Political Events and Economic Ideas (Published With the Support of Eshet)

Political Events and Economic Ideas Published with the support of the European Society for the History of Economic Th...

Author: Ingo Barens | Volker Caspari | Bertram Schefold

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Political Events and Economic Ideas

Published with the support of the European Society for the History of Economic Thought (ESHET).

Political Events and Economic Ideas Edited by

Ingo Barens Technische Universität Darmstadt, Germany

Volker Caspari Technische Universität Darmstadt, Germany

Bertram Schefold Professor of Economics, Johann Wolfgang Goethe-University, Frankfurt am Main, Germany

PUBLISHED WITH THE SUPPORT OF ESHET

Edward Elgar Cheltenham, UK • Northampton, MA, USA

© Ingo Barens, Volker Caspari and Bertram Schefold, 2004 All rights reserved. No part of this publication may be reproduced, stored in a retrieval system or transmitted in any form or by any means, electronic, mechanical or photocopying, recording, or otherwise without the prior permission of the publisher. Published by Edward Elgar Publishing Limited Glensanda House Montpellier Parade Cheltenham Glos GL50 1UA UK Edward Elgar Publishing, Inc. 136 West Street Suite 202 Northampton Massachusetts 01060 USA A catalogue record for this book is available from the British Library Library of Congress Cataloguing in Publication Data European Society for the History of Economic Thought. Conference (5th: 2001: Darmstadt, Germany) Political events and economic ideas/edited by Ingo Barens, Volker Caspari and Bertram Schefold. p. cm. Papers presented at the 5th Annual Conference of the European Society for the History of Economic Thought held February 22–25, 2001 in Darmstadt, Germany. ‘Published with the support of ESHET.’ 1. Economics—Political aspects—Congresses. 2. Economic policy—Political aspects—Congresses. I. Barens, Ingo. II. Caspari, Volker. III. Schefold, Bertram, 1943– IV. Title. HB74.P65E94 2004 330—dc22 2003049351 ISBN 1 84376 440 7 (cased) Printed and bound in Great Britain by MPG Books Ltd, Bodmin, Cornwall

Contents List of ﬁgures List of contributors Preface

viii ix xi

Introduction

1

PART I MONETARY THEORY AND POLICY BETWEEN INTERNATIONAL RIVALRY AND INTEGRATION 1

2

From bimetallism to monetarism: the shifting political aﬃliation of the quantity theory David Laidler Economic and Monetary Union in Europe: political priority versus economic integration? Otmar Issing

3

The political element in monetary theory Marcello de Cecco

4

Monetary reform in France: the French economists and the stabilization of the franc in the 1920s Cécile Dangel-Hagnauer and Alain Raybaut

5

Consequences of a monetary system: German monetary reform, 1948 – the birth of the DM and of a new central bank system and their political and economic implications Karl Häuser

9

37 55

70

94

PART II FRANCE’S ECONOMIC CRISIS IN THE EIGHTEENTH CENTURY AND THE ACCOMPANYING REVOLUTION IN POLITICAL ECONOMY 6

Quesnay’s creation of the Tableau économique in response to the economic weakness of France Walter Eltis

v

109

vi

7

Contents

Power and wealth: Quesnay betrayed by the Tableau économique? Jean Cartelier

8

Structural change and social transformation in physiocracy Gianni Vaggi

9

The kingdom of Ponthiamas – a physiocratic model state in Indochina: a note on the international exchange of economic thought and of concepts for economic reforms in the 18th century Rainer Klump

PART III

10

11

12

13

14

130 150

173

CO-EVOLUTION OF POLITICAL IDEAS AND ECONOMIC THOUGHT IN DIFFERENT COUNTRIES AND PERIODS

Cleomenes III’s politico-economic reforms in Sparta (235–222 ) and Cercidas’ economic thought Christos P. Baloglou

187

Economic theory as political philosophy: the example of the French Enlightenment Jean Cartelier

206

Economic theory and economic policy in Italy during the second half of the eighteenth and the ﬁrst half of the nineteenth century Herbert Pruns Advocacy of freedom and justiﬁcation of governmental interference in Western economic thought – the case of two liberal economists: Francesco Ferrara and Henry C. Carey Daniela Parisi The end of an era: the Austrian Zeitschrift für Nationalökonomie in the interwar period Kurt W. Rothschild

226

238

247

PART IV POLITICAL AND ECONOMIC CONTINUITY AND DISCONTINUITY IN RUSSIA 15

Patristic legacies in Russian economic thought and their signiﬁcance for the transformation of Russia’s economy and society 263 Joachim Zweynert

Contents

16

Speciﬁc interrelations of politics and economics in Russian history Vladimir Avtonomov

PART V

The Great Depression in Irving Fisher’s thought Giovanni Pavanelli

18

Planning for abundance: Nicholas Kaldor and Joan Robinson on the socialist reconstruction of Britain, 1942–45 J.E. King

19

275

POLAR REACTIONS TO THE GREAT DEPRESSION

17

PART VI

vii

289

306

THE JÉRÔME-ADOLPHE BLANQUI LECTURE

Harrod’s dynamics in the making Daniele Besomi

327

PART VII THE EFFECTS OF POLITICAL EVENTS ON ECONOMIC IDEAS: A ROUND-TABLE DISCUSSION Marcello de Cecco Walter Eltis David Laidler Bertram Schefold Christian Schmidt Erich W. Streissler

355 358 365 369 375 382

Index

393

Figures 2.1 2.2 6.1 6.2 6.3 6.4 7.1 7.2 7.3 7.4 7.5 8.1

A view of economic, monetary and political integration A concentric view of enlargement with respect to economic and monetary union Tableau économique: equilibrium Tableau Tableau économique: impact of ‘customs and habits in society, excess and luxury’ Tableau économique: impact of taxation of farmers Tableau économique: disequilibrium Tableau The function of q The respective inﬂuences of and on y Diagram showing how varies with and Diagram showing global relation of and Tableau’s Formule Du Pont’s table

viii

40 51 115 116 118 120 137 138 140 141 143 165

Contributors Vladimir Avtonomov, State University – Higher School of Economics, Moscow, Russia Christos P. Baloglou, Hellenic Telecommunications Organization S.A., Athens, Greece Ingo Barens, Institut für Volkswirtschaftslehre, Technische Universität Darmstadt, Germany Daniele Besomi, Independent researcher, Gola di Lago, Switzerland Jean Cartelier, Université de Paris X – Nanterre, FORUM, Paris, France Volker Caspari, Institut für Volkswirtschaftslehre, Technische Universität Darmstadt, Germany Cécile Dangel-Hagnauer, University of Nice – Sophia Antipolis, France Marcello de Cecco, Dipartimento di Economia Pubblica, Università di Roma La Sapienza, Rome, Italy Walter Eltis, University of Oxford, United Kingdom Karl Häuser, Department of Economics, Goethe-University, Frankfurt am Main, Germany Otmar Issing, Member of the Executive Board, European Central Bank, Frankfurt am Main, Germany J.E. King, Department of Economics and Finance, La Trobe University, Melbourne, Australia Rainer Klump, Department of Economics, Goethe-University, Frankfurt am Main, Germany David Laidler, Bank of Montreal Professor, University of Western Ontario, Canada Daniela Parisi, Istituto di teoria economica e metodi quantitativi, Università Cattolica del Sacro Cuore, Milano, Italy Giovanni Pavanelli, Dipartimento di Scienze Economiche e Finanziarie ‘G. Prato’, Università di Torino, Torino, Italy ix

x

Contributors

Herbert Pruns, Ministry of Food, Agriculture and Forestry, Bonn, Germany Alain Raybaut, University of Nice – Sophia Antipolis, France Kurt W. Rothschild, Johannes-Kepler-Universität, Institut für Volkswirtschaftslehre und Volkswirtschaftspolitik, Linz, Austria Bertram Schefold, Department of Frankfurt am Main, Germany

Economics, Goethe-University,

Christian Schmidt, Département d’économie (L.E.S.O.D.), Université Paris-Dauphine, Paris, France Erich W. Streissler, Department of Economics, University of Vienna, Austria Gianni Vaggi, Dipartimento di Economia Politica e Metodi Quantitativi, Università degli Studi di Pavia, Italy Joachim Zweynert, Institut für Wirtschaftssysteme, Wirtschafts- und Theoriegeschichte der Universität Hamburg and HWWA – Institute of International Economics, Hamburg, Germany

Preface The ‘inﬂuence of political developments on the evolution of economic thought’ – the theme presents a challenge. It is intellectual, primarily at the methodological level, for it is problematic to admit that economics as a scientiﬁc discipline should be aﬀected by currents and events. Economists like to target theories of universal validity, but they often discover that the elements of the theories are historically contingent. The Historical School thought that diﬀerent economic theories had to be formulated for each stage of economic evolution. A weaker form of essentially the same idea appears in the modern recognition that somewhat diﬀerent models must be used to describe diﬀerent economic systems, encountered in diﬀerent countries and periods. It is obvious that political developments lead to new social and economic problems which one tries to solve by means of new or more reﬁned theories. The political history and prevailing mentality in a country exerts a profound inﬂuence on national traditions of formulating and interpreting economic doctrines. Conversely, the views expressed by economic thinkers are the foundation on which politicians base strategies of economic development. Mercantilism and cameralism present early examples – my favourite is that of Philipp Wilhelm von Hörnigk who wrote a book with the title Österreich über alles, wenn es nur will (Austria above everything, if only she wants). The book was the most popular textbook in economics in the German-speaking area in the eighteenth century, and the title, modiﬁed, became the ﬁrst line of the German national anthem. The historical background to this disquieting connection is this: Hörnigk was a low-level diplomat of the Habsburgs. He had been employed to work in Brandenburg towards a treaty for common defence against the threat of the existing alliance between Louis XIV and the Turks. The armies of Louis XIV had conquered Strasbourg and the Alsace between 1680 and 1684, the Turks were besieging Vienna, Brandenburg stood aside and Austria had to be saved by the Poles. Hörnigk understood that the Habsburg countries would eventually have to go it alone. To this end, the Habsburg provinces had to be integrated economically, and Hörnigk groped towards a theory of economic integration. His book was published within a year of the siege. He was innovative: a programme of this type was in fact realised three generations later in the epoch of Maria Theresia, and the Habsburg monarchy xi

xii

Preface

became in some ways a model of Europe and of its problems of uniﬁcation. Political events had helped to trigger the formulation of new economic conceptions which in turn inﬂuenced future economic development. The European Society for the History of Economic Thought (ESHET) held its 5th Annual Conference on this theme. It was located in Darmstadt, Germany, 22–25 February 2001, and organized by Ingo Barens and Volker Caspari. I should like to thank them for the eﬃcacy with which they hosted a conference with about 90 presentations. Apart from the plenary lectures by David Laidler, Otmar Issing, Jean Cartelier and Marcello de Cecco (included in this volume), there were special events. A memorial session with additional short papers was dedicated to Ernest Lluch, one of the most distinguished historians of economic thought, a former minister of Spain and rector of his University, who had become the victim of a political assassination on 21 November 2000. The memorial session recalled his academic achievements and discussed themes in the history of economic thought which had been of special interest to him, such as links between the continental schools of mercantilism and cameralism. The JérômeAdolphe Blanqui lecture was given by Daniele Besomi; it is printed in Part VI of this volume. A variety of social events, including excursions to the medieval monastery of Eberbach and to the Nouveaux Arts treasures of Darmstadt, helped to make this conference a memorable event. This book contains the plenary lectures, the Blanqui lecture and a selection of other papers presented at the conference which related to the general theme, together with a concluding Round Table discussion on ‘The eﬀects of political events on economic ideas’. It was easy to group these contributions according to ﬁve general themes which have turned out to attract particular attention by the participants. This volume also contains a paper by Kurt W. Rothschild on ‘The end of an era: the Austrian Zeitschrift für Nationalökonomie in the interwar period’ which has been inserted in Part III. It was written as an invited paper for the Valencia conference of ESHET, the proceedings of which have not been published in English so the paper has been included here because it ﬁts in well with the general theme of the Darmstadt conference. For the ﬁrst time (Part I), ﬁve papers have been chosen which are representative of the actual interest in monetary systems as devices to foster economic integration at the time of the introduction of the Euro. The material of history by deﬁnition stems from the past but the questions asked derive from the present. A second group of papers deals with physiocracy, therefore with the beginning of rigorous analytical thinking in economics, associated with the endeavour to master the political, social and economic crisis of late French absolutism. The co-evolution of political ideas and economic thought has been observed in many countries and periods, starting

Preface

xiii

from classical antiquity to discussions of liberalism and socialism (Part III). A special session – of which two papers are included in Part IV of this volume – dealt with Russian economic thought which at ﬁrst may appear as a reﬂection of the various Western economic schools (classical and Marxian, historical and neoclassical), but which nevertheless presents some distinctive traits linked to special religious and intellectual traditions and to a long-standing practice of state interventionism. Part V of the book deals with attempted economic solutions to the problems posed by the Great Depression and the associated political transformation. The following Introduction summarizes the papers in more detail. I should like to thank Ingo Barens and Volker Caspari for having done most of the work associated with the editing of this book. Bertram Schefold President of ESHET (2000–2002)

Introduction The ﬁrst part mainly covers topics of monetary theory and policy. In recent history, the quantity theory of money is linked to the politics of the right. However, a century before the monetarist controversy the quantity theory was an important theoretical tool of the political left. Does the shift of ‘political company’ reﬂect an inﬂuence of politics on economic analysis? David Laidler explores this shift in his paper ‘From bimetallism to monetarism: the shifting political aﬃliation of the quantity theory’ by discussing inter alia the role of the quantity theory in the monetarist controversy and its role in the debate about bimetallism. As Laidler points out, it was the development of economic thought that inﬂuenced politics rather than the other way round. Economic integration has succeeded in bringing European countries closer together. In ‘Economic and Monetary Union in Europe: political priority versus economic integration?’ Otmar Issing expounds his views on the relationship between political, economic and monetary integration in Europe, or to put it diﬀerently, the links between the state, the market and the currency. He reviews the track record of economic integration, considers monetary union in the context of the high degree of economic integration already achieved and surveys how the Euro area fares in terms of the optimum currency area theory. He also reviews the political side of the integration and considers some of the challenges that Europe is facing today. The analysis of the monetary phenomenon solely by means of economic methodology which is constrained to the analysis of maximising agents is ‘folly’ because, as Marcello de Cecco stresses in ‘The political element in monetary theory’ it neglects the fact that money is a ‘creature of law and the state’. The legal concept of money can be traced back to old scholars who placed the phenomenon of money in the realm of jus civile and distributive justice. As de Cecco expounds it was the metallist concept which replaced the principles of jus civile with those of jus gentium, which itself came under serious attack after the abandonment of the gold standard. De Cecco further applies the Aristotelian categories of distributive and commutative justice to the monetary theories of Keynes, von Hayek and von Mises respectively. The economic eruptions caused by World War I triggered the suspension of the convertibility of the European currencies and preluded episodes of 1

2

Political events and economic ideas

high inﬂation and instability. Economists were challenged to reﬂect on the causes of these disturbances in order to seek remedies. Great Britain returned to the gold standard as Keynes did not succeed in convincing Churchill that the reinstatement of the gold standard would have severe consequences. France adopted a diﬀerent solution strategy because French economists succeeded in convincing the policymakers to engage in a stabilisation process. The paper of Cécile Dangel-Hagnauer and Alain Raybaut ‘Monetary reform in France: the French economists and the stabilization of the franc in the 1920s’ shows that the process of convincing oﬃcials at the Banque de France was a long and tedious one. The preconditions for monetary reform after World War II were far from perfect. In fact, after 1945 in Germany there were no central agencies, no government, no administration, no monetary authority. Karl Häuser’s contribution ‘Consequences of a monetary system: German monetary reform, 1948 – the birth of the DM and of a new central bank system and their political and economic implications’ describes the monetary chaos and the desolate state of the planned economy that prevailed after the collapse of the ‘Drittes Reich’ and the diﬃcult process of decision-making which started in 1946. He further describes how the change-over from the old to the new currency happened as a ‘big bang’ and argues that the decision for monetary reform had a much wider impact than is registered by money and prices. The second part is almost completely dedicated to the economic crisis in France in the eighteenth century and the accompanying emergence of the physiocratic school in political economy. Walter Eltis deals with the creation of the diﬀerent editions of the ‘Tableau économique’ which he describes as Quesnay’s response to the ﬁnancial and economic diﬃculties his country faced. Quesnay’s political project was making France strong enough to compete successfully with England in economic and in military aﬀairs. Taking into account these political aims, Jean Cartelier investigates how far the economics of the ‘Tableau économique’ supports Quesnay’s views on politics. In order to do this Cartelier transforms the ‘Tableau économique’ into an input–output model which allows him to shed some light on the fundamental relations of the production of wealth. The third paper on Quesnay by Gianni Vaggi focuses on the modernisation of agriculture as a decisive factor in the production of wealth and therefore an important element in the power of a nation. The fourth paper on physiocracy by Rainer Klump is an excellent little study on the international transfer of economic ideas in early modern times. The tale of ‘The kingdom of Ponthiamas’ is part of the book ‘Voyages d’un philosophe’ written and published by Pierre Poivre (1719–86), a French agronomist and missionary who had visited east and

Introduction

3

southeast Asia for several times in the ﬁrst half of the eighteenth century. Klump shows that the economic ideas which Poivre pronounced in his book are both inspired by Chinese and physiocratic traditions where the latter seem to have been inﬂuenced by the former via the writings of Jesuits who had travelled to China. The themes of the third part of this collection are heterogeneous as far as time and space are concerned. Christos P. Baloglou gives a brief portrayal of the political and economic reforms of Cleomenes III, a king of Sparta (235–222 ) and shows how these reforms have been inﬂuenced by Cercidas of Megalopolis’ (ca. 290–217 ) ideas on the equal distribution of wealth. The next step is bigger in time than in space. Jean Cartelier uses the French Enlightenment in order to exemplify his point that economic theory has never developed in a political vacuum. Herbert Pruns gives a ﬁne account of economic policy reforms in Italy (mainly in Tuscany) advocated by diﬀerent Italian economists at the end of the eighteenth and the beginning of the nineteenth century. Daniela Parisi compares two liberal economists – the Italian Francesco Ferrara and the American Henry C. Carey – concerning their justiﬁcation of governmental interventions and Kurt W. Rothschild shows how the themes and topics of the articles published in the Austrian Zeitschrift für Nationalökonomie have undergone a signiﬁcant change during the interwar period. Though being heterogeneous in time and space, the papers in this part of the book exemplify the co-evolution of political and economic thinking in diﬀerent countries and periods in Europe. Continuities and discontinuities in Russian economic thought have begun to attract the attention of economists all over the world who try to understand the peculiarities of the economies which have emerged in the process of transformation after the downfall of the Soviet empire. Joachim Zweynert follows Karl Pribram in the assumption that traditions of thought inﬂuence the economic organisation of the society in question. Now it is clear that important patterns of Russian thinking can be traced back to the legacy of the Russian Orthodox view of the world which Zweynert characterises as a combination of holism and anthropocentrism. The Slavophiles felt that the emergence of a special economic sphere in social life represented a disintegration. The atheistic intelligentsia returned to the anthropocentrism of the Russian Orthodox church. It led to a vision of progress as increased diﬀerentiation of the individual and diminished heterogeneity of the members of society. Of course, there were also dissenters, but this holistic of social life view facilitated the identiﬁcation with the programme of a planned economy. Russia in transition now appeals to the social market economy where holistic views are reconciled with a liberal economic policy in authors like Walter Eucken and Alfred Müller-Armack. Vladimir Avtonomov uses Joseph Schumpeter’s distinction between

4

Political events and economic ideas

professional economic analysis and ‘lay’ economic thought in order to discuss when and to what extent serious economic analysis played some role in the formation of economic policy in Russia, for lay economic thinking, of course, always permeated it. He ﬁrst observes that the revolutionaries used very little economic theory, while earlier reforms like the abolition of serfdom had been hotly debated, and economists had often been at personal risk when they voiced their opinion. The stabilisation reforms by Count Witte after 1860 involved professional economists to a greater extent; Witte himself was acquainted with Friedrich List’s national system of political economy. After the revolution, Lenin’s new economic policy was mainly pragmatic. Stalin’s turn to industrialisation and collectivisation caused intense discussion among Soviet economists and politicians and inspired some of them to work towards new economic tools, like input–output analysis (Leontiev) and the growth model by Feldman. Liberalisation later also led to speciﬁc developments in economic thought, in particular to the turn to mathematical economics (Kantorovich). Gorbachev actually employed a professional economist in a leading government post (Abalkin as vice prime minister), but his moderate reform was not carried out. During the transition, Gaidar under Yeltsin represented a younger generation of economists, but his pronounced liberalism did not survive either. In the light of these experiences, the speciﬁcity of Russian economic thought is mainly to be attributed a political tradition. In September 1929 Irving Fisher was still convinced that share prices were not overvalued. As Giovanni Pavanelli writes in ‘The Great Depression in Irving Fisher’s thought’ Fisher remained optimistic even in 1930 and 1931 and only after the Depression worsened did he became convinced that the crisis could not be simply interpreted as a downturn in the business cycle, however severe. New theoretical explanations were needed. Pavanelli describes Fisher’s debt–deﬂation theory and his policy recommendations, namely a monetary expansion that could in principle stop the downward spiral. Although the Depression did not undermine Fisher’s faith in the fundamental capacity of market economies for stability, Fisher acknowledged the need for a reform of the monetary system. As the defeat of fascism became more likely after 1943, increasing attention began to be paid to the question of postwar reconstruction. Both Nicholas Kaldor and Joan Robinson published a ‘series of brief and punchy polemics on various aspects of economic policies’. J.E. King documents in his contribution ‘Planning for abundance: Nicholas Kaldor and Joan Robinson on the socialist reconstruction of Britain, 1942–45’ the various proposals that were put forth by Kaldor and Robinson. As King argues, their writings, radical in tone and content, did not only revisit unresolved arguments from the interwar debate on the economics of socialism but dealt with important issues that were not addressed by prewar socialists before.

Introduction

5

The Round Table discussion showed once more the breadth and variety of the mutual inﬂuence of politics on economics and of economics on politics. Walter Eltis delivers a concise, detailed and learned account of how economic factors limited a further extension of French political and military power in the middle of the eighteenth century, and how the reorientation towards neglected French agriculture led to a new view of production and circulation in physiocracy. Quesnay’s achievement is here interpreted as the discovery of a coherent and logical framework for the analysis of the economy’s disposable surplus as the key to the understanding of economic growth or decline. Progress, however, is not linear, and Erich Streissler argues that the economic history of the world between the First World War and the 1980s can be seen as a regression from the internationalisation of capital markets which had been possible under the gold standard in the nineteenth century. The new economy has helped to accelerate capital movements recently, but the advances provided by the internet are not substantial compared to the advances once provided by the telegraph and the telephone 100 years earlier, and even if international capital now is very mobile, the world monetary system still lacks a stable anchor comparable to gold. The message implied by these observations is a contribution to the discussions held at the conference, for the political events and the consequent economic transformations which led to the downfall of the gold standard have not led to economic precepts which could compensate for the loss of the gold standard as an institution. Bertram Schefold also describes a regression. The time after the First World War was a period of exceptional intellectual activity in Germany in which both the sciences and the humanities ﬂourished and diverse innovative currents evolved in economics, among them a strand of the youngest Historical School which prepared for future discussions of economic systems. After the Second World War, the comparison of economic systems became an important subject in the Western world, but the discussions about the links between the cultural environment and the working of an economy which had been investigated after the First World War were largely ignored after the Second, with the consequence that, when the Soviet Union fell, the importance of intellectual traditions, mental attitudes and institutions for the process of a successful transition to a modern capitalist economy were neglected. Christian Schmidt examines the impact of the world wars on economic thinking in a more direct sense. The First World War is seen as a large-scale laboratory in which planning and new ways of ﬁnancing the activity of the state were experimented with. The Second World War actually led to the development of new planning techniques like linear programming, and inter-

6

Political events and economic ideas

national rivalry later to a new understanding of international conﬂicts in terms of evolutionary games. The potential for disarmament was explored by means of game theory during the Cold War, and the link between wars and changes in the structure of an economy has been investigated in reﬁned analyses of long waves. Thus wars can be productive of ideas. David Laidler looks at the opposite inﬂuence which runs from the spread of economic ideas to political action. Keynes believed practical men to be ‘the slaves of some defunct economist’ unawares. The perseverance of economists in making mistakes, like advocating minimum wage laws, demonstrate that they do not easily learn from events but try to increase their prestige, even at the price of neglecting the sound basis of their science. The mutual interaction between politics and economic ideas is itself part of economic life and must be studied by economists. Marcello de Cecco’s short opening remarks are also sceptical. He is concerned with the two varieties of capitalism which often were compared in the 1970s and 1980s: ‘Euro-Continental’ and ‘Anglo-American’. De Cecco believes that the decline of the former and the rise of the latter correspond to a political and ideological shift which also aﬀected economics and became a basis for the economic policies of the international economic agencies. The ﬁnal exchange between the participants in this Round Table discussion was not recorded but the conclusion prevailed that the political element in economic doctrines deserves more attention than it usually receives.

PART I

Monetary Theory and Policy between International Rivalry and Integration

1.

From bimetallism to monetarism: the shifting political aﬃliation of the quantity theory David Laidler*

INTRODUCTION Exponents of particular political agendas often deploy economic theories as tools of persuasion. That might mean that such theories are inherently politically loaded, or merely that politicians sometimes ﬁnd them useful. In recent history, the quantity theory of money has been inextricably linked to the politics of the right. The ‘monetarism’ that was associated with the economic policies of Ronald Reagan and Margaret Thatcher had a version of that theory at its very heart. But a century before the monetarist controversy, there was a debate about bimetallism in which the quantity theory was an important theoretical tool of the political left, albeit a populist rather than a socialist left. In the following pages, I shall explore these associations. After a brief reminder of what the quantity theory of money says, I shall discuss its role in the monetarist controversy, and go on to describe the part it played in the debate about bimetallism. I shall then take up aspects of the development of monetary economics in the 1920s and early 1930s, when the quantity theory seems to have migrated from the left to the right of the political spectrum. I shall conclude with the suggestion that, in this story, inﬂuence has run primarily from broader developments in economics to politics rather than in the opposite direction, and that, as a result of these developments, the quantity theory, which has changed remarkably little over the years, has at various times been useful as a support for very diﬀerent political positions.

DEFINING THE QUANTITY THEORY It will be helpful to preface discussion of the quantity theory’s political associations with a deﬁnition of the doctrine and a brief account of its place in monetary economics. Here we can hardly do better than begin with 9

10

Monetary theory and policy

the following quotation from Irving Fisher’s (1911) Purchasing Power of Money: The price level . . . normally var[ies] directly with the quantity of money (and with deposits that normally vary in unison with the quantity of money), provided that the velocities of circulation and the volume of trade remain unchanged, and that there be a given state of development in deposit banking. This is one of the chief propositions concerning the level of prices or its reciprocal, the purchasing power of money. It constitutes the so-called quantity theory of money. The qualifying adverb ‘normally’ is inserted in the formulation in order to provide for transitional periods or credit cycles (Fisher 1911, p. 320).

The quantity theory is, then, a theory of the determination of the general price level, in which causation runs from the quantity of money to prices, and from velocity and the volume of transactions too, if these do not, as in the real world they usually will not, remain constant. It is, however, a theory about equilibrium relationships, not about transitions between equilibria or cyclical ﬂuctuations. As Fisher explained in Chapter 4 of his book, when dealing with the latter, allowance has to be made for feedbacks running from price level movements to deposit creation and destruction, which in turn aﬀect prices in a recursive dynamic process, and these feedbacks are, strictly speaking, outside the scope of the quantity theory. Some monetary theories of the cycle are quite antithetical to the quantity theory, but others are ﬁrmly based on it. Fisher’s (1923) ‘Dance of the Dollar’ was one of these, and Ralph Hawtrey’s (e.g. 1919) theory that made so much of the inﬂuence of the ‘inherent instability of credit’ on the demand for traders’ inventories, was another. In both approaches, the quantity theory provided not a complete explanation of ﬂuctuations, but rather a starting point for the construction of such an explanation, and Fisher’s views diﬀered from Hawtrey’s mainly in matters of detail. The principal, though not the only, diﬀerence between them was that Hawtrey preferred to work with the Cambridge income velocity version of the quantity theory, rather than Fisher’s transactions velocity variant, a matter not so much of deep theoretical substance as of analytic convenience, as Pigou (1917) had persuasively argued. At ﬁrst glance, it would seem that to accept Fisher’s deﬁnition of the quantity theory excludes Milton Friedman from the company of its exponents, for he told readers of his (1956) ‘restatement’ of it that The quantity theory is in the ﬁrst instance a theory of the demand for money. It is not a theory of output, or of money income, or of the price level. Any statement about these variables requires combining the quantity theory with some speciﬁcations about the conditions of the supply of money and perhaps about other variables as well (Friedman 1956, p. 52, Friedman’s italics).

From bimetallism to monetarism

11

The contradiction here is more apparent than real, however, more a matter of semantics than of substance.1 The quantity theory as Fisher deﬁned it permits velocity to vary, but its empirical validity nevertheless requires that those variations reﬂect some underlying behavioural stability. The essential diﬀerence between the quantity theory and the tautological equation of exchange is that velocity is not merely a name for the ratio of money transactions (or money income) to the quantity of money, but a structural parameter in its own right. Anything that can be said about the determination of velocity can, furthermore, be recast to characterise that of its reciprocal, what Wicksell (1898, p. 52 ) called money’s ‘interval of rest’, and hence turned into a statement about the demand for money.2 The relationship that Friedman dubbed the quantity theory in 1956 has thus always been a key component of the theory that has traditionally been so labelled, even if this analytic truth did not become fully evident until the late nineteenth century. And when Friedman and his associates went on to combine this demand for money function with speciﬁcations of the behaviour of the supply of money and other variables, it was to produce empirical and theoretical models in which variations in the money supply were the primary cause of variations in the price level (Cagan 1956, Lerner 1956, Friedman 1969), empirical models in which they were the primary cause of variations in money income (Friedman and Meiselman 1963), not to mention theoretical and empirical analyses of the cycle, very much in the Fisher–Hawtrey tradition, in which variations in money growth were the main causative variable, but in which considerable attention was also paid to the inﬂuence on that rate of money growth of feedbacks from the rest of the economy to the banking system (Friedman and Schwartz 1963a, b). No-one, in short, should feel uncomfortable about designating Friedman and his associates as quantity theorists.

THE MONETARIST CONTROVERSY The quantity theory of money was peripheral to mainstream macroeconomics in the immediate aftermath of World War II. As late as 1960, prevailing orthodoxy had the IS-LM model of the determination of real income and employment as its centrepiece, and IS-LM had essentially nothing to say about the factors determining the behaviour of the price level.3 This was to become a considerable drawback in an environment increasingly characterised by high employment and inﬂationary pressures. There were, of course, theories of inﬂation available with which ISLM could be supplemented.4 The 1950s and 1960s was the period of the cost–push versus demand–pull debate, and of analyses of the

12

Monetary theory and policy

‘wage–price spiral’. To the extent that monetary expansion entered these discussions at all, however, it was as one potential inﬂuence among many on ‘demand–pull’, and/or as a necessary condition for the ‘spiral’ to continue without generating increasing unemployment. Even when the Phillips curve arrived on the scene and was formulated as a menu for policy choice in the 1960s, discussions about anti-inﬂation policies focused not so much on picking an optimal point on the curve and using monetary policy to get there, as on ﬁnding means, usually involving structural policies, or wage–price guideposts, to shift it.5 In these years, in fact, mainstream economic opinion was based on a general suspicion about the self-regulating capacities of market forces, and took for granted the appropriateness of an activist approach to macroeconomic policy in which monetary measures played at most a supporting role and often a purely passive one. Monetary policy was, furthermore, conceived of as a matter of control of interest rates and bank lending, not of the quantity of money. The British Radcliﬀe Committee’s Report (‘Committee on the Workings of the Monetary System, 1959’) gave a particularly clear, albeit perhaps rather extreme, statement of this inherently anti-quantity-theory position: The fact that spending is not limited by the amount of money in existence is sometimes argued by reference to the velocity of circulation of money. . . . We have not made more use of this concept because we cannot ﬁnd any reason for supposing, or any experience in monetary history indicating, that there is any limit to the velocity of circulation; it is a statistical concept that tells us nothing directly of the motivation that inﬂuences the level of total demand (Para. 391, p. 133).

Thus, the Committee went on, [w]e therefore follow Professor Kahn, in the evidence which he submitted to us, in insisting upon the structure of interest rates rather than some notion of the ‘supply of money’ as the centrepiece of monetary action; this does not however imply an absence of special interest in the activities of the banks. In the liquidity structure as we have described it, the banks hold a special position, in that they are, for most borrowers and for most short-term purposes, much the most convenient institutional source of funds . . . We emphasise that any . . . special concern, and any . . . extreme measures, ought to be aimed at the banks as key lenders in the system, and not at the banks as ‘creators of money’. It is the level of bank advances rather than the level of bank deposits that is the object of this special interest; the behaviour of bank deposits is of interest only because it has some bearing, along with other inﬂuences, on the behaviour of other lenders (Para. 395, p. 134).

Now the Radcliﬀe Committee’s views had deep roots in the Banking School tradition, which had, since the debates about Sir Robert Peel’s 1844

From bimetallism to monetarism

13

Bank Charter Act, stressed the complexity of the structure of the banking system’s liabilities, emphasised the strategic role of short-term credit oﬀered by the banking system to the business community in linking that system to the real economy, and argued that what we would now call the money supply was an endogenous variable which mainly responded to, rather than set in motion, ﬂuctuations in the price level.6 Sometimes, the Banking School carried the latter argument to the point of embracing what would later be called the ‘Real Bills Doctrine’, which held that, so long as the banking system conﬁned its lending to good quality short-term commercial bills, the quantity of money would automatically accommodate itself to the changing needs of trade without imparting either inﬂationary or deﬂationary impulses to the economy. Though the Radcliﬀe Report probably represents the fullest revival of these ideas in the mid-twentieth century, versions of them are also to be found in the American literature dealing with the ‘new view’ of economics pioneered by John Gurley and Edward Shaw (1960) and James Tobin (1969) at about the same time.7 It was probably the fact of rising inﬂation in the late 1960s and early 1970s, and the failure of policies aimed at directly controlling wages and prices, that did most to redirect attention away from such ideas and back towards the quantity theory as an explanation of inﬂation. Certainly that was the view of Harry Johnson, writing as early as 1971. He therefore predicted that what he called the ‘monetarist counter-revolution’, to which Friedman’s restated quantity theory was crucial, would peter out as inﬂation ceased to be a problem, and unemployment again began to attract attention. But inﬂation got worse and indeed persisted as the principal macroeconomic problem well into the 1980s. This fact did not, of course, in and of itself establish the correctness of the quantity theory as an explanation of the phenomenon, but it did provide more than ample opportunity for it to be re-established as a theory that potentially had something relevant to say about contemporary economic life. There was, nevertheless, more to ‘monetarism’ than the quantity theory as an explanation of inﬂation. That doctrine also encompassed a rather pervasive belief in the stability of the economy’s private sector, a speciﬁc scepticism about the existence of any systematic inﬂation–unemployment trade-oﬀ, and a preference for constraining monetary policy by a legally binding rule, which stood in stark contrast to the general acceptance of the virtues of discretionary policy among its opponents.8 Furthermore, and central to the matters under discussion here, as James Tobin (1981) noted: In public political and economic debate, monetarism has become a central part of conservative, that is to say nineteenth-century liberal, ideology. These days the other principal elements are most easily summarised as oppositions to

14

Monetary theory and policy Government: to public operation or regulation of economic activities, to redistribution of income and wealth, to collective consumption and investment and to budget deﬁcits (p. 33).

And, he continued, ‘the logical connections of the monetarism of the 1960s to its ideological partners remain obscure. Their unity was less in logic than in the person of Milton Friedman, the powerful and persuasive protagonist of the several ideas’ (p. 34). Though it is easy enough to agree with Tobin’s description of the ideological company that the quantity theory had recently been keeping at the time he wrote these words, it is much harder to accept his attribution of this liaison solely to the inﬂuence of Friedman. To begin with, the ‘monetarist-structuralist debate’ about inﬂation and growth was well under way in Latin America by the early 1960s, before the monetarist controversy had gathered much momentum in the United States and Europe, and Friedman’s work played only a peripheral role in this, particularly in its earlier period.9 There is not space here to describe the Latin American debate in any detail. Suﬃce it to note that the characteristic monetarist position in that debate was that inﬂation was a consequence of monetary expansion, and that ‘[t]here are many things which can be said about inﬂation, but most of them have relatively little to do with economic growth. Likewise, of the many things which can be said about economic growth, few have much relevance for the study of inﬂation’ (Harberger 1964, p. 319), so that control of the money supply was the sine qua non of control of inﬂation. The structuralist side, on the other hand held that ‘. . . in an economy with major bottlenecks and weak export markets, the attempt to achieve price stability through monetary or ﬁscal means will result in unemployment, underutilisation of industrial capacity and slow growth’ (Richard Ruggles 1964, p. 6). As a result, ‘[a] structuralist [who] would not be far from accusing a monetarist of holding to a quantitative theory of money’ (Uri, with Kaldor, Ruggles and Triﬃn 1966) was also likely to hold that ‘. . . credit restrictions . . . should, as a matter of principle, be considered the worst machinery to stop inﬂation’ (p. xv). Thus, by the early 1960s, the quantity theory was recognised to be central to a debate which one commentator characterised as follows: The monetarist-structuralist debate is more than the Latin American version of the international dispute concerning the eﬃcacy of monetary controls in stabilizing the price level. It also involves a deep disagreement over the ability of the price mechanism to bring about a socially acceptable rate of growth and distribution of income in the Latin American context. Finally the temperature of the polemics tends to be heated by mutual accusations of political bias to a higher degree than is characteristic of professional debates elsewhere (David Felix 1964, p. 371).

From bimetallism to monetarism

15

The temperature of those polemics only rose with the passage of time, moreover, and in due course aﬀected the debate elsewhere, particularly in Britain. Thus, in 1971, Nicholas Kaldor, earlier a leading ﬁgure among advocates of ‘structuralism’ in the Latin American debate, abused exponents of ‘the new monetarism’ that was then beginning to play a role in British debates in the following terms: ‘This new doctrine is assiduously propagated from across the Atlantic by a growing band of enthusiasts, combining the fervour of early Christians with the suavity and selling power of a Madison Avenue executive’ (p. 78), while a little later, a leader among those exponents, Harry Johnson, described ‘what passes for economics in the English establishment’ as a synonym for amateur incompetence, invincible ignorance of the rudiments of economic logic, and wilful disregard for the work of competent economists pursuing their subject in other countries – not to mention continual reassertion of non-facts about the British economy and economic behaviour itself (1975, pp. 221–2).

The monetarist–structuralist debate achieved white heat in the wake of the 1972 overthrow of the Allende government in Chile by General Pinochet, and the immediate institution thereafter of monetarist policies; and at this point Latin American experience impinged directly on the American and British controversies, as a proximate consequence of Friedman’s widely publicised, not to say much criticised, visit to Chile shortly after this event.10 In the Latin American debate, scepticism about the eﬃcacy of the price mechanism had distinctly socialist and sometimes Marxist roots, but, in advanced western economies, it was widely spread across the political spectrum, being largely a product of the inter-war experience. It is therefore worth recalling that the single most inﬂuential substantive monetarist contribution of the 1960s was Chapter 7, ‘The Great Contraction’, of Friedman and Schwartz’s (1963a) Monetary History of the United States. This chapter argued that the Depression, which had begun in America in 1929 and had continued till the outbreak of World War II, was the consequence, not of some fundamental ﬂaw in the market economy, but of incompetent policies implemented by a Federal Reserve system which was deeply and balefully inﬂuenced by the same Banking School ideas that would later permeate the Radcliﬀe Report. Nor is it without relevance that Cagan’s (1956) study of seven hyperinﬂations, another critical empirical contribution to the monetarist case, seemed to show that these events were not the consequence of instability inherent in the economy itself, but of monetary policy whose conduct had once again been heavily inﬂuenced by Banking School doctrine.

16

Monetary theory and policy

For those who accepted them, these results of Friedman and his associates undermined any general presumption that a market economy required widespread intervention to make it function. Hence, though they stopped far short of making a case against deﬁcit ﬁnance, income redistribution, and all those other policies mentioned by Tobin (1981), they did seem to require that arguments for such measures be made on the speciﬁc merits of particular programmes. And, because many people did accept the above-mentioned results at their scientiﬁc face value, they shifted the centre of political gravity of monetary economics well to the right of its immediate post-World War II location. To this extent, the quantity theory’s rightwing associations during the monetarist controversy followed naturally from that theory’s central place in a particular body of economic analysis that was then widely believed – rightly or wrongly is not the point – to be supported by historical and empirical evidence. This was more a case of economics aﬀecting politics than of politics aﬀecting economics. And as the history of the monetarist controversy more generally shows, these associations were clearly a result of forces much deeper than the mere inﬂuence of ‘the person of Milton Friedman’, as Tobin (1981) would have had it. This cannot, however, mean that the quantity theory is always and everywhere inherently supportive of conservative political doctrine, because a century earlier the bimetallist controversy generated just as much political heat as did the debate about monetarism, and, in this debate, the quantity theory was closely associated with the progressive left. It is to this episode that I now turn.

