could be around 40 to 50 years. Then says Robbins, 200 years later Cassel, investigating interest, fixed the lowest viable rate of interest at around 2% – essentially the same estimation! This says, Robbins, was one of Petty’s most astonishing discoveries.
Robbins then goes on to indicate the breadth of Petty’s other economic insights. These are also summarised by Fox (2008) and include the following:-
The importance of the amount of money in circulation, and its circulation velocity, for optimum economic activity
The delineation of the multiplier effect,
‘a hundred pound passing a hundred hands for wages, causes 10,000 l. worth of commodities to be produced, which hands would have been idle and useless, had there not been this continual motive to their employment’ (See Ibid P 11)
Advocacy of National accounting
Importance of quantitative information for Government decision making
Proportionate taxation
Public works to remedy unemployment
Increased population is not a drag on resources, but a source of added national wealth
Robbins finally explains that while Petty displayed very superior and penetrating economic insight, his thought lacked any sense of an economic system, and that is why he is included in with the economic ‘anticipations’.
Child and Locke
Robbins concludes his coverage of economic ‘anticipations’ with a lecture on Josiah Child and John Locke. The former was a wealthy stock holder and eventual head of the East India Company and the latter is famous as a philosopher and Enlightenment thinker, often called the ‘Father of Liberalism’.
Child was a widely read economic writer who, in 1668 published a pamphlet on trade and the interest rate. After a muted reception the pamphlet was republished in 1693 as ‘A New Discourse of Trade’. This time Child’s views were more widely received and they drew a response from John Locke, a man whose economic contributions Robbins describes as ‘tremendously historically important’.
Child’s main argument was that the legal rate of interest, then standing at 6%, should be reduced in order to improve economic conditions. To support his case he argued, poorly in Robbins’ opinion, that The Netherlands at the time had a lower interest rate and was more prosperous; and that past interest rate cuts in England had the result of increasing prosperity.
Locke’s1691 response, ‘Some Considerations of the Consequences of the Lowering of Interest, and Raising the Value of Money’, made several arguments against lowering the interest rate. First, he argued, lowering the rate would result in a number of practical negative consequences; thus,
Borrowing and lending would be more difficult, harming trade.
Varied interest rates would allow those skilled in finance to gain advantage over more vulnerable people, such as widows and orphans.
Banks and ‘scriveners’ would be able to work the system.
It would cause ‘crime’, as disputes would occur about what rates had been agreed, and false oaths would be sworn.
Secondly, he argued more theoretically against the proposal. What evidence was there, he asked, that the legal rate was not in harmony with what he called the ‘natural rate of interest? Moreover, trying to legally force interest rates down, in a way that conflicted with the underlying conditions of supply of demand, would produce all manner of problems that would impede trade and damage prosperity.
Robbins points out that there is some doubt about what Locke meant by the ‘natural rate of interest’. Locke claimed that the natural interest rate is raised when:-
Money is little in relation to debt or trade,
In such conditions, he said, there is no point in trying to lower interest rates.
But there has been disagreement about what Locke meant exactly by ‘money’, in this proposal. Robbins wavered somewhat, but felt that while Locke himself was perhaps a bit muddled he probably felt vaguely “… that plenty of money, in the total quantity sense, made more loanable funds available.” (P 71)
In any event, Robbins says that Locke wrote that money is like all other commodities when bought and sold – subject to all the same laws of value – and that just as land gives a yearly income – rent, money also gives and income – interest.
A second issue taken on by Locke in his ‘Considerations’, as well as in a 1695 publication, “Further Considerations Concerning Raising the Value of Money”, was that of the coinage. His main protagonist in this debate (one described by Robbins as ‘thoroughly good tempered’ and a model for modern economists) was a man called Lowndes – a First Secretary to the Treasury, and a significant figure in the founding of the Bank of England.
The mainly silver coinage of England, by 1680 – 1690 had become severely compromised by wear and by clipping, such that it didn’t represent the value it was stamped with, or that it weighed in the scales. To deal with the problem it was accepted a recoinage was necessary but a controversy ensued about what metal content and rate of value the coins should be set at. Lowndes argued that – as in fact the state of the coinage was recognised and in trade a shilling would now buy less than before – the amount of silver in the coins should not be changed, nor the face value; however the value of the coins relative to silver should be debased or devalued to about 80% of the previous face value.
Locke, whom Robbins describes as ‘a pure metallist’ argued that the value of the coinage should be the value of the silver contained. He thus proposed a recoinage where the new coins would be restored to the correct silver content.
Lowndes feared that such a recoinage would mean that the new coins would buy more goods than had become the norm; thus the prices of goods would drop and a general deflation would result, with all sorts of negative consequences. Despite these arguments, for which Robbins admits a sneaking sympathy, Locke’s views prevailed.
On balance though it has since been argued that perhaps Locke was right, because the new Bank of England was experimenting with a Government backed convertible paper currency. In those circumstances it is thought that Lowndes devaluation could have undermined the new paper money at birth, by raising fears that it too could subsequently be devalued.
