The Evolution of 'Orthodoxy' in Economics: From Adam Smith to Paul Samuelson.

Author:Waterman, A.M.C.
 
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The theory of economics does not furnish a body of settled conclusions immediately applicable to policy. It is a method rather than a doctrine, an apparatus of the mind, a technique of thinking, which helps its possessor to draw correct conclusions.

--John Maynard Keynes, introduction to Supply and Demand, vol. 1 of Cambridge Economic Handbooks (1922)

Some academic economists describe themselves or their work as "heterodox," and much has been written about a large variety of putatively "heterodox" research programs and schools of thought (e.g., Foldvary 1996; Davis 2006; Lee 2008). What all these economists seem to have in common is a rejection of or departure from what they conceive of as "orthodoxy" in economics, to which much less attention has been paid. "Orthodoxy" is commonly identified with "mainstream" economics: the kind of economics that most professional economists do. The term mainstream was perhaps for the first time used by Richard Judy (1964) and was later popularized in the 2001 edition of Paul Samuelson's textbook Economics (Samuelson and Nordhouse 2001).

There is indeed a sense in which it is instructive to regard "orthodoxy" as "mainstream": that which most practitioners have found works best for them. If, as John Maynard Keynes advised beginning students in 1922, economics is not a body of doctrine but a method of thought, then the orthodox way of doing economics is to employ that "method of thought" that seems to the majority of professionals most likely to maximize expected heuristic returns.

Every coherent "method of thought" rests upon assumptions, implicit or explicit. It is my purpose in this paper to identify the assumptions of "orthodoxy" by observing their evolution in economic analysis from Adam Smith's Wealth of Nations ([1776] 1976; hereafter WN in citations) to Samuelson's Foundations of Economic Analysis (1947). These assumptions are:

  1. That "political economy," subsequently called "economics," is a positive, value-free science.

  2. That all social phenomena are caused by and caused only by the purposeful actions of rational individuals.

    "Orthodoxy" in economics I take to be a conversation among all who accept these assumptions, however much they may disagree about everything else. I am aware that others have propounded different and more restrictive definitions of orthodoxy. My own minimalist definition is simply a means of demarcating the boundary of that conversation that all who regard themselves as "heterodox" choose not to join. Orthodoxy so conceived is a very broad church and may include some who might be surprised at being designated as belonging to it.

    As I understand these terms, it is impossible to claim that orthodoxy is the "correct" or even the "best" way of doing economics. And it is equally impossible to make these claims on behalf of any heterodoxy. It is important to note that many different schools of thought for example classical, neoclassical, Keynesian, post-Keynesian, Austrian, Chicago, and so on--and also many research programs--such as public choice, law and economics, feminist, experimental, and so on--are seemingly "orthodox" according to this paper's taxonomy, although their respective proponents differ, often very strongly, with each other.

    It need hardly be said that there is no correlation whatsoever between orthodoxy or heterodoxy in economics and any set of political beliefs and commitments.

    Adam Smith and the English School

    Adam Smith defined "what is properly called Political (Economy" as "a branch of the science of a statesman or legislator," an "inquiry into the nature and causes of the wealth of nations" (WN, IV.ix.38, IV.intro, my italics). (1)

    "Political economy" was pioneered by Antoine de Montchretien in 1615 as a recipe book for running France as a manorial fief of the House of Bourbon. But over the eighteenth century, it gradually came to be realized that the king's ministers could never have or comprehend the information necessary to manage a large, complex modern economy like that of France or England (WN, IV.ix.51). Pierre de Boisguilbert (1646-1714), building on Jansenist theodicy but abstracting from theology, explained how general economic activity in France was an unintended consequence of self-regarding actions by a multitude of private individuals. It was impossible for le Roi Soleil to control the economy and unnecessary for him to try because competition maximized wealth at equilibrium. Boisguilbert was made to suffer for his subversive doctrines, but his work Detail de la France (1695) is now regarded as the origin of modern economics (Faccarello 1999). Boisguilbert's ideas were transmitted and refined by a succession of French thinkers: Richard Cantillon (c. 1685-1734), Francois Quesnay (1694-1774) and his circle, and A. R. J. Turgot (1727-81). Adam Smith (1723-90) met Quesnay and Turgot in France and learned much from them. Turgot's Reflexions sur la formation et la distribution des richesse (1766) contains much sophisticated analysis, and Pierre Samuel du Pont de Nemours (1739-1817) and others suggested that it was the source of "tout ce qu'il y a de vrai" in Wealth of Nations (Groenewegen 1968).