THE DEBATE ABOUT BIMETALLISM From the end of the Napoleonic Wars until the 1870s, the international monetary system was essentially bimetallic.11 Britain, to be sure, was de jure on the gold standard, as de facto, was the United States in the years immediately preceding the Civil War, while many important economies, the various states of Germany for example, not to mention China and India, were on silver. The system as a whole, however, was dominated by the French ‘Law of Year Eleven’ which established a ﬁxed price of gold in terms of silver at a ratio of 15 1⁄2 ounces to one. Between its inception in 1803 and the early 1870s, the world market price of gold in terms of silver ﬂuctuated within two per cent of this ratio, even withstanding the severe shocks imparted to it by the extensive gold discoveries of 1849–51. Bimetallism broke down in the 1870s as a consequence of two major shocks, both political in origin. First, in the wake of the Franco-Prussian War, the newly created German Empire replaced its silver-based monetary

From bimetallism to monetarism

17

system with the gold standard, a measure which placed such a severe strain on the relative price of gold and silver that France, and countries linked to the French monetary system through the Latin Monetary Union, were faced with a choice between abandoning de jure bimetallism or ﬁnding itself de facto on an inﬂation-prone silver standard. Bimetallism was in due course abandoned by them as the decade progressed.12 In 1873 the United States Congress administered the coup de grâce to the old international monetary order by passing a Specie Resumption Act that put gold at the centre of the new system and gave no role to silver, a measure that was soon to be named by its political opponents ‘the crime of 1873’. These events had two important economic consequences. First, silver currencies depreciated against gold, and second there began a twenty-year period of slow deﬂation in gold standard countries. These two facts formed the background to the controversies between advocates of the restoration of bimetallism on the one hand, and defenders of gold monometallism on the other. In Britain, bimetallism drew most of its support from the business community, especially those of its members who thought that their competitiveness in international markets was threatened by the depreciation of silver currencies, particularly the Indian rupee.13 The focus among them was on the re-establishment of bimetallism as an international monetary system by agreement among the world’s leading governments. In the United States, such a viewpoint also had its supporters, but purely domestic issues had far more political importance there. Farmers in particular had debts ﬁxed in nominal terms, but faced falling output prices and land values. In large numbers, therefore, they supported the unilateral adoption of bimetallism by the United States, while silver mining areas of the country had their own quite obvious and direct interest in ﬁnding a place for silver in the monetary system. In an 1897 book, Francis Amasa Walker, perhaps the most able advocate of international bimetallism in the United States, or anywhere else for that matter, described the intellectual scene in terms that can be abridged as follows: [T]hree classes of persons . . . have been wont to call themselves bimetallists. We have ﬁrst the inhabitants of the silver producing states . . . silver coinage is with them not a ﬁnancial but an industrial issue . . . [T]he second . . . consists of those . . . in favor of superabundant and cheap money . . . they are for depreciated silver, because . . . it is the next best thing (by which they mean what we would call the next worst thing) to greenbacks . . . what they really want is silver inﬂation. The third element . . . believe that the system will at once avoid the evil of a restricted money supply, secure an approximate par of exchange between gold countries and silver countries, and promote stability in the value of money in the commercial world (pp. 217–19).

18

Monetary theory and policy

All advocates of bimetallism put the quantity theory of money at the very centre of their case. At one level, it played a straightforward role. The aim was to inﬂuence the behaviour of the price level, and the quantity theory taught that this could be done by inﬂuencing the behaviour of the money supply. Deﬂation was due to the stock of gold growing at too slow a pace to keep up with the monetary demand for it, and the deﬁciency could be relieved by allowing silver to ﬁll the gap.14 As J.S. Nicholson (1895), a British advocate of international bimetallism, remarked: [bimetallists] have argued that the supplies of gold have fallen oﬀ, that gold is hoarded by governments and banks, that silver has been demonetized, whilst on the other hand the volume of trade or the amount of the exchanges to be eﬀected has increased. This explanation really rests on the quantity theory in its simple form (p. 243).

Or, in the words of Henry Hucks-Gibbs, another important British bimetallist, so far, and only so far, as prices of commodities depend on the greater or less quantity of the mass of money in the world they will be steadier (as Mr. Jevons, himself no bimetallist, clearly shows in his Money and the Mechanism of Exchange, p. 138) when two metals form the measure of value than when one forms it (Letter to The Times, May 23 1881, as reprinted in Hucks-Gibbs and Grenfell (eds) 1886, p. 146).

In its then only recently developed stock supply and demand form, however, the quantity theory also played a more subtle part in the debate, being deployed against the claim that bimetallism was an unstable monetary system, inherently prone to swings between de facto gold or silver monometallism, depending upon the relationship between the metals’ mint and market prices. The logic of this claim is simple enough. If, but only if, the market prices of the metals are parametric to their monetary use, then Gresham’s Law will ensure that any bimetallic system is inherently on a knife edge. But quantity theorists, deploying supply and demand analysis, could and did argue against this that if, on the other hand, the demands for the metals for monetary uses are suﬃciently large relative to available quantities to aﬀect their market prices, then bimetallism can be (within limits) a stable system in which that monetary demand can absorb the consequences of non-monetary shocks to their market, and perhaps a more stable system than one based on the sole use of either metal.15 The inherited wisdom of the monetary economics of about 1870 was indeed that the metals’ market prices were independent of their uses as money. The quantity theory had played at best a supporting role as a short run adjustment mechanism in the classical economics of Adam Smith and

From bimetallism to monetarism

19

Ricardo, where the long-run purchasing power, the ‘natural value’, as it was habitually termed, of metallic money or of convertible paper money had been held to depend upon the cost of production of the metal in question. It was only in the 1870s that Alfred Marshall worked out a framework that took account of the facts that cost of production varies with the ﬂow of newly produced metal, rather than with the magnitude of its already existing stock, that the stock in question was large relative to that ﬂow and extremely durable into the bargain, and that the demand for that stock was dominated by monetary uses. This framework both exposed the inadequacy of the cost-of-production theory of value as a theory of the price level, and elevated the quantity theory to a position that it had never previously occupied, namely as a general theory of the price level, within which cost of production was but one, usually minor and remote, inﬂuence operating on the supply of money.16 As Walker summarised: ‘But it is in the case of the precious metals, which might, with a view to any brief period be called practically indestructible, that present cost of production has the smallest inﬂuence upon value’ (1897, pp. 26–7). Defenders of gold monometallism, such as Robert Giﬀen in Britain and the founder of the Chicago economics department, J. Laurence Laughlin, in the United States, understood the key role played by the quantity theory in the case for bimetallism, and did their best to undermine it.17 Giﬀen, for example, aﬃrmed that the prices of the precious metals were indeed parametric to their monetary uses: the chronic ratios of exchange between gold and silver and other commodities are not determined by any special qualities these metals have as money. It is the range of prices as part of a general economic condition which helps to determine the quantity of money in use, and not the quantity of money in use that determines prices (1892, p. 99).

Hence a monetary rule requiring the maintenance of convertibility into just one metal, namely gold, was the only sound basis for the monetary system. Laughlin’s position was the same.18 He argued that, under the gold standard, the price level was the outcome of factors aﬀecting both the cost of production of gold and goods so that ‘[t]he general level of prices, then, supposing that the agencies directly touching gold are constant, is governed by the high or low expenses of production of goods’ (1903, p. 362). Moreover, ‘[t]he quantity of the media of exchange is a result, not a cause, of the evaluation between gold and goods, and therefore cannot have been the means of ﬁxing prices’ (p. 362). In defence of this position he invoked ‘the doctrines known as the Banking Principles, [in which] we ﬁnd the body of thinking which had grown up opposed to the general tenets of the quantity theory’ (p. 263). Evidently, then, supporters of sound money during the bimetallic

20

Monetary theory and policy

controversy embraced essentially the same anti-quantity theory position on the relationship between money and prices that, as we have already seen, would later underpin the policy framework which monetarism opposed a century later. Profound diﬀerences between these two anti-quantity-theory groups nevertheless need explicit note. Giﬀen and Laughlin were devoted supporters of laissez-faire underpinned by a gold-standard rule for monetary policy, while the leading lights of the Radcliﬀe Committee were exponents of discretionary policy over a wide area. Thus, if the quantity theory migrated from the political left to the right in the years between these two debates, then Banking School doctrine just as surely made its own simultaneous journey from the right to the left. Now it is hard to think of an international bimetallic system as a politically radical arrangement. Inasmuch as it involved government intervention to ﬁx a relative price, it was indeed, as Giﬀen complained, ‘a departure from the Free Trade principle which [in his opinion] Governments ought to follow in all commercial matters’ (1886, repr. 1892 p. 49), and it did to that extent involve a form of ‘managed currency’ which Giﬀen considered ‘an unsuitable business for a State to undertake’; but its adoption would have still involved a commitment by governments to a policy rule, albeit a less constricting one than the gold standard. Had such a system been adopted in the 1890s, moreover, that would have involved not some bold new policy experiment but a formal return to arrangements that had not so long before been informally in place. The quantity theory’s association with radical politics at this time did not stem from its role in making the case for international bimetallism, however, but from the use made of it by American advocates of unilateral bimetallism who were ﬁrmly on the ‘progressive’ side of the political spectrum. William Harvey’s notable polemic Coin’s Financial School (1894), one of the seminal statements of this case, was in its own way just as reliant on the ‘quantitative theory of money’, as the doctrine is there referred to, as anything that Walker wrote, albeit a rather less sophisticated version of the theory, as one would expect from an author who was a pamphleteer rather than an academic economist. But in Harvey’s work, the quantity theory was enlisted in a political campaign on behalf of agriculture and labour against industry and ﬁnance. For him, the quantity theory taught that ‘[t]he value of the property of the world, as expressed in money, depends upon what money is made of, and how much money there is’ (p. 187), that ‘[t]he same law of demand and supply applies to [money] as applies to any speciﬁc class of property’, and it implied that bimetallism, if unilaterally adopted in the United States, would permit faster money growth and bring deﬂation to an end, and, as he put it, ‘stop this legalized robbery, that is transferring the property of the debtors to the possession of the creditors’.

From bimetallism to monetarism

21

He scorned proposals for international bimetallism as ploys on the part of the ﬁnancial community to prolong the status quo. ‘To that end [the money lenders in the United States] organize international bimetallic committees and say, “wait on England, she will be forced to give us bimetallism”. Vain hope! Deception on this subject has been practised long enough upon a patient and outraged people’ (p. 223). Indeed, ‘whenever property interests and humanity have come into conﬂict, England has ever been the enemy of human liberty’ (p. 22); but, Harvey went on, ‘the United States commands the situation, and can dictate bimetallism to the world at the ratio she is willing to ﬁx’ (p. 234). And he lampooned such American supporters of the gold standard as Laughlin, to whom he referred as ‘the professor in a chair of political economy, endowed with the money of bankers, [whose] mental faculties had trained with his salary’ (p. 174). There is, in short, no questioning Harvey’s credentials either as an exponent of the quantity theory or as a political radical, and his book sold in the tens of thousands. Moreover, its inﬂuence is clearly evident in the policies soon to be espoused by William Jennings Bryan in his successful bid for the Democratic Party’s presidential nomination in 1896. In his famous speech to the Democratic convention in that year, Bryan asserted that ‘if protection has slain its thousands, the gold standard has slain its tens of thousands’ and noted that ‘Mr McKinley was nominated in St. Louis upon a platform which declared for the maintenance of the gold standard until it can be changed into bimetallism by international agreement’. He then excoriated the Republican candidate (and future President) in the following terms: No private character, however pure, no personal popularity, however great, can protect from the avenging wrath of an indignant people a man who will declare that he is in favour of fastening the gold standard upon this country or who is willing to surrender the right of self-government and place the legislative control of our aﬀairs in the hands of foreign potentates and powers (p. 25).

Like Harvey, Bryan was deeply hostile to the banks’ role in the monetary system of the day. He argued that the right to coin and issue money is a function of government. . . . Those who are opposed to this proposition tell us that the issue of paper money is the function of a bank, and that government ought to go out of the banking business. I . . . tell them . . . that the issue of money is a function of government, and that banks ought to go out of the governing business (p. 22).

Moreover, he regarded the unilateral adoption of bimetallism in the United States as an application of an altogether deeper political principle:

22

Monetary theory and policy There are those who believe that, if you will only legislate to make the well-todo prosperous, their prosperity will leak through on those below. The Democratic idea, however, has been that if you legislate to make the masses prosperous, their prosperity will ﬁnd its way up through every class which rests upon them. You come to us and tell us that the great cities are in favor of the gold standard; we reply that the great cities rest upon our great and fertile prairies. Burn down your cities and leave our farms and your cities will spring up again as if by magic; but destroy our farms and the grass will grow in the streets of every city in the country (p. 27).

And so, he famously concluded: Having behind us the producing masses of this nation and the world, supported by the commercial interests, the laboring interests, and the toilers everywhere, we will answer their demand for a gold standard by saying to them: You shall not press down upon the brow of labor this crown of thorns; you shall not crucify mankind upon a cross of gold (p. 280).

It was this populist version of bimetallism, with its inﬂationist subtext, that Francis Walker was distancing himself from in the passage quoted earlier, but quite evidently, the quantity theory was deeply embedded in it. That is why, as Fisher later noted in the preface to The Purchasing Power of Money, 1911, The attempts by promoters of unsound money to make an improper use of the quantity theory – as in the ﬁrst Bryan campaign – led many sound money men to the utter repudiation of the quantity theory: The consequence has been that, especially in America, the quantity theory needs to be re-introduced into general knowledge (p. viii).

He suggested that, in reconstructing the quantity theory in that book, ‘I have the satisfaction of ﬁnding myself for once a conservative rather than a radical in economic theory’. But the conservatism to which he referred here was of a scientiﬁc nature. The quantity theory was to keep its distance from conservative political causes for a little while longer, as we shall now see.

THE INTERWAR YEARS The international gold standard, whose piecemeal creation in the 1870s had prompted the bimetallic controversy, survived until the beginning of World War I, but not because of any intellectual victory on the part of its supporters. Rather the discovery of the cyanide process made it possible economi-

From bimetallism to monetarism

23

cally to exploit South African gold deposits from the mid-1890s onwards, and this, along with gold discoveries in the Yukon at about the same time, was enough to set the world’s supply of monetary gold growing more rapidly than real output. Two decades of deﬂation came to an end, a mild inﬂation which would persist until 1914 began, and bimetallism lost its main political rationale. It is also worth noting that the leading monetary economists of the era, Marshall, Fisher and Wicksell, each according to his own lights a quantity theorist, had supported neither side in the bimetallic controversy. All three favoured price-level stability as a policy goal, but all three thought it possible to improve upon both gold and bimetallic standards to provide it.19 Thus, despite the failure of the bimetallic cause with which it had been intimately associated, the quantity theory remained associated with scepticism about the gold-standard policy rule, and hence with what it is fair to call ‘progressive’ thought on economic policy. It continued to occupy such a position after World War I. This is quite evident, for example, in the well-known role it played as the intellectual foundation for Keynes’s discussion, in the Tract on Monetary Reform, of the potential for conﬂict between the pursuit of domestic price stability and exchange rate stability, and his preference for the former in the event that a choice here should become necessary. And a monetary approach to the analysis of macroeconomic stability that started from the quantity theory also underpinned Hawtrey’s less radical, but nevertheless novel, proposals for re-establishing an international gold standard under which monetary measures would be co-ordinated among countries with a view to giving the stabilisation of prices, income, and employment pride of place on the policy agenda.20 Even so, in Europe in particular, the quantity theory was beginning to lose intellectual ground in the 1920s. Though Wicksell (1898) might have intended to do no more than extend the quantity theory to cope with contemporary institutional realities when he developed his famous ‘cumulative process’ analysis, the longer-run eﬀect of his eﬀorts on monetary economics was to shift its emphasis from the quintessential concern of the quantity theory with the relationship between money and the price level, towards the inﬂuence of the rate of interest on saving and investment, and hence to questions about the inter-temporal allocation of resources. This theme was, as Leijonhufvud (1981) emphasised, to become central to what we now call macroeconomics in the interwar years. And the element in Wicksell’s work that proved seminal here was the ‘pure credit economy model’ of Chapter 9 of Interest and Prices in which bank liabilities adjusted endogenously, even passively, to prices. In the hands of both Austrians such as Hayek and of the Stockholm School, Wicksell’s work became the starting point for competing non- even anti-quantity theory analyses of the fundamental

24

Monetary theory and policy

causes of cyclical ﬂuctuations which were associated with opposite ends of the political spectrum.21 Interacting with this powerful internal dynamic element in the development of economic theory, moreover, was the fact that, once the postwar hyperinﬂations had come to an end, chronically high unemployment became the key policy question in Europe; and by its very nature as a theory of the price level, the quantity theory had nothing direct to say about this matter. Matters were somewhat diﬀerent in American monetary economics.22 There, gold convertibility had been maintained during the War and the 1920s were, overall, a decade of prosperity. There was also a relative lack of explicit interest in intertemporal allocative questions in general, and a slowness to appreciate the importance of Wicksell’s ideas in particular, among mainstream American economists. After the bimetallic controversy, their discussions had turned to issues of central banking, and the Federal Reserve system had been established in 1913. It was natural enough, then, that the 1920s would ﬁnd American monetary economists debating the role of this new institution, and that the quantity theory would play a part in their discussions. Furthermore, at its onset after 1929, the Great Depression looked to most American observers like a particularly bad cyclical downturn, and monetary theories of the cycle of which the quantity theory formed a key component, not to mention policy nostrums derived from them, ﬁgured prominently in the literature it prompted. On the whole, however, even though the quantity theory was still not associated with conservative causes in the United States, its connection with the radical left that has been so close in the 1880s and 1890s had been weakened. That was because the boundaries within American economics and politics had shifted. The quantity theory continued to occupy an important position in neoclassical monetary theory, but in America in the 1920s, neoclassical economics was challenged from the left by institutionalism, in particular by the radical version thereof originally developed and propagated by Thorstein Veblen (e.g.1904) and later by such advocates of wholesale economic planning as Rexford Tugwell (e.g. Tugwell, Munro and Stryker 1925). In the monetary ﬁeld, moreover, the underconsumptionism of Foster and Catchings (e.g. 1923) had taken over as the preferred intellectual basis for inﬂationist policy proposals.23 When compared to these doctrines, even Irving Fisher’s quantity theory-based campaign to subject the Federal Reserve system to a legislated price stability mandate, let alone Allyn Young’s support for cautiously activist stabilisation policy based on his own adaptation of Hawtrey’s ideas to American conditions, were very much in the middle of the road. The word ‘middle’ is not used lightly here, however, for the same body of economics that had underpinned the conservative case for gold monometallism in the 1890s had also provided much of

From bimetallism to monetarism

25

the intellectual basis for the Federal Reserve Act of 1913, and it remained extremely inﬂuential throughout the 1920s and early 1930s, not least at the Federal Reserve Board in Washington.24 The early 1930s in the United States are sometimes thought of as being a time when ﬁnancial interests, supported by inﬂuential neoclassical economists, opposed any attempts to stabilise the ‘Great Contraction’, but ﬁnally met their political nemesis with the coming of the Roosevelt administration and its ‘New Deal’. This is, of course, a gross oversimpliﬁcation of events, but like most such oversimpliﬁcations there is a core of truth lying behind it. There was indeed much opposition to policy activism from the ﬁnancial community in the early 1930s, and it did ﬁnd support among economists. These were not, however, neoclassical adherents of the quantity theory, but the anti-quantity theory supporters of the gold standard and the ‘Real Bills’ Doctrine such as Benjamin Anderson, Henry Parker Willis, and indeed their mentor Laughlin himself who remained intellectually active until his death in the early 1930s.25 Setting out this group’s position in 1933, Laughlin criticised ‘the English writers of today’ for being ‘imbued with a strong belief in the quantity theory’ (p. 229). Here he singled out Keynes as someone who ‘had . . . gone to extremes in supporting inﬂation and the abandonment of the English gold standard’ (p. 231).26 For Laughlin, the Depression was the result of ‘a debauch in credit and overspeculation’ (p. 275) and recovery depended upon a revival of ‘production of saleable goods which is the only way of developing purchasing power’ (p. 273). ‘In reality, demand comes from other goods before money or credit enters on the scene’ (p. 220) and ‘to increase the medium of exchange as a remedy when there are less goods to be exchanged is fatuous’ (p. 285). This all too inﬂuential viewpoint was opposed by many, perhaps most, American academic economists at the time. The early 1930s were a time of widespread support among them for activist expansionary monetary, and indeed ﬁscal, policies, much of it based, if not directly on the quantity theory, then at least on an analysis of the cycle that derived from that doctrine. Lauchlin Currie (1934) was one of the most coherent advocates of such measures, and his analysis was essentially Hawtreyan at this juncture, yielding views on the causes of and remedies for the Great Contraction largely anticipating those later set out by Friedman and Schwartz (1963a).27 His characterisation of the place of the quantity theory in all this was as follows: In the past an altogether disproportionate amount of importance was attached to variations in the supply of money. In consequence of the almost universal abandonment of the quantity theory of money, however, there is a danger that the pendulum may swing too far in the opposite direction so that the eﬀect of variations in the supply of money may be unduly minimized (p. 3).

26

Monetary theory and policy

Currie was more than just a quantity theorist then, he was also a vigorous and explicit critic of the ‘Real Bills’ Doctrine in general. More speciﬁcally, he deplored the role it had played in both the Federal Reserve system’s policies of 1927–28, which were aimed at curbing the supply of bank credit for speculative purposes but had resulted in slowdown in money growth to which Currie attributed the onset of the contraction, and in creating what he termed the system’s ‘almost complete passivity’ thereafter. Small wonder, then, that his book was the subject of a scathing review by Anderson (in the New York Times Annalist, May 3, 1935) which began by branding Currie as ‘the uncompromising advocate of an extremely tight and inﬂexible version of the quantity theory’ (p. 662) and went on, among other things, to criticise him for holding a ‘[t]heory opposed to all accepted principles of banking’ (p. 662), for displaying a ‘complete misunderstanding of 1927–29 developments’ (p. 662) and ‘inadequate knowledge of actual banking practices’ (p. 670), while indulging in ‘the fallacy of cheap money as a substitute for economic readjustment’ (p. 670); and so on in this vein.. The important point about Currie in the context of this chapter is not only that he attracted an attack from Anderson for having oﬀered a critique of Federal Reserve Policy that derived from a version of the quantity theory, albeit a much more subtle one than Anderson gave him credit for. It is also that his work attracted the attention of Jacob Viner of the University of Chicago, who invited Currie to join his ‘Freshman brains trust’ in Washington, thus setting in motion a career that quickly saw him become economic advisor to Marriner Eccles at the Federal Reserve Board, and then to President Roosevelt himself. To the extent that association with the inner councils of the ‘New Deal’ confers progressive credentials on an economic theory, the quantity theory was still well endowed with them in the mid-1930s. The landscape of both economic policy and economic theory was, however, changing rapidly at that time, and this would soon aﬀect the location of the quantity theory in the political spectrum. To begin with, the inﬂuence of Laughlin and his associates waned quickly as the decade progressed. As with the intellectually related, albeit more rigorously based, policy pessimism of Austrian business cycle theorists, there were few takers in the intellectual market place for economic ideas that implied that a policy of waiting out the depression was the only viable option. Second, as the Depression continued in the United States, an ongoing build-up of free reserves in the banking system convinced many who would earlier have given pride of place to expansionary monetary measures that these were no longer likely to be eﬀective. Homely comparisons of such policies to ‘pushing on a string’ came into vogue, and the emphasis among policy activists shifted to the ﬁscal side. Here it is signiﬁcant that Currie himself was one of the architects of the

From bimetallism to monetarism

27

increases in required reserve ratios that were instituted in 1937 with the aim of mopping up excess liquidity in the banking system that, it was feared, might at some future time provide the basis for excessive and inﬂationary money creation. Though Currie would hardly have entertained such fears had he not retained some residual belief in a version of the quantity theory, it is equally clear that he had come to believe that, by 1937, the monetary authorities no longer retained control over the supply of money, independently of factors aﬀecting the demand for it.28 But other exponents of the quantity theory had also given up on it before 1937, crucially that bête noire of Laughlin and his associates, John Maynard Keynes. The Tract on Monetary Reform (1923) had rested on a straightforward and quite unoriginal exposition of the Cambridge version of the quantity theory, but in the Treatise on Money (1930) its author had sought to integrate that theory with a Wicksellian analysis of the inﬂuence of the rate of interest on savings and investment. Though this (not altogether successful, but that is another story) eﬀort had left Keynes a ﬁrm advocate of expansionary monetary policy based on open market operations as a remedy for unemployment, and hence as anathema to Laughlin et al. as ever, the critical variable which he sought to aﬀect was no longer the quantity of money, nor its rate of growth, but rather the level of the long run rate of interest. By 1930, Keynes’s view of monetary policy’s transmission mechanism had thus shifted away from anything that could be associated with the quantity theory towards a Wicksellian mechanism whose critical linkages ran through bank rate to the long interest rate and thence to investment spending, with the supply of money adjusting passively to maintain equilibrium with its demand. Given associated changes in the total quantity of money and in the eﬀective level of bank rate respectively, it is via the latter that the ultimate modiﬁcation in the purchasing power of money is generated, looking at the problem dynamically. The order of events is not that a change in bank rate aﬀects the price level because, in order to make a new bank rate eﬀective, the quantity of money has to be altered. It is, rather, the other way around. A change in the quantity of money aﬀects the price level in the ﬁrst instance because . . . this means a bank rate which will change the market rate of interest relatively to the natural rate . . . If we start from a position of equilibrium, then – provided that eﬃciency earnings are stable – the condition for the continued stability of price levels is that the total volume of money should vary in such a way that the eﬀect of the corresponding volume of bank lending on the market rate of interest is to keep the volume of new investment at an equality with current saving (1930, I, p. 197, Keynes’s italics).

Dennis Robertson (1931) suggested that Keynes was here dealing with a ‘hen and egg’ situation of no importance, but this is surely not so. To

28

Monetary theory and policy

emphasise the rate of interest and volume of bank lending as the critical variables for monetary policy, and to treat the quantity of money as passively adjusting to validate their consequences, is to adopt exactly the view of the working of monetary policy that later appeared in the Radcliﬀe Report, which, as I have already noted, could trace its ancestry to the antiquantity theory position of the Banking School and of the gold monometallists of the 1880s and 1890s. Given Keynes’s earlier credentials as a quantity theorist, this was a step of great signiﬁcance in the development of monetary thought, and one of lasting importance, the use of an exogenous money supply assumption at certain points in the General Theory, notwithstanding.29 And it should be noted that Keynes’s version of this theory, just as surely as Laughlin’s, can be traced to the Banking School, this time by way of Wicksell who had, like Laughlin, been deeply inﬂuenced, though in a very diﬀerent direction, by Thomas Tooke, perhaps the leading exponent of Banking School ideas in the 1830s and 1840s. Now what has been described here was a migration from the political right to the left on the part of the quantity theory’s rival, the endogenous money doctrine of the Banking School. This idea’s links to the political right had mainly been derived from its aﬃliation with the gold standard during the bimetallic controversy, and they persisted into the 1930s in American monetary thought. The combination of Wicksell’s espousal of what amounted to endogenous money in his ‘pure credit economy’ model, however, along with his simultaneous advocacy of managed inconvertible currencies had already put this alliance under stress in the 1890s, and a clear-cut break came when Keynes, who had always been sceptical of the gold standard, embraced the Wicksellian viewpoint in 1930 just prior to Britain’s abandonment of gold convertibility in 1931. Even so, the story of the shifting political associations of monetary theories in the 1930s also involves a more or less simultaneous journey towards the right on the part of the quantity theory. In the 1920s, the quantity theory had provided the underpinnings of Irving Fisher’s campaigns for imposing by act of Congress a price-stability rule on the Federal Reserve system and a crucial step in the quantity theory’s rightward move was taken when this idea of subjecting monetary policy to a legislated rule was adopted by members of the economics department of the University of Chicago in the early 1930s, and in particular by Henry Simons.30 The association of a distinctive ‘Chicago Tradition’ with the quantity theory in the early 1930s, the alleged imperviousness of that tradition to ‘Keynesian’ ideas later in the decade, as well as its inﬂuence on Friedman’s monetarism, have been much debated in recent years, so suﬃce it here simply to state those of my own views on these matters that are relevant to the current discussion: there was little in the way of positive analysis that

From bimetallism to monetarism

29

was unique to Chicago in the early 1930s; Simons’ statement of the case for a legislated monetary policy rule as an integral component of his 1934 Positive Program for Laissez Faire, however, established the quantity theory in a distinct and novel ideological context; and ﬁnally, Simons’ work was inﬂuential in shaping the ideas of the later Chicago School of which Friedman’s monetarism would in due course become an important component.31 Even so, the populist, as opposed to conservative in the traditional sense, characteristics of Simons’ (1934) Program must be noted. There was much in it that would have appealed to the progressives of an earlier era, and which even perhaps derived from their agenda, but which was missing from the body of doctrine with which Friedman’s monetarism would later be associated. Simons favoured, for example, the vigorous pursuit of antitrust policies, as well as serious income redistribution through a taxtransfer system.32 And this is not to mention the fact that another element in his Program, which did ﬁnd its way into Friedman’s postwar work, was the institution of 100 per cent reserve requirements against chequable bank deposits, a measure which would have had the eﬀect of transferring the prerogative to create money from the banks to the government, just as those earlier progressives had also advocated. If Simons’ agenda was no longer classiﬁable as leftist in the 1930s and thereafter, that was more because a large segment of the left had adopted new goals and analytic tools by then than because Simons was opposed to all of the populist ideas with which the quantity theory had been associated forty years earlier.

CONCLUSIONS The foregoing story is easily enough summarised. The same, or at least a very similar, quantity theory of money that was closely associated with rightist policies in the 1970s and 1980s was located at the other end of the political spectrum about a century earlier. It seems to have changed the political company it kept in the 1930s, just when the anti-quantity theory endogenous money doctrines of the Banking School made precisely the opposite change. But there is nothing in this story as I have told it to suggest that this shift reﬂects an inﬂuence of politics on economic analysis. The logic of the quantity theory was reﬁned between 1880 and 1980 to be sure, but it was not radically altered; the predictions which it yielded about the relationship between monetary policy and inﬂation, and monetary policy and cyclical ﬂuctuations, remained more or less the same, and just as testable (in principal at least) at the end of the period as at the beginning; and the same can be said of Banking School ideas too.

30

Monetary theory and policy

What shifted over the period was the political centre of gravity around which monetary policy debates were balanced, and this shift itself was brought about in part by changes in the broader body of economic theory. In the ﬁnal quarter of the nineteenth century, conservative conventional wisdom in monetary matters had supported the gold standard as a means of constraining attempts to manage the monetary system on the part of governments and banks, and not far below the surface of this wisdom there lay the idea that the ‘natural’ value of gold was parametric to its monetary role. At that time, however, the quantity theory was already well on its way to displacing the cost of production theory of the price level within the corpus of economic analysis, and it was profoundly subversive of this conventional wisdom, with which Banking School ideas had become closely interwoven. Not only did the quantity theory seem to provide an apparently simple guide as to how the monetary system might be managed, but it even suggested that, inasmuch as the monetary demand for gold was a major inﬂuence on its price, the gold standard was itself a particular form of managed system. The replacement of the cost of production theory by the quantity theory, and the questions this raised about the scientiﬁc soundness of a body of conventional policy doctrines based on it was, in and of itself, enough to make the quantity theory attractive to political radicals, not least the American progressives who enlisted the quantity theory in support of a particular, and probably inﬂationist, form of managed money. No doubt Irving Fisher’s 1911 eﬀorts to restore respectability to the quantity theory among advocates of ‘sound money’ had some of the eﬀect he desired in breaking its association with radical politics, but as support for the gold standard faded in the 1920s and 1930s, the quantity theory needed only to stand still to appear to be moving rightward. The interwar years were the time in which macroeconomic analysis focused increasingly on matters of intertemporal allocation, rather than the determination of the general price level, and it did so against a background of apparently chronic failure of market mechanisms to generate full employment. Keynes’s General Theory and the IS-LM model that was extracted from it were in no way innovative as far as economic policy was concerned, but they gave an ex post analytic seal of approval to a policy agenda that was already well established by 1936, and whose activism would have seemed extreme to the point of being unimaginable to most economists before 1914. Moreover, monetary policy had only a minor role to play on this agenda, so it provided a natural home for passive Banking School ideas on its role. The widespread acceptance of these theoretical developments in turn shifted the scientiﬁc middle ground of economic thought even further to the interventionist left of the political spectrum and only served to

From bimetallism to monetarism

31

heighten the illusion of a rightward movement on the part of the quantity theory, which was antithetical to the idea that monetary policy was unimportant, and had in any event by then been adopted by advocates of ruleguided policies. In short, in my version of this story, it was the development of economic thought that inﬂuenced politics rather than the other way round, and, almost as a side eﬀect, created the illusion of political migration on the part of the quantity theory and the opposing ideas of the Banking School. But, I hasten to add, I am sure that there are other ways of telling the same tale to a diﬀerent eﬀect. Though I hope that some readers will ﬁnd my narrative convincing, I am even more anxious that those who do not will in due course construct alternative interpretations of the episodes I have described here, for it is only by debating diverse views that we will come to a deeper understanding of the complicated history of our discipline.

NOTES *

1.

2.

3. 4. 5. 6. 7.

The opening lecture delivered at the 2001 conference of the European History of Economic Thought Society, on ‘The Inﬂuence of Politics on Economic Thought’, held at the Technical University of Darmstadt. This lecture had its origins in an email correspondence with Robert Leeson about postwar Chicago economics, and why the quantity theory should be regarded as a right-wing doctrine. I am grateful to him for the intellectual stimulation, and to Perry Mehrling, Bill Robson, Rick Szostak and Michael Trautwein who made many useful comments on an earlier draft. D. Patinkin (1969, 1974) criticised Friedman for attributing the idea of the quantity theory as a theory of the demand for money to a Chicago tradition of the 1930s, and for failing to acknowledge a strong Keynesian inﬂuence on his formulation of the demand function in which opportunity-cost variables play a critical role. Patinkin was surely right about both issues, but Robert Leeson (2000) has shown that the Treatise on Money played an unusually large role in the graduate monetary economics course which Friedman took from Lloyd Mints in 1932. It is, of course, in that book that Keynes developed liquidity preference theory, so Friedman’s work may well, after all, have originated in Keynesian monetary theory to which he was, nevertheless, ﬁrst exposed at Chicago. In this context, it is worth noting that Fisher (1911) contains an account of an empirical study carried out by Fisher of the money-holding behaviour of Yale undergraduates. In Laidler (1991) I have argued at some length the case for treating Cambridge and Fisherian approaches to the quantity theory as essentially the same. Though, as I have argued in Laidler (1999, Ch. 13), the quantity theory survived in the LM curve of exogenous money-stock versions of the model, from which Friedman rescued it. Bronfenbrenner and Holtzman (1964) provided the standard survey of this material for contemporary readers. On the evolution of the Phillips curve as a policy menu, see Laidler (1997). The sections of the Report dealing explicitly with monetary policy were largely written by Richard Sayers, whose Modern Banking, a standard textbook of the time, provides further evidence of a strong Banking School inﬂuence. See Perry Mehrling (1998) for a discussion of this ‘new view’ and its relationship to earlier American work in the Banking School tradition in general, and the aﬃnity between the work of Gurley and Shaw and Tobin in particular.

32 8.

Monetary theory and policy

There are many surveys of monetarism. Probably the most comprehensive and useful single source is Thomas Mayer et al. (1978). As readers of this volume will quickly discover, although the creation of this body of doctrine is popularly ascribed to Milton Friedman, this is a serious oversimpliﬁcation. In particular the independent, sometimes parallel, contributions of Karl Brunner and Allan Meltzer, to which Mayer pays careful and well-merited attention should explicitly be acknowledged here. See Brunner and Meltzer (1993) for a comprehensive retrospective account of their contributions to monetary economics. 9. It is usual to attribute the coinage of the word ‘monetarism’ to Karl Brunner (1968). I have not found this noun in the course of perusing literature on the Latin American debate, but the adjective ‘monetarist’ is a commonplace therein from the early 1960s onwards. The connections between this earlier debate and the later controversy need more attention from historians of economic thought. 10. Friedman’s side of the story is told in Friedman and Friedman (1998). 11. For a wonderfully clear and comprehensive account of the theory and history of bimetallism, see Angela Redish (2000). 12. Velde and Weber (2000) argue that Germany’s adoption of the gold standard increased rather than diminished the viability of bimetallism at 15½/1, and that its disappearance in the 1870s therefore constitutes a puzzle. This conclusion appears to be an artifact of their no doubt ingenious model, rather than being based on any traditional historical analysis, however. 13. Michael Trautwein, in private conversation, has reminded me that this does not mean that the falling prices of the 1870–96 period did not have an eﬀect on the development of the political left in Britain. It probably did, for these were years in which militant trade unionism became increasingly important in British industry. But bimetallism was not high on the policy agenda, if indeed it ﬁgured at all, of those who were involved in nurturing this development. 14. In the context of this paper, it is particularly noteworthy that Friedman (1990) reexamined the bimetallists’ case with considerable sympathy, concluding that such a system probably would have been viable, and indeed might have produced a better price level performance than did the gold standard. 15. Perhaps the fullest exposition of this position in contemporary literature is that given in Fisher (1911, Ch. 7) which sets out the analysis which he ﬁrst developed in Fisher (1894). 16. The main purpose of Laidler (1991) is to trace the evolution of these ideas in detail. 17. On this, see also Laidler (1991 pp. 159 et seq.). 18. See Girton and Roper (1978) for a more sympathetic treatment of Laughlin’s views than they get here. 19. Marshall (1887) favoured symetallism supplemented by widespread voluntary indexation of capital and labour market contracts, Fisher (1911) suggested indexing money itself by way of his compensated dollar scheme, while Wicksell (1898) proposed an international paper money whose value would be stabilised by interest rate movements coordinated among the world’s central banks. I have discussed these matters in more detail in Laidler (1991). 20. These were embodied in the Genoa Resolutions of 1923, but came to nothing. 21. For a discussion of the contributions of these two groups, and the relation of their work to Wicksell’s, see Laidler (1999, Chs 2 and 3). 22. I have discussed the role of American monetary economics in the interwar years, and its relationship to the development of macroeconomics more generally, in Laidler (1999, Chs 9 and 10). In (1998) Mehrling proposed a more complex classiﬁcation for analysing the development of American monetary economics than that which I adopt in this section of the current paper, in which advocates of the quantity theory and Banking School positions are further subdivided according to whether they supported policy rules or discretion and/or active or passive approaches to monetary policy. I intend no criticism of Mehrling’s taxonomy in expressing the hope that the simpler one adopted here is adequate for the purposes of this chapter.

From bimetallism to monetarism 23.

24.

25.

26.

27. 28.

29.

30.

31. 32.

33

It is worth noting that Paul Douglas’s 1932 book The Coming of a New Party embraced both planning and underconsumptionist arguments for ﬁscal and monetary expansion. I suspect that Simons’ (1934) A Positive Program for Laissez Faire should be read as an attack on Douglas, though I have no direct evidence to support this conjecture. Note that when Mehrling (1997) discussed Young’s work as seeking a ‘middle ground’ in monetary economics, the two extremes that he had in mind were represented by this conservative group’s Banking School ideas, and Fisher’s quantity theory. From the point of view of analysing the development of competing strands in what was to become American neoclassical monetary economics, this classiﬁcation seems to me to be absolutely appropriate, but when the economic basis of inﬂationist and more generally interventionist politics is the subject of discussion, as it is in this chapter, it is necessary to recall the existence of radical institutionalism and underconsumptionism. As I have noted in Laidler (1999, Ch. 10) there is a loose relationship between the views of this group and those of such ‘Austrian’ theorists based at the London School of Economics, as Friedrich von Hayek (1931) and Lionel Robbins (1934). However, these Americans lacked the well-worked-out theory of the cycle, deeply rooted in capital theory from which the Austrians derived their policy conclusions. It is worth noting in passing here, that Friedman (1974) singled out the London group as exponents of an atrophied version of the quantity theory to which he contrasted favourably the version in circulation in Chicago at that time. It is, of course, quite erroneous to attribute any shape or form of quantity theory to this group. They were totally and explicitly opposed to it. But he explicitly excepted T.E. Gregory, then at the London School of Economics, who was deeply inﬂuenced by Austrian ideas, without being entirely under their inﬂuence. It is not, perhaps, coincidental that Gregory was an authority on the work of Thomas Tooke, the leading ﬁgure in the Banking School. I am grateful to Robert Leeson for drawing my attention to Laughlin (1933) from which this and other quotations used here are drawn. I have discussed the interconnections here in some detail in Laidler (1993). At this point, then, Currie’s interpretation of monetary factors in the 1930s diverges sharply from that of Friedman and Schwartz (1963a), for they held the slowdown in money growth that followed these measures responsible for the economy’s sharp contraction in 1938. Currie blamed this contraction on an inadvertent tightening of ﬁscal policy. The latter is most conspicuous in the General Theory where the eﬃcacy of money-wage cuts is discussed as an hypothetical rather than a practical policy, and as has often been noted, discussions of the monetary system are conspicuous by their absence from the General Theory. That is why I am one of those who believe that, overall, the treatment of this topic in the Treatise was in no way superseded in the later book. And, it should be recalled, the Radcliﬀe Committee explicitly invoked Richard Kahn’s evidence as the immediate authority for their own views on the issue. Initially Simons had opted for a constant money-supply rule, but shifted to a price-level rule in 1936. His failure to refer to Fisher as an earlier exponent of this idea in the latter paper was surely not as reprehensible as it might now look, for the simple reason that Fisher’s advocacy of it would have been common knowledge to Simons’ intended readership. I have developed and defended these positions at greater length in Laidler (1993, 1997 and 1999, Ch. 10). Tobin (1981) noted these diﬀerences between Simons’ agenda and Friedman’s. Perry Mehrling ﬁrst drew my attention to the relationship of Simons’ policy programme to populist ideas. I also owe to him the caveat that Simons’ populism should be explicitly distinguished from altogether darker, even proto-fascist, versions of such doctrine, associated, for example, with the likes of Father Charles Coughlin. These attracted much support in the 1930s. Reeve (1943) is a useful source of information on these matters.