Concluding his remarks concerning Locke, Robbins lists six major contributions to economic thought contained in his work (P 77-8):-
- His criticisms of Child’s proposals to legally lower the interest rates.
- His somewhat ambiguous views on the determination of a ‘natural rate of interest’.
- His support for the legitimacy of interest on loans, by comparison with rent on land.
- Associated with his discussion of interest, Locke develops a quantity theory of money and a determination of price level ampler than anything previous – apart from William Petty; and elsewhere he analyses the velocity of circulation of money which certainly surpasses anything previous that Robbins is aware of.
- He provides a discussion of the influences determining value, this involving the effects of supply and demand on price alongside reflections on the difficulty of conceiving of stationary conditions regarding price; all this accompanied by ‘very shrewd’ remarks about market price.
- Lastly, Locke discusses the incidence of taxation, positioning himself among those who argue that in the final analysis, most tax at this, and previous, times fell on the landowners.
Then, before leaving Locke, Robbins quotes that other writer on this period whom he admires – William Letwin – who praises Locke’s perception of ‘broad underlying forces’ at work when he explores natural rates of interest, and natural influences on price and the value of money, edging – says Robbins – towards the idea of systematic processes at work.
Summary of this Page
It is appropriate at this stage, the conclusion of Robbins ‘anticipations’, to conditionally ‘sign off’ this page before turning, on a separate page, to ‘Pre Political Economy’.
Before doing so a number of comments and a summary of the page are appropriate.
The page presents a brief account of early western economic thought following Lionel Robbins lectures originally presented at the London School of Economics during 1979 – 81. Positioned within the ‘marginalist’ school of economics, Robbins has apparently followed the path the editors of the book of his lectures warned about; that is, he has presented his choice of economic ideas as a journey from error to truth, and highlighted those ideas he saw as relevant to and leading to his own position. That being said, Robbins includes many warnings as to his possible bias, and to value judgements made by himself and others. In giving his opinion of matters he reveals himself to be a sincere seeker of the ‘true’ nature of economic matters, keenly enthusiastic about learning.
The page started with an account of ancient Greek society, based on slavery, which gave its privileged class the leisure to pursue the arts and enquire into the nature of the world.
In Greek economics, the legacies of Plato – division of labour – and Aristotle – the origin of money, use value and exchange value, commensurability, private property natural and unnatural uses of trade and commerce – were outlined.
The Christian Scholastic Philosophers were then discussed, with regard to their developing views on usury (a legacy of Aristotle’s dim view of interest on loans), and on their concern with how to determine the ‘Just price’ in a Christian society. A gradual relaxation in their views on usury occurred over many, many years.
Robbins described a debate amongst later academics regarding early middle age views about the way in which prices were arrived at. Robbins supported the view that prices were seen to be determined during an essentially market process, rejecting the alternate view – that prices were based on production costs, especially the cost of labour.
The vast literature of Pamphleteering was described next, bringing the time broadly up to the late 16th /early 17th centuries. Here interest groups, civil servants and individuals circulated their views on taxation, subsidies, protective tariffs and so on. Against the background of those times, which included the rise of nation states, voyages of discovery and the Reformation of the Christian church, two main issues were discussed – the debasement of the currency and early discussion of the quantity theory of money.
Turning to the Mercantilist thinking of those times, the concept of bullionism, alongside the perceived imperative of a positive balance of trade, was described. On one side was the view that wealth was limited, most importantly represented by gold and silver bullion; and that trade was a zero sum process involving a gain by one party and a loss by the other. On the other side were views that wealth was limitless and depended ultimately on the product of human labour.
The contributions of William Petty, born in 1623, then followed. Petty started as a cabin boy at 14, but eventually became the widely qualified secretary to Thomas Hobbes and Physician General with Cromwell’s Army.
In economics he pioneered quantitative measurement, and an essentially modern investigatory method using empirical evidence and deductive thinking. In economic theory he expounded an early version of the labour theory of value, eventually arguing that economic value derives from a combination of land and labour – and that a natural par could be found between them in order to express value by either alone.
Petty contributed a wide breadth of other economic insights including the rate of rent of land, relative to its capital value; the circulation velocity and multiplier effect of money; the importance of national accounting and proportionate taxation; and public works to counter unemployment.
The page concludes with Robbins discussion of the views of John Locke, philosopher and Enlightenment thinker, often called the ‘Father of Liberalism’.
Locke’s contributions to economic included the ideas of a natural rate of interest, a refined quantity theory of money, velocity of circulation of money, devaluation and inflation. He also discusses the influence of supply and demand on value, and explores market price. In a consideration of taxation he argued that most tax, in those and previous times, fell on landowners.
Locke was praised by William Letwin for perceiving ‘broad underlying forces’ at work in his explorations of natural influences on interest, price and value – edging, says Robbins, towards the idea of systematic processes at work.
This page provisionally ends here. Discussion continues on the separate page, ‘Pre Political Economy’.
Profit, Wealth and Value 