    Smith's definition of political economy captures the spirit of his French predecessors. For though intended to be useful for "the statesman or legislator," political economy is or ought to be an heuristic enterprise that is in principle disinterested, open-ended, and scientific. Building on the work of Boisguilbert and his successors, that "inquiry" rests upon assumption (2): what we now call methodological individualism. Smith "threw over the old idea of an entity called the state or the nation existing outside the individuals who constitute its subjects or members" (Levy and Peart 2013, 372). All economic phenomena are taken to be the result of the purposeful actions of rational individuals. The assumption was lucidly stated by William Paley (1743-1805), Smith's famous and influential English contemporary, whom John Maynard Keynes thought was "[p]erhaps ... the first of the Cambridge economists" (qtd. in Waterman 1996, 419): "[A]ltho' we speak of communities as sentient beings; altho' we ascribe to them happiness and misery, desires, interests and passions, nothing really exists or feels but individuals" (Paley 1785, 587, italics in the original).

    The method of inquiry that gradually evolved in the eighteenth and early nineteenth centuries is what we now call economic analysis. Individuals' complex, multidimensional interactions are caricatured in simple verbal (and later mathematical) cartoons. These cartoons abstract from the whole of reality, save the two or three hypothetically causal nexi between individuals conjectured to produce the phenomenon to be observed. Induction from observation plays little or no part--save only to suggest plausible hypotheses ex ante. The method is chiefly deductive, given the behavioral assumptions underlying the hypotheses. Observation is focused on those few variables explicit in the hypotheses.

    Why has Smith so important a part in a story that for most of its first century was a French enterprise? Because Turgot died in 1781; because the French Revolution (1789-99) disrupted political culture and intellectual life in France; because France was replaced by Britain as Top Nation after 1815 and the world had to learn English; because of Dugald Stewart's influential Edinburgh lectures on political economy in 1800-1801 (Pryme 1870, vii; Corsi 1987); because of the Edinburgh Review, founded by Stewart's students to propagate his ideas (Fontana 1985); because of the Political Economy Club, established in London in 1821 by Robert Malthus, David Ricardo, James Mill, Robert Torrens, and others, committed both to criticizing and refining Smith's ideas and to propagating them among the governing classes, thus inaugurating the "English School" of political economy (Waterman 2008), of which present-day economics is the direct, lineal descendent; and, above all, because Wealth of Nations was immediately recognized and studied as a seminal contribution to political thought.

    There is a great deal more to Wealth of Nations than economic analysis, which is confined largely to books I and II, but that analysis is foundational for all the rest.

    Book I expounds what we should now call a microeconomic account of product and factor prices. These prices are determined by supply and "effectual demand." In each period, a "market price" is established by competition among buyers and among sellers. "It is the interest of all those who employ their land, labour, or stock, in bringing any commodity to market, that the quantity should never exceed the effectual demand; and it is in the interest of all other people that it should never fall short of that demand" (WN, I.vii.12). At long-term equilibrium, market price will equal "natural price," to which "the prices of all commodities are continually gravitating" (WN, I.vii.15). Natural commodity price is the cost of production and is determined by the natural prices of the factors required to produce it (WN, I.vii.4; Samuelson 1977). These paragraphs in Wealth of Nations constitute the primordial account of the existence, uniqueness, and stability of market equilibrium in economic analysis.

    Natural factor prices are explained in chapters iii and iv of book II. They are determined in macrodynamic, steady-state (2) equilibrium of an aggregate (e.g., national) economy, when the rate of capital accumulation is equal to the rate of population growth induced by that accumulation. The natural wage is the steady-state wage, which determines the natural rate of profit as its inverse (Hollander 1973; Waterman 2009). Though population growth is biological and involuntary, "the demand for men, like that for any other commodity, necessarily regulates the production of men" (WN, I.viii.40); and everything else likewise is caused by the actions of individuals pursuing...

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