34

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REFERENCES Anderson, B. (1935), ‘Money and credit in boom crisis and depression’, New York Times Annalist, Friday, May 3. Bronfenbrenner, M. and F. Holtzman (1963), ‘Survey of inﬂation theory’, American Economic Review, 53 (Sept.), 593–661. Brunner, K. (1968), ‘The role of money and monetary policy’, Federal Reserve Bank of St. Louis Review, 50 (July), 8–24. Brunner, K. and A.H. Meltzer (1993), Money and the Economy: Issues in Monetary Analysis, Cambridge University Press for the Raﬀaele Mattioli Foundation. Bryan, W.J. (1896), The Cross of Gold, repr. (with an introduction by R.W. Cherny), Lincoln, NB: University of Nebraska Press, 1996. Cagan, P. (1956), ‘The monetary dynamics of hyperinﬂation’, in M. Friedman (ed.), Studies in the Quantity Theory of Money, Chicago: University of Chicago Press, pp. 25–117. Committee on the Workings of the Monetary System (the Radcliﬀe Committee) (1959), Report, London: HMSO. Currie, L.C. (1934), The Supply and Control of Money in the United States, Cambridge, MA: Harvard University Press. Douglas, P.H. (1932), The Coming of a New Party, New York: McGraw Hill. Felix, D. (1963), ‘Monetarists, structuralists, and import substituting industrialisation: a critical appraisal’, in W. Baer and I. Kershenetzky (eds), Inﬂation and Growth in Latin America, Homewood, IL: Richards Irwin, republished New Haven: Yale University Press, 1964, pp. 370–401. Fisher, I. (1894), ‘The mechanics of bimetallism’, Economic Journal, 4 (Sept.), 341–55. ——— (1911), The Purchasing Power of Money, New York: Macmillan. ——— (1923), ‘The business cycle largely a “dance of the dollar”’, Journal of the American Statistical Association, 18 (Dec.), 1024–8. Foster, W.T. and W. Catchings (1923), Money, Boston: Houghton Miﬄin. Friedman, M. (1956), ‘The quantity theory of money, a restatement’, in Studies in the Quantity Theory of Money Chicago, Chicago: University of Chicago Press, pp. 3–21. ——— (1969), The optimum quantity of money, in M. Friedman, The Optimum Quantity of Money, London: Macmillan, pp. 1–50. ——— (1974), ‘Comments on the critics’, in R.J. Gordon (ed.), Milton Friedman’s Monetary Framework, Chicago: University of Chicago Press, pp. 132–77. ——— (1990), ‘The crime of 1873’, Journal of Political Economy, 98 (Dec.), 1159–94. ——— and R.D. Friedman (1998), Two Lucky People, Chicago: University of Chicago Press. ——— and D. Meiselman (1963), ‘The relative stability of velocity and the investment multiplier in the United States 1898–1958’, in Commission of Money and Credit, Stabilization Policies, Englewood Cliﬀs, NJ: Prentice Hall, pp. 165–268. ——— and A.J. Schwartz (1963a), A Monetary History of the United States 1867–1960, Princeton, NJ: Princeton University Press, for the NBER. ——— (1963b), ‘Money and business cycles’, repr. in M. Friedman, The Optimum Quantity of Money, London: Macmillan, 1969, pp. 189–235. Giﬀen, R. (1892), The Case Against Bimetallism (2nd edn), London: George Bell and Son.

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Girton, L. and D. Roper (1978), ‘J. Laurence Laughlin and the quantity theory of money’, Journal of Political Economy, 61 (April), 599–625. Gurley, J. and E.S. Shaw (1960), Money in a Theory of Finance, Washington, DC: Brookings. Harberger, A.C. (1964), ‘Some notes on inﬂation’, in W. Baer and I. Kershenetzky (eds), Inﬂation and Growth in Latin America, Homewood, IL: Richard Irwin, republished, New Haven: Yale University Press, pp. 319–51. Harvey, W.H. (1894), Coin’s Financial School, ed. Richard Hofstadter, Cambridge, MA: Belknap Press, 1963. Hawtrey, R.G. (1919), Currency and Credit, London: Longman Group. Hayek, F.A. von (1931), Prices and Production, London: Routledge. Hucks-Gibbs H. (1881), ‘Letter to The Times’ (May 26), repr. in H. Hucks-Gibbs and H.R. Grenfell (eds), The Bimetallic Controversy, London: Eﬃngham Wilson, 1886, pp. 143–6. Johnson, H.G. (1971), ‘The Keynesian revolution and the monetarist counter-revolution’, American Economic Review, Papers and Proceedings, 61, May, 1–14. ——— (1975) ‘What passes for economics in the English establishment’, repr. in E.S. Johnson and H.G Johnson, The Shadow of Keynes, Chicago: University of Chicago Press, 1978, pp. 221–6. Kaldor, N. (1971) ‘The new monetarism’, repr. in C. Johnson (ed.), Monetarism and the Keynesians, New York: Printers Publishers, 1991, pp. 79–94. Keynes, J.M. (1923), A Tract on Monetary Reform, London: Macmillan. ——— (1930), A Treatise on Money, (2 vols), London: Macmillan. ——— (1936), The General Theory of Employment, Interest and Money, London: Macmillan. Laidler, D. (1991), The Golden Age of the Quantity Theory, Hemel Hempstead: Philip Allan. ——— (1993), ‘Hawtrey, Harvard and the origins of the Chicago tradition’, Journal of Political Economy, 101 (Dec.), 1068–103. ——— (1997), ‘The Evolution of the Phillips curve as policy menu’, in C. Eaton and R. Harris (eds), Trade, Technology and Economics: Essays in Honour of Richard G. Lipsey, Cheltenham, UK and Lyme, USA: Edward Elgar, pp. 88–106. ——— (1999), Fabricating the Keynesian Revolution, Cambridge: Cambridge University Press. Laughlin, J.L. (1903), The Principles of Money, New York: Scribners (as repr. 1916). ——— (1933), The Federal Reserve Act, Its Origins and Problems, New York: Macmillan. Leeson, R. (2000), ‘Keynes, Chicago and Friedman: resolving the dispute over the quantity theory oral tradition’, West Australia, Murdoch University (mimeo). Leijonhufvud, A. (1981), ‘The Wicksell connection – variations on a theme’, in Information and Co-ordination, London: Oxford University Press, pp. 131–202. Lerner, E. (1956), ‘Inﬂation in the Confederacy 1861–1865’, in M. Friedman (ed.), Studies in the Quantity Theory of Money, Chicago: University of Chicago Press, pp. 163–5. Marshall, A. (1887), ‘Remedies for ﬂuctuations in general prices’, repr. in A.C. Pigou (ed.), Memorials of Alfred Marshall, London: Macmillan, 1925, pp. 188–211. Mayer, T. et al. (1978), The Structure of Monetarism, New York: Norton. Mehrling, P. (1997), The Money Interest and the Public Interest: the Development of American Monetary Thought, 1920–1970, Cambridge, MA: Harvard University Press.

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——— (1998), ‘The money muddle: the transformation of American monetary thought, 1920–1970’, in M.S. Morgan and M. Rutherford (eds), From Interwar Pluralism to Postwar Neoclassicism (Annual Supplement to History of Political Economy), Durham, NC: Duke University Press, pp. 3–30. Nicholson, J.S. (1892), A Treatise on Money and Essays on Monetary Problems (2nd edn), London: A. and C. Black. Patinkin, D. (1969), ‘The Chicago tradition, the quantity theory and Friedman’, Journal of Money, Credit and Banking, 1 (Feb.), 46–70. ——— (1974), ‘Keynesian monetary theory and the Cambridge school’ in H.G. Johnson and A.R. Nobay (eds), Issues in Monetary Economics, London: Oxford University Press, pp. 3–30. Pigou, A.C. (1917), ‘The value of money’, Quarterly Journal of Economics, 32, 38–65. Redish, A. (2000), Bimetallism, Cambridge: Cambridge University Press. Reeve, J.E. (1943), Monetary Reform Movements: a Survey of Recent Plans and Panaceas, Washington, DC: American Council on Public Aﬀairs. Robbins, L.C. (1934), The Great Depression, London: Macmillan. Robertson, D.H. (1931), ‘Mr. Keynes’ theory of money’, Economic Journal, 41 (Sept.), 395–411. Ruggles, R. (1964), ‘Summary of the conference on inﬂation and growth in Latin America’, in W. Baer and I. Kershenetzky (eds), Inﬂation and Growth in Latin America, Homewood, IL: Richard Irwin, republished New Haven: Yale University Press, pp. 3–20. Sayers, R. (1938), Modern Banking, London: Oxford University Press (7th edn 1967). Simons, H. (1934), A Positive Program for Laissez-Faire, Chicago: University of Chicago Press. ——— (1936), ‘Rule versus authorities in monetary policy’, Journal of Political Economy, 44 (Feb.), 1–30. Stigler, G. (1988), Memoirs of an Unregulated Economist, New York: Basic Books. Tobin, J. (1969), ‘A general equilibrium approach to monetary theory’, Journal of Money, Credit and Banking, 1 (Feb.), 15–29. ——— (1981), ‘The monetarist counter-revolution today – an appraisal’, Economic Journal, 91 (March), 29–42. Tugwell R., T. Munro and R.R. Stryker (1925), American Economic Life and its Means of Imnprovement, New York: Harcourt Brace. Uri, P. (with N. Kaldor, R. Ruggles and R. Triﬃn) (1966), A Monetary Policy for Latin America, New York: Praeger. Veblen, T. (1904), The Theory of Business Enterprise, New York: Scribner. Velde, F.R. and W. Weber (2000), ‘A model of bimetallism’, Journal of Political Economy, 108 (Dec.), 1210–34. Walker, F.A. (1897), International Bimetallism, New York: H. Holt and Co. Wicksell, K. (1898), Interest and Prices (tr. R.F. Kahn), London: Macmillan, for the Royal Economic Society.

2.

Economic and Monetary Union in Europe: political priority versus economic integration? Otmar Issing1

1.

INTRODUCTION

The Hellenistic poet Moschus called Europe the ‘other continent’, the destination of the ﬂeeing bull with the Princess of Tyros on its back. This idyllic image marks the birth of Europe as an ideal. We are now moving into a new millennium in which Europe will witness further integration and aspire to progress and greater prosperity. Will the future be a continuation of current trends? The recently established Economic and Monetary Union (EMU) marks a crowning step in the process of economic integration in Europe. This is a milestone and will, at the same time, be a catalyst for some form of political integration for two reasons. First, the introduction of the euro will subject the institutional arrangements of the current 12 participating member states to many new tests. Second, political forces are preparing for the enlargement of the European Union, with many states wishing to accede. Hence, the future will not be just a continuation of current trends. In this chapter I intend to expound my views on the relationship between political, economic and monetary integration in Europe (the ‘triangle’) or, to put it slightly diﬀerently, the links between the state, the market and the currency. This triangle is fascinating, but also complex, and has many implications. Europe as an ideal was always, ﬁrst and foremost, a political project driven by political decisions. However, following early setbacks on the political front, the focus turned to economic, and then to currency, matters. After World War II, the ‘lead’ was taken by economic integration. Over time, economic integration – which became a goal in itself – has succeeded in bringing European countries closer together and has thereby also achieved its wider political purpose. The higher degree of economic interdependence has in turn justiﬁed proceeding to monetary integration on two grounds: to defend the achievements of economic integration and to make further progress in this respect. Now, with EMU in operation for over two 37

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years, the issue of political integration is back on the agenda. It is therefore crucial to identify the key elements of this debate. This chapter is organised as follows. Section two gives the background and puts political, economic and monetary integration in a historical perspective. Section three reviews the track record of economic integration, which is the most advanced side of the triangle and the one that has produced the most beneﬁts for European citizens. Section four considers monetary union in the context of the high degree of economic integration already achieved. Economists have formulated the optimum currency area (OCA) theory, which could serve as a benchmark for monetary union. Section ﬁve surveys how the euro area fares in terms of the optimum currency area theory. Section six reviews the political side of the integration triangle and considers some of the challenges that Europe is now facing. Section seven contains some concluding remarks.

2.

EUROPEAN INTEGRATION FROM A HISTORICAL PERSPECTIVE

Around the ﬁrst century  a large part of the European continent, but by no means all of it, was uniﬁed under the political union of the Pax Romana, which featured a common legal system and administration, and a common monetary system with a single currency across its territory. A merchant setting oﬀ from Rome on a journey to Colonia Claudia Ara Agrippinensis or Lutetia Parisorum – the Roman names for Cologne and Paris respectively – was able to pay his bills with the same coin, the denarius, over his entire journey. This political, economic and monetary system lasted for several centuries, although its geographical extent varied, as did the prosperity it generated: the ‘right mix’ between a common political order and economic and monetary unity seemed to have been found.2 There was also a common, ﬂourishing culture and language underpinning it, and all these elements reinforced each other. Some centuries later the system had collapsed as a result of many pressures, both internal and external. Subsequently, the European continent was never to witness such a degree of integration again, despite several attempts to unify it – mainly by force. Despite a never-ending series of wars, the fragmentation of the continent, and economic and political disasters, the ideal of a united ‘Europe’ of some kind never disappeared. In 1712 the Abbé de Saint-Pierre published a treatise entitled Projet de traité pour rendre la paix perpétuelle entre souverains chrétiens. Ou projet de traité pour la paix perpétuelle en Europe. Visionaries like Victor Hugo contributed to preserving the ideal. There was

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also a short phase of new momentum after World War I (see the PanEuropean Movement by Coudenhove-Kalergi, for instance).3 The ideal survived World War II, despite the continent’s devastation. The main emphasis in this context was always on politics or, more precisely, on political integration and on creating some type of political union. It was also in this vein that European or – to be more precise – Western European integration was re-proposed shortly after World War II. In September 1946 Winston Churchill, in his memorable Zurich speech, called for the re-creation of the ‘European family’ and the setting-up of a structure permitting it to live in peace, safety and freedom. He felt that Germany and France should take the lead in building a kind of United States of Europe, while Great Britain would remain head of the Commonwealth of Nations. The post-war period was marked by a desire for political reconciliation. The ﬁrst concrete step towards integration was the founding in 1952 of the European Coal and Steel Community (ECSC). Its central institution, the High Authority, was supranational in character. It provided for the Europeanisation of the production of coal and steel, which had previously formed the basis for war and destruction. This was ﬁrst and foremost a political project that was soon followed by a draft Treaty on the Establishment of the European Defence Community among the six members of the ECSC. However, in the summer of 1954 the French National Assembly did not ratify the treaty. This led to the scrapping of plans to establish a ‘European Political Community’ and to the abandonment of the idea of creating a European Union intended primarily as a political entity. During this critical phase, the embryonic European integration process – in which little hope was invested – could have easily exhausted itself. Even a break-up of the already established European structures was possible. This state of aﬀairs reﬂects the diﬃculty of politically integrating Europe by bringing together a wealth of countries with their distinct histories, cultures, political systems and singularities, all going back centuries. Although political integration as a goal fell into disfavour for a while, as it was felt to be overambitious, some visionary political leaders decided to pursue the path of economic integration. This led to the establishment of the European Economic Community, and also EURATOM, with the Treaty of Rome in 1957. Figure 2.1A shows the original plan for European integration that was attempted just after World War II. This plan would have started with some form of political integration. Economic and monetary integration would then have been mandated as part of the political plan. As plans for early political integration were deferred, a ‘functional’ integration process started to gain momentum in the 1950s. The latter is illustrated in Figure 2.1B, with economic integration as its starting point. Over the following 45 years, economic integration acted as a spur to monetary integration.

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A. Early political integration plans (after World War II) [State] POLITICAL INTEGRATION

PI starting point

MONETARY INTEGRATION [CURRENCY]

ECONOMIC INTEGRATION [MARKET]

‘Command’ EI and MI

B. ‘Functional’ integration process (underlying Treaty of Rome, 1957) POLITICAL INTEGRATION?

ECONOMIC INTEGRATION EI Starting point

Figure 2.1

MONETARY INTEGRATION EI then exerts pressure towards MI, and also PI?

A view of economic, monetary and political integration

The question now is: to what extent will this process of economic and monetary integration push political integration forward? Why did economic integration face fewer obstacles and actually start to lead the way towards European integration in the second half of the century? Economic integration was intended from the outset to be ‘functional’, i.e. to remove barriers and thereby pursue material and economic interests. It brings widespread beneﬁts because it encourages trade, and establishes a more competitive environment, and thus stimulates the participating economies to become more eﬃcient, to reduce costs and to innovate. Hence, a fuller play of comparative advantages in an integrated market yields a positive-sum game for all countries involved.4 At the same time, this process inevitably entails a loss of national sovereignty.

Economic and Monetary Union in Europe

3.

41

EUROPEAN ECONOMIC INTEGRATION

The process of economic integration that started with the plan for the customs union in 1957 has advanced through various phases. Following the implementation of the Single European Act of 1986 and the Single Internal Market Directive of 1992 (the ‘Single Market Programme’), this process is now largely complete. European countries have made signiﬁcant progress in removing tariﬀ and non-tariﬀ barriers between member states. The four basic freedoms – which promote the free circulation of goods, persons, services and capital across Europe – are now well established.5 The success of European economic integration is also evidenced, inter alia, by: (i)

the high degree of interdependence of European countries. IntraEuropean trade has risen tremendously over the past 45 years; (ii) signiﬁcant and increasing foreign direct investment between euro area countries, and rising ﬁnancial ﬂows and diversiﬁcation in European household portfolios; and (iii) the gradual enlargement from the original six founding members of the EEC to the current 15 EU members, and the many applications to join. In short, the single market is now a reality and we can say that the economic integration side of the ‘triangle’ has progressed enormously. Work on the remaining ‘imperfections’ is advancing. Correspondingly, all EU members are now more interdependent than in the past, and each one has a stake in the well-being and evolution of its partners. Under these circumstances, spillovers from national policies could be signiﬁcant and currency ﬂuctuations could threaten the ﬁnancial stability of the whole area and hamper intra-EU trade and investment. The crisis of 1992 is a case in point. It entailed a large change in nominal and real exchange rates, a swing in relative intra-European prices and had tremendous consequences for trade ﬂows within Europe. Complete capital liberalisation in the wake of possibly diﬀerent monetary and economic policies, combined with the exchange rate mechanism (ERM) of the European Monetary System (EMS) would always subject its member countries to a ‘1992 risk’. In the process, resistance to free trade and even a risk to the status quo as such, i.e. the established standard of integration, would be possible. To avoid this risk, the conviction underlying the Maastricht Treaty was that nominal exchange rates must be irrevocably ﬁxed to achieve and maintain a truly uniﬁed single European market, an argument that I will develop further.

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In this respect, the single currency reﬂects a desire to defend and strengthen the degree of economic integration achieved thus far and can also be interpreted as an insurance against (symmetric) shocks that may emerge in the future. Without a single currency, the achievements and deepening of the Single Market could be endangered. On the other hand, the move to Monetary Union is not only ‘defensive’ but also ‘expansionary’ as it is connected with – in some cases – high-ﬂying expectations of further political integration.

4.

MONETARY UNION

Monetary Union in Europe started with 11 EU members on 1 January 1999 and one more country joined on 1 January 2001. The single currency does away, once and for all, with internal nominal exchange rate ﬂuctuations, completes the Single Market and, with a single money for almost 300 million people, increases the eﬃciency of currency use in an unprecedented manner. Monetary policy is set by the Governing Council of the European Central Bank (for a description, see, inter alia, the ECB Monthly Bulletin articles of January 1999 and June 2003, and The Monetary Policy of the ECB, a book published by the ECB in 2004). As already discussed, monetary integration across these countries is expected to secure and reinforce the continuance of economic integration. At the same time, Monetary Union in Europe also has a political dimension. Monetary Union on this broad scale, with a common currency among 12 sovereign countries is, in historical terms, an unprecedented event. It entails the transfer of national monetary policy decision-making powers to a supranational entity, the European Central Bank (ECB). This step represents a very substantial change in the institutional structure of the participating member countries. On the one hand, the introduction of the single currency has fostered the completion of the Single Market. On the other hand, relinquishing sovereignty in such an important ﬁeld as monetary policy and transferring it to a supranational institution is a move towards the creation of a kind of ‘European statehood’. This transfer of sovereignty shows a convergence of political will and demonstrates that EMU members have achieved a high degree of harmony in monetary policy attitudes and preferences. The political dimension of Monetary Union was also recognised in the Maastricht Treaty. This Treaty on European Union stresses the determination ‘to mark a new stage in the process of European integration undertaken with the establishment of European Communities’. For the time being, the introduction of the single currency ﬁts between the integrating economies of the member countries and the elements of state which they

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43

already share. The single currency combines functional and economic elements with institutional and political ones. Moreover, it is undeniable that Monetary Union also marks a deep change in the way participating countries see themselves. I shall return to some of these arguments in section six. It was a political decision to start with monetary union for a group of countries which did not form a political union and which fulﬁlled the optimum currency area criteria only partially (as is discussed below). So the challenging question now is: will ‘the economy’ adjust to allow monetary union to work under these exceptional conditions? Or will instead economics feed back into politics, thereby creating a kind of mechanism to implement stronger political ties? The concept of the euro as a ‘catalyst’ for political integration is a somewhat extreme variant of this concept. These two strands of potential developments are not exclusive to each other. Therefore, in the end, the impact of monetary union on ‘Europe’ should be an adoption in the ﬁeld of economics and politics as well.

5.

THE CONTRIBUTION OF THE OPTIMUM CURRENCY AREA THEORY

A town or city should not have its own currency and, at the other extreme, the whole world should not share a single currency either. This would reduce the ﬂexibility of relative prices and hamper real adjustments across countries at totally diﬀerent stages of development, with diﬀerent institutional environments, etc. So, from a purely economic point of view, what is the optimal area of circulation of a single currency? Historically, currency zones have coincided with national territory. But in 1961, Mundell, in his seminal article entitled ‘The Theory of Optimum Currency Area’, asked, more generally, if sovereign countries sharing a high degree of labour mobility could ﬁnd it more advantageous to adopt a single currency. Labour mobility would in fact reduce the need to alter real factor prices and to adjust nominal exchange rates in response to some types of shock. Several other properties of an economy – such as price and wage ﬂexibility and capital mobility – were then ﬂagged by other authors in the 1960s and 1970s. Hence, the optimality of a currency area came to be deﬁned in terms of these properties that, when shared by some partner countries, would reduce the usefulness of nominal exchange rate adjustments between them, foster internal and external balance and help insulate countries from some types of shock. But how highly does the euro area currently rank in terms of the OCA properties? Would the high degree of economic and ﬁnancial integration already achieved justify a move towards monetary integration? How could EMU aﬀect these properties, i.e. the optimality of the euro currency area?

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Monetary theory and policy

I shall try to answer the ﬁrst two questions above by reviewing the economic justiﬁcation for proceeding with EMU. I will then address the third question and the policy dimension and political implications of Monetary Union in section six. But I must admit that I myself am continually learning new elements in this area. 5.1

An Assessment of the Main OCA Properties

Following the seminal paper by Mundell and other pioneering contributions, the optimum currency area literature has experienced both ups and downs (reﬂecting in part the uneven progress towards EMU). But what has made the concept of an OCA very resilient is that – irrespective of its limits – it provides a very general conceptual framework in which to address an important question not only for Europe but also for other regions of the world. The notion of an OCA has now a developed theoretical and empirical dimension. I would like brieﬂy to review the status of the euro area with respect to the OCA’s main properties, and then discuss some limitations. Here, I can only summarise the outcome of the very broad research contributions that are available.6 For obvious reasons, the United States serves as a primary reference for comparisons. Concerning price ﬂexibility, a property ﬁrst discussed by Friedman (1953), various studies show that it is currently modest in Europe and signiﬁcantly lower than in the United States. This ﬂexibility is hampered, albeit to diﬀerent degrees across the euro area, by the slow implementation of some structural reforms.7 But, the drive to continue implementing the single market programme and product market reforms will enhance price ﬂexibility. Concerning wage ﬂexibility, despite signiﬁcant progress in recent years, real wages are still quite rigid in most European countries, albeit with notable diﬀerences. In general, real wages adjust much more slowly to economic shocks in continental Europe than in the United States. Moreover, labour mobility is low in continental Europe compared with the United States. The existence of various barriers makes large-scale migration within Europe an unlikely response to economic shocks. But even within individual countries in Europe, the degree of inter-regional migration – and also occupational mobility – is currently quite low.8 Concerning ﬁnancial market integration, an issue discussed by Corden (1972), the volume of cross-border ﬁnancial ﬂows is rising steadily and all ﬁnancial actors in the euro area – including commercial banks – are now exposed to more internal and external competition in the provision of ﬁnancial services. There is an ongoing consolidation process that is still more

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45

manifest within individual member countries than across the euro area, but interest diﬀerentials have become very small between all countries. We can therefore expect ﬁnancial integration to deepen further in the coming years, creating a truly pan-European ﬁnancial market. This will allow national investors to diversify their portfolios more easily. If one member country is hit by a country-speciﬁc shock, investors can still beneﬁt from higher returns elsewhere, and withdraw – or even borrow – funds from abroad. Concerning cross-country foreign direct investment, several studies show that it is modest in comparison with trade and other ﬁnancial ﬂows, but is now becoming more relevant in the euro area. Both inward and outward foreign investment from other euro area countries has risen in almost all countries over the past ﬁve years. These investment ﬂows accumulate over time, leading to an increase in the share of foreign-owned assets and portfolio diversiﬁcation, which can help cushion asymmetric shocks. Concerning economic openness, a characteristic ﬁrst discussed by Kenen (1969), each euro area country exhibits a high degree of openness, particularly the smaller economies. However, the euro area is a far more closed entity than each of its constituent countries and, as a whole, it compares with the United States. Concerning diversiﬁcation in production and consumption, a factor that was also ﬁrst discussed by Kenen (1969), the members of the euro area are generally less likely to be subject to asymmetric disturbances because they are still more homogeneous than the United States, i.e. they all produce a bit of everything and have similar consumer preferences. Concerning the similarity in inﬂation rates, a property discussed, inter alia, by Fleming (1971), over the past 10–15 years inﬂation has gradually converged at low levels in all euro area countries. As a result of this convergence process, EMU started in a low inﬂation environment. The stabilityoriented monetary policy pursued by the ECB will continue to keep inﬂation low. Continued deregulation in product markets should support this process. However, national developments, together with catching-up processes, will still cause some inﬂation diﬀerentials. These diﬀerentials are, however, self-correcting and should therefore be limited in time. There is no reason to believe that we will witness severe and long-lasting inﬂation divergence in the euro area. Concerning ﬁscal integration, a property also discussed by Kenen (1969), various aspects need to be considered. In respect of ﬁscal convergence, all euro area countries have satisﬁed the criteria of the Maastricht Treaty. Nevertheless, a sustained process of further ﬁscal consolidation towards budgets in balance, or even in surplus, is called for under the Stability and Growth Pact. From the perspective of ﬁscal stabilisation, euro area countries would then be able to withstand economic disruption aﬀecting their

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budget once they have complied with the medium-term targets of the Stability and Growth Pact. Viewed in terms of risk-sharing, there is at present no ﬁscal transfer system that would allow the transfer of funds to a member country that was aﬀected by a country-speciﬁc adverse shock. However, given the high degree of diﬀerentiation in production and consumption and the increasing synchronisation of continental European business cycles (see Artis and Zhang 1998), I do not think that this is a big disadvantage at present. The present arrangement reﬂects the limited degree of political integration. It is diﬃcult to imagine that there would now be strong political support for an extended transfer system between EMU members. Or, to put it the other way round, if substantial transfers were to take place, the taxes to raise the funds could create substantial, even dangerous, strains between countries. Hence, in all likelihood, the system now in place has to live with limited transfers. 5.2

Summary of Views on the Euro Area as an OCA

On the negative side, euro area countries still exhibit low price and wage ﬂexibility compared with the United States and this may remain so, albeit with some gradual improvements. Labour mobility is also modest. However, I should also note that there are some encouraging signs concerning price and wage ﬂexibility. In recent years, wage moderation has become more common in most countries. This is reﬂected in higher employment. Looking ahead, the drive to continue implementing the single market programme and deregulation initiatives will undoubtedly enhance price ﬂexibility. Furthermore, product market reforms, increasing integration, and globalisation can also promote an easing of restrictive employment protection legislation. On the positive side, the euro area countries are highly diversiﬁed. Due to their high degree of diversiﬁcation, they tend to behave more as a group than the United States does. Financial market integration is high and increasing. It will play an increasingly important role in cushioning shocks and alleviating the subsequent adjustment. The similarity in inﬂation rates is an achievement, albeit with some possible temporary divergencies. A signiﬁcant amount of ﬁscal convergence has already been achieved, but more rapid reductions in public debt ratios are badly needed. The euro area is proceeding without a ‘ﬁscal shock-absorbing’ mechanism that has been a cornerstone of most, but by no means all, existing monetary unions. This means that euro area members will have to rely almost entirely on their own resources, on national automatic stabilisers and on the operation of

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47

the price and wage mechanisms in the event of asymmetric shocks. At the same time, the constraints on national ﬁscal policies should not be overstated. They are more binding during the transition to compliance with the medium-term objectives of stability programmes. Once these have been achieved, euro area countries will be able to undertake substantial countercyclical ﬁscal policies to weather temporary disturbances. 5.3

Some Limitations of the OCA Theory

I should now stress some limitations of the OCA theory. This theory is mostly backward-looking, so that it cannot account for the fact that a monetary union involving 12 European countries now exists. The economic and institutional environment is changing, and this is aﬀecting all the above OCA properties. In particular, there are two diﬀerent arguments that may arise in the years ahead: one strengthens the OCA argument in the euro area, while the second renders the verdict more complex. The ﬁrst argument is often referred to as the ‘endogeneity’ of the OCA hypothesis. Frankel and Rose (1998), Rose (1999), and other authors have pointed out that if intra-industry trade accounts for most trade within a monetary union and the partner countries are all aﬀected by some major external shocks (e.g. oil shocks), then business cycles may become more synchronised and the members of the monetary union may satisfy the OCA properties more easily ex-post even if they were not satisﬁed ex-ante. Hence, according to the endogeneity literature, the euro area should gradually become more of an OCA. The second argument is the ‘concentration’ hypothesis. Authors like Krugman (1995), in his ‘Lessons from Massachusetts’, postulate that the single currency, together with stronger trade and ﬁnancial ties, will result in greater specialisation among euro area countries. This may gradually intensify inter-industry trade, and cause each country to become more sensitive to industry-speciﬁc shocks. This would in turn yield more idiosyncratic business cycles. Hence, euro area countries may witness more pronounced growth, employment and inﬂation diﬀerentials than in the past. This could be a concern in view of the generally limited price and wage ﬂexibility, low labour mobility and the lack of a risk-sharing mechanism. As each ﬁeld claims to have some supporting empirical evidence, the verdict on the result of ‘endogeneity’ of an OCA remains unclear. In this context, it might be interesting to brieﬂy refer to this conference and its title: ‘The inﬂuence of political developments on the evolution of economic thought’. As an unprecedented ‘experiment’, EMU has already attracted research from a host of scholars. I would expect, or at least not rule out, that EMU and its development will have an impact on OCA theory and,

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perhaps, beyond that on some general aspects of macroeconomics and microeconomics. 5.4

Summing Up

All in all, the jury on the OCA test is still out. The euro area may not yet be an optimum currency area in all respects to the extent that, for example, the United States is. On the one hand, the euro area scores well in terms of several properties and has the potential for a signiﬁcant increase in price and wage ﬂexibility in the near future. On the other hand, it follows from the above considerations that the OCA criteria can by no means give a deﬁnite and comprehensive answer to this question. An important related aspect concerns the beneﬁts from sharing a single currency. Static thinking in terms of costs and beneﬁts at a certain moment in time may well be misleading. Consider, for instance, that we are now incurring a large share of the costs (such as those for the ‘changeover’), while several of the beneﬁts will only gradually make themselves felt. The net beneﬁts are in fact not guaranteed and will depend on economic development, the policies that are implemented and on institutional reforms. Hence, the net beneﬁts will depend greatly on the implementation of EMU itself, and they can diﬀer from country to country and even change over time. But what could be the role of politics in the implementation of EMU and in improving its OCA properties? A lack, or shortage, of some OCA properties – for example, concerning ﬂexibility and mobility – must not be a ‘given’. Instead, it can and must be corrected. Furthermore, monetary union will foster transparency and market competition. This will endogenously help to improve several OCA properties. It is now time for the politicians, for governments, to undertake the badly needed structural reforms. These reforms will not be easy to implement, but are fundamental for enhancing price/wage ﬂexibility and adaptability, and fostering innovation. This will in turn allow the full beneﬁts of monetary integration to be reaped. Hence, EMU will strengthen the OCA properties if both policymakers and the public recognise that EMU must be a catalyst of reforms and endorse those reforms.

6.

POLITICAL PRIORITIES

I will now return to the unresolved side of the original triangle: political integration. With the start of monetary union, the Maastricht Treaty has created a unique, historical asymmetry. On the one hand, there is a supra-

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national European monetary order, and yet there are predominantly national sovereignties in other areas. I would like to review the track record in this area. I shall start by posing some questions and trying to answer some of them, at least partially: (i)

Given that we now have a monetary union without a deﬁnite and speciﬁc form of political integration, can monetary union work under these conditions? (ii) To what extent can the single currency be a ‘catalyst’ for political integration? (iii) What kind(s) of political union would eventually be compatible with monetary union? (iv) And what kind of political union might gradually (eventually) develop in Europe following the enlargement process?

A tentative answer may also hinge on what is meant by political union. The considerations that I present below are for reﬂection. In section two I said that attempts to promote political integration after World War II were immediately stalled. This reﬂects the diﬃculty of integrating Europe by bringing together a wealth of countries with their histories, cultures, political systems and constitutions.9 Looking at the status of political integration now, there are at least three complementary dimensions within which Europe has made some progress and which could be considered. The ﬁrst dimension is that euro area members already share policy decisions in the European context. This process of largely functional political integration at the inter-governmental level is bound to deepen over time, as the legal and regulatory framework will be harmonised further. Furthermore, while euro area members maintain control over national ﬁscal policies, such policies are bound by the Stability and Growth Pact and multilateral surveillance. The second dimension is that euro area countries have already transferred areas of national sovereignty to the supranational level. This includes sovereignty over monetary and exchange rate policies, as I have already mentioned, but the framework for microeconomic policies has now to a large extent also been centralised in the area of Single Market, competition and trade policies. The third dimension is that in all countries some of the main traditional functions of state are steadily changing under diverse pressures. The pressure of globalisation, the growing role of knowledge and innovation and the deepening of economic and ﬁnancial interdependence are now aﬀecting economic sovereignty, security, as well as national identity and culture. Hence, the euro area (and the other EU) countries already share some

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elements of state formation. But there are also important ﬁelds in politics which are not directly linked to monetary integration, such as a common foreign policy and a common defence policy. I will not speculate on what might be envisaged in these areas. A good way to describe the current situation is to call it a ‘Hayekian search process’ for a still unknown ‘constitutional solution’. We know where we stand, we should develop some ideas of what the European constitution should do, but the search is still going on. Hence, as EMU is going to have consequences for the political structure, there is also an ‘endogeneity of politics’. It may not be appropriate exclusively to consider political integration for Europe in forms we are familiar with from current examples or from history. The process should instead be left open – for progress – and also for correcting mistakes. Moreover, we must not fall into the trap of the ‘bicycle theory’, believing that the reform process must not stop or else it will fail, and rush into new constitutional arrangements. In particular, there are some risks, or political options, that the euro area (the EU) cannot aﬀord and must avoid. Most important are the misguided calls for a ‘social union’ – or a highly regulated European welfare state. A political union of this kind would hamper the very ﬂexibility of prices and wages that each country should pursue for EMU to be successful. The enlargement process is eﬀectively a major challenge within the challenge, namely to ﬁnd a sustainable modus vivendi and clear political arrangements for the current participants of EMU. It helps to visualise the European integration process in terms of concentric circles as in Figure 2.2 The 12 euro area countries would be situated in the innermost circle, with the three remaining EU countries in the second circle (i.e. ‘pre-ins and outs’). The ‘oﬃcially recognised’ candidates for accession to the EU follow in the third circle, jointly with other potential applicants for EU accession in the outermost one. A remarkable osmosis is likely to occur in the foreseeable future between these circles. In any event, it will be interesting to see how the accession of new EU member states (or even the run-up to their accession) will aﬀect attitudes towards monetary union. Will EU countries currently outside monetary union feel more comfortable in the future as part of a larger group of ‘outs’? Or would the shock of suddenly ﬁnding themselves on the same level of integration as countries that were suﬀering in the not-too-distant past under the regime of communist-planned economies dominate? This could give rise to interesting scenarios if new EU members with close links to the euro (but without being formal members of monetary union) were to leave one or other of the ‘old’ members far behind in terms of monetary integration.

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European Union today 15 countries 12 countries

European Union and Accession countries

EURO AREA PRE-INS & OUTS 3 countries ACCEDING COUNTRIES

Figure 2.2 A concentric view of enlargement with respect to economic and monetary union We now have an economic and monetary situation in Europe that is based on a very clear set of rules and grounded in sound market-based principles. They are generating net beneﬁts for all members. We have to nurture this economic and monetary state of aﬀairs in Europe, understand the signals that the economy and the markets are sending, interpret them and undertake all the reforms necessary for Europe to prosper. I am conﬁdent that the current economic and monetary constellation in Europe will continue to work well in the future. Where do we go from here? Whereas much thought has been given to enhancing political integration, the idea is now also emerging that, in political terms, ‘Europe’ might already be much closer to a steady state than is generally suggested (see, for example, Di Fabio, Frankfurter Allgemeine Zeitung, 2 February 2001). Seen from this perspective, the current form of political integration ‘only’ needs to be completed with improved practical instruments and legal clarity. Whatever vision is preferred, i.e. a wide-ranging or a more modest one, at this juncture we must not squander what we have built over 45 years of integration. We should not leap into the unknown towards new constitutional arrangements with which we cannot easily identify.

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CONCLUSION

If we think in terms of European history over the last centuries and, particularly, after the early failure to create political union after World War II, the current circumstances are an incredible achievement. We now have a very high degree of economic integration, a functioning monetary union and some elements of political integration. The euro is an important achievement in itself. It also has the clear potential to accelerate reforms and progress in many more areas. While the start of Monetary Union has been a success, the major challenges still lie before us. If Europe is to seize the opportunity, it must use Monetary Union as a catalyst for the necessary reforms. As for the political way ahead, pragmatic, step-by-step progress is the most promising approach. Europe must not rush into any traditional model of political union. The chances of success for EMU now rest primarily on the ability of each country to undertake its own reforms. This will overcome the main disintegrating forces, i.e. that economies and regions drift apart irreversibly. The room for manoeuvre for truly autonomous national policies in several areas is narrower than before the creation of EMU. Correspondingly, the margin for erratic or proﬂigate policies is also small. That should reassure not only markets, but also the citizens of Europe.

NOTES 1. I would like to thank Francesco Paolo Mongelli and Wolfgang Schill for their valuable contributions. 2. The stability of the denarius was ensured by the natural scarcity of money. When subsequent emperors started debasing the currency, its general acceptance began to fade. 3. See ‘Europäische Unionsbewegungen’ by Anton Zottmann, in Handwörterbuch der Sozial-wissenschaften, vol. III, Tübingen 1961. 4. A very detailed account, and an empirical assessment, of the economic eﬀects of completing the single market is given by Emerson et al. (1988). 5. Economic integration is by no means easy to describe and/or assess. It is occurring as a result of market forces, blurring the separation between national jurisdictions, and an ongoing legislative and institutional process promoting economic integration through actions at the Community level, by the Commission, or other agencies of the Community, such as the European Court of Justice. These actions are leading to continuing modiﬁcations and a harmonisation of the existing legislation, the removal of elements of national legislation restricting the ‘four freedoms’, and ﬁscal harmonisation. 6. See, inter alia, the EMI’s 1998 Convergence Report, OECD (1999), the EU Commission’s ‘One Market, One Money’ (1990), Ishiyama (1985), Tavlas (1993), Corden (1993), De Grauwe (2000), Masson and Taylor (1991), Artis (1991), Eichengreen (1990), Buiter (2000), and Portes (1999). 7. For example, there is still little market competition and downward rigidity in several sectors, particularly those with a high concentration of state-owned enterprises or of former state monopolies.

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8. A panel of experts set up by the EU Commission in 1996 attributes low labour mobility also to a combination of institutional and administrative factors, including the limited cross-border portability of social protection and supplementary pension rights, administrative diﬃculties and high fees to gain legal resident status, the lack of comparability and reciprocal recognition of professional qualiﬁcations and restrictions on public sector employment. The OECD (1999) examines various other determinants of low labour mobility. 9. See also Padoa-Schioppa (2001)

REFERENCES Artis, M.J. (1991), ‘One market, one money: An evaluation of the potential beneﬁts and costs of forming an economic and monetary union’, Open Economies Review, 2, 315–21. ——— and W. Zhang (1998), ‘The linkage of interest rates within the EMS’, Weltwirtschaftliche Archiv, 132(1), pp. 117–32. Buiter, W. (2000), ‘Optimal currency areas: Why does the exchange rate regime matter’, Centre for Economic Policy Research (CEPR), Discussion Paper Series No. 2366. Corden, W.M. (1972), ‘Monetary integration, essays in international ﬁnance’, International Finance Section No. 93, Princeton University, Department of Economics. De Grauwe, P. (2000), Economics of Monetary Union, Oxford: Oxford University Press, Fourth Edition. Eichengreen, B. (1990), ‘One money for Europe? Lessons from the U.S. currency union’, Economic Policy: a European Forum, Vol. 5, No. 1 (April 1990a), pp. 118–87. ——— (1990), ‘Is Europe an optimum currency area?’, CEPR Discussion Paper No. 478, London: Centre for Economic Policy Research (November 1990b). Emerson, M., D. Michel Aujean, Michel Catinat, Philippe Goybet and Alexis Jacquemin (1988), The Economics of 1992: The EC Commission’s Assessment of the Economic Eﬀects of Completing the Internal Market, New York: Oxford University Press. European Central Bank (1999), ‘The stability-oriented monetary policy strategy of the Eurosystem’, ECB Monthly Bulletin, January. European Central Bank (2003), ‘The outcome of the ECB’s evaluation of its monetary policy strategy’, ECB Monthly Bulletin, June. European Central Bank (2004), The Monetary Policy of the ECB, European Central Bank. Fleming, J.M. (1971), ‘On exchange rate uniﬁcation’, The Economic Journal, 81. Frankel, J. and A.K. Rose (1998), ‘The endogeneity of the optimum currency area criteria’, The Economic Journal, July. Friedman, M. (1953), Essays in Positive Economics, Chicago: University of Chicago Press. Ishiyama, I. (1975), ‘The theory of optimum currency areas: A survey’, Staﬀ Papers, International Monetary Fund, 22, 344–83. Issing, O. (1996), ‘Europe: political union through common money?’, The Institute of Economic Aﬀairs. ——— (2000) ‘Europe: common money – political union?’, IEA Economic Aﬀairs, March.

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Kenen, P.B. (1969), ‘The optimum currency area: An eclectic view’, in Mundell and Swoboda (eds), Monetary Problems of the International Economy, Chicago: University of Chicago Press. Mundell, R.A. (1961), ‘A theory of optimum currency areas’, American Economic Review, 51 (1961), pp. 657–65. OECD (1999), ‘EMU: Facts, Challenges and Policies’, Organisation for Economic Co-operation and Development, Paris: OECD. Padoa-Schioppa, Tommaso (2001), ‘The European Union and the Nation State’, (The Hume Lecture 2000), Hume Occasional Paper No. 58, The David Hume Institute. Rose, A.K. (1999), ‘One money, one market: estimating the eﬀect of common currencies on trade’, National Bureau of Economic Research Working Paper 7432, December. Tavlas, G. S. (1993), ‘The “new” theory of optimum currency areas’, The World Economy, 1993, 663–85. Viñals, José (2000), ‘Monetary policy in a low inﬂation environment’, presented at the First ECB Central Banking Conference ‘Why Price Stability?’ in Frankfurt, 2–3 November 2000.

3.

The political element in monetary theory Marcello de Cecco

INTRODUCTION As this conference takes place in Darmstadt, I think it ﬁt to begin my lecture today by quoting a book whose English translation was preceded by an author’s introduction written in Darmstadt. It is, of course, Die Staatliche Theorie des Geldes, written by Georg Friedrich Knapp in 1905 and whose English translation appeared in 1924. In the introduction Knapp thanks J.M. Keynes, who we know had been the moving force behind the translation. This does not surprise us, coming directly after the publication of Keynes’s Tract on Monetary Reform. Keynes was always searching for elective aﬃnities with thinkers in his own as well as in other countries. The proposal of monetary stabilization by devaluation and straightforward monetary management, which he advanced in the Tract had been ﬁrst put forward, a few years before, by Piero Sraﬀa in his undergraduate dissertation. Keynes was in close contact with Sraﬀa and, by 1924, had succeeded in bringing him to Cambridge, snapping him up from Benito Mussolini’s vindictive clutches. It was natural for him to bring to the attention of English readers also the work on money which had, in the years before the war, caused such a stir in Germany. In the introduction to the ﬁrst German edition, G.F. Knapp had written: ‘I hope for the approval and perhaps the help of those who take the monetary system (or better, the whole system of payments) to be a branch of political science. I hold the attempt to deduce it without the idea of a State to be not only out of date, but even absurd, however widely these views may still obtain’. Most unfortunately for us, Knapp decided to shroud his analysis in arcane Greek neologisms of his own invention. Thus the commendable purpose following from his incipit ‘Money is a creature of law. A theory of money must therefore deal with legal history’ received in the rest of the book a demonstration made awkward by the strange Greek neologisms used to re-christen all monetary phenomena and institutions, and more generally all human behaviour. 55

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Keynes’s approval of Knapp’s incipit was in A Tract on Monetary Reform complete. And his derivations and demonstrations were argued in the current terms and expressions of a most elegant and persuasive modern English, conferring on the book an intellectual and practical importance in the whole world which Knapp’s arcane reasoning never achieved. Still, it was Knapp who persuaded Keynes and not the other way around.

LEGAL ORIGINS OF MONEY Money is a creature of law and the state, because it is by its nature, a collective phenomenon. It is therefore an eminently political institution, which it would be folly to analyse by means of an economic methodology restricted to the constrained maximising behaviour of individuals. Almost 150 years earlier than Knapp and Keynes, Ferdinando Galiani had been much more radical, in stating that ‘this science, which the modern French have, because of their supreme ignorance called “economic”, while they ought to have called it “political”, is really much more diﬃcult than it may appear. It reduces to an application of extremely simple general theories and extremely composite particular cases. He who thinks that he masters it just because he has understood the theory, is a fool: because its truths are so easy, plain, vulgar and inept that even a child can guess them . . . But its application requires an immense, profound and detailed knowledge of the country which one wants to give advice to’ (Sull’ Annona di Genova, in ‘Opere a cura di Furio Diaz e Luciano Guerci’, Napoli, Ricciardi, 1975, p. 735). Thus we have Galiani placing the whole subject of economics in the intellectual ﬁeld of politics, while warning about attempts to apply the principles of economic theory without giving the utmost attention to the context in which the events and behaviour under study occur. While Knapp and Keynes insist on the legal origins of the monetary phenomenon and, as the law is a creature of politics, on the political nature of it, the resemblance of the Neapolitan Abbè to the German and to the English thinker is only superﬁcial. Galiani, earlier than anybody else, asserted the gravitation laws of human behaviour to be found in what we now call individual utility maximisation under budget contraints, and thus thought that the root of all political action was egotistic individual welfare maximisation. But his caveat about applying economic theory without knowing to perfection the details of the institutional context of each individual case brings him back into an intellectual aﬃnity with Knapp and Keynes. And, of course, with Friedrich List.

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THE DISTRIBUTIVE JUSTICE AND COMMUTATIVE JUSTICE FOUNDATIONS OF MONETARY SYSTEMS Neither Keynes nor Knapp were jurists; nor was Galiani. What they were claiming about the phenomenon of money, and about attempts to theorise about it, had been studied by old jurists and political philosophers using the categories of jus civile and jus gentium, of distributive and commutative justice. It can be said, without much hesitation, that old scholars placed the phenomenon of money squarely within the realm of jus civile and distributive justice, while the monetary theory which gradually but inexorably prevailed between the sixteenth and nineteenth centuries (and became ‘la pensée unique’ in the last decades of the nineteenth century, thus causing the violent intellectual reaction of people like Knapp and Keynes), proceeded from the certainty that money belonged in the realm of commutative justice, of jus gentium. Old scholars were persuaded that money was one, perhaps even the most important, of the instruments of distributive justice, designed and used by the state to achieve and maintain political equilibrium. Distributive justice, according to Aristotle, was inherently geometrical, having to do with the relative positions of men in society. Monetary theory and policy should be therefore aimed at maintaining these relative positions in a state of longterm socio-political equilibrium. Most of these movements, of course, took place outside the space of the market. The invention of money was thus due to the need to have a stable unit of account, to reckon what people’s relative place in society was, what was due to them according to distributive justice. Money, however, was also an instrument of exchange between people belonging to diﬀerent gentes, therefore to diﬀerent political societies. Exchange between people of diﬀerent gentes, strangers to one another, would often take place in the market space. Money would be used not at its face value, as it would be in dealings between citizens of the same state, but at its intrinsic value, according to the weight and ﬁneness of the metals of which the coins used as money were made. It thus ceased to be an expression of sovereignty, a creature of the law, as it was used to regulate exchange between people subject to diﬀerent units of sovereignty. No more pretium, it would become merx. It was thus an instrument of simple commutative justice, where calculations could be made arithmetically, without having to consider the relative position in any society of individuals taking part in exchange, as they did not belong to the same societal equilibrium but to diﬀerent societies and states. It is the same sort of reasoning according to which merchants were subject to the lex mercatoria and citizens to the jus civile. The lex mercatoria was a product of the merchants themselves, dealt with transactions

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between merchants, who were supposed to hold themselves to the principles of mercantile behaviour, i.e. to proﬁt maximisation devoid of any respect for the position of men in society. Market prices were considered by deﬁnition as the only ones relevant in transactions, and money used was also taken not to be the expression of sovereignty but to be measured only by its weight and ﬁneness, thus respecting the principles of metallism. It is absolutely fascinating to see the two concepts of money, the two ‘philosophies of money’ (to repeat the apt title of a little book Herbert Frankel published some twenty-odd years ago to illustrate to economists the thought of Georg Simmel), ﬁghting one another but coexisting for a long time, with the gradual but seemingly deﬁnitive replacement of the legal by the metallist concept of money in the two centuries before the outbreak of the First World War. The temporary victory of metallism, its apparent apotheosis in the age of the international gold standard, however, does in no way lead to a real de-politicisation of money, to its becoming a neutral instrument through which no distributive activities take place. It simply means that a political class, that of the mercantile bourgeoisie, in the course of time, ﬁrst saw its rights of existence recognised and then succeeded in imposing its Weltanschauung on the rest of the polity. Thus the principles of jus gentium gradually replaced those of jus civile, and commutative justice became the only form of justice applicable to all citizens.

METALLISM AND THE RISE OF THE BOURGEOISIE Scholars like Karl Polanyi identify the spread of the gold standard to most countries in the ﬁfty years between the Franco-Prussian War and the outbreak of the First World War as the absolute triumph of the mercantile bourgeoisie, whose interests became society’s stated ideals. I have argued elsewhere, some twenty ﬁve years ago, that the spread of the gold standard in those few decades represented, on the contrary, the monetary outcome of national coalitions, often composed of landowners and industrialists, where the former agreed on the necessity of a stable standard to ﬁght the vagaries of silver prices and the latter on that of a convertible standard to attract foreign capital and to keep it in the countries where it went. Landowners had previously embraced the gospel of cheap money, of bimetallism, of the silver standard, which made exports of primary products easier and more proﬁtable for them. But the deep and unpredictable oscillations of silver prices, induced by political decisions like the adoption of the gold standard by the German Reich and the silver purchase policies of the US Congress, convinced them to abandon such an unstable monetary standard, which made economic calculations too uncer-

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tain, and to converge on gold. Thus a debtor’s coalition of landowners and manufacturers could come about. Both classes were highly indebted. But landowners were indebted to local credit institutions, and in local money, and earned gold currency by exports or by the payment of tithes, while local manufacturers were indebted in foreign currency to pay for imported foreign productive machinery and worked only for the domestic market. The wild gyrations of silver prices brought them together in favouring the gold standard, but the alliance was to prove only temporary. The formation of an international agricultural raw materials market in Europe between the eighteenth and the nineteenth century, in any case, drastically reduced the interest of the landed classes in a money functioning according to the principles of distributive justice, i.e. capable of maintaining domestic relative prices, denominated in imaginary money, at levels such as to assure the permanence of ancien régime societies based on status. The landed classes, which were the traditional wielders of political power, when they became large exporters of agricultural products, lost interest in the ancien régime monetary system, where relative prices were expressed and ﬁxed in imaginary money, rents were paid in gold coin which was never debased by the sovereign, and wages were expressed in silver or copper coins, or in divisionary coins of even lesser intrinsic content, which could be tampered with by the sovereign for ﬁscal purposes, and frequently were. The distributive justice inherent in such a régime was obtained by appropriate domestic policies, which did not rely on market prices to entitle the diﬀerent orders of society to the income which could maintain their relative status. Agricultural exports sold at internationally ﬁxed market prices made the great nobles lose their vested interest in maintaining the ancien régime monetary system. If they had revenues in gold other than their tithes, they acquired an interest in a rising price of gold in terms of silver, copper and other token money. They were won over to the market system and to a monetary system where the relative prices of coins were ﬁxed by markets. As long as the social status of the aristocracy had depended on the operation of distributive justice through the stability of a monetary system based on imaginary money, because all costs and revenues had domestic origins, the aristocracy stuck to the traditional monetary system based on imaginary money. When it started receiving gold for its exports, it became interested in the devaluation of all coins except gold ones and in prices ﬁxed in actual markets. We can think of the ancien régime monetary system as one where money was more important as a unit of account than as a performer of the other functions traditionally attributed to it by monetary theory. What was called the imaginary money system was actually a system of long-term price

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ﬁxing, where spot markets were only of residual importance for the pricing of goods and services. Long-term prices were used, as I said before, to maintain the diﬀerent orders of society in their traditional relative places. Imaginary money was thus instrumental in keeping socio-political equilibrium. But such equilibrium as was guaranteed by the system did not come about automatically. Ancien régime monetary policy deﬁnitely existed and at its core was the need to raise or lower the value of actual coins relative to those of the unit of account (the imaginary money) with the purpose of maintaining social relativities unchanged. One had his wage, or his tithe or its taxes (if it was the government) denominated in the unit of account, the imaginary money, but it was actually paid in another, real coin, and the good sovereign organised variations in actual coinage which followed movements in exogenous variables but disturbed the relative values expressed in the imaginary money, the unit of account, as little as possible or at least as gradually as possible. Thus the sovereign made himself the operator of a distributive justice among his subjects which would survive even the harsher realities of changes brought about by pure commutative justice operating outside the borders of the state and in transactions between the state subjects and foreigners. Of course, this diﬀerence, between a monetary system and a monetary policy moved by the need to administer distributive justice, and the outside realities represented by the values expressed by the metallic content of coins in foreign trade, could be kept only as long as the world of commutative justice remained outside that in which distributive justice was administered. This was possible only as long as the economic relations of a country with the outside world were minimal. As market relations applied to economic transactions with the outside world, the ancien régime monetary system would be disrupted by a prevalence of foreign trade on domestic trade, with spot prices obtaining in real markets and paid in coins valued by their metallic content. It is not without reason that the ancien régime monetary system remained in force also because there was a general dearth of monetary metals. As long as that was the case, a monetary system divorced from the metallic content of coins had reason to exist and to remain in existence. After the deluge of specie from America, it became harder to maintain a system based on relativities that were far from those established between metals in actual markets. Conventionally ﬁxed values respectful of relative social status had to give way to market-established ones. Imaginary money did not have much reason to survive when there was an abundance of metallic money. The unit of account function could now be performed in real markets by real coins, valued at their intrinsic value. It is no accident that the silver standard came earlier, as a metallic

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standard, than the gold standard. The latter stuck around as long as the gold bonanza from South Africa lasted. Obviously suﬃcient silver was available at an earlier stage to make it cheap enough to justify its use as real currency. And there was subsequently, and for a shorter time, suﬃcient gold to be cheap enough to serve as the base of real monetary systems in several countries. The interesting period to examine is that between the gold discoveries of California and those of South Africa. This is the period of the Great Depression of the 1870s, 1880s and early 1890s. Depression of prices, not of output, it has been maintained. And depression of gold prices, in gold standard countries. Silver countries experienced much less steeply falling prices. As long as there was enough silver to go around, however, and the banking system had not yet reached the level of development it had attained on the eve of First World War, the problem of the unit of account did not seem to reappear, as the printing press had not come into fashion again as a quick system to create enough actual means of exchange.

THE FIRST WORLD WAR AND THE TRIUMPH OF FIAT MONEY Everything changed with the First World War and the huge introduction of paper money in most developed and less developed countries. We can then see the interest of economists shifting back to the problem of money as a unit of account. With governments issuing enormous quantities of paper money to pay for their war and post-war expenses, could anyone seriously contend that prices were undisturbedly formed in markets by individual welfare-maximising private operators? The delusion that money had become de-politicised, carefully nurtured by marginalist economic theory at the time of the gold standard, could clearly not be kept up after the state, in most countries, had resorted so liberally to the printing press. If money was now in most countries ﬁat money and links to the metal standard had been cut almost everywhere, if exchange rates between paper currencies were ﬂuctuating, new rules had to be invented to study and regulate money. Or, as the mainstream economists thought, one could try to go back to the good old days of the gold standard, adopting the version suggested by Ricardo to economise scarce gold. A return to convertibility, they thought, was the only way of kicking the state out of the economic system, as it would not be able to tamper with the currency and with market prices. Commutative justice would prevail again, after its temporary war-time abeyance.

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KEYNES’S ATTEMPTS TO RETURN TO DISTRIBUTIVE JUSTICE Keynes, and like him many others, thought this was day-dreaming. Some did not believe the pre-war gold standard had not been a government policy like any other, adopted to favour the classes that beneﬁted most from it. Others thought that maybe the gold standard had been the triumph of commutative justice, of well-organised markets, and that money in it had been de-politicised and that liberty had ruled in its modern sense, as liberty from the state. But, even if this post-war invention of a pre-war heaven was a fair representation of reality, Keynes was also convinced that the world had been destroyed by the war; the centre no longer held. New rules had to be found on which to base a monetary system and a monetary policy. What was again needed was a money to serve as a stable unit of account, knowing that it was impossible to give it a ﬁxed or changing metallic content – a sort of modern imaginary money, to ﬁx again the relative values and positions in society. This meant, of course, that the state was not hopefully withdrawing from the scene and leaving the whole job to commutative justice and to freely functioning markets. It was, on the contrary, taking upon itself the task of establishing a monetary system on principles which would allow it to reﬂect socio-economic equilibria in each individual country, now that even the superﬁcial universalism of the gold standard was irreparably lost. Had all countries been facing the same problem, that of having forever lost a metallic anchor for their currencies, the ancien régime world would have returned in modern garb. There was, however, a country, the United States, which had emerged from the war having amassed all the gold previously held in Europe, and having piled up huge credits vis-à-vis the belligerent Allies. The US had kept its own monetary system functioning according to the principles of the gold standard and showed every intention of continuing to do so. Having also become the largest producer of both agricultural and manufactured goods in the world, and having a structurally positive balance of trade with the rest of the world, the US would have imparted a strong deﬂationary bias to the rest of the world, and the dollar would have performed the store of value function for the whole world, as other currencies were left in the unhinged status in which the war had plunged them. Keynes thought the situation was so novel as to require a fresh approach to monetary theory. He came out with a solution which became known as the theory of managed money. Starting from the unavoidable reality of the US gold standard, he tried to chart a course of action for other currencies, which could not serve as store of value as they lacked a strong metallic link. His eﬀort was to ﬁnd a way of minimising the eﬀect of the use of the dollar

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as a store of value by the citizens of countries other than the US. Later he would accept protectionism as a way of solving this tragic dilemma. In the 1920s, however, he tried the managed currency solution: how to reconstruct a monetary system without a ﬁrm metallic link and still capable of performing the functions of a stable unit of account and means of payment. He suggested a ﬂexible exchange rate as a way out. In this way the state would come out openly on the side of entrepreneurs and wage earners and against savers because he thought that investment was structurally weak in mature economies, while saving was excessive. The position of savers in Britain, he thought, had become too favourable before the war and should, through the management of the new ﬁat money system that had come about, be brought back to the relative place in society it had enjoyed in previous centuries. Thus the pound sterling ought to ﬁnd a new and lower parity with the dollar, and the managers of the currency ought to further bring it down without hesitation, if it failed to re-establish in Britain a satisfactory distributive justice equilibrium, one involving full employment of all available workers. As with mercantilism, also in this ﬁeld, Keynes’s stance appears as a sort of reversion to pre-classical theory. It can be advanced that his monetary theory, based as it is on the pivotal role of the state in the supply of money, and paying as it does great attention to the ﬁscal function of money, is akin to what we have called ‘ancien régime monetary theory’. Money does what the state wants it to do. Monetary demand theory, on which his own Cambridge School had focused, and which is an attempt to reconcile money with the rest of neoclasssical microeconomics is, until the General Theory, played down. Money as a political phenomenon is what Keynes is interested in in most of what he does between Indian Currency and Finance and The General Theory, with the Treatise spanning both ﬁelds.

THE RESURRECTION OF MONETARY ORTHODOXY While Keynesian monetary theory is being developed, however, mainstream economics is directing its reﬂexions to very diﬀerent problems. Its most intelligent theorists, like Hayek and Mises, see as the most important problem of monetary theory the de-politicisation of money, the organisation of a monetary system where the impossible feat will be achieved of exorcising money’s capacity to be an instrument of distributive justice in the hands of its issuer and manager, the state. A neutral money, one that will leave relative price formation to the forces working their way towards equilibrium in the private economy, is what orthodox economists want to

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devise, and in von Mises’s opinion the gold standard ‘like all human creations, is not free from shortcomings, but in the existing circumstances there is no other way of emancipating the monetary system from the changing inﬂuences of party politics and government interference, either in the present or in the future. And no monetary system that is not free from these inﬂuences will be able to form the basis of credit transactions’ (from the preface to the English edition of The Theory of Money and Credit, Jonathan Cape, London, 1934, republished by Liberty Press, Indianapolis, 1980, p. 29). As a chapter of the German edition of his book, Mises had republished his celebrated article ‘On the Classiﬁcation of Monetary Theories’, that had ﬁrst appeared in 1917–19. A more earnest apologia of the method of neoclassical economics for the study of money has never appeared. Still, the main tenets of Mises’s analysis have passed directly into mainstream monetary theory and are the ideological background of most textbooks on money even today. What was still contentious in Mises’s own time, and had to be aﬃrmed by conscious polemical argument, has now become orthodoxy, that can be stated without either polemic or proof. Mises’s article is an expression of triumphant marginalism. Take the dismissive certainty with which the canonist’s ideas on money are treated. ‘Canonist jurisprudence, ignorant of the ways of the world, saw the origin of the employment of money in the command of the state; it taught that money was a valor impositus.’ ‘Others’, he goes on to say, ‘working by analogy, compare money to blood in the human body, or to language, which facilitates interchange’. ‘All these points of view’, says Mises, ‘have one thing in common: they cannnot be built into any system that deals realistically with the processes of economic activity. It is utterly impossible to use them as foundations for a theory of exchange’. These are, he says, the ‘acatallactic theories’. Now contrast what he aﬃrms about the so-called catallactic theories, those which insert money into the theory of individual utility maximisation. They have been so successful that Frank Hahn, no enemy of marginalism, had to note disconsolately in 1980 that there is no place for money in general equilibrium theory, that is in the latter-day (and somewhat paradoxical, in view of the pivotal role played in it by the auctioneer) manifestation of methodological individualism. Several decades before the same remark had been made by Schumpeter, though he was another great admirer of general equilibrium theory. Mises seems to have presumed too much of the so-called scientiﬁc approach he was advertising, at least as much as he was dismissive of acatallactic theories. I think one can go a long way by applying, as I have tried to do in this chapter, the Aristotelian categories of distributive and commutative justice to monetary theories. In the light of this distinction, one can, for instance,

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see Hicks’s attempt to divide the economic system into two parts, one which works by ﬁxing prices and the other one by ﬂexing prices, and read his seminal article ‘A suggestion for simplifying the theory of money’ in this new light.

THE POLITICAL ELEMENT IN CONTEMPORARY MONETARY THEORIES But enough of these old disputes. I want to turn, in the last part of my chapter, to more recent advances in monetary theory to see how one can detect the political element in them. About neomonetarism and neoquantitativism there is not much to say. Having read the Austrians, Mises and Hayek in particular, we can see Friedman and his school as epigones, as latecomers at the end of the nineteenth century’s new attempt to exorcise the state from monetary theory, to shield the so-called naturally formed relative prices from the malign inﬂuence of man-made money. In all honesty, it must be recognised that Friedman is just as adamant in his attempt to neutralise private banks, to prevent them from inﬂuencing relative price formation and individual-maximising behaviour. The Chicago School is against anybody, bureaucrat or banker, who by a man-made institution like money, be it state money or credit money, wants to tamper with relative price formation. But here again the garb is modern but the content is rather old, if one remembers the Italian neoclassical school, in particular Pareto, De Viti De Marco and Einaudi, and their violent expostulations against ‘false money’ and less than one hundred per cent banking systems. Modern banking systems’ capacity to pre-empt economic resources or at least direct them to particular uses, in other words, to centralise an economic system which in their view was eﬃcient only if it was as decentralised as possible, was fully detected by these skilled economic theoreticians at the end of the nineteenth century. Thus orthodox economists’ battles have been waged in the monetary ﬁeld against state seigniorage and the modern banking system’s capacity to create money. In the end, therefore, even in the twentieth century, we can distinguish monetary theories according to the same categories we have used hitherto. Obviously, the number of economists who try to liberate the economic system from the interference of state seigniorage exercised through monetary management in the twentieth century is very large, and from the 1970s onwards it becomes overpowering. It is, however, necessary to mention one school of monetary economists who have really swamped the ﬁeld in the last couple of decades. I refer to the new classical school of theorists who

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adopt rational expectations as the foundation of their theoretical constructs. One of the great shibboleths of the classical economists had been money illusion. Money illusion can be seen as the theoretical second coming of the medieval doctrine of ‘faux-monnayeur’. Sovereigns who clipped coins or changed the face value of them with respect to the instrinsic content were venial sinners. But those who instructed their mintners to alter the alloy of which a coin was made were mortal sinners, because they used their superior knowledge to fool citizens who had no means of assaying the chemical content of the coins. Dante had them ﬁrmly consigned to the eternal pains of a special section of his Inferno. Money illusion is not based on such drastically asymmetric information between sovereign and citizens. But it relies on an unfair advantage the sovereign has over the citizen. The rational expectations school, by saying that you cannot fool any of the people any of the time, because people know the model according to which the economy works and understand what the government is doing when it tampers with the money supply or with ﬁscal policy, thus negate any, more than temporary, monopoly of information on the part of the government. Economic policy and in particular monetary policy can only distort the natural functioning of the economy if it comes to private agents as a surprise. There are thus two ways of using the new theoretical approach, and both have been explored. Either it can serve as the latest version of the neutral money story, as a tranquillising view of the inevitable triumph of the utility-maximising individual. Alternatively, the focus can be placed on the equally old story of the predatory state’s attempts to expropriate citizens. The state, according to Lucas and Co., is the old bogey ﬁrst put on the scene by Saint Augustin in the fourth century: it is not an expression of the people, but an enemy of the people. It creates, by its violence, a need for protection, and then oﬀers itself to the people as protector. The new-classics are only the latest comers in this view, authoritatively preceeded by the realist school, which starts with Machiavelli and whose most illustrious modern exponents are Gaetano Mosca and Vilfredo Pareto. Against the political class, according to Lucas and Co., the citizen wins in the long run, because, as they say, he knows the model, but a subtext of this story is dedicated to examining in detail the misdeeds of which the state is capable by carefully pretending to be virtuous and then unleashing an unexpected bout of inﬂation, which, in the short run, catches the citizens oﬀ their guard. We have come a long way from Keynes, or from the pre-classical scholars who preached solidarism and corporatism, or saw, as the physiocrats, the sovereign as the ﬁrst landowner of the country. Money is a weapon in the hands of a rent-seeking state, which is bad by deﬁnition and can go to

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the wily extremes of pretending to be virtuous to destroy the citizens’ defences ﬁrst by earning their trust and then by devilishly bringing back the inﬂation which will allow it to maximise its rent. To read economic journals today is to encounter a state which is only able to use its powers to manage money to maximise the welfare of the politicians and bureacrats of which it is composed. Politicians have only one goal in mind, that of being re-elected, and, when their party has conquered government powers, they try to inﬂuence the monetary authorities into implementing monetary strategies which will secure re-election. Economists’ duty is thus to study ways to insulate society from this peril. The most obvious suggestion is to take monetary policy out of the politicians’ hands and give it to conservative central bankers who are either appointed for life, if we believe them to be individuals of superior integrity who ought to be shielded from political inﬂuence, or, if we believe them to be fallible human beings, get kicked out if they do not achieve a certain stated minimum inﬂation rate objective, while they get a wage rise if they do.

THE THEORETICAL UNDERPINNINGS OF CONTEMPORARY MONETARY REGIMES These matters, however, have also invested civil society. Actual laws have been passed to restrict non-elected central bankers’ objectives exclusively to inﬂation ﬁghting, with the inﬂation objective rigidly spelled out in law. This is, as we know, the case of the European Central Bank, while in New Zealand the central bank governor is subjected by law to the opposite incentives of wages rises and dismissal. The temptation of Pareto’s and Mosca’s political class seems to have aﬀected even the judges of the Bundesverfassungsgericht. Asked to pronounce itself on whether the ratiﬁcation by the German Parliament of the Maastricht Treaty constituted a diminution of the principle of democracy which is the basis of the German Grundgesetz, the Bundesverfassungsgericht ruled in 1993 that this has actually happened because the second added paragraph of art. 88 of the Grundgesetz which was added after Maastricht to make the German Constitution consistent with the Treaty of European Union ‘has excluded an essential political area, where the maintenance of the value of money supports individual liberty and where money supply determines the public ﬁnances and the political areas which depend on them, from the regulatory power of sovereign authorities and, barring amendments to the Treaties, from parliamentary control of areas of responsibility and means of action. If monetary policy decisions are placed in the hands of independent central banks on a basis of complete autonomy, the

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use of the sovereign powers of the State is taken away from the direct responsibility of the national or of the super-national Parliament, with the aim of taking monetary matters away from the inﬂuence of interest groups and of those who wield political power and may be worried about their own re-election’. Thus the German Constitutional Court justiﬁes the diminution of sovereignty implied by the German Parliament’s acceptance of the Treaty of European Union which established the totally independent European Central Bank with the need of ‘taking monetary matters away from the inﬂuence of interest groups and of those who wield political power and may be worried about their own re-election’. There is yet another attempt to neutralise, de-politicise money, which is an all-powerful instrument likely to fall into the wrong hands. It is based on the assumption that non-elected bureaucrats are more virtuous than elected politicians and less worried about their own careers after they ﬁnish their stint at the Central Bank, or that they are less likely than members of parliament to fall prey to powerful interest groups. The position of the Treaty of European Union, accepted and justiﬁed as we have just seen by the German constitutional judges, is very diﬀerent from the US Congress in 1913, when they established the Federal Reserve System. They showed no intention of creating an independent central bank, which they made subject to the sovereign power of parliament and accountable to it. They also did not seem to believe in the least the monetarist axiom that the money supply is the sole determinant of the price level, which is, on the contrary, the philosophy embraced by the makers of the Treaty of European Union. As a result, as far as we Europeans are concerned, our new monetary union is ruled by the quantity theory of money and by the theory of rational expectations, which are behind, respectively, the ﬁrst and the second pillar of the ECB monetary policy instruments, money supply control and inﬂation targeting. Actually, I believe that we have been given by the makers of the Treaty of European Union a seemingly monetarist, rational expectation European Central Bank for completely diﬀerent reasons. The greatest fear, on the part of the Northern European politicians who contributed to the drafting of the Maastricht Treaty, was that the Southern countries who were going to be members of the Union could pre-empt, by their spendthrift ﬁscal policies, some of the national incomes of the parsimonious northern countries. They tried to prevent this by the stability pact, but also had to make sure that the European Central Bank, where each participating central bank had an equal vote, was neutralised in its inﬂationary capabilities and thus they conﬁned it to inﬂation ﬁghting. Furthermore, the ECB gave itself a strict two per cent price inﬂation target to respect. Thus the spendthrifts would not prevail in the New Europe.

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In the end, therefore, the political element in monetary theory appears to play the part of protagonist even in the European monetary union plot. The drafters of the Maastricht Treaty, like the drafters of the Federal Reserve Act, seem to have believed in two diﬀerent types of monetary theory, but it is more probable that they just used the monetary theory they found convenient to further their respective political goals. This is very comforting for people who believe in the primacy of democratic political processes, while economists may feel that they are not the power behind the throne.

4.

Monetary reform in France: the French economists and the stabilization of the franc in the 1920s Cécile Dangel-Hagnauer and Alain Raybaut*

1.

INTRODUCTION

The suspension of the convertibility of the European currencies and the episodes of high inﬂation and instability, all of which were the result of the economic disruptions caused by World War I, drove economists to reﬂect on the causes of these disturbances and to seek remedies for them. The conditions of Great Britain’s return to the gold standard, the critique voiced by Keynes in The Economic Consequences of Mr Churchill are well known, as is the diﬀerent solution adopted by France: instead of returning to pre-war parity, the French government engaged in a two-year stabilization process that led to an 80 per cent devaluation in June 1928. Thus, rather surprisingly, it was the ‘incompetent’ French economists who succeeded in persuading policymakers and in particular the ‘French Minister of Finance (Whoever he is or may be)’ (Keynes, 1925) to take the right decision, notwithstanding the hostility of public opinion, of most politicians and even of the majority of economists, whereas Keynes failed to convince Winston Churchill that the reinstatement of the gold standard in 1925 at pre-war parity would have severe consequences.1 The contributions to economic theory of the French economists who worked to convince Joseph Caillaux and Raymond Poincaré were not at the level of those of the ‘magician of Cambridge’ (Rueﬀ, 1975). Stranger still, the positions of the diﬀerent authors in the area of monetary and exchange rate theory were rather dissimilar, ranging from Nogaro’s nominalism to Rueﬀ’s beliefs in the self-equilibrating virtues of the market. However, on the subject as to whether to revalue the franc or accept the verdict of the foreign exchange market, authors such as Charles Rist, Charles Gide, Bertrand Nogaro and Jacques Rueﬀ all agreed that it was advisable to stabilize the franc at its market level. In fact their contributions to the debate were of diﬀerent 70

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kinds. As vice-governor of the Banque de France, Rist was directly involved in the stabilization process, while Nogaro played a role as member of parliament and member of the Aristide Briand Cabinet. Rueﬀ was only thirty in 1926 and his key contributions to economic and political debate were still to come. He nonetheless participated in the technical tasks required by the stabilization process. As for Gide, who had reached the age of seventy-nine, he carefully avoided any involvement in the political debate, while actively voicing his position in the press. All four, however, had published articles in the Revue d’économie politique, of which Gide was both the founder and the chief editor. Another French economist to have published important articles in the Revue was Albert Aftalion. While not taking part in the public debate, Aftalion had gained the high esteem of his colleagues in the academic sphere. Between 1924 and 1926 he published a series of articles, the majority of them in the Revue, on the relationship between money, prices and exchange rates, thereby providing empirical and theoretical arguments in support of the position of the ‘stabilisateurs’. The process of convincing oﬃcials at the Banque de France was, however, a long and tedious one, the ﬁnal positive outcome of which Rist must be credited with. It was Rist who managed to convince Governor Moreau of the Banque de France that stabilizing the franc was the right solution. It was then up to Moreau to use his authority to tip the scales and gain the support of Poincaré, as shown in the second section of this chapter. The third section is devoted to the intellectual inﬂuence of Aftalion. The respective roles of Gide, Nogaro and Rueﬀ are examined in the fourth section, leaving concluding remarks to the ﬁnal section.

2.

IMPLEMENTING THE STABILIZATION OF THE FRENCH FRANC: RIST, MOREAU AND POINCARÉ

At the end of the war, many believed that the return to convertibility at prewar parity was imminent. As years passed the facts were to contradict this prediction. The reasonable solution was to stabilize the franc, as the conclusions reached by the Committee of Experts appointed in 1926 were to show. All that was needed then was to convince the government – not an easy task, as we shall see. 2.1

The Origins of Monetary Instability: 1919–26

Remembering that the French Treasury had quickly repaid its debt to the Banque de France after the defeat of 1870, thereby enabling the rapid

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return to the gold standard, the French government naively believed it could take the same course of action in the wake of World War I. It thus accepted the terms of the Convention of April 1920, which entailed an active policy on the part of the government alone. It was up to the government to work out its budget so as to provide the 2 billion francs that were required each year. . . . The Banque de France . . . could remain passive. All it needed to do was to wait for the eﬀects [of deﬂation] on the exchange rates, on prices and on the circulation, and the day would come when the repayment of bank notes into gold at the rate prevailing before the war would become again automatically achievable (Rist, 1928, p. 84).2

Reflecting on the events of this period, Sédillot notes: ‘If exaggerated lack of conﬁdence is fatal, the excess of conﬁdence is hardly less so’ (1959, p. 58). Some observers quickly became aware nonetheless of how serious the situation actually was. Commenting on budget ﬁgures, Rist (1924, p. 71) notices that between 1921 and 1922: The government has reduced its debt to the Banque de France by 2 300 million. But, at the same time, it has increased its short-term debt by 10 850 million. How . . . could it manage otherwise, since the general budget alone (leaving aside the special budget for the freed regions, known as the budget for ‘recoverable expenses’) was closed showing a deﬁcit of 5 415 million, which reached 5 480 million in 1922? The budget published in July 1923 after long parliamentary discussions shows an apparent equilibrium. But this equilibrium does not include the repayments to the Banque or other expenses that wrongly appear in our opinion in the budget for recoverable expenses.

Obviously France was counting on Germany paying for the reparations. Thus short-term debt sharply increased as a result of issues of National Defence bills, while the inﬂationary ‘advances’ of the Banque de France to the Treasury continued. In fact, as Rist (1928, pp. 84–5) recalls: ‘The Banque was subject, against its will, to the repercussions of a ﬁnancial policy over which it had no control and which, undeniably, however restrictive it could have been, would never have reached the goal that had been set’, namely the return of the franc to its par. While monetary instability developed in continental Europe, culminating in the German hyperinﬂation crisis, Great Britain and the United States stopped supporting the franc in the spring of 1919. The pound and the dollar were worth respectively 60 and 11 francs at the end of 1919. By the beginning of 1924, they had reached respectively 85 and 20 francs. Exchange controls were reinforced but were ineﬀective in containing capital ﬂight and speculation. In the spring of 1924 the exchange crisis intensiﬁed, the pound and dollar reaching respectively 116 and 27 francs.

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Fortunately the Poincaré government received the assistance of a banking pool, comprising American banks led by Morgan and British banks headed by Lazard, in the form of a loan of 100 million dollars and four million pounds. This provided the Banque de France with the means to fend oﬀ speculation, while the Poincaré government proposed the vote of additional taxes. Within two months the pound fell to 67 francs, the dollar to 15 francs and Poincaré was hailed as the country’s saviour. The franc rallied, but only temporarily. In May 1924, disapproving the higher taxes, voters elected a new majority headed by the Radical party, allied with the Socialists. Eager to promote further revaluation, the new government planned to ﬁnance the public deﬁcit by what boiled down to a tax on capital. This of course triggered greater ﬂight of capital, while banks energetically refused to provide the government with short-term loans. In parliament the political struggle intensiﬁed, delaying and sometimes even impeding the vote of the budget. Debt repayments were thus made impossible, while the advances granted to the government by the Banque de France increased considerably. Lack of conﬁdence turned into panic, as ﬁnancial and political disaster appeared to be inevitable. 2.2 The Plan of the Committee of Experts and the Appointment of the Poincaré Cabinet Chaired by Charles Sergent, a Committee of Experts was established in May 1926, with the mission of advising the minister of ﬁnance on the necessary measures to be taken to restore the ﬁnances of the country. It comprised representatives of the banking sector and of large industrial ﬁrms, the director of the Bank of Algeria, Emile Moreau, the vice-governor of the Banque de France and two professors from the Law Faculty of Paris, Gaston Jèze, a specialist in public ﬁnance, and Charles Rist. In his book Jèze emphasizes that the Committee’s members ‘worked in complete independence . . . [and] in full harmony’ (Jèze, p. 496). The Committee’s report was presented to the government on 3 July, at a moment when the situation was sharply deteriorating. First, it stigmatized the errors that had been committed: the delay in voting taxes; the abuse of borrowing and of inﬂationary policies; the tenacious illusion that Germany would pay for the major part of the burdens of the war and that the United States and Great Britain would generously write oﬀ the debt they had granted France to ﬁnance her defence. Second, the Committee considered that ‘the return of the franc to its par was a wild dream, a sheer economic and ﬁscal impossibility. The problem was not to revalue, but to stabilize the franc’ (Rist, 1928, p. 85). Actually the Committee did not recommend passing a law on stabilization immediately. Rather the experts believed it was essential to begin by

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implementing a de facto stabilization, a process involving both technical and psychological aspects. It was ﬁrst necessary to restore conﬁdence in the currency. It was important, Jèze wrote, that ‘the French and foreigners not fear for the safety of their investments, that they believe in the respect of prior commitments and that they expect a continuity in the views that are voiced without which no plan can be enforced’ (Jèze, op. cit., p. 498). The Experts’ propositions were thus twofold. First, they aimed at straightening out the public ﬁnances. This required stricter budgetary procedures as well as a sharp compression of public expenses and the levying of new taxes. It would also entail renegotiating the external debt, reducing borrowings, forbidding the further issuance of National Defence bills and the gradual reduction of the Banque de France’s advances to the government. Second, their propositions concerned the Banque de France and how it was to go about stabilizing the franc. As Rist notes, ‘far from remaining passive, the Banque was expected . . . to play an active role’ (Rist, 1928, p. 86). This meant providing the Banque with the proper means (the Experts were alluding here to the loan granted to the Banque de France in 1924 by the American and British banking pool), ‘while waiting for the natural return of capital that would deﬁnitely secure the stabilization process’ (Jèze, p. 502). However, as Rist writes (1928, p. 86): The experts surely remembered [that] instead of putting an end to the subsequent quick rise of the franc thanks to unrestricted purchases of the foreign currencies oﬀered for sale, thereby rebuilding a guarantee fund that could be used to face future crises, [the Banque de France] had tolerated that the franc return to levels that everyone knew could not be maintained.

Rather the Experts declared that the Banque de France should be authorized to make such purchases. Accordingly the rigid ceilings that restricted the central bank’s currency issuances should be removed. The Experts proposed ‘in accordance with the persistent tradition of the Bank of England concerning the purchase of gold, to eliminate all limits to the issuance of bank notes against either precious metal or against cheques drawn on countries committed to the gold standard’ (ibid., p. 86). The Committee concluded that such measures, ‘applied in gradual and logical order’, would suﬃce to improve the situation, noting however that the process would be accompanied by diﬃculties and hardships that any postponement would only worsen. Even before the oﬃcial publication of the report, Briand, then at the head of the government, declared he intended to implement it. Caillaux, the minister of ﬁnance, also gave his assent, subject to reserves as to the size

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of the ﬁscal eﬀort that was required.3 However, Radical and Socialist party members, Léon Blum in particular, who then formed the House majority, after having greeted the appointment of the Committee with distrust and ‘even great hostility’ (Jèze, p. 496), blaming most of its members for belonging to big business and to the banking industry, attacked the Experts’ report vehemently. Nonetheless, no majority emerged within the House as to what policy to adopt and the Briand cabinet was overthrown. The new cabinet formed by Edouard Herriot on 19 July had no deﬁned programme, but only announced it did not intend to adopt the Experts’ plan. When Herriot appeared in the House, ‘there was a movement of stupor and indignation. One had the feeling that the mess was going to get worse’ (Jèze, p. 504). Indeed, the crisis reached its height on 21 July, the pound sterling reaching the maximum level of 243 francs. The Herriot cabinet was immediately overthrown. The Treasury now held only one million francs at the Banque de France, whereas it was expected to pay back 1 200 million francs of debt at the end of July! Thus, the new governor of the Banque de France, Emile Moreau, who had been appointed on 24 June by Caillaux, notes that on 21 July, we had to warn the Treasury that if it did not immediately ﬁnd a way to replenish its current account with readily available resources, we would have to contemplate suspending our payments on behalf of the government over the entire territory (Moreau, 1954, p. 36).

It is in this critical context that Poincaré, who had already saved the day in the spring of 1924, was called upon on 23 July. As soon as the new cabinet was appointed, capital began moving in the opposite direction: on 23 July the pound fell back to 208 francs and to 196 francs four days later. Poincaré easily gained the support of the banks so that the government was able to meet its commitments in time. Moreover, the large amounts of outstanding short-term debt became less of a threat thanks to the return of conﬁdence. Better still, several big taxpayers agreed to pay their taxes in advance. In addition, Poincaré succeeded in obtaining the entry into his cabinet of leaders from the Radical party (including Herriot), which weakened the opposition in the House. 2.3 Persuading Moreau and Poincaré: from the de facto Stabilization to the de jure Stabilization Poincaré’s presence alone is not what made the stabilization process possible. Although he always denied it publicly, Poincaré took a series of measures that were globally in agreement with the main conclusions of the

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Experts.4 That he did adopt these measures owes a lot to the work of persuasion accomplished by Moreau, who himself was won over by the analyses of the new vice-governor, Charles Rist. Indeed neither Moreau nor certainly Poincaré were naturally inclined to fully consider the dangers that the sudden and signiﬁcant turn of conﬁdence implied for the French economy. Moreau was unquestionably a well-proven ﬁnancier, having been the governor of the Bank of Algeria for twenty years. However, albeit determined to stabilize the franc, Moreau hoped ﬁrst for its strong re-appreciation. His memoirs bear witness to the considerable eﬀorts made by Rist to ﬁnally persuade him to set a ceiling to the rise of the currency. According to Rist the ongoing rise of the franc would certainly lead to a decrease of domestic prices but also to a drop in exports and to unemployment. The ensuing depression would generate social unrest and require a decrease of nominal wages that would jeopardize the chances of straightening out the public ﬁnances. The recent events in Great Britain were a perfect illustration of the diﬃculties that would arise. Hence the current level of wages ﬁxed a boundary to the re-appreciation of the franc that was not to be crossed.5 The solution lay, as the Experts had suggested, in the Banque de France freely purchasing whatever amounts of foreign currency it deemed necessary to put an end to the upward speculation. Quite fortunately Governor Moreau ‘was a man whose beliefs were as ﬁrm as slow to be formed. Once they had taken shape, his resolve became unwavering’ (Rueﬀ, 1954, p. viii).6 All that was needed then was to convince him: pointing to the tangible signs in France that an economic depression was in the oﬃng and to the harmful eﬀects of the revaluation in Britain, Rist and the Director of Economic Studies, Quesnay, succeeded in making Moreau share their analysis. Once converted, Moreau considered it was his duty to convince Poincaré as quickly as possible and even by force. Poincaré, ‘whose intelligence [could] understand everything’ (Rueﬀ, op. cit., p. vi), quickly grasped that the devaluation would aﬀect mostly the lower middle class of rentiers, the civil servants and the intellectuals, while beneﬁting tradesmen, the industry and the ﬁnancial sector. Actually those in favour of stabilization belonged mainly to big industry (not to the banking sector or small business, not to mention the farmers and tradesmen).7 In France not only the conservatives but the members of the Radical Party as well remained opposed to stabilization until 1928, and even the Socialist Party, rather in favour of stabilization, opposed the ‘bourgeois’ stabilization when the Poincaré government decided upon it. Thus Poincaré anticipated the protests that a devaluation would produce. As Rueﬀ notes (ibid.), he was especially aware of

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the blow that [would] be dealt to the tradition of enrichment thanks to hard work and savings. . . . All this he hate[d]. Thus he [was] prepared to oppose as strongly as he [could] the conclusions that his reason and his patriotism [would] eventually impose upon him. The only policy that [appeared] morally acceptable to him [was] the return to the 1914 rate.

The task was therefore not an easy one for Moreau. With the assistance of Rist, he relentlessly devoted his energy, from the summer of 1926 to the month of June 1928, to overcoming Poincaré’s long hesitations. In fact, by the summer of 1926, Moreau and Rist thought they had already convinced Poincaré and the majority of the Regency Board of the Banque de France. On 7 August a law was passed, creating a special fund for the redemption of the National Defence bills and the amortization of the government debt. It authorized the Banque de France to buy coins of gold or silver and foreign currency at their spot market price. It also reduced the cap on the Banque’s capacity to issue currency to ﬁnance these purchases. In line with the Experts’ conclusions, the law opened the way to monetary reform. Notwithstanding, while contributing to rebalancing the budget and giving the Banque the means to prevent the negative consequences of an overvalued franc, the law only set up transitory measures. As underscored by Rist, it did not establish a ‘normal monetary regime’ based on the free ‘circulation of capital between the largest world markets’, which could ‘only resume as the result of legal stabilization, that is, with the return to the exchangeability of bank notes for gold’ (Rist, 1928, p. 102). Unfortunately, Moreau notes that Poincaré had become hostile again to stabilization in the autumn of 1926. Thus he deferred taking any decision before the month of February 1927. This led him on 19 November to listen ‘to Mr Sergent expound the dangers of an abrupt rise of our currency with visible disfavour’ (Moreau, 1954, p. 164). Surprisingly this did not prevent him from asking the governor the following day to call a meeting of the Banque’s Regency Board to decide on an intervention to stop the rise of the franc, and to do so again two days later! However, only in December 1926 was a decisive step taken that put, temporarily, an end to Poincaré’s wavering. Indeed on 20 December the pound had fallen below 120 francs: the market appeared to be overreacting and the franc began rising ‘beyond reasonable limits’. Faced then with the growing concern among his collaborators, Moreau decided unilaterally to take the decision ‘to defend the price of 120 francs to one pound at all costs and to stand in the way of any further increase of our currency’ (Moreau, 1954, p. 185). From that moment on the Banque’s interventions maintained the franc’s exchange rate within narrow limits. The de facto stabilization had been achieved. Still, while he had abandoned the wild dream of a complete revaluation,

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Poincaré was not ready to set up the legal framework required for the de jure stabilization that Rist and Quesnay, in particular, thought should be achieved rapidly. As Rueﬀ notes, both were quite aware of the instability of the franc: many hoped, they knew, there would be a new upward phase. They observed ‘with growing concern the speculation’ that was ‘drowning’ the market under a ‘ﬂood of capital either re-entering the country or imported from abroad’ (Rueﬀ, op. cit., p. x), a reaction to the balanced budget, achieved since July 1926, and to recovered political stability, Poincaré having been triumphantly re-elected in April 1928. So Rist and Quesnay resumed their eﬀorts to persuade Moreau there was a need for legal stabilization. By the spring of 1928 they had won him over. This time again all that remained was to convince Poincaré who ‘proved once again to be the most tenacious of contenders’ (ibid.). Moreau argued that the price of 125 francs to one pound had prevailed for several months and that the economy had adjusted to it. Insisting it was necessary to stabilize the franc very rapidly at this level, Moreau threatened Poincaré he would go as far as to resign if no decision was taken. It was a diﬃcult struggle, Moreau recalls in his memoirs, for facing me was the most noble of all sentiments in the country. It was a real tragedy. To those who like [Poincaré] said to me: ‘It is necessary for the government to respect its commitments, one must not impoverish the middle classes’, I was obliged to answer: ‘That’s impossible, we need to stabilize the franc. Respectable as is the past, it is necessary to think of France’s future’ (Moreau, op. cit., p. 573).

Until the end, Rist and Moreau faced Poincaré’s own constantly renewed convictions. But on 21 June, while listening to Poincaré address the House, they knew the battle had been won. The law of stabilization deﬁning the new franc was voted on 28 June 1928. The weight in gold of the Poincaré franc was 65.5 mg of gold of a ﬁneness of 0.9, that is, one ﬁfth of the weight of the Germinal franc. As Rueﬀ writes: It took two years to convince Mr Poincaré that the convertibility of the franc at an economically founded level was indispensable for the security of the nation. The scruples he overcame testify that, in public action, the most diﬃcult and most commendable task is more often than not to recognize one’s duty rather than to accomplish it (Rueﬀ, 1954, p. xiii).

3.

THE INFLUENCE OF AFTALION

That Rist played a decisive role in the stabilization process is thus undeniable. The interesting question to raise here is whether Rist and others had

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been inﬂuenced by other economists. The analysis of Rist’s writings does seem to indicate that Aftalion exerted an intellectual inﬂuence on the actors of this important historical moment. 3.1

Rist’s Deﬂation in Practice

Rist is especially known as the co-author with Gide of the Histoire des doctrines économiques, ﬁrst published in 1909. Rist met Gide in Montpellier where he was ﬁrst appointed professor. As recounted by Jean-Marcel Jeanneney, that is when they decided to write a history of ‘doctrines’, not one of ‘ideas’, because ‘in those days, one did not speak so much in terms of economics as of political economy, that is of a subject matter the purpose of which was to shed light on the way policies were conducted’ (Jeanneney, 2000). To this Rist was to remain faithful all his life through, one of his last books being Histoire des doctrines relatives au crédit et à la monnaie depuis John Law jusqu’à nos jours. By 1914 he was recognized as a specialist of monetary matters and called upon by the governments of Austria, Rumania, Germany and Portugal, all countries suﬀering from hyperinﬂation in the wake of the First World War. On the basis of this experience, Rist published La déﬂation en pratique in 1924. There are mainly two forms of deﬂation according to Rist. ‘Outright deﬂation’ (déﬂation radicale) is the permanent destruction of means of payment that sometimes accompanies repayment of government debt. ‘Moderate deﬂation’ (déﬂation modérée) is the temporary reduction in the money circulation resulting from the repayment of government debt to banks, the latter remaining free to use the means of payment returned to them to ﬁnance subsequent business needs.8 For Rist, while deﬂation could be a means of promoting the return of the currency to its parity and of restoring the wealth of agents previously despoiled by inﬂation, its eﬀects on the economy could be extremely damaging. In his book Rist explains the link he sees between deﬂation, the exchange rate and the budget deﬁcit. Observing the post-war events, his belief is that, in the case of a budget deﬁcit, the additional issuance of Treasury bills inﬂuences the rate of exchange ‘directly’ (Rist, 1924, p. 74). He writes: ‘Today, the situation is very diﬀerent: the French exchange market is subjected to direct inﬂuences of which the variations in the price level are merely repercussions’, adding that: ‘Short-term capital movements are amongst the most important of these inﬂuences’ (ibid., p. 75). This raises the question as to what determines such movements. Rist’s answer is: expectations, ‘predictions about the future’, and among them, the fear of inﬂation. ‘What then’, Rist asks, ‘is a continuous issuance of new National

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Defence bills if not the threat of future inﬂation?’ Indeed, because a revival of business would require a greater supply of currency, achieved by the discounting of the Defence bills held by the public, it would produce a drop in value of the franc and trigger an increase of domestic prices. Thus inﬂation would eventually occur. Interestingly Rist considers that the external depreciation of the franc precedes its internal depreciation, the ﬁscal situation being at the root of the whole process. In other words, what Rist depicts here is a process that runs from the exchange rate to the domestic level of prices. This is precisely what Aftalion also observes in the series of articles he begins publishing in 1924, which will form the basis of Monnaie, prix et change, where he suggests a theoretical analysis of the phenomenon. 3.2

Aftalion’s Contribution

Aftalion’s business cycle theory, contained in Les Crises périodiques de surproduction (1913), was to become a reference cited by such authors as Hansen (1951) and Haberler (1937). Aftalion’s book on money, prices and foreign exchange, Monnaie, prix et change (1927), was less inﬂuential, although it attracted the attention of Hansen.9 In France the theory expounded in this book received wide, if not unanimous, recognition.10 However, despite the renown he had won both in France and abroad, Aftalion remained modest and reserved all through his life (Lhomme, 1957). He was thus not the sort of person to step into the limelight and participate openly in the kind of debate we are interested in here. Aftalion’s Monnaie, prix et change is an attempt to build a new theory of both money and exchange rates. In fact Aftalion’s main purpose is to explain what determines the level of prices. With this in view he begins by discarding the quantity theory, preferring the ‘income theory’, of which he proposes an amended version, his ‘psychological theory’. Aftalion rejects the quantity theory, partly on the basis of empirical arguments, observing that ‘far from it being money that governs prices, it is very often . . . prices that govern money’ (Aftalion, 1948, p. 34). Turning to the income theory, Aftalion ﬁnds its ﬁrst formulations in Cantillon (1755) and Tooke (1844). However, in his opinion, Wieser (1927) is the author who aﬀords ‘the most remarkable exposition of the income doctrine’, because he ‘relates the income theory to the modern theory of value, the theory of ﬁnal utility’ (ibid., p. 236). An advocate of the marginal theory, Aftalion criticizes nonetheless the marginalists for being content with ‘a doctrine as simplistic as the quantity theory’. Wieser’s accomplishment is thus of having applied the marginal principal to money, thereby ﬁlling an important gap (ibid.).

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For Wieser, Aftalion explains, the utility of the ‘last monetary unit’ is ‘indirect’ (ibid., p. 237) insofar as it stems from its purchasing power. This last unit is in fact ‘the last of the units that each individual has at his disposal’, in other words, ‘the last unit of his income’ (ibid.). As a result, the utility of ‘each monetary unit of our income diminishes when [it] increases’ (ibid.). From this, Aftalion infers that as nominal income increases, the quantity of available commodities remaining the same, the value of money decreases and prices increase.11 On these grounds Aftalion sets out to examine the two variables that aﬀect the nominal income: the money supply and the exchange rate. An increase in the money supply can result from a greater production of gold, a larger government budget deﬁcit ﬁnanced by ﬁat money or a greater amount of credit granted by banks. In each case, the author insists, the greater amount of money will lead to higher prices only if it translates into an increase in income. We shall return to this point later. The impact of the exchange rate on prices Aftalion provides evidence in several cases that a change in the exchange rate can inﬂuence prices, one instance being France in 1922–24. Thus after establishing that prices governed the supply of currency during this period, Aftalion seeks to show that prices in France varied under the inﬂuence of the exchange rate. This he establishes ﬁrst empirically.12 To prove his point theoretically, Aftalion draws up a long list of ‘diﬀerent categories of incomes’ that tend to increase under the inﬂuence of ‘the direct rise in foreign currencies’ (ibid., p. 175). This list includes the incomes of agents participating in international trade, of holders of securities denominated in foreign currencies and of residents receiving their income from abroad. For Aftalion the ‘increase in the exchange rate, by aﬀecting income, causes this increase of prices that would remain unexplained by the quantity theory’ (ibid., p. 188). Thus Aftalion asserts that the income theory can account for most ‘monetary experiences’. There do, however, remain cases for which it cannot provide a rationale, for example, the German hyperinﬂation of 1923. This leads Aftalion to propose his own monetary theory, the ‘psychological’ theory. This he achieves by making ‘certain corrections or [by including] additional features to [Wieser’s] income theory’ (ibid., p. 244). First, to explain the value of money Aftalion suggests that holding money allows the satisfaction of wants other than the mere indirect satisfaction provided by its purchasing power. For instance holding money enables agents to invest in securities, to make donations or to keep it for hoarding purposes. Second, concerning the purchasing power of money per se, agents have ‘expectations’ (des attentes) and even ‘requirements’. Aftalion notes then

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that, according to Wieser’s income theory, ‘the value of the monetary unit [only] depends on the satisfaction provided by the exchange of the last unit of income, the utility of the commodity that one can buy with this unit’. Aftalion emphasizes instead ‘that it depends on the satisfaction that we expect to obtain by means of this unit’ (ibid., p. 296). Accordingly we might remain more or less ‘faithful’. If ‘a rather great stability of the value of the monetary unit characterized the previous period, we believe that this stability will continue’ (ibid.). However everyone also forms ‘predictions’ (des prévisions) concerning the future evolution of prices (ibid.). In a nutshell, when an agent appraises the purchasing power of money at a given date, not only does he consider the satisfaction brought about by the commodities that he can obtain in immediate exchange, he also takes into account past as well as expected future price levels. By incorporating ‘qualitative’ factors such as ‘predictions’ and the various motives for holding money into the income theory, thereby transforming it into a ‘psychological’ theory, Aftalion aﬃrms he is able to explain phenomena like the German 1923 hyperinﬂation for which he asserts that agents’ predictions concerning future levels of the exchange rate played a crucial role. This leads him to investigate the issue of exchange rate determination. The determination of the exchange rate Aftalion’s theory of exchange rates is also based on the critique of existing theories, namely the balance of accounts theory, which he quickly discards, and Cassel’s purchasing power parity theory (Cassel, 1916). Why Aftalion is less critical of the latter is because ‘it is a qualitative theory, for it considers the exchange rate to depend on the quality of a currency, on the value resulting from its internal purchasing power’ (ibid., p. 428). The most critical argument he addresses Cassel’s theory is that the supply and demand for foreign currencies cannot lead to an exchange rate based on purchasing power parity. On the one hand, ‘imports concern goods that are not produced domestically or are so at [very] high prices’ and, on the other hand, certain goods produced domestically ‘are not exportable or at best with diﬃculty’ (ibid., p. 483).13 Aftalion also criticizes Cassel’s theory for neglicting ‘predictions’. Whereas foreign exchange is held for the indirect satisfaction it provides through its current purchasing power, it derives its utility from its expected purchasing power as well. Thus ‘predictions’ have an important role to play in the determination of the exchange rate. So Aftalion proposes his own theory of the exchange rate, also labelled ‘psychological’. It is based on ‘qualitative’ factors. Foreign currencies are held, Aftalion argues: for speculation purposes; in order to face commitments to pay back debt denominated in foreign currencies; as a means of

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evading taxes (ibid., p. 480). From a ‘quantitative’ viewpoint, each speciﬁc currency is subject to ‘the law of diminishing utility [that] applies here as elsewhere’ (ibid., p. 492). The exchange rate is thus determined like any other price, by the equalization of the marginal utility deriving from the holding of foreign currency for the diﬀerent motives the author distinguishes. As in the case for money, the value of foreign exchange is inﬂuenced by past as well as expected future levels, to the extent that agents prove to be either more or less ‘faithful’ or inclined to make ‘predictions’. Thus discrepancies between domestic and external prices will tend either to remain for some time or to quickly disappear, depending on what kind of behaviour prevails (ibid., 316–20). Accordingly Aftalion is able to explain sequences such as those observed between 1920 and 1924 in France where variations in the exchange rate ‘governed prices’ and ‘prices in turn governed the money circulation’ (ibid., 81). This is a sequence similar to the one depicted by Rist in Deﬂation in Practice, but based on more theoretical considerations. Finally Aftalion considers the ‘more remote factors’ likely to aﬀect exchange rates: the balance of payments, capital movements, ﬁscal policy, state intervention on the foreign exchange market, etc. The factor that he focuses on particularly is the ‘monetary circulation’. The question raised then is to what extent ‘monetary inﬂation’, that is, the increase in the money supply, can lead to a fall of the country’s exchange rate. 3.3 Aftalion and Rist on Exchange Rate and Price Level Behaviour in 1927–28 The following passage sums up Aftalion’s position with regard to this matter, illustrating the distinction he establishes between what we could label the ‘income sphere’ and ‘capital sphere’, akin to the distinctions established by Tooke (1844) and Wieser (1927), but also Schumpeter (1917/1918) and Keynes (1930): [In 1927–28, the] circulation moved from 53 to 64 billion. . . . This increase had two main causes: . . . [t]he return of French capital and foreign capital imports [that] did not, at the beginning, result in a currency inﬂation because, through various circuits, bank notes returned to the Banque de France. Later, however, there were increases in the amount of currency. And the legal stabilization was carried out in June 1928 partly to put an end to it. Yet these currency increases did not involve a rise in prices in 1927–28, because they did not increase income. The purchasing power of the newly issued notes that were in the hands of individuals did not correspond to income, but to capital. These notes represented former savings, which had been aﬀected to various uses and now took the form of notes.

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Monetary theory and policy When, for example, individuals bring back capital to France, they receive notes from the Banque de France in exchange for foreign currency. They have more notes, but they do not have more income. The capital . . . they previously held in foreign currency they now hold in francs. . . . In these various cases, individuals who receive notes do not beneﬁt from an increase of income, are not induced to pay higher prices for consumer goods. . . . However the purchasing power received by individuals in exchange for their capital can be used for the acquisition of . . . production goods. . . . But precisely, in 1927, these were times of low prices, of depression caused by the recovery of the franc and of stagnation of productive activity. Prospects were not those of an increase in prices (ibid., p. 209–11, emphasis added).

In sum, there was no price increase during the stabilization process because the entry of capital into France did not result in an increase of income, but only in a change in the composition of the agents’ wealth, which had no eﬀect on consumer prices (or on production prices in the particular circumstances the author describes). Interestingly, in 1928, Rist develops a similar analysis in an article published in the Revue d’économie politique. To the question: ‘By deciding to purchase foreign currencies unrestrictedly, at a stationary price, did the [Banque de France] deserve to be blamed for creating “inﬂation” and did the 25 billion francs that it thus put into circulation represent, as it is sometimes stated, a creation of credit?’ (Rist, 1928, p. 88), the author’s answer is no. Accordingly, in the following three pages, observing that in 1927 there had been no price increase in France, Rist suggests three explanations. First, the imported currencies were deposited on accounts at commercial banks, which deposited them on their account at the Treasury, thereby allowing the Treasury to pay back part of the Banque de France’s ‘advances’ (an instance of ‘outright deﬂation’, according to Rist). Second, because of the slowdown in activity agents paid back their bank loans and did not apply for new ones. Third: The foreign currencies absorbed by the Banque came essentially from two sources: the return of the cash formerly held abroad by the French; speculative purchases by foreigners, while the franc was increasing, of both French or foreign securities listed in Paris and, after the stabilization, acquisitions of French securities purchased in the hope of a rise of either the franc or, in the case of a return to stability, of the value of the securities themselves (ibid., pp. 94–5).

Rist goes on to explain that the cash that French nationals now held in francs represented ‘working capital’ that could not be invested on account of the economic slump, while the francs held by the sellers of securities to foreign speculators were ‘capital to be invested’ and not ‘a reserve for consumption’ (ibid., p. 95). There was thus ‘an increase in Stock Market prices

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unaccompanied by a rise in commodity prices’ (ibid.). There is thus an amazingly close resemblance with the explanation provided by Aftalion. Earlier in the article, Rist expresses a more general agreement with Aftalion’s analysis of the link between money, prices and the exchange rate. More interestingly, he notes that the Committee of Experts had shared Aftalion’s views, thereby pointing to Aftalion’s far-reaching inﬂuence: As for the amount of the circulation, far from being the factor determining the level of exchange rates and prices, [to the Experts] it appeared governed, on the contrary, by exchange rate and price levels, as proven by innumerable experiences. We can refer here without any further comment, to the illuminating and ﬁnal demonstration of this fact provided by Aftalion in the remarkable articles published in this Revue (ibid., p. 85).

4.

OTHER PROTAGONISTS: GIDE, NOGARO AND RUEFF

Although more numerous than in Great Britain, the French economists in favour of stabilization formed a minority, including the circle of economists around Charles Gide and the Revue d’économie politique. As already mentioned, Rist had become aware quite early of the diﬃculties the revaluation of the franc would involve. He was not alone, as Gide began campaigning for stabilization very early. The case of Nogaro is quite interesting, as his membership of the Radical Party should have induced him to side with the supporters of the return to pre-war parity. Instead he played an active role under both the Briand and Poincaré Cabinets. As for Rueﬀ, his analysis of the consequences of the revaluation of the pound led him to be called upon to participate in the stabilization process. 4.1

Gide’s Unﬂagging Campaign

However small, the group of economists in favour of stabilizing the franc had gained the support of an invincible ally, the mere fact that the return to pre-war parity ‘had always appeared [to the Banque de France] too remote an ideal’ (Rist, 1924, p. 61). Great Britain, so to say, had not been as lucky as France, the pound having depreciated only moderately. Keynes as a result had been quite alone in his battle against the decision taken by Great Britain in April 1925 to reinstate the gold standard at pre-war parity. As Pénin (1997) shows, in fact Gide and Keynes were to take similar positions on several points. Actually Gide’s campaign in favour of stabilization had already begun during the war and he was already strongly defending the idea in 1920, which did not go unnoticed: ‘Starting in the 1920s, Gide

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is Professor at the Collège de France, the historical leader of a strong cooperative movement, vice-president of the Human Rights League, chief editor of the Revue d’économie politique and he is much in the public eye, notwithstanding his great modesty and a tendency to publish in third-rate journals’ (Pénin 1997, p. 9). In Gide’s opinion, what is ‘desirable is a state of stability enabling everyone to make their predictions and draw up a budget’.14 Pointing to the diﬃculties likely to arise should the franc begin to appreciate, he prophesies the even more serious problems that would result from any substantial revaluation: once prices and incomes have increased, it is practically impossible to diminish them.15 Gide goes even further than Keynes, suggesting not only the relinquishment of the gold standard, but of the franc itself and the adoption of a new currency.16 In January 1926, he suggests that France should imitate Finland, a country that had just returned to the gold standard after devaluing her currency by seven-eighths to her greatest advantage. Much to Gide’s dislike, Caillaux begins by hesitating before announcing his support of the Experts’ report.17 When Poincaré takes oﬃce, while avoiding taking sides politically, Gide writes he regrets that the new cabinet does not comprise the excellent experts that were part of the previous one, Poincaré himself lacking the necessary competences, having ‘only been minister of ﬁnance once or twice like everybody else’.18 Gide publishes a series of articles cautioning against the risks of revaluation and underlining the diﬃculties met by England as a result of the return to pre-war parity, the extra burden on the public ﬁnances and the economic diﬃculties that an increase of the exchange rate would involve. This time his campaign is much more energetic and is given much coverage in the press.19 It seems that Poincaré was responsive to Gide’s arguments.20 Between 1927 and 1928 Gide continues his campaign in favour of the de jure stabilization. When it is achieved, he comments ironically that this decision owes little to Poincaré’s ‘ﬁnancial knowledge’, noting that France has always managed to ﬁnd a ﬁnancial saviour when she needed to!21 It took some courage to take such positions. As Rueﬀ recalls (1977, vol. III, no. 2, 341), there were risks for everyone: Those who were not there and did not have to face the problem of the stabilization cannot imagine the intellectual and moral courage, or even the personal risk, that this decision implied. Those who were blind, the weak, the cowardly and even the simply complacent, almost all the orthodox economists, were for the return to pre-war parity. Mr. Colson, then vice-president of the Conseil d’Etat, was threatened with dismissal because, in an address to the Academy of Moral and Political Sciences, he had indicated, very cautiously and with many qualiﬁcations, – scandalizing his colleagues unanimously – that he wondered whether it was reasonable to pursue the process of returning to pre-war parity.

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Gide was certainly not someone to let himself be intimidated (nor Colson, aged seventy-three in 1926, for that matter), even enjoying swimming against the tide, as Pénin observes (1997, p. 8). As Schumpeter (1954, p. 843, fn. 6) notes, Gide was an ‘all-round leader’ and in this instance he took on the responsibilities for what was expected of him. 4.2

Nogaro, the Member of Parliament

Like Gide, Nogaro began campaigning for stabilization in the wake of the war. One of France’s authorities on money and ﬁnance, Nogaro entered politics at an early age. Elected to parliament in 1924, he joined the Radical Party, taking part in both party conferences and parliamentary debates, and was soon appointed to the parliamentary commission of ﬁnances. A member of the French delegation to the Society of Nations in 1925, he was called upon one year later to participate in the Briand Cabinet in the midst of the ﬁnancial turmoil. Quite badly informed about ﬁnancial issues, Briand had actually consulted with Nogaro before forming his cabinet. Nogaro painstakingly explained how the stabilization should be carried out. Unlike most politicians, Briand did not have a really deﬁnite opinion on the subject but, according to H. Montet (1950, p. 426), he was immediately convinced by Nogaro’s arguments. Although he then intended to entrust the ministry of ﬁnance to Nogaro, the latter suggested instead the choice of Caillaux, a controversial politician, who had nevertheless acquired a strong reputation as technician for having put together the French income tax system. It was, however, explicitly understood that Nogaro, while in charge of public instruction, would participate directly in the ﬁnancial policy. Actually Nogaro was the one who prepared the stabilization project. Convinced, then, that he needed to have full powers to carry out his projects more promptly, Briand requested them from the House. The Briand Cabinet was overthrown, followed by the Herriot Cabinet forty-eight hours later, and replaced by the Poincaré Cabinet. As recounted by Montet, Nogaro and Poincaré opposed each other quite vehemently during a parliamentary debate but, struck by his opponent’s arguments, Poincaré invited Nogaro to talk the matter over that same evening. It seems that at the end of the discussion Poincaré had become more open to the idea of stabilization. A few days later Nogaro warned Poincaré that speculation was driving the franc above its normal price, the consequences of which could be extremely damaging. He also explained that the Banque de France should be granted the right to buy and sell foreign currencies at the price level chosen for the stabilization, thereby adding weight to the arguments put forward by Moreau and Rist.

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It seems that the role played by Nogaro was decisive. His action was discrete, Montet (p. 428) recalls, but indisputably eﬀective: ‘He had not separated his interest in science from his concern for his country. Had he had but this single opportunity to place the former in the service of the latter, this instant would have given a meaning to his entire life.’ 4.3

Rueﬀ, the Young Government Oﬃcial

Rueﬀ was part of Poincaré’s entourage during the two years of the stabilization process, which is one reason why he was asked to write, a quarter of a century later, the preface to Moreau’s memoirs. He had previously published an article on the variations of unemployment in England (which was to raise a heated debate in England in the early 1930s with the publication of large excerpts in The Times).22 Basically Rueﬀ had shown there was ‘quasi-total correlation between the variations of . . . the real wage and of unemployment’ (Rueﬀ, 1975/1977, p. 164). In August 1926 the young Inspecteur des finances was appointed to the Poincaré Cabinet to conduct a study the purpose of which was to determine the parity at which the franc should be stabilized. In his memorandum, while trying to avoid taking sides in the political debate, Rueﬀ suggests that the parity be in accordance with the level of prices prevailing in the countries committed to the gold standard. He thus sets out to measure the level of wholesale and retail prices in diﬀerent countries, focusing more especially on price levels in Germany. The memorandum also contains a measurement of ‘the level of stabilization corresponding to the parity with German wages’ (Rueﬀ, 1959/1977, p. 346). As Rueﬀ recollects in the preface to Moreau’s memoirs, it was Poincaré who personally insisted that he focus his investigation on the relationship between the exchange rate and wages: ‘I would like to know, he told me, what is, for each industry, the minimum level of the exchange rate below which it would have to reduce wages to preserve its outlets’ (Rueﬀ, 1954, p. ix). Apparently it was Rist and Quesnay who had initially attracted Poincaré’s attention to this problem. As recounted by Rueﬀ, they considered that ‘wages set the absolute lower level to the revaluation of the franc’ (ibid., p. viii). Examining the course of events in England they observed that, despite a moderate depreciation of the pound (of the order of 10 per cent), the return to pre-war parity had produced an increase of unemployment resulting from the discrepancy between costs, which remained high as an eﬀect of rigid wages, and prices, now set in accordance with the gold price of the pound. In France, although wages were more ﬂexible, their reduction could only have been achieved in a ‘climate of profound depression, which would have generated considerable suﬀering’ (ibid.) and led to social unrest.

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However, Rueﬀ was to ﬁnd out several years later that Poincaré’s personal insistence that he centre his study on the level of wages owed much to the role played by trade union leader Léon Jouhaux, the secretary general of the CGT.23 Jouhaux conversed several times with Poincaré, calling his attention to the risks of unemployment that the appreciation of the franc was fuelling. Rist was to tell Rueﬀ, also later on, that these interviews ‘had been the decisive factor in the ﬁnal success of Mr Moreau’s undertakings’ (Rueﬀ, ibid., p. ix). The conclusion to Rueﬀ’s memorandum, handed in on 20 November 1926 (at a time where the pound was worth around 130 francs), was thus that ‘if we were to stabilize the currency today at a parity consistent with German wholesale prices, it would be necessary to set the price of the pound sterling at around 145 francs. A parity consistent with retail prices would correspond to a price of about 120 francs and one consistent with wages to a price within these two limits’ (ibid., p. ix). Rueﬀ was therefore one of the actors to have contributed to ‘upset [Poincaré’s] profound convictions and his personal preferences’ (ibid., p. x).

5.

CONCLUDING REMARKS

Commenting on the decision taken in June 1928, Keynes (1928, p. 85) writes: Perhaps we deserve what we have got. France has abandoned principle and consistency alike, but she has always refused sacriﬁces which were avoidable and has obeyed in the end the teachings of experience. We in England have not submitted either to the warnings of theory or to the pressure of facts, obstinately obedient to conventions.

While ‘France’ obviously refers to Poincaré and the ‘We in England’ is an indirect reference to Churchill, Keynes also stresses that the French have proved to be more pragmatic than the English. In doing do, he underestimates the role played by the French economists like Gide who fought the ‘conventions’ that prevailed in France as well as in England.24 It is worth noting that the French economists we have referred to agreed not only on how to interpret the ongoing events, on which economic variables were the determinants and which were the determined ones, but also on the measures to be taken. This is all the more remarkable as these authors held theoretical views on the issues related to international money matters that did not exactly coincide. For instance, Rist, who qualiﬁes Aftalion’s theory as ‘illuminating’ and as the ‘ﬁnal’ word on the subject, developed ideas that were actually quite diﬀerent, if not opposite, as is well known to the readers of the Histoire des doctrines relatives au crédit et à la

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monnaie. The same could be said of Nogaro who disagrees with Aftalion’s monetary theory (Dangel and Raybaut, 1997b) but develops a similar view as to the events that unfolded during the period, campaigns for stabilization at the same time as Gide, while disagreeing with the latter’s quantitative views on money. Thus is seems that the period was very important for the forming of the authors’ opinions on policy matters. The inﬂuence it had on their theoretical views is more questionable, the exception being perhaps Rueﬀ who was then only at the beginning of his career.

NOTES * 1. 2.

3. 4. 5. 6.

7. 8.

9. 10.

11. 12. 13. 14. 15. 16.

The authors would like to thank Giovanni Pavanelli for his helpful comments on an earlier version of this paper. The usual disclaimer applies. We do not enter into the debate here as to whether the franc was stabilized at too low a level. See Alcouﬀe (1997/1998) on this point. It is thus interesting to note that the French government was not deliberately seeking to increase its spending capacity by relying on an increase of the money supply, which contrasts with the behaviour of the Italian government, stigmatized by the Italian economists (see Pavanelli, 1993). See below, the role played by Nogaro in convincing Caillaux. As noted by Jèze, ‘a convinced member of parliament, he did not want to admit to the incapacity of the Parliament. On the contrary his political opponents repeatedly stated that all his did was apply the Experts’ plan’ (p. 506). Rueﬀ played a role in deﬁning this boundary. See below. In 1954, concerning Moreau’s personality, Rueﬀ notes that ‘he has remained very attached to his native Poitou. He exploits the family estate, likes hunting. He has travelled very little, does not speak any foreign language. . . . I am sure that in his encounter with Mr Rist and Mr Quesnay, their knowledge of foreign countries, their international background worried him more than it reassured him. The voices that are familiar to him are those of the Province and of the French land’ (Rueﬀ, 1954, p. vi). See Pénin (1997), p. 9. Rist introduces a third form of deﬂation (déﬂation de crédit). The decline in the money supply characterizing this ‘credit deﬂation’ follows the increase of the discount rate implemented by the central bank to put an end to the speculation that accompanies an economic boom. We ignore it as it is unrelated to ﬁscal policy, which is what Rist focuses on here. See Mehrling, 1997, pp. 99–101 and 110–14. Gide, a supporter of the quantity theory, mentions Aftalion’s tentative critique of the theory. As for exchange rates, Gide supports the balance of payments theory, mentioning once again Aftalion’s critique of this conception (Gide, 1884/2000, p. 219, fn. and p. 266, fn.). For a critical account of Wieser’s theory of money, see Ellis (1937). Aftalion’s own account of Wieser’s theory is in fact quite cursory. See Dangel and Rainelli, 2000, p. 250. See Rainelli (1986). Quoted by Pénin (1997, p. 10) from l’émancipation, 1920. See Pénin (1997, p. 10). See Pénin (1997) who refers to articles published in L’émancipation, Le progrès civique and Le quotidien. It seems that Gide was alone in suggesting abandoning the gold standard, a prospect that did not even cross people’s minds.

Monetary reform in France 17. 18. 19. 20. 21. 22. 23. 24.

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See Pénin (1997), fn. 5. In L’émancipation, quoted by Pénin (1997), p. 10. For more details, see Pénin (1997), p. 9. According to Pierre Miquel. See Pénin (1997, p. 10, fn. 10). Pénin (1997), p. 11. J. Rueﬀ (1925), ‘Les variations du chômage en Angleterre’, Revue politique et parlementaire, no. 32. For details concerning the debate see Rueﬀ (1975). Also see Alcouﬀe (1997/1998) for an interesting analysis of the relationship between Keynes and Rueﬀ. Confédération générale du travail. For details, see Pénin (1997), p. 11.

REFERENCES Aftalion, Albert (1913), Les crises périodiques de surproduction, vols 1 and 2, Paris: Librairie des Sciences Politiques et Sociales Marcel Rivière. Aftalion, Albert (1927), Monnaie, prix et change, third edition (1948), Paris: Librairie du Recueil Sirey. Alcouﬀe, Alain (1997), ‘Keynes and the French guardians of Say’s Law before 1936’, contribution to the ﬁrst European Society for the History of Economic Thought conference, Marseille, 27 February–1 March, published in L. Pasinetti and B. Schefold (eds), Keynes before Keynes, Cheltenham, UK and Lyme, USA: Edward Elgar, 1998, pp. 53–73. Cantillon, R. (1755), Essai sur la nature du commerce en général. Reprinted by the Institut National d’Etudes Démographiques, Paris, 1997. Cassel, Gustav (1916), ‘The present situation of the foreign exchanges’, Economic Journal, vol. 26, March. Dangel, Cécile and Michel Rainelli (2000), ‘Albert Aftalion, théoricien de la monnaie et des changes’, in P. Dockès, L. Frobert, G. Klotz, J.-P. Potier and A. Tiran (eds), Les traditions economiques françaises, 1848–1939, Paris: CNRS Editions, pp. 247–58. Dangel, Cécile and Alain Raybaut (1997a), ‘Albert Aftalion’s macrodynamic theory of endogenous business cycles’, Journal of the History of Economic Thought, vol. 19, no. 1, pp. 72–91. Dangel, Cécile and Alain Raybaut (1997b) ‘Money, prices and institutions in Bertrand Nogaro’s analysis of economic ﬂuctuations’, contribution to the ﬁrst European Society for the History of Economic Thought conference, Marseille, 27 February–1 March. Dangel-Hagnauer, Cécile (2001), ‘La théorie marginaliste de la monnaie et des changes d’Albert Aftalion’, in S. Dormard (ed.), Albert Aftalion, Redécouverte d’un économiste français du XXe siècle, Paris: L’Harmattan. Ellis, Howard S. (1937), German Monetary Theory – 1905–1933, Harvard: Harvard University Press. Gide, Charles (1884), Principes d’économie politique, twenty-sixth edition (1931), Paris: L. Larose, reprinted with a preface and annotations by Y. Breton (2000), Paris: L’Harmattan. Gide, Charles and Charles Rist (1947), Histoire des doctrines économiques, seventh edition, Paris: Sirey. Haberler, Gottfried von (1937), Prosperity and Depression, fourth edition, New York: Atheneum, 1963.

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Hansen, Alvin H. (1951), Business Cycles and National Income, New York: Norton. Jeanneney, Jean-Michel (2000), ‘Preface’, in P. Dockès, L. Frobert, G. Klotz, J.-P. Potier and A. Tiran (eds), Les traditions économiques françaises, 1848–1939, Paris: CNRS Editions, pp. 11–16. Jèze, Gaston (1934), Cours de sciences des ﬁnances et de législation ﬁnancière, Paris: Marcel Giard. Keynes, John M. (1925), ‘The economic consequences of Mr Churchill’, ﬁrst published in the Evening Standard, 22, 23 and 24 July, reprinted in J.M. Keynes (1931), pp. 206–230. Keynes, John M. (1926), ‘An open letter to the French minister of ﬁnance (whoever he is or may be)’, ﬁrst published in The Nation and the Athenaeum, 9 January. Reprinted in J.M. Keynes (1931), pp. 76–82. Keynes, John M. (1928), ‘The stabilisation of the franc’, ﬁrst published The Nation and the Athenaeum, 9 January, reprinted in J.M. Keynes (1931), pp. 82–5. Keynes, John M. (1930), A Treatise on Money, reprinted in The Collected Writings of John Maynard Keynes (1971), vols V and VI, London: Macmillan. Keynes, John M. (1931), Essays in Persuasion, reprinted in The Collected Writings of J.M. Keynes (1972), vol. IX, London: Macmillan. Lhomme, Jean (1957), ‘L’inﬂuence intellectuelle d’Albert Aftalion’, Revue Economique, no. 3, pp. 23–32. Mehrling, Perry G. (1997), The Money Interest and the Public Interest. The Development of American Monetary Thought, 1920–1970, Cambridge, MA and London: Harvard University Press. Montet, H. (1950), ‘L’action parlementaire de Bertrand Nogaro’, in L. Baudin et al., L’œuvre scientiﬁque de Bertrand Nogaro, Paris: Editions DomatMontchrestien, pp. 421–30. Moreau, Emile (1954), Souvenirs d’un gouverneur de la Banque de France. Histoire de la stabilisation du Franc (1926–1928), Paris: M-TH. Génin, Librairie de Médicis. Nogaro, Bertrand (1924), La Monnaie et les phénomènes monétaires contemporains, second edition (1935), Paris: Librairie Générale du Droit et de Jurisprudence. Pavanelli, Giovanni (1993) ‘Stabilità Interna e Vincolo Estero nel Dibattito Economico Italiano (1919–1939)’, Il Pensiero Economico Italiano, vol. I, no. 2, pp. 55–93. Pénin, Marc (1997), ‘Charles Gide et John Maynard Keynes’, contribution to the 1997 Charles Gide Conference, Lyon, 2 and 3 October. Pénin, Marc (2000), ‘Charles Gide et la monnaie’, in P. Dockès, L. Frobert, G. Klotz, J.-P. Potier and A. Tiran (eds), Les traditions économiques françaises, 1848–1939, Paris: CNRS Editions, pp. 855–67. Rainelli, Michel (1986), ‘Loi du prix unique et théorie de la parité des pouvoirs d’achat: un retour à G. Cassel, A. Aftalion et J. Viner’, Revue d’économie politique, vol. 96, no. 1, Jan.–Feb., pp. 25–38. Rist, Charles (1924), La déﬂation en pratique (Angleterre, Etats-Unis, France, Tchécoslovaquie), Paris: Marcel Giard. Rist, Charles (1925–26), ‘Pour la stabilisation du franc’, ﬁrst published in Le moniteur des intérêts matériels, reprinted in C. Rist (1933), pp. 3–50. Rist, Charles (1928), ‘La loi du 7 août 1926 et le mécanisme de stabilisation français’, Revue d’economie politique, January, reprinted in C. Rist (1933), pp. 82–102. Rist, Charles (1933), Essais sur quelques problèmes économiques et monétaires, Paris: Sirey.

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Rist, Charles (1938), Histoire des doctrines relatives au crédit et à la monnaie depuis John Law jusqu’à nos jours, Paris: Sirey. Rueﬀ, Jacques (1930), ‘A short story of the ﬁnancial recovery of France’, conference given to the Economic Federation of Japan and Industry Club of Japan, Tokyo, 17 September, translated into French and reprinted in J. Rueﬀ (1977), vol. III, no. 3, pp. 348–53. Rueﬀ, Jacques (1954), ‘Préface’, in E. Moreau (1954), pp. i–xv, reprinted as ‘Réﬂexions inactuelles sur la stabilité monétaire’, in J. Rueﬀ (1977), vol. III, no. 3, pp. 353–62. Rueﬀ, Jacques (1959), ‘Sur un point d’histoire: le niveau de la stabilisation Poincaré’, Revue d’économie politique, March–April, pp. 169–78, reprinted in J. Rueﬀ (1977), vol. III, no. 3, pp. 343–48. Rueﬀ, Jacques (1975), ‘La fin de l’ère keynésienne’, Bulletin de l’institut économique, November–December, pp. 1–11, reprinted in Le Monde, 19, 20, 21, February 1976, reprinted in J. Rueﬀ (1977), vol. III, no. 1, pp. 159–78. Rueﬀ, Jacques (1977), Œuvres Complètes, Paris: Plon. Schumpeter, Joseph A. (1917/1918), ‘Das Sozialproduct und die Rechenpfennige. Glossen und Beiträge zur Geldtheorie von heute’, Archiv für Sozialwissenschaft und Sozialpolitik, vol. 44, translated into English by A.W. Marget (1956) as ‘Money and the social product’, International Economic Papers, vol. 6, pp. 148–213. Schumpeter, Joseph A. (1954), History of Economic Analysis, Allen & Unwin. Reprinted by Routledge, 1994, London. Sédillot, René (1959), Du franc Bonaparte au franc de Gaulle, Paris: Calmann-Lévy. Tooke, Thomas (1844), An Inquiry into the Currency Principle: The Connection of the Currency with Prices and the Expediency of a Separation of Issue from Banking. Reprinted by the London School of Economics and Political Science, London, 1959. Wieser, Frederich von (1927), Social Economics, Reprints of Classic Economics, Kelley, 1965.

5.

Consequences of a monetary system: German monetary reform, 1948 – the birth of the DM and of a new central bank system and their political and economic implications Karl Häuser

PRELIMINARY REMARKS – INTRODUCTION Germany’s monetary history is a rather disorderly one. Within three quarters of a century it had to undergo three fundamental changes of its monetary system and the next one – hopefully the last one – happened two years ago, the change into the Euro-system. Germany, arising as a political unit in 1871 did not have a common national currency until the last quarter of the nineteenth century when it replaced seven diﬀerent currencies of more than a dozen sovereign states by a single newly created currency, i.e. the mark. In eﬀect, that procedure, the monetary uniﬁcation of the German Reich, reminds us in some way of the establishing the European monetary uniﬁcation of today, leaving aside the diﬀerent historical circumstances. The new national currency, the mark, a gold-based money, worked very well up to World War I when it was suspended from gold and increasingly inﬂated in such a way that it ended in late 1923 due to hyperinﬂation. By means of currency reform the mark was replaced by a new currency, the Reichsmark (RM), which has survived a quarter of a century only when under the Hitler regime another World War was ﬁnanced again in an inﬂationary way. This inﬂation together with its currency was abandoned and replaced in 1948 by the Deutsche Mark (DM). So between 1871 and 1948 Germany had to undergo monetary uniﬁcation (following 1871) and two currency reforms (1923, 1948) both of which were a consequence of the two World Wars. The last of the two reforms, the emergence of the DM, is our subject here. I am going to treat it from four aspects, namely a) the preconditions, b) the process of decision-making and the alternatives, c) the reform and d) 94

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economic and political consequences and consequences for economic thought. After the end of World War II nobody knew what was going to happen to Germany and whether the country would survive as a political entity. The so-called Third Reich had collapsed following unconditional surrender. Thereafter Germany was a country without a government, without scope for political action and without a voice. Was she nothing more than a geographical name? In fact, the remaining parts of the country after the separation of the eastern territories taken by Poland and the USSR, were occupied and separated into four areas each governed by one of the four Allied powers, France, Great Britain, the USSR and USA. Even the intention of the four declared at the Potsdam Agreement in 1945 in which they stated that they were going to maintain the four zones as an economic entity proved utopian because each of the allied powers followed its own path. In fact there no longer existed any central agencies, government, administration, monetary authority or central bank. Both the country as well as its economy were devastated by the war and it suﬀered in addition from the physical split into four separate areas which split the former united economic area. As a result, the country could not maintain viability and could not supply its population with suﬃcient food – a population which was considerably augmented by the inﬂux of refugees from eastern territories (around 12 millions). True, the need for change and help diﬀered in the four areas. It seemed to be less urgent in the more agrarian and sparsely populated regions of the French and the Soviet zones than it was in the densely industrial areas of the American and the British zones of occupation which at the same time were the most devastated ones. Despite the diﬀerent needs for betterment in the four zones of occupation there was common allied agreement on the necessity of change towards an improvement of economic conditions in order to prevent starvation. As the need for it was certainly most urgent in the American and in the British zones both occupation forces assisted the supply of food in their respective zones which required no less than two billion dollars from the American taxpayer in order to prevent hunger and disease. So the Americans and the British were mostly urged to improve the situation in such a way that Germany might reach viability and would be able to supply itself. In 1947 the two powers decided to cooperate in this aim and to combine their two zones into one ‘united economic area’, sometimes called the bizonal area. It was even given some elements of sovereignity with a parliament, an ‘economic council’, whose authority was conﬁned to economic and ﬁnancial aﬀairs and still subject to allied control. The two main obstacles to economic recovery were the monetary chaos and the desolate state of the planned economy, both interrelated and both inherited from the Third Reich. Prices were frozen in 1936 already when

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inﬂationary ﬁnancing began to aﬀect prices. As this process accelerated increasingly during the war nearly all goods had come under state control. This command economy degenerated into a desperate administration of shortage and it culminated in the destructions of war and afterwards in the partition of Germany. The situation had been aggravated by an extreme inﬂationary money supply which had grown to a magnitude which came close to the twentyfold of what it should have been in order to produce and to buy the national product at oﬃcial prices. As a consequence rationing went out of control and social order crumbled. It was virtually impossible for any person to survive under oﬃcial economic conditions, i.e. under the rules of law for food rationing. There was a popular joke at that time saying that those still alive in April 1946 will be arrested because of continuing black market activities. The mere necessity of survival had forced the population to forget about rationing and the command economy and to try to deal outside the oﬃcial markets. As it did not pay to look for a job more and more people tried to do barter trade by exchanging real goods, e.g. shoes for bread, a coat for a bicycle, a carpet for fuel. As barter trading means bilateral pricing it leaves the economy without a common price structure. So how can one do reasonable accounting and follow rules of economic eﬃciency? Since both black markets and barter trading had become increasingly important it had resulted in absurd economic conditions and in utter economic ineﬃciency. As money failed to do the services it should there was no longer a generally accepted unit of account nor was money the preferred means of payment and it was by no means a store of value. Why then not restore the monetary system? Why did it take more than three years to do it? It was because command economy and the old currency, the RM, had remained as the only element of a common order in the four zones. But any change needed the consent of the Allied powers if the unity of the German economy was to be maintained as outlined in the Potsdam Agreement. Contrary to this deep changes had been made in economic institutions in the Soviet zone already, e.g. by expropriations of ﬁnancial and physical property and by closing down all banks and other ﬁnancial institutions. But the currency as such remained as it was, the RM.

PROCESS OF DECISION-MAKING AND THE ALTERNATIVES Although there had been agreement about the necessity of a radical shrinkage of money in order to squeeze the money supply, this was given a diﬀerent priority by the four powers. To the Soviets it meant that money is less

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instrumental in a socialised economy than it is in a market economy. Nevertheless, quadrilateral negotiations on monetary reform were initiated as early as 1946. Some progress was made in the early stages but began to stagnate as soon as it came to the highly complex details of such a plan. When ﬁnally the Americans pressed for a decision, the Soviets refused and withdrew from the Allied Control Council on 20 March 1948 thus rendering this institution incapable of acting. Shortly afterwards the Soviets staged a 15-month blockade of the three western sectors of Berlin. It was the real beginning of the Cold War. Only now the three western powers were determined to act in common for currency reform. The basis for initial currency negotiations of the four powers which had begun in the Allied Control Council in 1946 had been an American paper: the so-called Colm-Dodge-Goldsmith Plan (CDG plan) named after its authors. Two of them, Gerhard Colm and Raymond W. Goldsmith were reputed economists with a German background – both emigrated to the United States, in 1933 and 1934 respectively – whereas Joseph M. Dodge had been an American banker. The CDG-plan remained the blueprint after the Russians had abandoned cooperation. There was also no lack of German proposals on how to remove the surplus money supply. About 300 plans were known though not all very adequate. Some were dated even before 1945. But the Allied powers regarded monetary reform as their own business and therefore did not take any notice of German plans, with one exception to be mentioned below. There was even no public discussion about currency reform plans in those days in Germany as normal information and communication as well as public opinion did not yet exist. When even newspapers were scarce since paper was still regulated and rationed the German population carried on in an apathetic way regarding the future. The only German plan for currency reform of relevance for the three western powers was the ‘Homburger Plan’ named after Bad Homburg, the place where it had been drawn up. It was the result of a group of ten experts of which the most well-known was later to be Ludwig Erhard, who in future years became Federal Minister of economic aﬀairs. The group was acting in a semi-oﬃcial way as they were appointed by the then German administration for the bizonal area. The intention was to be able to oﬀer a plan in case the Allies should ask for a German proposal. Although the three western Allies considered the CDG Plan as their guideline for reform they were interested in being informed about the German proposal, the Homburger Plan. It may be helpful to consider for a moment the monetary problems and the existing alternatives. In principle the surplus money could be cured in either of three ways. A ﬁrst possibility could be to unfreeze prices and to give way to inﬂation until a new equilibrium at a much higher price level is

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reached which then should be maintained in order to secure price stability at the new equilibrium level. In this case no monetary reform would be necessary. However, the inﬂationary process which then would be necessary in order to rearrange the total price structure might have been too harsh a cure for, and in addition it would sanction, the black market dealers and their proﬁts and thus create social tensions. A second way to eliminate excess money could be tried involving rigorous taxation together with sterilising budget surpluses and/or an extreme restrictive monetary policy in order to reduce excess monetary supply. But this would have meant a very long and painful way to go which ﬁnally might have ended in depression. A third way is to be seen in a currency reform by which the existing currency is to be replaced by a new currency in an adequately restricted magnitude which is appropriate to a desired price level. Most experts voted for this third option and it was also the solution oﬀered by both plans, the CDG Plan as well as the Homburger Plan. In any of these options a central bank would be necessary. It was agreed that monetary reform should be preceded by the establishment of a new central bank. Only if the money supply of the new currency could rigorously be kept on a stability course would it be possible to overcome the scepticism of the inﬂation-ridden population and to restore conﬁdence in the stability of a future currency. For this reason a new central bank was necessary in order to manage this task. When in need of it one might ﬁrst think of the Reichsbank, the former German central bank. But it did not exist any more as it had disappeared when the Reich government had ceased to exist at the end of the war. Consequently no central control of money supply could be executed apart from the fact that the country was divided into the four separated territories of the Allied powers and that the Reichsbank headquarters, which was situated in the Soviet sector of Berlin, had been largely destroyed. For these and for other reasons a reactivation of the former Reichsbank never had been considered to be a solution. At an early stage, two and a half years before monetary reform, the Americans had made the ﬁrst basic decision towards establishing a new central bank system. They gave order to found Land Central Banks (LZB) in each country of their zone. This design for a new German central bank system was in a way a copy of US monetary constitution in accordance with the system of the Federal Reserve Banks. By British inﬂuence it later had been somehow modiﬁed according to British experience. The American action was soon followed in the French and later on in the British zones. When in a second step the diﬀerent LZBs began to operate it was felt that a superior coordinating organisation should be added. This stage was reached when on 1 March 1948 a top bank for the ten LZBs of the three zones was set up, the Bank deutscher Länder (BdL), as a new central bank for the three

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Western zones of occupation. It began to operate shortly before the date of the currency reform in 1948. The establishment of the BdL was quite unspectacular and the German public hardly took any notice of that event. It was not until a few months later, after monetary reform, that this ﬁrst trizonal institution began to attract public attention, because by now the three western German occupation zones had a common central bank already, as well as a common currency, but they still did not constitute a state with a common government. During this early stage, when a western German state did not yet exist, the central bank assumed a role which at least in some areas had a governmental status. In lieu of a trizonal government it assumed perforce responsibility not only for monetary policy but also for matters of international payment and for monitoring and for somehow steering macroeconomic development. So the new central bank gained an essential and estimated position right at the beginning. This can be seen by the fact that those parts of the law governing the BdL which dealt with the bank’s instruments proved so eﬃcient that the basic elements of the bank and in particular its independence from government were retained when, by a German government a decade later, in 1957, the BdL had been converted into the Deutsche Bundesbank.

THE REFORM When a last endeavour to reach a quadripartite agreement had failed in February and March 1948 the Americans were ready for action in consent with the two other Western Allies. The original blueprint for the reform, the CDG plan, had been modiﬁed into what has been called the ‘Outlines’. These outlines served as the deﬁnite instruction for the reform. Note was taken of the results of the German group of experts which had elaborated the Homburger Plan when the deﬁnite preparations began. This can be concluded from the fact that the Allies obviously waited until that plan was ready. Only two days after that date, on 20 April 1948, they gave the ﬁnal order to start the necessary actions in order to prepare for the reform. These activities have been one of the most secret actions after World War II, which in part reminds us of a detective story. No German knew anything whether or when or how a reform should happen, except for ten persons. These were mainly the authors of the Homburger Plan who were ready to be brought into a secret camp where they had to stay for seven weeks without knowing where they were and without any contact with the outside world. There they had to elaborate the laws, prescriptions and instructions necessary for the currency reform according to the ‘Outlines’ formally rendered by the three Allied powers, in fact by the Americans whose principal

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actor was Edward Tenenbaum, a young oﬃcer of the US army. Ten days after they had ﬁnished their work and after release from the camp, the reform was executed, as of 2 June 1948. Although the population had been longing for monetary reform and the end of economic chaos, it came as a surprise when it eventually happened after months of hopes and fears. It was announced on a weekend. On the next day, Sunday 20 June, the whole population was provided with new money. Together with the food cards issued every four weeks, each person received 40 Marks of a hitherto unknown new currency called the Deutsche Mark (DM) in exchange for the equivalent amount of the old currency (40 RM). Two months later, people were allowed to change another 20 RM for 20 DM. Only these two amounts – the per capita amount of DM 60 – was exchanged at a rate of 1:1. This changeover from the old to the new currency happened as a big bang, overnight and without exception. As of Monday 21 June, the Deutsche Mark was the only legal tender. Hence its acceptance was assured right from the beginning, especially as it was in short supply. Old RM notes could only be paid into bank accounts and the credit on these accounts was then – as a provisional procedure – initially converted at a rate of 10:1 but not yet of immediate disposal. Generally, this rate was also applied to any debts and credits outside banking but not to balances held with banks and other ﬁnancial institutions. The most important question to be answered ﬁrst was which amount of money should be targeted by the reform, in other words what was the adequate initial volume of ﬁat money. It was intended to correct the volume of money in such a way as to aliment the aﬀordable real transactions at the oﬃcial level of prices. The reason behind this position was that there should be neither deﬂation nor inﬂation regarding the level of regulated prices and that this should allow gradually to unfreeze prices without severe transformation problems. But in order to act in this way and to calculate the exchange rate of the old money in relation to the new currency one ought to know a) the amount of old money in circulation, b) the value of the social product to be produced and bought, c) the institutional factors, i.e. the necessary transactions and the propensity for keeping cash or liquidity by all sectors of the economy including the ﬁnancial sector. None of these statistical data were available in the trizonal fractioned and desolate country. As it was mere guesswork to determine the volume of the new money it was decided to keep open its ﬁnal amount. This could be reached by issuing a minimum amount of ﬁat money as a ﬁrst stage and by supplying an additional portion of a second step when the eﬀects of the initial issue had been noticed. So the new money had been issued in the following sequence. First,

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the total population had been supplied with 60 DM per capita in two instalments, of which the ﬁrst one, amounting to 40 DM, had been distributed immediately at the day of the currency reform. Six weeks later it was followed by the second portion (20 DM). In both cases the amounts had been exchanged at a rate of 1:1 from RM into DM and this had been the only social concession made by the reform. Second, bank accounts after having been converted at a rate of 10:1 could be drawn only at half of its amount, that is, 5 per cent of the former RM value, whereas the remaining half remained blocked. Third, in October three tenths of the blocked half had been freed. Consequently, the former RM banking accounts were deﬁnitely converted at a rate of 100:6.5 into the new currency, leaving aside some later corrections for very long-term savings stemming from pre-war times. Financial institutions, however, were treated in a very diﬀerent way which would require a separate chapter of explanation. In brief, all public securities and all credits to public authorities as well as credits to other ﬁnancial institutions were extinguished. As this would have led to bankruptcy for the ﬁnancial sector as a whole the ﬁnancial institutions received public bonds called ‘Ausgleichsforderungen’ (equalisation funds) to such a degree as to settle their balance sheet. In fact, the amounts of those equalisation funds were the ﬁnancial result of the liquidation of the ﬁnancial heritage of the Third Reich. There were many other diﬃcult problems to solve: How to treat creditors with money balances in the Soviet zone and in the lost territories? How about private debts which generally were written oﬀ by 90 per cent and thereby would have favoured debtors? How about branches of ﬁnancial institutions in the Soviet zone, etc.

CHANGE OF ECONOMIC ORDER, POLITICAL IMPLICATIONS AND CONSEQUENCES FOR ECONOMIC THOUGHT The decision for monetary reform had a much wider impact than is commonly registered under the heading of money and prices. It deeply aﬀected the economic and social order as well as the political future of the relevant area. It also changed the mentality and the hopes of the population and it was not without inﬂuence on economic reasoning. The economic eﬀect was immediately apparent when virtually the next day the economic order had been changed by a dramatic upheaval. As it was intended to let money perform its basic function ﬁrst and foremost as a generally accepted medium of exchange, it was necessary to abandon rationing of goods and to change over from a planned to a market

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economy. On the other hand, the extreme shortage of vital goods which had caused so much suﬀering seemed to recommend further rationing of essentials. These considerations gave rise to heated political discussions and reactions. Even the Allied powers who still had the ﬁnal say were reluctant to make a decision in favour of such a radical change towards a market economy. They left it therefore to the Germans to decide to what extent they would like to change towards a new economic order. The man with the courage, the vision and the willpower to attempt the experiment of a market economy beginning with monetary reform by the much quoted ‘header into cold water’ was the previously mentioned Ludwig Erhard. Few people had known him before. He had been elected director of the administration for economic aﬀairs in March 1948 and thus like a de facto minister of economics of the bizonal territory. Against ﬁerce parliamentary opposition he had fought for a law which gave room for manoeuvre and which he actually widely used to abolish price control and rationing (under the inconspicuous title ‘Law on the guiding principles governing economic control and price policies after monetary reform’, the socalled Leitsätzegesetz of 24 June 1948). So currency reform was followed by fundamental changes in economic conditions. In spite of enormous tensions following these abrupt changes – rapidly growing unemployment, rising prices, brusque shifts in economic structure and production – the economy began to grow at double-digit rates and continued to develop into what later on was known as the economic miracle. Beyond this economic turn-around the reform also showed far-reaching political consequences. As a ﬁrst political consequence of the currency reform it led to an integrated economic area. Thanks to the common monetary policy and to a new economic order for the area of the three zones these areas could converge towards unity. They formed a nucleus from which the future Western German state could grow. Although only vaguely and on a smaller scale, Germany was beginning to take shape again. However, when in September 1949 a West German state was established, i.e. the Federal Republic of Germany, it could not be expected that the population would welcome that state with its arbitrary boundaries and without any historical justiﬁcation or predecessor but only had its existence in the partition of Germany. So when after some time that state gradually was admitted by its inhabitants it was in great part economic success which helped it to be accepted; and money, the DM, became a symbol of that emergence. Yet, by the same process another far-reaching political eﬀect of currency reform worked in the opposite direction. It sealed the division of post-war Germany into two fundamentally diﬀerent states. Although monetary reform was not the deﬁnite cause of this development it accelerated and

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aggravated the process of dividing Germany by establishing diﬀerent economic and monetary areas. It aggravated what was called the German question: the question of how to treat Germany and how to consider its further role. The impact of the monetary decision manifested itself most dramatically in Berlin where the two diﬀerent monetary and economic systems confronted each other within one town situated 100 miles behind the Iron Curtain and under the authority of the four powers. As a consequence, West Berlin crumbled away from its hinterland and became politically and economically an island or an annex to Western Germany, whilst the eastern part of the city remained embodied within its environs. On a small scale Berlin was a model for Germany as a whole which showed the German situation after monetary reform by demonstrating the consequences of the reform when it divided the city into two state entities with extremely diﬀerent economic systems by which tensions between east and west were intensiﬁed. In fact, the monetary reform in Germany with its harsh consequences in particular from the Berlin blockade may be considered as a landmark which drove the political tensions between east and west to a point which may be considered as the beginning of what has been called the Cold War. Whilst monetary reform had hastened the division of Germany it also meant a deﬁnite choice of the three zones in favour of the West. They soon mutated into a state which initially scarcely could be accepted as such by its population as it was not easy to identify oneself with an artiﬁcially created state. However, it gained reputation by economic success. As economic success was born of currency reform it may be said that the currency and the relevant state, the DM and Federal Republic of Germany, have been interlinked from the very beginning. Mutually supporting each other both could gradually gain acceptance inside and outside the country. So the DM and hence the currency reform played a major role in the onset of a West German state, the Federal Republic of Germany. It is one of the paradoxes of recent German history that the same currency, the DM, which once contributed to the division of Germany, four decades later became a magnet to attract people from the eastern German state, to the Federal Republic of Germany, and thus contributed to the reuniﬁcation of the country. When the wall between East and West Germany was broken down at the end of 1989 but no political uniﬁcation could yet be seen, it was the outspoken vote of the people in the East German state to be included into the DM area. In their demonstrations they chanted ‘Wenn die DM nicht zu uns kommt, kommen wir zu ihr’ (if the DM does not come to us we will go to the DM). Again it was the currency which became a promoter for national aﬀairs. A last remark is to be made with respect to the topic of this conference, i.e. the inﬂuence of political development on the evolution of economic

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thought. When Germany during the 12 years of the Hitler regime and in the aftermath of war had been cut oﬀ from any international aﬃliations and trends it left economics as well as other academic disciplines in a rather backward situation. Only a few exceptions can be named such as Walter Eucken, Erich Schneider and Heinrich von Stackelberg of which the last two were possibly more known outside Germany than they were recognised inside. Although the tradition of the historical school generally was no longer in high esteem it was still present in the generation of the members of the academic community. After the end of the war the search for new orientation caused most economists to look for more modern trends. In many cases this lead towards economic liberalism in the tradition of classical economics but it also gave way to the ideas of the Freiburg school. The success of the currency reform as well as of the new economic order fostered and accelerated this trend. In contrast, socialism, which particularly after World War I was very popular in Germany be it in the Marxian or in any other related variant, lost its former signiﬁcance. It even took quite some time to disseminate Keynesian economics in Germany as it seemed to have a smell of anti-liberalism although Keynes had been somehow popular since the 1920s already because of his The Economic Consequences of the Peace. However, Keynes’s General Theory with its recommendations for ﬁscal policy was suspected of favouring inﬂation. The debate in the 1950s on those questions initially impeded the acceptance of modern Western economics although the ‘bible’ of economics in those years, i.e. the ‘Einführung in die Wirtschaftstheorie’ (Introduction to Economics) written by Erich Schneider, being the most important textbook in Germany, was straightforward Keynesianism. But it took about a decade until the pupils of Keynesian economics could gain positions and inﬂuence. In sum, the currency reform both promoted and retarded economics when it demonstrated the importance of economics as a science and in particular favoured monetary theory but also impeded an early implementation of Keynesian theory. In brief it may be said that there can be observed at least four other ﬁelds of inﬂuence induced by currency reform. In the ﬁrst instance and most obviously the development encouraged the ideas of the Freiburg School of economics together with what was later called ordo-liberalism. This method of reasoning centres on problems of social order, on the limits of state control, on orderly marketing, on fair competition and so on. Although the school was formed in the 1930s it had already gained its broad reputation and its particular inﬂuence in Germany by the events following the reform of 1948. A second consequence may be seen in the rise of modern monetary theory and in the theory of central banking which before had been of less importance, as can be demonstrated by German

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textbooks. In particular, economics became important in monetary policy when the newly established central bank, the BdL, had installed a research department right from the beginning. It soon became important for shaping the bank’s policy as well as for inﬂuencing public opinion. It began to publish monthly reports as early as January 1949 in which the economic situation of Western Germany was analysed even before the Federal Republic of Germany had been founded. These reports gained considerable inﬂuence since nothing comparable existed in those days. The third ﬁeld of inﬂuence can be registered as a result of the increasing reputation and importance of economics in general. After all, the outstanding ﬁgure for economic aﬀairs in those years, Erhard, has been a professor of economics. Public opinion had become much more interested in economic aﬀairs than it was before. Last but not least economics was able to gain public recognition when it was recognised as a powerful instrument for steering economic policy. Again, Erhard was the representative ﬁgure for this development. It was he who organised a ‘Wissenschaftlicher Beirat’ (scientiﬁc council) for consulting the government in economic aﬀairs even before the Federal Republic of Germany had come into existence. This council, whose members were professors of economics, was integrated into the later ministry of economic aﬀairs. Similarly an economic council for ﬁscal aﬀairs had been set up. This example had been followed by other ministries (agriculture, transport) later on.

SUMMARY In sum, it may be concluded that the success of the currency reform and of the succeeding monetary regime had far-reaching consequences in the realm of policy as well as for economic thought. First, an extremely inﬂated and damaged currency had been replaced by a new monetary regime, i.e. a new currency together with a newly established central bank system in which the central bank remained independent of government. The reform also prepared for a new social order by which a totally planned economy had been successfully transformed into a market economy within a very short time. The new currency, the DM, rapidly reached monetary stability and convertibility. However, it aggravated the division of Germany into two diﬀerent and hostile states but helped to consolidate a West German state, the Federal Republic of Germany. With respect to economic thought it was able to promote economics as an academic discipline in Germany and it strengthened the belief in an autonomous central bank system as well as in the merits of monetary stability. This experience inﬂuenced convictions underlying economic reasoning and economic policy when monetary

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stability and an autonomous central bank was considered to be a precondition for monetary theory as well as for the implementation of European Monetary Union and the subsequent Euro system. The reputation which the DM and its central bank had gained did not only play a role as a currency leader in Europe but also in the re-uniﬁcation of the two German states by way of the attraction which the DM exerted over the people in the eastern part of the country. In sum, the famous saying ‘money matters’ has a much wider meaning than being conﬁned to monetary aﬀairs alone.

PART II

France’s Economic Crisis in the Eighteenth Century and the Accompanying Revolution in Political Economy

6.

Quesnay’s creation of the Tableau économique in response to the economic weakness of France Walter Eltis1

When François Quesnay began to publish on economics there were unmistakable indications that fundamental change was required in France. The ﬁnances of the state were in perpetual diﬃculty, and it had to borrow at higher interest rates than the private sector. Paris was the intellectual capital of Europe, and France was unquestionably one of Europe’s great powers, but she had diﬃculty in simultaneously ﬁnancing the army and the navy which her international ambitions required. In the repeated wars with Great Britain in what has been described as the Second Hundred Years War (dating from 1688 until 1815) military weaknesses associated with inadequacies of ﬁnance hampered France’s eﬀorts to match Britain in the colonisation and exploitation of the wealth of North America and India. In the absence of representative institutions such as the British Parliament, the wealthy in France would not consent to the taxation required to establish the French state on a ﬁnancial foundation commensurate with its political aspirations. Quesnay’s response to the diﬃculties his country faced was to construct a scientiﬁc theory which could explain the economic decline of France, and how it could attain an economic strength which matched its intellectual and cultural leadership. As one of France’s leading natural scientists and a fellow of the Royal Society of London he was well qualiﬁed to do this. In the process Quesnay created what Philippe Steiner described in 1998 as ‘the new science of Political Economy’. The sequence of Quesnay’s own intellectual discovery of the principles he put forward for France’s recovery is becoming clear. In his articles for the Encyclopédie of 1756 and 1757 he discovered the ‘produit net’ as the source of all sustainable tax revenues. In 1756–57 he already insisted that industry and commerce created no net product, and he included fourteen ‘Maximes de gouvernement économique’ in the article ‘Grains’ which already included every constituent of physiocratic economic policy. The Maximes became 109

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twenty-four in 1759 and 1760, and thirty in 1767, but he added nothing radical to the policies he had set out before the invention of any of his sophisticated technical contributions to economics. The Encyclopédie articles included detailed calculations of the relationship between agricultural technology, the price of corn and the extent of the ‘produit net’, but contemporary economic writers also produced detailed calculations. One year later, in 1758, he created a growth sequence by combining three assumptions: ﬁrst, the prospective gain to the ‘produit net’ from freedom to export; second, the further beneﬁt from the reinvestment of these additional proﬁts; and, third, the extent of the gain from the remarkable returns which were achievable from this additional investment as a consequence of the 100 per cent rate of ‘produit net’ which the Encyclopédie articles had established. In combination these would permit the population which the French economy could support in comfort to grow by two million in each successive year, while the ﬁnances of the state would be rapidly restored. These calculations exist in manuscript form (they are reproduced in Quesnay, 1958, 53–4) and Loïc Charles has shown (2000) that they were also included, virtually verbatim, in Henri Pattullo’s Essai sur l’amélioration des terres, 1758, which everyone read including the King. Quesnay makes three references to this book in his ‘Questions intéressantes’, more than to any other. The degree of his inﬂuence upon its content may have come close to his later collaboration and co-authorship with the marquis of Mirabeau. Pattullo, and perhaps Quesnay himself, follows the growth calculations with the statement that, ‘according to this progression, one ought at no point to be surprised by the rapid success of the economic government of M. de Sully. In thirteen years, this Minister paid oﬀ the debts of the Kingdom, reduced taxes and created a public treasure’ (Pattullo 1758, 242–3). Possibly soon after this, there is the far more sophisticated growth sequence in the form of a ‘Mémoire to an Agricultural Society’ which remained unpublished until its inclusion in Philosophie rurale in 1763 (PR. ii. 354–78). Ronald Meek has suggested that ‘all the evidence, textual and otherwise points to François Quesnay as its author’ (1962, 38), and no contemporary had the intellectual power and the bold grasp of economic interrelationships to create it. This shows the agricultural capital of France and its ‘produit net’ rising by 12 milliards of livres in the nine years from 1761 to 1770, through the same 100 per cent re-investment of higher agricultural proﬁts as the calculation which Pattullo reproduced in 1758. The policies to achieve this progression, the freeing of agricultural markets and the replacement of taxes which fell upon farmers by a single tax on rents, had to be introduced prior to 1761, the ﬁrst year of the sequence, so this may have been drafted as early as 1759.

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Neither of these sequences which illustrate the recovery of France includes any reference to the industrial and commercial sector: only the growth of agriculture is set out. Charles is surely right in his suggestion that Quesnay appreciated that the integration of industry into the argument required a more sophisticated and intricate construction, and the Tableau économique, of which the ﬁrst version was printed in 1758–59, was the result.

QUESNAY’S DISCOVERY OF THE TABLEAU ÉCONOMIQUE The initial version of the Tableau has generally been analysed from the original versions which were printed privately in Versailles (King Louis XV reputedly being among those who looked over the proofs). Meek and Kuczyinski reproduced them with every number fully explained in 1972. What posterity has largely overlooked is the contrast between the negligible circulation of the Versailles versions which can be inferred, because only four copies survived into the twentieth century, and the vastly greater circulation of the 161-page volume which Quesnay added in 1760 to Mirabeau’s L’Ami des hommes entitled Le Tableau économique avec ses explications (abbreviated below as Expl.). This book, including this Seventh Part which Quesnay largely contributed, went into many further editions, and hundreds of copies survive into the twenty-ﬁrst century. This is undoubtedly the version of the Tableau which Quesnay addressed to his contemporaries.2 He and Mirabeau begged that all would read it after the statement that economic science, ‘the fundamental science of the government of nations’ has astonishingly up to our own time, ‘no teachers, no expert practitioners, and no true elements’ (Expl. 120–21). They said that ‘every man who takes the trouble needed to grasp all the principles which can be derived from this economic study will be rewarded for his work by the guaranteed results, and by the understanding he will have acquired of the nature and the eﬀects of all political operations’ (Expl. 129). It is to this 1760 book on the Tableau that he and Mirabeau referred when they sought to develop it further in Philosophie rurale in 1763 ([1763] 1972, ii.161). Quesnay never referred back to the Versailles versions which were evidently working documents which he constructed to obtain an initial understanding of the principal inter-relationships and their consistency. Most of the detailed content of the Versailles versions is included in the 161-page book of 1760, and there is far more besides. It is divided into two parts: the ﬁrst, ‘Tableau économique considéré dans sa construction’ sets out the full inter-relationships in equilibrium; the

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second, ‘Tableau économique considéré dans les déprédations privées’ sets out the various ways in which its equilibrium can be disturbed to produce sharp economic deterioration. A principal tension in the equilibrium Tableau of Part I is the apparent assumption that ‘la grande culture’, with a consequent rate of return on annual agricultural advances of 100 per cent, prevails throughout the economy. Elsewhere, Quesnay frequently states that much of France is actually farmed through ‘la petite culture’ which yields only 35 to 36 per cent, while many peasants scrape a bare subsistence, with virtually no farm capital and generate no surplus. The Tableau of Part I therefore describes what the French economy could be rather than what it is. Quesnay and Mirabeau state speciﬁcally that ‘la grande culture’ is actually being achieved in only a few areas of France close to Paris. ‘You will still even ﬁnd some examples of it in our Kingdom, close to the Capital, and the Tableau has been constructed based on these examples’ (Expl. 200). But in the equilibrium Tableau of Part I, it is assumed (Expl. 147–54) that it is actually being achieved in a million farms, each worked by one farmer who employs one labourer. This élite state-of-the-art farming will then provide a good and secure livelihood for two million agricultural families of four to produce an agricultural population of eight million. They will pay rent which will support a further million families of four who live twice as well on average as a farming family. The expenditure of rents then generates suﬃcient income from the landlords and from farmers, who receive half of what landlords spend, to provide good incomes for a further million families of four in industry and commerce. These four million families and the consequent core population of sixteen million for whom the economy provides a good and secure living on the basis of ‘la grande culture’ include those such as the lawyers, doctors and domestic retainers who work principally for the recipients of the ‘produit net’. These are ‘All the men who exercise the lucrative professions’ (Expl.152). There is thus a constellation of employees who surround the rentiers and who are included in that class. In addition to the four million families who obtain a good living, there will be several million more with very low incomes whom Quesnay and Mirabeau describe as little ﬂies (moucherons) (Expl. 149) who fail to be supported on the basis of ‘la grande culture’. These obtain a precarious living outside the circle of eﬃcient farming and those it supports, by farming ineﬃciently or by seeking work in the cities without regular employment. There is no reference to this precarious element of the population which lives outside the Tableau in the Versailles editions, or in Quesnay’s and Mirabeau’s subsequent publications, but it helps to resolve the paradox that Quesnay was supposedly writing about France, but with

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assumptions about agricultural eﬃciency which claimed far more than the economy was actually delivering at that time. They focused on this potentially eﬃcient enclave of the economy because it was the principal source of tax revenues and because it was the main element of the economy which was monetised, and to which the inter-sectoral ﬁnancial ﬂows of the Tableau were therefore relevant. There is a unique statement of the power of the multiplier eﬀects of the Tableau’s zigzags. ‘One sees where each part of real wealth ought to go, ought to stop, ought to be consumed, ought to be reproduced, and what is the beneﬁcial result of the mutual eﬀect of each of the two classes upon the other, which doubles their real wealth and triples its visible eﬀect through an extended circulation, rapid and equal’ (Expl. 271). The circulation of 1000 millions of revenue in its zigzag form creates demand of 1000 million in agriculture and 1000 million in industry and commerce, which doubles its impact, and we come to the triple ﬁgure of 3000 million by adding in the 1000 million of incomes which are directly supported by the revenue within the broadly deﬁned rentier class. The three columns of the Tableau thus show how the circulation of the revenue trebles the demand it generates. Hence the mutually disastrous eﬀects of any failure in the process of circulation within the area of ﬁnance which Quesnay and Mirabeau characterise as ‘civil piracy’ (Expl. 120), through a crystallisation of money into ﬁnancial fortunes which are held as liquid balances or exported by its owners, who ‘know neither king nor country’. Meek proposed the resolution of one of the paradoxes of the Tableau in equilibrium, that the demand of every class in the community goes half to agriculture and half to industry, while the monetary value of agricultural output is twice that of the industrial and commercial sector. Meek’s proposed reconciliation (1962, 282–3) (which I followed in Eltis ([1975a] 2000, 32–3))3 was that the industrial and commercial sector arranged the economy’s international trade, using money which reached it via the Tableau’s circular ﬂows to buy food for export and to bring in additional manufactures in exchange. This enabled France to produce a higher monetary value of food than manufactures, while its domestic demand for an approximately equal proportion of manufactures would be met through imports. In ‘Les Explications’, it is speciﬁcally stated that this is exactly what occurs, for half the income which the sterile class receives through the circulation process is absorbed into external commerce which this class arranges in order to obtain the goods which even a wealthy society will not produce for itself (Expl. 143–4). Food exports are of course also a central element in the policies required to establish the high price of agricultural produce which is needed to sustain a rate of return of 100 per cent on annual agricultural advances.

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The equilibrium of the Tableau can be disturbed in a number of ways, each of which will produce a sustained period of economic decline from the utopian level of French potential output which it delineates. The second Part of ‘Les Explications’ is devoted to a detailed account of how and in what manner output will decline as a consequence of a variety of disturbances. Each of these is illustrated with a disequilibrium Tableau which shows a fall in the wealth which is reproduced in each successive year. The loss from these disturbances could not have been set out if the equilibrium Tableau (illustrated in Figure 6.1) had not been presented ﬁrst with such care and clarity. The ﬁrst disturbance which receives attention is a reduction by each class in the propensity to consume food from 50 to 40 per cent, with a corresponding increase in the propensity to consume industrial and commercial products from 40 to 60 per cent. In the chapter heading, this is attributed to an excess of ‘luxe’, but in the Tableau which illustrates its impact (Figure 6.2), it is described more generally as ‘customs and habits in society, excess, luxury’. It is shown at the foot of this Tableau that in the initial year of the disturbance, the economy’s reproduction falls from 2705 to 2357 million livres, that is, by about 121⁄2 per cent. If the whole loss fell on agricultural advances, these would fall from 1050 million to 702 million, or by approximately one-third. No calculations of further decline in subsequent years if the excess of ‘luxe’ as presented continues, but Quesnay and Mirabeau state, ‘One sees by this very simple demonstration, that an excess of luxe de décoration can very rapidly utterly ruin an opulent nation’ (Expl. 195). A corresponding calculation shows how an increase in the propensity to consume food from 50 to 60 per cent, as a consequence of an increase in ‘luxe de subsistence’, higher consumption of strawberries and champagne and suchlike, will raise the economy’s reproduction from 2705 to 2953 million livres. Quesnay’s insistence that the direction of consumption inﬂuences the rate of growth has been widely challenged. In particular it has been asserted that a domestic reluctance to consume food can be counterbalanced with additional exports of food which can then be traded for the extra manufactures which the French population desires (Negishi, 1989). In ‘Les Explications’, Quesnay and Mirabeau actually cover this line of criticism by describing an increase in the propensity to consume food from 50 to 60 per cent as ‘an increase in consumption or in exports of agricultural produce’ (Expl. 195). This underlines the depth of thought which went into the construction of the Tableau, and of the sophistication of the underlying argument, only a fraction of which is presented in detail in the actual Tableaux and their explanations. The next disturbance to the equilibrium Tableau concerns spoliation, a

Quesnay’s creation of the Tableau économique

Figure 6.1

Tableau économique: equilibrium Tableau

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Figure 6.2 Tableau économique: impact of ‘customs and habits in society, excess and luxury’

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reduction from whatever cause, including taxation, of farmers’ annual agricultural advances from 1050 to 1000 million livres. Because this 50 million reduction in annual advances also reduces the revenue by 50 million, and the interest which farmers receive to sustain their advances, the reproduction is said to fall by 128 million from 2705 to 2577 million livres. Quesnay and Mirabeau go on to suggest that if the same cause continued to reduce farmers’ annual advances by 50 million in each successive year, then after four years they would lose half of their total capital including their primary advances. The actual calculation which moves from a total loss of 128 million in the ﬁrst year to half of their total capital in the fourth is unclear: numbers are asserted which are unexplained (Expl. 206). They describe the loss of one half of farmers’ total capital as the loss of one horse out of two, so that the conditions of ‘la grande culture’ are entirely dismantled, ‘when one of the two horses which pulls a carriage has fallen, the other has to stop’ (Expl. 207). The disastrous consequence is a reversion from ‘la grande culture’, which yields a revenue of 100 per cent, to ‘la petite culture’, which yields only 35 per cent and even worse. What is interesting about this case is that Quesnay and Mirabeau refer to the inﬂuence of decline which continues for four years. Still more devastating is the impact of a fall in the rate of return on annual agricultural advances from the 100 per cent assumed in the equilibrium Tableau to 20 per cent. Quesnay and Mirabeau say that this was estimated as the average rate of return in France in 1700 (Expl. 217), and this reversion to the situation in the last years of the reign of Louis XIV would have two kinds of adverse eﬀects. This would destroy both the condition of agriculture, and the creation of monetary demand which depends on the circulation of the revenue which is reduced by four-ﬁfths. The statement at the foot of the Tableau (Figure 6.3) which describes the eﬀect of a deterioration in agriculture, describes the former. If the net product suddenly falls by four-ﬁfths, farmers will only be able to pay the rent they had contracted for by disposing of most of their farm capital. Consequently in the following year they will lose all their annual advances, and in the third year they will also lose their primary advances, and therefore be forced to abandon their farms at the end of three years. Then, in the absence of new rent-paying farmers, the land will fall into ‘petite culture’, where Quesnay says that ‘the proprietor will lose at least nine-tenths of his revenue’ (Expl. 214). This appears exaggerated: why should landlords lose nine-tenths when the yield of ‘la petite culture’ is approximately one-third that of ‘la grande culture’? Perhaps even ‘la petite culture’ cannot be undertaken in all the farms where ‘la grande culture’ formerly prevailed. The statement that rents will fall by at least nine-tenths at the end of three years of a four-ﬁfths reduction in ‘produit net’ is presumably a dynamic consequence of this catastrophic event. A static economy producing through ‘la

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Figure 6.3

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Tableau économique: impact of taxation of farmers

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petite culture’ could achieve a ‘produit net’ which was only two-thirds lower, but an economy sliding downwards from ‘la grande culture’ could be far more disrupted. The destructive impact is accentuated by the link between the circulation of the revenue and the money supply. A loss of four-ﬁfths of the revenue will be accompanied by the demonetisation of a large fraction of the economy, and there will merely be certain cantons where merchants concentrate where money still circulates (Expl. 231). This demonetisation consequent upon a four-ﬁfths fall in the agricultural rate of return may help to explain why the fall in ‘produit net’ is as much as nine-tenths. It is crucial that it is the expenditure of the revenue which produces the Tableau’s zigzags which create the economy’s eﬀective demand. Hence anything which reduces the revenue by four-ﬁfths will have a catastrophic impact upon eﬀective demand, and at the same time, demonetise much of the economy. Quesnay and Mirabeau outlined a number of possible causes of a destruction of agricultural advances through a deterioration in the agricultural rate of return. The most signiﬁcant concerned the reimposition of barriers to internal or external trade. The equilibrium Tableau where annual agricultural advances yield 100 per cent is based on the assumption of agricultural free trade which establishes export markets for food at international prices. If barriers to food exports are reimposed, or if farmers are obliged to sell below world prices to state agencies, or if they are not free to ﬁnd the best markets within France, much of the ‘produit net’ will be destroyed. Further policy errors which can damage the agricultural rate of return are associated with the granting of monopoly privileges in the marketing of food to companies which exploit farmers, and prevent them from achieving the ﬁnancial returns the Tableau assumes. The ﬁnal distortion, again illustrated by a disequilibrium Tableau (Figure 6.4), is due to taxes which fall upon those who generate agricultural incomes in place of the ideal taxes which fall directly on the ‘produit net’, rather than upon those who generate it. Here Quesnay assumes that considerable taxes are levied on the incomes of farmers with the consequence that their rate of return is reduced from 100 to 66.67 per cent. Further taxes are levied through those who have bought the privilege of administering taxes (the so-called tax farmers) who absorb 400 millions but convey far less than this to the state. In the Tableau of Figure 6.4, these 400 millions take the form of an addition to sterile expenditure, and in the text under the Tableau, Quesnay suggests that much of this crystalises into monetary fortunes which do not return to circulation, but largely remain in the coﬀers of ﬁnanciers. The adverse eﬀects from the failure to base taxation on the ‘single tax’

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Figure 6.4

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Tableau économique: disequilibrium Tableau

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are thus various and complex, but their net impact is to reduce the reproduction by one-sixth in each successive year, and in consequence once again to rapidly reduce cultivation from ‘la grande culture’ to ‘la petite culture’. Quesnay and Mirabeau suggest that this is precisely what began to occur in 1660 when the prosperous economy of Sully and his heirs was gradually destroyed (Expl. 262). This initial presentation of the Tableau for a wide readership therefore oﬀered an account in Part I of what France could achieve in the course of the 1760s on the basis of what it was already achieving in a few regions. What could subsequently go wrong to destroy that superior economy was then set out in Part II, as excessive consumption outside agriculture, spoliation which deprived farmers of a fraction of the advances they required to achieve the continual reproduction of agricultural output, economic policies which prevented farmers from achieving adequate prices for their food at home and overseas, and taxes which fell on the incomes of farmers or else upon the goods they purchased. These errors which reduced the economy from its state of prosperity echoed the deterioration which, Quesnay and Mirabeau insisted, actually occurred after 1660. The Tableaux in ‘Les Explications’ which set out the impact of these policy errors show their detailed eﬀect over only a single year, but passages of text including those under the Tableaux, make it extremely clear that Quesnay has in mind a continuation of these adverse eﬀects over several years, so that what is being described is actually the economics of decline. The text also occasionally refers to several years of growth if disturbances are favourable. What is at no point shown or apparently envisaged is further growth from the high point that the economy could supposedly reach which is delineated in the equilibrium Tableau in the ﬁrst Part of the book. This, like all of Quesnay’s equilibrium Tableaux, therefore describes a high stationary state which is represented as the utmost that France can achieve. Growth will be required as in Pattullo’s L’Amélioration in 1758, or the ‘Mémoire’ of Philosophie rurale, which may have been written soon afterwards, to attain this potential high point. A subsequent downward departure from this will involve the economics and the underlying equations of decline. The existence of millions of low-paid and uncertainly employed workers who are additional to the four million with well-paid and secure employment, who are included within the utopian Tableau, might appear to imply that the French economy could grow further from this supposed peak. Quesnay and Mirabeau did not set out this possibility so we must contrast their stationary Tableaux with a rate of return of 100 per cent on annual agricultural advances which set out France’s potential, and a series of greatly inferior Tableaux which described the realities of the French

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economy in the 1750s and the 1760s. They then set out processes of decline from the utopian Tableau to the France of reality, or conversely, growth from the actual France to the high state it could achieve by the end of the 1760s.

QUESNAY’S CREATION OF LATER EDITIONS OF THE TABLEAU The next appearance of the Tableau after 1760 was in 1763 in Philosophie rurale, and Quesnay and Mirabeau actually describe this as a development of the Tableau in ‘Les Explications’ which they refer to as ‘the ﬁrst explanation of the Tableau économique’ (PR. ii.161). It is to be noted that they do not refer to the Versailles Tableaux of 1758–59 as ‘the ﬁrst explanation’ for these were never published for the population at large. In Philosophie rurale they developed a précis of the Tableau which removed the zigzags. This allowed the same derangements as those in ‘Les Explications’ to be presented with greater simplicity, but also with a signiﬁcant loss. The zigzags of 1758–59 and 1760 highlighted the impact of the eﬀective demand generated by the expenditure of the revenues. In 1763 some of the wealthier farmers are assumed to spend as if they were landlords, to produce what is described as the same underlying Tableau, but the impact of the expenditure of the revenues and of demonetisation when rents fall receives more attention in the 1760 version. The principal disturbances, excessive ‘luxe’, spoliation, an inadequate price of agricultural produce and the taxation of farmers’ incomes in place of rents are presented quite similarly in 1763 and in 1760, but the Tableaux are presented without 1760’s fourteen lines of zigzags, which made it possible for Quesnay and Mirabeau to set out more elaborate economic sequences in Tableau form. This permitted them to represent aspects of the economics of growth and decline (described in detail in Eltis, 1996). The ﬁnal version of the Tableau emerged as the ‘Analyse de la formule arithmétique du Tableau économique’ of 1766. This is the Tableau of 1763–64 slightly elaborated. Quesnay uses it to illustrate two key causes of disturbance in his ﬁrst and second Problèmes économiques of 1766 and 1767. These are constructed to illustrate what can be assumed to be the two physiocrat policy proposals to which he attached most signiﬁcance, which is presumably why he chose to put the 1766 Tableau through its paces to illustrate them. The ﬁrst sets out the full impact of a higher price of agricultural produce and it takes the economy from a rate of return on annual agricultural advances of about 20 per cent to 40 per cent. Rather than taking the utopian Tableau as either the start or the end-point, as in 1760

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or 1763, Quesnay begins from the France of reality in which agriculture yields only 20 per cent and he shows how it could yield 40 per cent. The second problem takes an ultra-utopian Tableau where agricultural advances yield an English 150 per cent in place of a prospective French 100 per cent as its start, and Quesnay shows how an attempt by the sovereign to levy 500 millions of indirect taxes will only yield 121 million of additional revenue, and cost the nation a total of 932 million, so that the cost to the nation is ‘in the region of eight times’ what ‘the sovereign receives from it’ (Quesnay, 1958, 990). 1766 and 1767 when the two ‘problèmes économiques’ were published was close to the end of the physiocrat-inﬂuenced Laverdy administration and it is natural that Quesnay should have used the Tableau to set out the impact of what all recognised as the two key physiocratic policies, freedom to export and the substitution of a single tax on rents for the myriad of ineﬃcient taxes from which France suﬀered. The impact of freedom to export was practical politics under Laverdy, and it could therefore be described almost realistically with a comparison between two disequilibrium Tableaux. There was no political possibility of actually introducing the single tax in the 1760s, and the impact of France’s ineﬃcient tax system was shown by demonstrating how taxes like France’s would ruin even the British economy. It is perhaps surprising that it is the utopian equilibrium Tableaux of 1758–59 and the equilibrium ‘Analyse’ Tableau of 1766 which have attracted the predominant attention of the secondary literature, while the more realistic disequilibrium Tableaux of 1760, 1763 and 1766–67, many of which refer to the France of reality, have been comparatively neglected. Quesnay’s and Mirabeau’s statement in ‘Les Explications’ that ‘I would recommend above all that you do not pretend to understand the Tableau perfectly until you have seen it unfolding in its complete development’ (Expl. 126) has been ignored. This chapter, which has so far traced the development of the Tableau from 1758 to 1767, indicates how Quesnay’s policy proposals scarcely altered during these nine years. But the technical sophistication with which they were presented advanced after 1760, because the removal of the zigzags permitted a more intricate analysis including the presentation of sequences of growth. The technicalities of the Tableau fascinated Quesnay, and subsequent generations of economists who have been drawn to it have also regarded it as the core of his contribution. It was an extraordinary innovation in technical economics and it has been universally regarded as such. The advance in economics for which he was responsible had its origins in the economic weaknesses of France in the 1750s and the 1760s, which persuaded an outstanding scientist to produce the ﬁrst coherent account of the technical

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relationship between investment and economic growth, the ﬁrst inputoutput Table, and so much more besides.

THE DEVELOPMENT OF THE TABLEAU AFTER QUESNAY Increasingly sophisticated representations of the Tableau and its implications began to appear in the nineteenth century, and these were developed far further in the twentieth. Marx described it as ‘an extremely brilliant conception, incontestibly the most brilliant for which political economy had up to then been responsible’ (1969–71, iii. 344), and he devoted 30 pages of his posthumously published Theories of Surplus Value to its explanation. He chose the ﬁnal static version of 1766 for his detailed exposition. There are innumerable modern explanations and reconstructions of the static Tableau including especially those by Spengler (1945), Meek (1962), Eltis (1975a), Herlitz (1996), Vaggi (1987), and Pressman (1994). The latter has produced a coherent exposition which meets the challenge of simultaneously providing (i) a clear account of inter-sectoral demand, (ii) a precise account of where the economy’s money is at each stage, and (iii) a detailed account of the physical advances of each sector, where they come from and how they are used up and regenerated. Previous restatements have generally succeeded in two of these, but not in all three. Quesnay’s static Tableau is now thoroughly understood and several scholars have focused attention on how it can be developed further. Quesnay himself set out the manner in which it can provide a foundation for the economics of growth in the dynamic tableaux in ‘Les Explications’ which have been the principal subject of this chapter, which were followed by his more precise tableaux in Philosophie rurale, and the ﬁnal 1766–67 versions of the Tableau. Modern accounts of the growth theory inherent in some of these tableaux have been presented by Barna (1976), Vaggi (1987) and Eltis (1975b, and 1996). Quesnay scholarship has also developed reconstructions of the Tableau in its input–output form. Notable early examples are by Phillips (1955) and Barna (1975), while Jean Cartelier has set out some of the potentially farreaching implications in his chapter in this volume, that develops lines of argument which he presented originally in 1991. Authors previous to Cartelier appear to have overlooked some of the necessary implications of the representation of the Tableau as a two-sector economy in which the inter-relationship between the inputs and the outputs of each sector is quantitative. In Cartelier’s successive representations, a unit of output in the productive sector (which produces ‘corn’) requires a

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precise quantitative input from the sterile sector (which produces ‘iron’). With these assumptions, the corn and iron sectors taken together necessarily form a single uniﬁed economy, with a uniform rate of return on capital. In his chapter in this volume, he shows how Quesnay’s insistence that agriculture alone yields a ‘produit net’ can only survive this representation of the argument in the special case of Quesnay’s own equilibrium Tableaux where the rate of return on annual agricultural advances is 100 per cent, and consumer demand is divided equally between the two sectors. There is no interconnection in any of Quesnay’s writings between the level of physical productivity achieved in the sterile sector and the ‘produit net’ which is consequently realised in the productive sector. In contrast with the assumptions of Cartelier’s reconstruction, an increase in labour productivity in the manufacture of iron raises the rate of return on capital in both the manufacture of iron and also in the production of corn in which iron is a necessary input. A reduction in the labour cost of producing a unit of iron as a consequence of higher productivity in the sterile sector will reduce the labour required to produce a unit of corn (since the wages of corn-producing workers include a speciﬁc quantity of iron)4 and this will raise the ‘produit net’ of a worker who produces corn. In Cartelier’s restatement, industry (iron) and agriculture (corn) both produce basic commodities in Sraﬀa’s sense (Sraﬀa 1960) since each is necessary for the production of the other. The only non-basic commodity or ‘luxury’, which does not enter into the production of any other commodity, is ‘services produced by landlords’ including those provided by their ancillary employees such as lawyers. As in any Sraﬃan economy, a change in productivity in the production of any basic commodity inﬂuences the overall rate of return on capital, or in Quesnay’s language, the economy’s ‘produit net’. Agriculture’s primacy over industry therefore apparently dissolves if the Tableau is presented in input–output form with quantitative coeﬃcients. In contrast to Cartelier’s assumption that the production of a unit of corn requires a precise physical input of iron, Quesnay’s assumptions can be represented in terms of ﬁnancial ﬂows, so that the input of iron required to produce a unit of corn depends on the fraction of agricultural incomes which is spent on iron. When productivity in the manufacture of iron doubles, the comparative price of iron in relation to corn will halve (if there are equal organic compositions of capital in the two sectors) and agricultural producers who continue to spend the fraction (1) of their incomes on iron (one-half in most of Quesnay’s examples) will obtain twice as much iron as before. Therefore, if industrial workers each produce twice as much iron as before, and agricultural workers with unchanged corn wages continue to spend half their money incomes on iron as Quesnay generally

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assumes, they will each enjoy the beneﬁt of consuming twice as much iron. Then, with unchanged corn wages, their ‘produit net’ expressed in corn will be uninﬂuenced by what happens to productivity in the manufacture of iron. The whole beneﬁt from higher manufacturing productivity will be enjoyed in the form of extra workers’ consumption of iron (manufactures), and none will be passed on in the form of cheaper inputs and therefore higher returns to their agricultural employers. So did Quesnay intend to say that when the Tableau is in equilibrium, agricultural producers spend half their incomes on manufactures, whatever the quantity of manufactures this brings to them, which would reproduce his own results? Alternatively, did he believe that agricultural workers needed to be paid suﬃciently to enable them to purchase a speciﬁc quantity of manufactures, which would produce the conditions required for Cartelier’s reconstruction with its powerful new implications? Quesnay only appears to have stated a precise assumption about the wages of agricultural workers on one occasion, actually in the Explanation of the Versailles Tableau of 1758–59. There he assumed that workers would be paid suﬃcient money to purchase a speciﬁc quantity of corn. He declared that the daily wage will be suﬃcient to purchase ‘a twentieth of the price of one setier’ ([1758–59] 1972, 10). In the Wealth of Nations Adam Smith deﬁned the equilibrium wage quite similarly, for the money price of labour must always be such as to enable the labourer to purchase a quantity of corn suﬃcient to maintain him and his family either in the liberal, moderate, or scanty manner in which the advancing, stationary or declining circumstances of the society oblige his employers to maintain him ([1776] 1976, 509).

Thus both Quesnay and Smith deﬁned the equilibrium wage as the money required to purchase a quantity of corn and Smith actually spelt out the consequence that if manufactures became cheaper in relation to corn, workers would enjoy a rising standard of living expressed in manufactures until a frugal peasant could consume more manufactures than an African king (ibid., 23–4). Quesnay never spoke of the favourable implications for workers’ living standards of rising productivity in manufacturing. Ricardo and Marx, in contrast, both deﬁned the equilibrium wage in terms of quantities of necessities of both food and manufactures, and according to each, cheaper manufactured necessities would reduce the wages employers had to pay,5 and raise the rate of return on capital in the manner of Cartelier’s input–output reconstruction of Quesnay’s tableau. Quesnay’s own conclusion that what happens in industry will be irrelevant to the rate of return in agriculture will continue to be sustained if, as in Smith’s argument and perhaps Quesnay’s also, agricultural wages are not

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reduced when the real cost of manufactures falls. That leaves entirely intact Quesnay’s conclusion that agriculture yields a ‘produit net’ which depends wholly on what immediately concerns farming. In all his writings, the predominant inﬂuences upon the agricultural ‘produit net’ are whether ‘la grande culture’ or ‘la petite culture’ prevails, and whether foreign and domestic markets for food are free, or restricted by trade barriers and administrative controls. Whether Cartelier’s interpretation should be preferred appears to depend on whether the relationship between agricultural and industrial inputs is best expressed in quantities, of for instance corn and iron as he suggests, or indeed of any designated physical inputs in a generalised Sraﬃan restatement of Quesnay’s Tableau. Alternatively, should Quesnay’s own conclusions be reiterated by presenting all inter-sectoral ﬂows as ﬁnancial ﬂows expressed in values? Cartelier wrote in 1991 that, ‘the principal argumentation which Quesnay develops is in values’ (p. 27). In Quesnay’s successive representations of the Tableau, the outputs of sectors and the various ﬁnancial ﬂows are always represented as sums of money, and these vary proportionately with the price of corn. Corn predominates as the principal determinant of wages and therefore of agricultural costs and the total surplus. Steiner (1994) and Vaggi (1987) have each shown how much emphasis Quesnay placed on ﬁnancial ﬂows expressed in money, where the average price of corn realised over a series of harvests excercises great inﬂuence. It may be, therefore, that values in a Quesnaysian economy are best represented as multiples of the price of a setier of corn. In contrast, in Cartelier’s representation of the values of a Quesnaysian system, the prices of ‘corn’ and ‘iron’ (representing all sterile sector production) exercise equal inﬂuence upon the values represented by the Tableau’s ﬁnancial ﬂows. Cartelier’s new reconstruction of the Tableau shows how sensitive Quesnay’s conclusions are to quite narrow diﬀerences in assumptions. That he has been able to discover so much that is new from an apparently straightforward input–output reconstruction underlines the Tableau’s potential to generate new interpretations with powerful implications, which may be as extensive in the twenty-ﬁrst century as they were in the twentieth.

NOTES 1. Emeritus Fellow of Exeter College, Oxford, and Visiting Professor of Economics at the University of Reading. Address for correspondence: Danesway, Jarn Way, Boars Hill, Oxford 0X1 5JF. 2. It is sometimes asserted that Quesnay was sole author of ‘Les Explications’ but this cannot be. It must be Mirabeau who declared that he had found ‘a man of genius’ as a

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‘guide’ (Expl. 124) and who confessed to past error (as a populationist in the ﬁrst edition of L’Ami des hommes) at the opening of the chapter which concerns the impact of agricultural deterioration upon population. (Expl. 215). Quesnay was clearly the sole author of the Tableaux, of the statements under these, and of the calculations based upon them in the text. 3. In private correspondence in 1976, Joseph J. Spengler, who took a diﬀerent view in 1945, came close to an endorsement of the Meek solution, which I had adopted. 4. In Quesnay’s many statements of agricultural costs, especially in the production of corn, farm animals, labour and seed corn predominate. The products of the sterile sector therefore enter agricultural costs predominantly through the expenditure of half of agricultural workers’ wages on the sterile side of the Tableau. Spades, ploughs and other agricultural implements, are of course manufactured in the sterile sector, but their cost will be small in relation to that of labour and farm animals. 5. In the chapters ‘On Wages’ in Ricardo’s Principles and on ‘The Buying and Selling of Labour-Power’ in Marx’s Capital the equilibrium wage has to be suﬃcient to enable workers to ‘perpetuate their race’ (Ricardo) and for the worker to ‘perpetuate himself’ (Marx). Ricardo’s standard of living which ensures this consists in ‘the quantity of food, necessaries and conveniences become essential to him from habit’ ([1817] 1951, 93), while Marx includes ‘food, clothing, fuel and housing’ ([1867] 1974, i.168).

REFERENCES Barna, Tibor (1975), ‘Quesnay’s Tableau in modern guise’, Economic Journal, 85, September, pp. 485–96. Barna, Tibor (1976), ‘Quesnay’s model of economic development’, European Economic Review, 8(4), December, pp. 315–38. Cartelier, Jean (1991), ‘L’économie politique de François Quesnay ou l’utopie de royaume agricole’, Introduction to Quesnay, Physiocratie, ed. J. Cartelier, Paris: GF-Flammarion, pp. 10–64. Charles, Loïc (2000), ‘From The Encyclopédie to the Tableau économique: Quesnay on freedom of grain trade and economic growth and the origins of the Tableau économique’, European Journal of the History of Economic Thought, 7(1) Spring, pp. 1–21. Eltis, Walter (1975a), ‘François Quesnay: a reinterpretation. 1: The Tableau économique’, Oxford Economic Papers, 27(2), July, pp. 167–200. Developed as Chapter 1 of The Classical Theory of Economic Growth, Macmillan, 1984, 2nd edition, Palgrave 2000. Eltis, Walter (1975b), ‘François Quesnay: a reinterpretation. 2: The theory of economic growth’, Oxford Economic Papers, 27(3), November, pp. 327–51. Developed as Chapter 2 of The Classical Theory of Economic Growth, Macmillan, 1984, 2nd edition, Palgrave 2000. Eltis, Walter (1996), ‘The Grand Tableau of François Quesnay’s economics’, European Journal of the History of Economic Thought, 3(1), pp. 21–43. Herlitz, Lars (1996), ‘From spending and reproduction to circuit ﬂow and equilibrium: the two conceptions of Tableau Économique’, European Journal of the History of Economic Thought, 3(1), Spring, pp. 1–20. Marx, Karl (1867), Das Kapital, Hamburg. In 1974 English language edition with posthumous 2nd and 3rd vols, Moscow: Progress Publishers for Lawrence and Wishart. Marx, Karl (1969–71), Theories of Surplus Value, 3 vols, Moscow: Progress Publishers for Lawrence & Wishart, 2nd Printing.

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Meek, Ronald L. (1962), The Economics of Physiocracy, London: Allen & Unwin. Mirabeau, Victor de Riquetti, marquis de, and François Quesnay (1756–60), L’Ami des hommes, 8 parts of which the 7th, added in 1760, is ‘Tableau Économique avec ses explications’, Avignon. Reprinted in 1970 by Scientia Verlag Aalen. Mirabeau, Victor de Riquetti, marquis de, and François Quesnay (1763), Philosophie rurale, Amsterdam. Second 1764 edition reprinted in 1972 by Scientia Verlag Aalen. Negishi, Takashi (1989), ‘Expenditure patterns and international trade in Quesnay’s Tableau Économique’, in Developments in Japanese Economics, Academic Press/Harcourt Brace Jovanovich, Japan. Pattullo, Henri (1758), Essai sur l’amélioration des terres, Paris. Phillips, A. (1955), ‘The Tableau économique as a simple Leontiev model’, Quarterly Journal of Economics, 69, February, pp. 137–44. Pressman, Stephen (1994), Quesnay’s Tableau Économique, Fairﬁeld, NJ: Kelley. Quesnay, François (1756), ‘Fermiers’, republished in 1958 in François Quesnay et la Physiocratie, 2 vols, Paris: Institut National d’Études Démographiques (subsequently INED), pp. 427–58. Quesnay, François (1757), ‘Grains’, INED, pp. 459–510. Quesnay, François (1758), ‘Questions intéressantes sur la population, l’agriculture et le commerce’, added to L’Ami des hommes in 1758, and reprinted in INED, pp. 619–66. Quesnay, François (1758–59), Tableau Économique. Republished in 1972, Marguerite Kuczynski and Ronald L. Meek (eds), as Quesnay’s Tableau Économique, London: Macmillan. Quesnay, François (1766a), ‘Analyse de la formule arithmétique du Tableau Économique’, INED, pp. 675–82. Quesnay, François (1766b), ‘(Premier) problème économique’, INED, pp. 859–78. Quesnay, François (1767a), ‘Maximes générales du gouvernement économique d’un royaume agricole’, INED, pp. 949–76. Quesnay, François (1767b), ‘Second problème économique’, INED, pp. 977–92. Quesnay, François (1768), Physiocratie, ed. S. Du Pont, Paris. Reprinted in 1991, ed. Jean Cartelier, Paris: Flammarion. Quesnay, François (1958), François Quesnay et la Physiocratie, 2 vols, Paris: L’Institut National d’Etudes Démographiques (abbreviated as INED). Ricardo, David (1817), Principles of Political Economy and Taxation, London. Reprinted in 1951, P. Sraﬀa (ed.) as vol. 1 of The Works and Correspondence of David Ricardo, 11 vols, Cambridge: Cambridge University Press. Smith, Adam (1776), An Inquiry into the Nature and Causes of the Wealth of Nations, 2 vols, London. Republished, edited by R.H. Campbell, A.S. Skinner and W.B. Todd, 2 vols, Oxford: University Press. Spengler, J.J. (1945), ‘The physiocrats and Say’s Law of Markets’, Journal of Political Economy, vol. 53, September and December. Sraﬀa, Piero (1960), Production of Commodities by Means of Commodities, Cambridge: Cambridge University Press. Steiner, Philippe (1994), ‘Demand, price and net product inthe early writings of F. Quesnay’, European Journal of the History of Economic Thought, 1(2), pp. 231–51. Steiner, Philippe (1998), La science nouvelle de l’économie politique, Paris: Presses Universitaires de France. Vaggi, Gianni (1987), The Economics of François Quesnay, London: Macmillan.

7.

Power and wealth: Quesnay betrayed by the Tableau économique? Jean Cartelier

1.

INTRODUCTION

Loïc Charles and Philippe Steiner ([5]) rightly draw our attention to Quesnay’s neglected political views, namely the project of making France strong enough to confront England in economic and in military aﬀairs.1 Schematically, Quesnay insists more upon wealth than upon population, which makes a diﬀerence from most of the economists of his time, and more upon the navy than upon the army. Walter Eltis ([7]) carefully relates the ‘explanations’ of the Tableau économique contained in l’Ami des Hommes and the Philosophie rurale to the policy recommendations of Quesnay. He emphasises the practical character of these diﬀerent Tableaux by contrast with the abstract character of the ﬁrst versions and of the Formule. He gives also a detailed account of the eﬀects of diﬀerent policies, namely the extension of grande culture, free trade of corn (which amounts to a higher price of corn) and tax reform. Gianni Vaggi ([12]) insists on the modernisation of agriculture as a decisive element of the power of a nation. Such preoccupations seem well in accordance with Quesnay’s more general concern, that is refounding the French monarchy on a natural order in which politics and economics can hardly be distinguished. As a matter of fact, Quesnay pursued more or less the same apparent objectives as Colbert, i.e. wealth and power for the French monarchy, but the means and the social philosophy he advocated make it impossible to confuse them: the physiocratic idea of a royaume agricole is completely foreign to Colbert and has something to do with a political philosophy far anterior to mercantilism ([1]).2 Political philosophy, however, does not motivate the present chapter which aims at checking the coherence and consistency between Quesnay’s political recommendations about a nation’s power and his main economic propositions. Such an inquiry is necessary since Quesnay speaks in the name of science. ‘Everything in this world is subject to the laws of nature: men are endowed with this intelligence required to understand and observe them; but the great number of factors 130

Power and wealth

131

involved demands that they should be grouped together in comprehensive patterns, which form the foundation of a very far-reaching and self-evident science, whose study is indispensable if we are to avoid mistakes in policy’ ([9], Formule, p. 214, Meek’s translation, [8], p. 154). His theory of the production of wealth is presented as the basis of the Maximes. His views are not given as mere opinions founded either on experience or on the authority of great philosophers; they are circulated as scientiﬁc laws which should rule societies as physical laws eﬀectively rule the physical world. Politics is anchored in science unless it is the other way round . . . Taking into account that very remarkable speciﬁcity of Quesnay’s thought, it is worth investigating how far the economics of the Tableau supports Quesnay’s views on politics and military power. According to Quesnay, wealth is the basis of a nation’s power. But wealth is not a stock (and specially not a quantity of money) but a reproducible ﬂow of net value. What is essential to preserve, and to increase if possible, is that produit net. This cannot be done but: ●

●

●

by promoting the ‘right technique’ in agriculture (grande culture with farmers and horses) at the expense of the wrong one (petite culture with sharecroppers and oxen) by implementing free competition in order to get a ‘good price of corn’, which means that a net value appears only in agriculture so that a unique land tax on the produit net guarantees both a good public ﬁnance and a prosperous agriculture by favouring conspicuous consumption at the detriment of luxury in the way or ornamentation, i.e. by orienting landlords’ expenditures with respect to agriculture rather than industry, which is supposed to favour the reproduction of the produit net.

In order to assess their logical coherence Quesnay’s recommendations must be related to the main parameters of the Tableau and be submitted to a formal study (section 2). Short comments concerning the consistency of Quesnay’s political recommendations with the Tableau’s economics follow (section 3).

2.

A FORMAL STUDY OF THE TABLEAU ÉCONOMIQUE

Let us consider the Tableau économique in its latest version, the Formule of 1766, free from the formal diﬃculties met in the zigzag).3 The three actions enumerated above correspond to the following parameters of Quesnay’s economics:4

132 ● ● ●

2.1

France’s economic crisis in the eighteenth century

: fraction of the territory cultivated with the best technique (grande culture) : fraction of produit net (that is the value of surplus product) going to the productive class : fraction of produit net spent with respect of the productive class The Tableau économique as a Special Classical System of Prices

When economy complies with natural order, we have¸ 1. In the diﬀerent versions of the Tableau, 0.5. A classical system of prices combines two elements: a technique of production of commodities by means of commodities and a given rule of distribution of the value of surplus product between sectors. From the Formule, it is easy to derive the data relative to the ‘right technique’, that of grande culture. Taking quantities produced by both sectors as physical units, it turns out that 25 of corn output are used in corn production (2 billions out of 5) and another 52 in iron production (2 other billions spent by classe stérile with respect to classe productive). Following the same reasoning, we ﬁnd that 12 of iron output in used in corn production (1 billion out of 2). The ‘right technique’ is thus:

2 5 1 2

2 5

0

⇒

1 0 0 1

(7.1)

where the ﬁrst column of the two matrices corresponds respectively to the inputs and the outputs of agriculture (the ﬁrst row is for corn, the second for iron) and the second column to the inputs and outputs of industry. We suppose that an inferior technique is available for the production of corn (petite culture) which is:

3 2 10 10 1 4 0

⇒

1 2

0

0

1 2

(7.2)

When used on all the territory, it gives half of corn production as compared to grande culture, with relatively more advances (but less in absolute value). Constant returns are assumed. The technique eﬀectively used for the production of corn is a linear combination of (7.1) with weight and (7.2) with weight 1 . The global technique is thus:

3 2 10 5 q 1 0 4

⇒

1 2

0

0 q

(7.3)

Total quantity of corn produced is 1 2 . When the ‘right’ technique is used on the entire territory, it is equal to one. Quantity of iron q is not

133

Power and wealth

limited by the territory but by the quantity of input supplied by agriculture and/or by the quantity of iron consumed by the landlords. The vector of surplus product is: s

1 2 5

q

25q 1 4

(7.4)

In order to have s0 the quantity of iron produced must obey the following constraint: 1 2 2 q 1 4 . Clearly, s, the vector of commodities available for any other use than inputs for production, depends on two factors: the percentage of land cultivated according to grande culture and the scale of production of industry. Coeﬃcient , the extension of cultivation with farmers and horses as opposed to that with sharecroppers and oxes, and q, the quantity of iron both partially reﬂect the choice of consumption by landlords. That choice is less a matter of individual preference than a question of socially-oriented behaviour. Landlords, as the pre-eminent social group, may inﬂuence in a decisive way, according to Quesnay, the type of society. This seems the very sense of opposing conspicuous consumption to luxury in the way of ornamentation. The produit net, y, in which consists wealth properly speaking, is the scalar product y p, s where p is the price vector. In order to determine prices we need to specify the rule of distribution of y, still unknown, between the sectors. Parameter formally does the job. The following system of equations expresses the logic of price determination: p1 3 10 p1 1 4 p2 y

p2q (1)y p1 25 q

(7.5)

where y is deﬁned by: y p, s (p1 p2)

1 2 5

q

25q 1 4

(7.6)

The basic property of this system is rather counter-intuitive. The value of y is not known except by solving (7.5), which in turn depends on the way y is distributed betwen agriculture and industry. The metaphor of a cake whose magnitude would depend on the way it is shared clearly shows how it is diﬃcult to spontaneously come to this view. To my knowledge, no commentator has been aware of such a strange property of Quesnay’s economics before the revival of classical theory, due to Sraﬀa and others. The failure to recognize that fundamental feature of the theory of prices which supports the Tableau is certainly responsible for a major shortcoming in interpreting Quesnay’s economics: namely the belief that any sector’s

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France’s economic crisis in the eighteenth century

ability to generate net value would depend on characteristics speciﬁc to that sector. A quick look at (7.5) shows that such a belief is ill-founded. The imputation of speciﬁc levels of productivity to diﬀerent sectors comes only from an assumption about the economy as a whole ( concerns agriculture and industry as well). Productivity of agriculture, be it exclusive or not, has nothing to do with the intrinsic properties of agriculture (fertility of land, for instance) but with a global view about the entire economy, given namely by the rule of distribution of net value. Price theory lying behind the Tableau is a member of a larger family. Petty, Cantillon, Smith and Ricardo are other members characterized by diﬀerent assumptions about net value’s distribution: the net value is distributed proportionally to the number of workers (Petty), to the quantity of land (Cantillon) or to the value of the means of production advanced (Ricardo). The only very successful price system in the history of economic analysis is Ricardo’s prices of production theory, taken again by Dmitriev, Bortkiewicz and Sraﬀa.This point has to be kept in mind in order to understand some a priori strange results below. Assuming constant returns is not suﬃcient to determine prices independently of the quantities produced (or independently of ‘demand’) if 1 i.e. if industry captures a part of the value of surplus product. In this case there is an interdependence between the relative price and the level of production of industry as shown by (7.5). Moreover, system (7.5) has only one degree of freedom (the sum of the two equations gives (7.6)). We can choose whatever equation of the system (7.5). Let us select the second one: p2q (1 )y p1 25 q

(7.7)

Equation (7.7) recalls that industry sales (p2q) minus costs (inputs bought to productive class: p1 25 q ) equals the net revenue of industry (1)y. Solving (7.7) gives: 5 4q (1 ) (1 ) p1 p p2 4 2q (1 ) (1 2)

(7.8)

if p2 is taken as numéraire. For 1 we have p 52, the solution of the Formule, whereas for 0 we have either p 54 if 0 or p 56 if 1. Value of surplus product, that is produit net, is, according to (7.6) and (7.8):5 y

q(1 3) 4q 2(1 ) (1 2)

(7.9)

For 1 and 1 we have y 1, i.e. 2 billions, the solution of the Formule, whereas for 1, y depends on q. But, as the following equation makes it clear, there is another dependence through the expenditure of produit net. The quantity of iron is ruled by:

Power and wealth

q (1)y

1 4

135

(7.10)

Equation (7.10) states that gross product of industry is equal to sales, which are the sum of the fraction of produit net spent in respect of the sterile class plus the inputs paid by the productive class. We have to solve simultaneously (7.9) and (7.10) which gives the following equation in q: 8q2 [2(1 )(610)2(13)]q (12) (1 ) (1 ) 0

(7.11)

We have three parameters to study simultaneously. For the sake of convenience, we shall take 1 and postpone the study of the inﬂuence of , which is rather straightforward, once other formal properties have been established. For 1, (7.11) reduces to 8q2 (4168)q 6(1)0. The positive (and economically meaningful) solution is:6 q

1 [842 2 (42 16 4 42 4 1) ] (7.12) 8

The quantity of iron depends on the distribution of net value between agriculture and industry and on the composition of landlords’ expenditures. The ﬁrst parameter, , is a proxy for the productivity of agriculture (when 1 we have the exclusive productivity of agriculture and for 0 that of industry) and an indicator for the price of corn. As we know, both phenomena are the two faces of the sam e coin. We have now all we need to study the inﬂuences of the three parameters selected above. However, before embarking upon this task, it is worth specifying some original properties of Quesnay’s price system as compared with the Ricardian one issued from Sraﬀa’s book. 2.2 Quesnay’s Price System and Ricardo’s Prices of Production: A Brief Discussion Two points at least deserve a discussion: (i) is there something such as a ‘corn model’ common to Quesnay and Ricardo?, (ii) does it make a diﬀerence if the rule of distribution is expressed in terms of unknown rates of return rather than in terms of shares of net value ()? Let us consider the ﬁrst question which is that of the alleged homogeneity of in- put and output in agriculture. It is well known that Marx saw in this intrinsic property of agriculture the origin of Quesnay’s tour de force, namely to have been able to formulate a surplus value theory without having any value theory! More interestingly, according to Sraﬀa’s interpretation,

136

France’s economic crisis in the eighteenth century

Ricardo’s theory of proﬁt emerged from the corn model of 1815, generalized later in the Principles in a wage-commodities model and achieved in Sraﬀa’s Production of commodities by means of commodities in the Standard commodity model [11]. Now it is clear that agriculture does not exhibit the homogeneity property in the Tableau since among the reports of the productive class some outputs from the sterile class are to be found. Nevertheless, it is tempting to see to what extent the homogeneity property in agriculture would alter Quesnay’s theory of prices. A quick look at (7.5) convinces us that supposing 1 4 0 does not change the system fundamentally. The reason is that p2 still appears in the ﬁrst equation through y. The price of iron matters for the determination of the price of corn even if iron is not an input of agriculture. This comes from the fact that net value, which enters the equation of corn, is nothing but the value of a bundle of commodities (the surplus product) including a quantity of iron. The second question is a little more complex. Quesnay speaks most often of rates of return and rarely of shares of net value. He assumes that the rate of return on annual advances (made of corn only) are 100 per cent. Above a formalization was, however, preferred in terms of shares. At least two motives exist for adopting such a position. The ﬁrst one is that in a model in terms of rates of return it is not generally possible to assume an a priori given rate of return. The rate(s) of return is (are) unknown and has (have) to be determined by solving the system. Let us rewrite (7.5) as follows: p1 ( 3 10 p1 1 4 p2 )(1r)

p2q p1 25q (1r )

(7.13)

where is a parameter for the diﬀerence between the diﬀerent rates of return. When 1 we have a Ricardian system of price. For 0 do we have a physiocratic system, agriculture only being productive? It is doubtful. First of all, q, the quantity of iron, ceases to play any role since it disappears from the second equation. Reporting the value of p2 given by that equation into the ﬁrst one gives, after simpliﬁcation: 3 1 (1r) (1 r ) (1r)1 0 10 10

(7.14)

If 1 and 0, as in the Formule, we have (1 r) 53. This value conforms to the Tableau but not to its logic. The crucial point is the following: in (7.13) and (7.14) prices and rate of return are independent of the alternative utilizations of the surplus product, which is not the case of (7.5). The formalization in terms of rate of return does not guarantee that supply equals demand in every market. As a matter of fact, this is true for Sraﬀa’s system as well; nothing is said on the relation between composition of net value and

137

Power and wealth

expenditures of revenue. Quesnay, rightly, insists on the condition of reproduction which implies not only that output value be greater than input value but also that producers be able to get eﬀective receipts great enough to allow them to produce again on the same scale. In order to check that condition of reproduction, we have to make explicit what is the expenditure of the revenue y. In that sense, Marx’s schemes of reproduction are closer to the Tableau than Ricardo’s theory of prices of production.

3.

EXPECTED AND UNEXPECTED PROPERTIES OF THE TABLEAU ÉCONOMIQUE

Coming back to our main point, we shall try to draw some implications from the formal study of the Tableau. 3.1

Landlords Expenditures, Corn Price and produit net

Let us represent the function of q just found in a three-dimension diagram in order to show how it is related respectively to and :

1.4 1.2 q 1.0 0.8 0.6 0.0 0.2 0.6

0.4 gamma

0.8

0.4 alpha

0.6 0.8 1.0

1.0

Figure 7.1

0.2

The function of q

138

France’s economic crisis in the eighteenth century

Not surprisingly, the importance of the classe stérile is negatively related to and to , but to a lesser extent for the latter.7 The determination of q is a necessary step to calculate the produit net and to express it as function of and . We have, replacing q in (7.9): 4 { 8 [ 8 4 2 2 (42 16 4 42 4 1) ]} 1

y

1 4 { 8 [ 8 4 2 2 (42 16 4 42 4 1) ]} 6(1 )

(7.15) A three-dimensional diagram exhibits what are the respective inﬂuences of and on y: 1.0 0.9 0.8 0.7 y 0.6 0.5 0.4 0.0 0.2 0.4 0.6 gamma

0.2 0.4 alpha 0.6

0.8

Figure 7.2

0.8 1.0

1.0

The respective influences of and on y

Produit net y increases with in accordance with Quesnay’s theses. But, contrary to his repeated assertions, y decreases with ! This relation is steeper the lower the values of .8 Only for 1, y ceases to depend on . It is true that Quesnay considered only this special case. But there is no reason not to explore the formal properties of the model when the economy has not yet reached a natural order position and when the price of corn has not yet reached its natural value. The result above is not diﬃcult to understand once a false evidence is dissipated. Contrary to what Quesnay (and most of his commentators) thought, it does not make sense to pretend that produit net is due to the fertility of land. As a scalar product of prices by surplus product, produit net generally depends on the relative scale of activity of the two sectors which,

139

Power and wealth

in turn, depends on . It is only in the special case where 1 that this interdependence is broken. Developing (7.6) gives: y p1

1 2 5

2 p1q p2q 5

p2

1 4

(7.16)

net value in industry (1 )y

which makes it clear why q disappears in the evaluation of y when 1 and why the story becomes complex when this does not occur (for 1). In order to understand why produit net y decreases with , one needs just to recall that two distinct inﬂuences have to be taken into account: the one concerns the vector of surplus product, the other the vector of prices.

y 24(1 ) From (7.9), it appears that partial derivative is q [4q 6(1 ] 0 if 1.9 When q increases, the composition of surplus product changes: it contains more iron dq and less corn 25 dq. When 1, prices are 25 and 1 respectively. So that, the positive variation of the value of iron dq is just compensated by the decrease of the value of corn component: 25 52 dq. But, for 1, the price of corn is lower than 52 and the decrease in value of corn com y ponent is no longer suﬃcient to compensate the increase dq. As a result: q

q

y 0. Now, since 0 as seen above, we have 0. From the point of view of the inﬂuence of the structure of landlords’ expenditures, the idea of sterility of industry is not a question of degree but a question of nature. An economy with 1 qualitatively diﬀers from one where 1 . Qualifying Quesnay’s theory by admitting that industry could be ‘a little bit’ productive as soon as agriculture is admittedly ‘far more’ productive than industry (a point of view rather close to Forbonnais’ views) would not do justice to it. It is only when natural order prevails that a negative inﬂuence of an increasing ceases to be true. But, in this extreme case (1) produit net y does not depend negatively on q and therefore not positively on , despite one of Quesnay’s favourite statements. Net value depends on the extension of grande culture only, that is on . 3.2. Landlords’ Expenditures, Corn Price and the Global Rate of Return Another basic proposition of Quesnay is that a high price of corn, i.e. a high , ceteris paribus leads to a higher produit net and thus to an increase in the wealth of a nation. That contention seems well supported by the formal study of the Tableau as shown by the diagram above. But, as we shall see later, the inﬂuence of on y depends on the numéraire. In order to avoid this diﬃculty, it may be convenient to consider the rate of return on advances rather than produit net since it gives an idea of economic eﬃciency

140

France’s economic crisis in the eighteenth century

independent from the numéraire. Quesnay himself emphasizes the importance of the rate of return on advances as a strategic variable. Therefore, it is worth inquiring into the inﬂuence of and on the overall rate of return, that is the ratio of produit net to the total advances a. Total advances are (for 1): 52 (1q)p 12. Calculating p, taking into account (7.12) gives: p

1 20 8 [ 8 4 2 2 (42 16 4 42 4 1) ] 10(1 ) 1 [ 8 4 2 2 (42 16 4 42 4 1) ] 12(1 ) 8 8

(7.17) Total advances are then 1 a 25 { 1 8 [ 842 2 (42 16 4 42 4 1) ]}

1 20 8 [ 8 4 2 2 (42 16 4 42 4 1) ] 10(1 ) 1 8 8

[ 8 4 2 2

(42 16 4 42 4 1)

] 12(1 )

21

(7.18) The overall rate of return is: with and :

y a.

The diagram below shows how varies

0.70 0.65 0.60 0.55 rho 0.50 0.45 0.40 0.35 0.2 0.5 alpha

0.4

0.6 gamma

1.0

Figure 7.3

Diagram showing how varies with and

0.8

1.0

141

Power and wealth

Unexpectedly, at least if one is true to Quesnay, the global productivity of the economy does not vary positively with . It is quite the contrary! This global relation is a combination of two opposed partial ones. In agriculture an increase in the relative price of corn improves the productivity of this sector and its own rate of return. This is due to the fact that quantity of corn as output is greater than as input. For a similar reason that very increase in the relative price of corn (which is a decrease in the relative price of iron) lessens the productivity of industry since quantity of iron as output is greater there than as input. The global relation depends on the relative importance of these two opposite and simultaneous eﬀects. As the sign of

the derivative depends on both functions, whether varies positively or negatively with is not known a priori. As a matter of fact, the speciﬁc result above is contingent to the technique. It could have happened, with a diﬀerent technique, that be an increasing function of as well. But, by an historical irony, the data of the Tableau are not favourable to Quesnay’s point of view! For example, taking 0.5, the two-dimensional diagram is:

0.47 0.46

rho

0.45 0.44 0.43 0.42 0.41 0.40

0

0.2

0.4

0.6

0.8

1.0

gamma Figure 7.4

Diagram showing global relation of and

For 1, we have 0.4, which is Quesnay’s own result. A modiﬁcation of relative price p in favour of corn results in a decrease of the global rate of return of the economy for a very large range of values of .

142

3.3

France’s economic crisis in the eighteenth century

Natural Order and Extension of grande culture

Developments above have made it clear that a great source of trouble comes from the situations with 1. The life of the physiocratic scholar is far better when 1! There are (at least ex post) strong analytical reasons for Quesnay’s insistence on favouring a ‘good price of corn’, that is the price which is to be observed in the international market for corn. Abolition of the French regulation on corn trade, which expresses a ‘subsistence pact’ between the sovereign and the French people, is for him the best thing to do in order to get that result. The basic idea behind such a policy is that free competition will drive market prices to their ‘natural’ level. At this level, agriculture is the only activity for which the value of sales (valeur vénale) is above that of costs (valeur fondamentale). To keep the story simple, let us consider hereafter an economy where such a policy has been successfully applied and where 1, that is when industry is sterile and agriculture exclusively productive. Hence, (7.8) reduces to: 5 p1 p p2 2

(7.19)

1 3 4

(7.20)

and (7.6) to: y

Now, produit net does not depend on landlords’ choice of consumption but only on the part of the territory cultivated by farmers with horses. This is true also for total advances (avances annuelles plus amortization of avances primitives) in agriculture that amounts to 3 4 1 4 52 2 2 . Note that if the rate of return on annual advances only is 100% and independent of , this is not the case of the return on total advances equal to: 1 3 10 4 2 , which grows from 25%, when 0, to 66.666% when 1. Quesnay is then right, by his own standard, when he advocates the extension of the grande culture and a good price for corn. Besides, the quantity of iron increases with (and thus with the produit net) and its level is higher the greater is 1, the fraction spent in respect of the sterile class. In monetary terms, with p2 2 billions taken as a numéraire, (7.20) is: y

1 3 2

(7.21)

It is not very diﬃcult to draw alternative Formules according to diﬀerent values for and . The monetary description given by the Tableau has to be amended in order to take into account the various extensions of the grande culture.

143

Power and wealth

Instead of taking for granted a net revenue of 2 billions, we have to consider a value of 1 2 3 . This revenue is spent according to, respectively, and 1 with respect to agriculture and industry. That sterile class spends the entirety of its revenue compared to productive class does not depend on but only on the assumption that it is . . . sterile. It remains to determine the amount spent by productive class in respect of sterile class. Physical quantity of corn produced is known ( 1 2 ) , which determines the quantity of input bought to sterile class ( 1 4 ) independently of its importance. Price of iron is known (2 billions), which means that productive class buys for 1 2 billion compared to sterile class. The Formule is then:

Productive class

Landlords (1 + 3λ)/2

α(1 + 3λ)/2

(1 – α)(1 + 3λ)/2

Sterile class

(1 – α)(1 + 3λ)/2

(1 + λ)/2

(1 + λ)/2 1 + 2λ Payment of produit net

Figure 7.5

1 + 2λ – α(1 + 3λ)/2 1 + 2λ – (1 + λ)/2 = (1 + 3λ)/2

Tableau’s Formule

It is easy to check that for 0.5 and 1 we get the 1766 Formule (the 2 billions of avances annuelles being in natura) whereas we have y 2 and Rp 3 irrespective of , which inﬂuences only Rs 3 for 0 and Rs 1.5 for 1. Most of the results mentioned above are unexpected or counter-intuitive. But it is not yet clear whether they conﬁrm or not Quesnay’s recommendations about the means to get a French monarchy able to resist England.

144

4.

France’s economic crisis in the eighteenth century

‘AGRICULTURAL KINGDOM’THE BEST ROAD TO WEALTH AND POWER?

Several points seem to need discussion. 4.1

Produit net and Choice of numéraire

First of all, the choice of numéraire is relevant for our problem. Such an assertion may sound strange since the Tableau is expressed in money terms. But in an exercise where Quesnay’s aﬃrmations are not taken at their face value, it must be a rule to accept only those propositions which may be derived logically from the initial assumptions. Does money enter the Tableau as more than a descriptive device? It is diﬃcult to answer such a question. In any case, even if it is not impossible to ﬁnd some elements of a monetary theory of wealth (some interesting quotations may be found in Hommes ) it would be diﬃcult to give a clear account of it in modern terms. Another line of interpretation is explored above according to which Quesnay’s implicit price theory is not in money terms but, as any classical price system, in real terms. Prices are determined up to a scalar factor, which means that we have to choose a numéraire. Wealth, although evaluated by Quesnay in money terms, is theoretically determined only in real terms. In the formal study above, iron is taken as the numéraire. Produit net is conceived of as a purchasing power of corn over iron. The relative price of corn p is thus a decisive determinant of produit net. As p is obviously positively related to , there is no surprise to ﬁnd a positive relation between and y. Of course, if we had considered corn as numéraire 1/p would have been inversely related to as would have been produit net evaluated in corn. As a consequence, maintaining that a high price of corn is favourable to a high produit net is theoretically meaningful only if there is a good reason to choose iron as the numéraire. As far as military power and international pre-eminence are concerned, is there a numéraire that is specially signiﬁcative? Are military expenditures oriented towards agriculture or towards industry? Quesnay is not very prolix on this point. He prefers (probably rightly) to insist on the importance of the navy which has the great advantage of not diminishing the labour force in agriculture as does the army ([10], Hommes, p. 520). The value of surplus product is thus the essential factor. ‘What is to increase the progress of our navy is the increase in the revenue of the State’ ([10], Hommes, II, p. 524). The fact that Quesnay reasons in money terms makes him forget that produit net is the value of a vector and not an indistinct purchasing power. Composition of produit net could matter but it is not straightforward to assess which is best suited to the development of navy.

Power and wealth

145

If military considerations do not allow us to conclude in favour of a numéraire, political considerations do. There is a clear political motive to choose iron as a numéraire and to stress the positive relation between a high price of corn and wealth. What is essential to Quesnay is the market power of an agricultural nation, power exerted upon non-agricultural countries. More speciﬁcally, he conceives of France as a combination of two nations. ‘Thus an agricultural kingdom which engages in trade unites in itself two nations which are distinct from one another: one, bound to the territory which provides the revenue, constitutes the essential part of the society; and the other is an extrinsic addition which forms part of the general republic of external trade, employed and paid by the agricultural nations’ ([9], Formule, p. 225, M eek’s translation [8], p. 162). Favouring one against the other leads Quesnay to express the wealth of the former as a power to command commodities produced by the latter. But now a conﬂict arises. On the one hand, it makes sense to adopt iron as a numéraire to stress that agriculture is really the heart of the economy, but, on the other, for France as a whole, it is the global rate of return in the economy which is the decisive factor. And, as we have seen, given the data of the Tableau, global productivity is not higher the greater the fraction of produit net going to agriculture. In other terms, the global rate of return is not necessarily correlated with a high price of corn. It is just the contrary. Such a result, although contingent on the technique, does contradict the search for increased eﬃciency and maximum wealth. That contradiction deserves to be explored further. 4.2

Productive Activity and Increase of Wealth

The point may be put in a nutshell. According to the formal logic of the Tableau, a society in which the unique activity considered as productive dominates does not generate a greater net value than one where the sterile class is important. What matters is not the proportion of productive to non-productive activity but, inside the former, the relative extension of grande culture as compared to petite culture. In formal terms, what explains the importance of 1+ produit net is not q or q/ 2 but . An agricultural kingdom is not proved to be the most convenient form of society according to Quesnay’s own criterion of wealth! This counter-intuitive conclusion ceases to be surprising as soon as the ‘intuitive’ reasoning is shown to be false. This reasoning is the following: as the exclusive productivity of agriculture comes from its intrinsic properties (fertility of land, nature’s gift, etc.), the greater the fraction of activity devoted to it the greater the amount of wealth. But the story really told by the economics of the Tableau is diﬀerent. What determines the relative

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importance of agriculture is the way in which landlords spend the net value, denoted by . We have shown why was indiﬀerent to y when

y 1 and why 0 when 1. The indiﬀerence of may be directly obtained from the Tableau. If we consider the Formule, we immediately see that all receipts of the sterile class are spent with respect to the productive class. This means that all the is produit net is spent directly or indirectly with respect to the productive class whatever may be. The only important point, clearly made by Quesnay, is that produit net should not be hoarded. Were industry allowed to be ‘a little bit’ productive, some very unexpected results would follow, namely that luxury is to be preferred to conspicuous consumption as allowing a higher produit net! Again we must avoid confusing surplus product – which is a vector equal to the diﬀerence between the output and input vectors of the economy as a whole – and produit net – which is the scalar product of the price vector by the surplus product. Surplus product is aﬀected by the expenditure behaviour of landlords, both in size and in structure, in a way clearly intelligible: q varies inversely with . The inﬂuence of on prices is not so clear as (7.17) reminds us. The inﬂuence of on wealth is a combination of both inﬂuences which cannot be known except by making explicit all the formal relations contained in the Tableau. There is thus no economic foundation, strictly speaking, to Quesnay’s position on the relative importance of the two classes. But there is obviously a strong political motivation. Loïc Charles and Philippe Steiner ([5]) clearly explain this relatively to the debate on the noblesse commerçante prompted by the book by Coyer. As a matter of fact, Quesnay’s argument is part of a larger attempt at rehabilitating nobility. Not being politically justiﬁable, as Quesnay himself recognizes in the Traité de la monarchie, nobility may appear more acceptable when disguised as landlords. But the argument runs short and cannot be sustained by convincing arguments ([4]). There seems to be no economic (or even rational) argument supporting the restriction of industry to a minimum . When the territory is cultivated at its best (1) there is no obvious economic harm in favouring industry by luxe de décoration; even if the produit net is not greater, the surplus product increases. Would it not be better to have a greater surplus product with a undiminished produit net? Would it not be better to have a greater population making a living from industry? The answer to this question is not an economic one. It depends heavily on the idea one has about a royaume agricole. More precisely, if one thinks that citizens must be attached to the territory (directly or indirectly) one should favour a strict faste de subsistence, i.e. 1, which would imply the minimum production of iron compatible with the needs of agriculture (q 12) with a ﬂow of 1

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billion in the Formule and of 32 5 billions for agriculture if we take into account advances in natura. In that case, the system of quantities is, following (7.3):

2 1 5 5 1 2 0

⇒

1 0 0 12

(7.22)

Surplus product is made of corn only and industry is nothing but the strictly necessary appendix to agriculture. 4.3 Grande culture versus petite culture: The Real Source of Increased Wealth Concerning the increase of wealth, the decisive distinction is not between productive and non-productive activity but that between grande culture and petite culture, a distinction which is internal to agriculture. In our formal study, it is denoted by , the fraction of the territory devoted to culture with farmers and horses.We may interpret Quesnay’s idea of growth as a progressive increase of through time that ceases when reaches its maximum 1. At this point a natural order situation exists. Growth stops unless the technique improves. A brief parallel with Adam Smith may be interesting. Remember that, for Smith, productive labour is one which is exchanged against capital and that growth is interpreted as an increase in the proportion of waged or productive labour employed in the country. More precisely, labour hired by capital produces this year a value (expressed in labour commanded) (1r) times higher. If a certain fraction of this additional value, say , is devoted to hiring more labour next year, quantity of productive labour increases by a factor (1r). If the total quantity of labour available is constant, growth will cease (except for increasing returns coming from a greater division of labour) when all labour has become productive, i.e. spent in a capitalist relation of production, as opposed to a relation with menial servants. More than an increase in the mass of commodities produced, growth of nations is characterized by extension of a certain mode of production. The relation above shows that for Quesnay it is only the extension of a special relation of production in agriculture (the grande culture) which accounts for the growth of the net product. Growth cannot be reduced to a purely quantitative phenomenon since it requires, by its very deﬁnition, a change in the social relations of production. The diﬀerence with Smith is, however, important. Quesnay does not explain clearly how an increase in the advances comes about (see, however, ([6])). The key to this shortcoming would be, according to R. Meek, the following contradiction. On the one hand, Quesnay could not admit that a

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fraction of produit net comes in the hands of the farmers: there should be no reason to exempt them from taxation; on the other, he could not state that farmers never get some part of the revenue: there could not be any increase in the productive advances and consequently no increase in wealth. This dilemma would explain the strange treatment of farmer’s proﬁt which is condemned to be transitory, existing only during the intervals between rent contracts. Meek’s interpretation is interesting and full of ingenuity. But he takes for granted that Quesnay had in view an unlimited increase in wealth, which is precisely the point in question. It seems, on the contrary, that Quesnay thinks only of a permanent high level of wealth when he refers to a ‘large kingdom whose territory [is] fully cultivated by the best possible methods’ ([9], Formule, p. 210, Meek’s translation, [8], p. 151). Moreover, according to Quesnay, a source exists for the increase of productive advances: it is simply the expenditure of the landlords’ revenue. ‘Thus it is with reference to the order of the distribution of expenditure, according to whether it is returned to or taken from the productive class, according to whether it increases or diminishes the advances of this class, and according to whether it maintains the prices of products or causes them to fall, that we may calculate the eﬀects of the good or bad leadership of a nation’ ([9], Formule, p. 223, Meek’s translation, [8], p. 161). But Quesnay’s calculations sharply diﬀer on this point (the inﬂuence of and on y and ) from those presented above. If the interpretation in terms of a classical price system suggested in this chapter is correct, we may admit that, despite its impressive character and its incredible sophistication, Quesnay’s economic argument is far less consistent than most commentators believe with his political recommendations. In this sense, Quesnay is betrayed by his own Tableau économique.

NOTES 1. 2.

3. 4.

5.

I am very grateful to Walter Eltis for his remarks and suggestions. Of course, he is not responsible for remaining errors and insuﬃciencies. ‘At the head of his ideal society we see a single ruler, a pious king, who subjects himself to the law of nature. There are in his realm no legislators, no man-made laws, but a council of jurists interpreting the tenets of ius naturale, quite in the same manner as the Spiritual Lords and Canon lawyers in the Middle Ages interpreted, for the beneﬁt of the Christian king, the laws of God’ ([1], p. 167). One of them is the role played by the advances of the classe stérile (see [3]). The Tableau is interpreted here as a special case of a classical system of prices. A classical system of prices is a combination of a technique and a rule of distribution (or imputation) of the value of surplus product among sectors. For a justiﬁcation of this point of view, see ([2]) and ([3]). If corn is chosen as numéraire, produit net (in corn) would be: (2 6)q

y 20q 5(1 ) (1 )

Power and wealth 6.

149

For 0, q is given by 8q2 (2 62)q (1 ) 0. The positive solution is then: 1 q 16 (2 622 (1 2 2 2 6 2))

8.

A qualitatively identical result would be obtained for 0, the level of qbeing uniformly lower due to the inferior technique used. The choice of numéraire obviously aﬀects the relation between yand . As a matter of fact, i f corn is taken as numéraire, produit net (in corn) is a decreasi ng function of . But, this does not at all inﬂuence the negative relation between y and .

9.

The sign of

7.

10.

y

q

is not aﬀected by the choice of numéraire.

These rates are respectively 33.3% and 66.6% if the value of iron inputs is taken into account Total advances, i.e. total value of inputs in corn and iron sectors, are a 1 q 2 . If we consider the rate of return for the economy as a whole (with the iron sector), y the rates a respectively become, for q 1, 12.5% and 40%. They negatively depend now on q: for 1, varies from 50% when q 1⁄2 to 33.3% when q 32 .

REFERENCES [1] Beer, Max (1939), An Inquiry into Physiocracy, London: Allen and Unwin. [2] Cartelier, Jean (1991), ‘L’économie politique de François Quesnay ou l’Utopie du royaume agricole’, introduction to Quesnay, Physiocratie, edited by J. Cartelier, Garnier-Flammarion. [3] Cartelier, Jean (1998), ‘Quesnay François and the Tableau économique’, in The Elgar Companion to Classical Economics, edited by H. Kurz and N. Salvadori, Northampton, MA, USA and Cheltenham, UK: Edward Elgar Publishing. [4] Cartelier, Jean (2000), ‘Nobility and Royaume agricole: The Tableau économique as a Political Utopia’, ESHET Fourth Conference, Graz. [5] Charles, Loïc and Steiner, Philippe (2000), ‘ La politique de Quesnay’, mimeo. [6] Eltis, Walter (1999), ‘The ﬁrst growth model: Quesnay’s (and Mirabeau’s) dynamic Tableaux in Philosophie rurale’, Colloque international Charles Gide, Sorbonne. [7] Eltis, Walter (2001), ‘How Quesnay’s Tableau économique oﬀered a deeper analysis of the predicament of France’, ESHET, Fifth Conference, Darmstadt, mimeo. [8] Meek, Ronald (1963), The Economics of Physiocracy, Essays and Translations, Cambridge, MA, USA: Harvard University Press. [9] Quesnay, François (1991), Physiocratie, edited by J. Cartelier, GarnierFlammarion. [10] François Quesnay et la Physiocratie, INED, 1958. [11] Sraﬀa, Piero (1960), Production of Commodities by Means of Commodities, Cambridge: Cambridge University Press. [12] Vaggi, Gianni (2001), ‘Quesnay and the road to prosperity: technology, markets and polity’, ESHET, Fifth Conference, Darmstadt, mimeo.

8.

Structural change and social transformation in physiocracy Gianni Vaggi

POOR FRANCE To the physiocrats the French Kingdom is not a wealthy or advanced nation, but rather a poor country which has suﬀered a century-long period of decay. In Extrait des économies royales de M. De Sully which accompanies the Tableau économique of 1758–59 we read: ‘PAUVRES PAYSANS, PAUVRE ROYAUME’ (Quesnay’s emphasis) (Kuzcynski and Meek, 1972, p. 10) – a synthesis of the evil and damages of contemporary France. This text is made up of twenty-four short maxims which accompany the third edition of the Tableau économique in the ﬁrst months of 1759; the words quoted refer to a note to maxim fourteen. A similar text, with this emphasis, is in the Maximes générales du gouvernement économique d’un royaume agricole published in 1767 in the Physiocratie by Pierre Samuel Du Pont de Nemours, a disciple of François Quesnay (INED, 1958, vol. II, p. 973). These are important contributions in the work of the master of physiocracy; in this brief sentence and in that emphasis there is the synthesis and analysis of the main problem of France in the eighteenth century. Towards the end of the Extrait, there is a very long footnote, the last one, where Quesnay deals with the problem of wars and of the military power of the states; he explains that soldiers and battles are not ‘des événements décisifs des guerres’ (Kuzcynski and Meek, 1972, p. 21); the decisive element of national power is the ability of her citizens to ﬁnance, through taxation, the army; in the end power depends on the economic strength of a country. Here Quesnay approvingly quotes a work by Boisguilbert, Le Détail de la France sous Louis XIV, where it is maintained that the decadence of the Kingdom begins around 1660. This is the eﬀect of a foolish ﬁscal system which taxes the farmers and agricultural income; as a consequence at the time of Louis XIV only a third of the income reaches the coﬀers of the Kingdom (Kuzcynski and Meek, 1972, pp. 19–21). Quesnay writes the Tableau during the Seven Years’ War, which for him is one more example of the superiority of England over France.1 150

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What are the true causes of this superiority? He takes a long-run perspective of the impoverishment of the French Kingdom and goes back one century; the decadence begins during the period of Colbert’s power when French industry was being protected to the detriment of agriculture. This was an epoch characterised by an iniquitous and ineﬃcient ﬁscal system and by those commercial policies that were to go by the name of Colbertisme, and which are strongly disapproved of by physiocracy. In the ﬁrst decades of the eighteenth century the attempt by John Law to reform the credit system ends up with the ﬁnancial disaster of the Mississippi Company, and the tax reform suggested by Boisguilbert and Vauban are not put in practice. The decline of France during the last century does not concern ﬁnances only but even, and more dramatically, the population. In the two articles Grains and Hommes, Quesnay describes the secular course of the population of France; according to him, during the last century population has decreased from twenty-four to about sixteen million people, also on account of the continuous wars; in particular he quotes the War of the Spanish Succession (INED, 1958, vol. II, pp. 506 and 512–13). The wars are accompanied by commercial and ﬁscal policies that damage agriculture and increase the misery of the countryside (INED, 1958, vol. II, p. 506). The article Hommes continues with calculations concerning the number of families, or as he says of feux, and he quotes demographic data from Dupré de Saint-Maur and Buﬀon and from a Détail du Royaume de France of 1753 by the less well-known Doisy (INED, 1958, vol. II, p. 514). Quesnay’s experience as a small landholder also leads him to directly appreciate the poverty of the countryside. But if the there is a dark age in the history of France there is also a period of light and power. This is precisely the epoch of Sully, the powerful minister and adviser of Henry IV in the ﬁrst decades of the seventeenth century. For Quesnay these are the years when French agriculture is ﬂourishing, government ﬁnances are prosperous, the army is strong and the population full of hope. To the praise of the epoch of Henry IV and of Sully Quesnay devotes several passages in the articles of the Encyclopédie that precede the Tableau (INED, vol. II, Grains pp. 483, 504 and Impôts, p. 594). We have an epoch of wealth and power followed by secular decadence. For Quesnay history is not just a chronicle of military events, nor a story of battles and princes, but the analysis of the causes of wealth and of the rise and decline of nations in the course of the centuries. This is his approach to history: the perspective is a long-run one, contemporary events have to be explained inside this secular view and at the same time these events are used either to conﬁrm or to disprove the various theories about the causes of the well-being of human societies. Politics comes into the

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picture but it is closely related to the art of administration and of government, possibly the art of a good administration. Therefore history, economics and politics are all aspects of the same process. This is not a new approach in the age of the Enlightenment; the problem of the secular evolution of human societies had already been set, a few years before, by the Baron de Montesquieu in France and by David Hume in England; Adam Smith will study society with a similar methodology. It has to be noted that sometimes the physiocrats stretch history, often building myths, like that of the epoch of Sully. It is not at all clear why, in the one hundred years that go from 1660 to the time of Quesnay, France actually loses eight million people. The physiocrats must single out the appropriate policies which will eventually lead to the prosperity of the Kingdom. A remarkable synthesis of the physiocratic remedies to the misery of France could be the opposite of the initial quotation ‘wealthy peasants, wealthy kingdom’. It must be pointed out that, in the eighteenth century, an epoch of strong convictions in the power of natural laws, the physiocrats emphasise the fact that there is ample space for polity and policies. Nations in general and France in particular may suﬀer the evil consequences of bad administration or enjoy the state of bliss deriving from the deeds of enlightened administrators. Nature is powerful but does not impose her laws upon men and rulers; of course, when they do not follow the laws of nature society impoverishes, as France did in the eighteenth century. But how can prosperity be achieved and which economic measures must be implemented? Quesnay likes the use of data and ﬁgures, but he also uses pungent comparisons between good and bad situations and approaches the reader with metaphors. His theoretical answer is built on this method of analysis, in a continuous connection of rhetorical matters and analytical reasoning that is worth following.

A NEW PRINCIPLE OF WEALTH Victor Riqueti Marquis de Mirabeau describes the story of his conversion to physiocracy during an interview in Quesnay’s entresol at Versailles on 27 July 1757 (Hecht, 1958, p. 256). To Mirabeau, then a supporter of the theories which regard population as the main cause of the wealth of nations, Quesnay objects that the Marquis puts ‘the cart before the oxen’, a ﬁne metaphor. If men lack the means of subsistence, on account of the poverty of the countryside and of cultivation in particular, there will never be suﬃcient provisions to maintain a growing population. The true wealth of an agricultural kingdom consists in the ability of agriculture to produce more than what is necessary to maintain the peasants and the farmers; wealth

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and power depend on the physical surplus of necessaries that is annually produced in the country. Quesnay refuses the mercantilist idea that wealth is made up and measured by the stock of precious metals; on this point he is explicit in the article Grains, published in 1757 in the Encyclopédie of Diderot and D’Alembert. In this article Quesnay contrasts Spain, which enriches herself by exploiting the treasures of Peru, to England, which bases her opulence on the production of material goods (INED, 1958, vol. II, p. 501); clearly Quesnay prefers the latter way. Quesnay is even more explicit in his opposition to the mercantilist view of wealth; he says that the activity of the merchants and of the commercial intermediaries is sterile, because in resale trade there is an exchange of goods of equal value (Sur les travaux des artisans, INED, vol. II, p. 897). In the Explications du tableau économique, that accompanies the third edition of the Tableau he says that there cannot be creation of wealth in the sphere of circulation (Kuzcynski and Meek, 1972, p. v). A nation is prosperous if she can maintain a large number of people and that is possible only if there are abundant necessaries: ‘le fondement de la société est la subsistance des hommes’, writes Quesnay in Le Droit Naturel (INED, 1958, vol. II, p. 741). The full title of the article, which appeared in the Journal d’agriculture of 1765, is Observations sur le droit naturel des hommes réunis en société, a clear indications that Quesnay refers to organised human societies and not to some ideal ‘state of nature’. The idea of the importance of a surplus of agricultural goods has already existed in political economy since William Petty’s A Treatise of Taxes and Contributions of 1662, where the author maintains that the existence of a physical surplus in the production of subsistence goods, over and above what is required by the producers themselves, is the basis for the social division of labour (Petty, 1662, p. 30). But it is with Quesnay that the productivity of the agricultural sector becomes the principal cause of national wealth, at least for a kingdom with ample and fertile lands, a royaume agricole.2 Quesnay’s ﬁrst economic work is the Encyclopédie article Fermiers of 1756; this work is based on another metaphor: the opposition between the pétite culture based on the use of oxen and of the plough with the ploughshare of wood and the grande culture, that employs horses and a plough with an iron ploughshare. The latter technique is much more productive than the ﬁrst one and the use of the horse indicates a sort of ‘best technology’. In his Tableau Economique avec ses explications par Francois Quesnay of 1760 Mirabeau makes clear that the grande culture implies a higher productivity of labour and a higher net proﬁt; thus we seem to have a clear case of increasing returns, at least with respect to labour and to that part of the annual advances which is accounted for by wages (Mirabeau, 1760b, pp. 184–5). Unfortunately this type of cultivation is adopted only in some

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regions of northern France and the problem is how to extend la grande culture throughout the entire territory of the Kingdom.3 This point must be stressed: Quesnay singles out a new principle of the causes of national wealth; the prosperity of a country directly derives from productivity increases in agriculture and not from the ability of her foreign trade merchants as was the case in mercantilism. The progress to prosperity does not begin with the conquest of foreign territories, the order of causation is reversed: a wealthy kingdom will be able to employ an eﬃcient army and a large navy and then will become powerful and will have a chance to expand overseas.4 The key magnitude is the agricultural surplus, the produit net, which results from the application of the most advanced methods of cultivation in agriculture, which is the sector in charge of subsistence. This new principle of wealth sees the source of wealth in production and technology and not in foreign trade. This is also the grounds for a possible peaceful coexistence among the states of Europe, but if peace is in the mind of Quesnay the prosperity and possibly the power of the French Kingdom is at the forefront of his preoccupations. The change from oxen to horses is not a purely technical matter; horses are powerful machines for production, which incorporate the most advanced technology, but they cost a great deal more than oxen and require a lot of other instruments and means of production to keep them eﬃcient. Technical progress is clearly of an embodied nature; it is the result of the accumulation of capital in agriculture. Therefore it is necessary to have more investments in ﬁxed capital, the horses and the ploughshare of iron, but this may happen only if there are cultivators suﬃciently rich to make these investments. The primary sector has to undergo a process of structural change, which is led by a large accumulation of capital particularly in the form of avances primitives, the ﬁxed capital of which horses themselves are an item. Let us explore a bit more what kind of structural transformations are highlighted by Quesnay. We have seen that for Quesnay improvements in technology depend on the accumulation of capital, but already in Fermiers we have another fundamental step in Quesnay’s analysis; the two technologies, oxen and horses, are accompanied by two diﬀerent social forms of cultivation. La pétite culture is linked to sharecropping, an historical legacy of the feudal system; la grande culture is carried out on the basis of a contract of land lease which implies that the tenant farmer is a true entrepreneur, he anticipates capital, coordinates production, retains the whole output and bears the risk of cultivation. But we cannot stop there because that inevitably leads us to some fundamental questions: how is it possible to trigger the process of investment in agriculture? Who is in charge of it? Where do the new investments come from? The answers to these questions

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require a general view of the working of the economic system. A single article, Fermiers, cannot provide all the answers. In order to achieve capital accumulation and the increase of agricultural productivity it is necessary to explain how the French farmers can become wealthy enough to have the necessary resources to be reinvested. Capital accumulation is not a purely physical fact, but requires a theory of income distribution and a theory of the value of commodities, ﬁrst of all of corn. The new principle of wealth has to be inserted into the actual circumstances of contemporary France; social and economic transformations are necessary in order to make the agriculture of France more productive. Quesnay must explain how the French Kingdom can move from a backward stage to an advanced one; this is not a purely technical process but it is a deeper process of economic and social transformation which involves a redistribution of income among social classes. Quesnay has to build a more articulated and general scheme, capable of explaining how there will be both the resources and incentives to switch to la grande culture, and why this will beneﬁt the entire Kingdom. The 1757 articles Grains and Hommes provide many of the answers even if not all of them.5 We can regard the 1756–57 articles like steps in the construction of the Tableau économique, but even the Tableau, whatever its version, does not provide a complete list of all the policies and eﬀects of the economic and social transformations which are required to achieve the ideal stage. To achieve prosperity France has to be modernised, but in the view of the physiocrats monarchy has to be preserved and possibly legitimised; at the same time the coﬀers of the government have to be full and all social classes have to be better oﬀ. Quesnay is not so naive as to assume that the new wealth will spread to all social groups in a uniform way; indeed some classes and the merchants and professional traders in particular will lose both income and power. However, most of the population of France will beneﬁt from the physiocratic reforms and Quesnay is particularly keen to show the advantages which will be obtained by some social groups: the farmers and the landlords, the people of the countryside and citizens of the big cities, the peasants, and the government. These groups would build among them the economic and political alliance which should implement physiocratic policies. Quesnay and his disciples have to show that these policies will make the whole Kingdom and not only the farmers more prosperous. To this end they need a general analysis of the way in which the new principle of wealth will spread its eﬀects throughout the economy. Quesnay needs a general analysis of the social and economic system and this is where the Tableau économique comes into the picture. We shall follow the physiocrats’ argument but we shall also evaluate whether or not their attempt has been successful.

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THE DIFFERENT TABLEAUX: THE SYSTEM OF EXPENDITURES AND REPRODUCTION Quesnay must convince the landlords and the government that they will beneﬁt from the increase in agricultural productivity. This is a very important political problem, particularly during a war, and the physiocrats must provide a convincing answer; all the more so because they want to implement a tax reform requiring the taxation of rent. Quesnay has to move from the microanalysis, at the level of the agricultural entrepreneurs, to the macro-argument and to the level of the general economic system. The Tableau économique is a fundamental instrument to support the physiocratic contentions and to provide the necessary ‘convincing answer’ to the above issues. The analysis of the Tableau suggests some interesting considerations. The Tableau may be regarded as a great rhetorical exercise; the descending lines which continuously intersect each other, the zigzag versions of 1758–60, ﬁll with amazement and admiration the salons of Versailles, but they also strike the imagination of the researchers. They represent a rather obscure piece of analysis which appears to deserve attention and respect. But if it had only been ‘a coup de théâtre’ designed to intimidate human imagination the fame of the Tableau would not have lasted throughout the centuries to inﬂuence authors like Marx and Leontief. Quesnay has a genuine research interest: he has to discover the laws of nature, to reveal them to the rulers, to explain the indirect eﬀects of certain policies. The Tableau is a powerful tool to disclose these ﬁnal outcomes; the rhetoric accompanies the genuine eﬀort of comprehension of the laws which regulate the economic and social reproduction of nations. Physiocracy may be a rhetorical attempt, but an intellectually honest one. The fact that Quesnay intends to describe the laws of nature may also contribute to explaining why we ﬁnd so many tableaux which represent the ideal conditions of cultivation, the state of prosperity, instead of the state of contemporary France. Quesnay wants to emphasise the relationships existing among the diﬀerent economic magnitudes in the natural order of things, when natural laws are not constrained by erroneous policies.6 It must be pointed out that there is more than one Tableau. The Tableau économique is not always the same: various tableaux are constructed by Quesnay between 1758 and 1767. There is a clear evolution in the course of the years towards the ﬁnal version of June 1766, the Analyse de la formule arithmétique du Tableau économique. The evolution of the various types of Tableaux derives from the need to simplify the main ideas for public opinion, but also from the need for clarity for Quesnay himself.7

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The original type of Tableau is the so-called zigzag and appears in Versailles in 1758 and 1759 in three successive editions (Kuzcynski and Meek, 1972) and in Part VI of Mirabeau’s L’Ami des hommes of 1760.8 Then we have the précis version of the Philosophie Rurale and ﬁnally the version of the Analyse, which is used also in the Premier and Second problème économique respectively of 1766 and 1767. All the tableaux are characterised by three columns, the central one refers to the revenu while the two columns at the sides are respectively the avances of the productive class (left-hand side of the table) and those of the sterile one (right-hand side of the table). We have two key notions: revenu and avances. The zigzag schema presents a tripartite division with a column for the revenue and two columns for the advances and when all exchanges have taken place the productive and sterile sector have fully rebuilt their advances. Revenue and advances are the two central concepts in all the diﬀerent tableaux. The Tableau ascribes a fundamental role to the expenditures of revenue, a typical function of the aristocracy; in this way some kind of balance is reestablished between the landlords and the farmers with respect to the economic role of the two classes. The latter group is in charge of the creation of wealth thanks to its role in production and investment, but the former class is at the origin of the process of expenditures and of circulation of revenue, the central column in all the tableaux. However, other things change in the various tableaux. Commentators have always been puzzled by the ﬁgures which appear in the diﬀerent versions of the Tableau; there are indeed remarkable inconsistencies in Quesnay’s numerical examples.9 Here we want to draw attention to the changes in the headings of the various tableaux, from the zigzag version to the précis, to the formule of the Analyse.10 Up to the Tableau of Part VI of L’Ami des hommes the headings of the three columns are split in two parts; on top we read from left to right: Dépenses Productives, Dépenses du Revenu and Dépenses Stériles; below each heading we ﬁnd Avances Annuelles, Revenu and again Avances Annuelles respectively.11 In the so called précis type of tableau of the Philosophie Rurale of 1763–64 the word Dépenses no longer appears in the top heading.12 This word will never reappear in any of the following tableaux, neither in the Analyse, nor in the two articles on the ﬁrst and second economic problem. Instead of ‘Tableau économique’ the general heading is changed in ‘Précis des résultats de la distribution représentée dans le Tableau’. In the full title of the Analyse we read that the Tableau is designed to explain ‘la distribution des dépenses annuelles d’une nation agricole’, and in the text the Tableau has the heading: ‘Reproduction totale: Cinq milliards’ (see INED, 1958, pp. 793, 801); now the term reproduction appears explicitly. Moreover in the Analyse the speciﬁcation of the overall Réprises of the productive class is much clearer than in the various

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zigzag and précis (ibid., p. 798). The Tableau of the Premier problème économique presents the heading: Tableau de la distribution; again we ﬁnd distribution. Expenditures, distribution and reproduction are the essential aspects analysed by Quesnay in the Tableau, and of the three ‘reproduction’ is the crucial element. The Tableau shows that when the circulation of revenue has taken place the advances of the two sectors are entirely reproduced. This is due to two facts: ﬁrst, the initial expenditure of the revenue by the landlords; second, the mutual expenditures of the productive and sterile classes on each other’s products. As a matter of fact at the bottom of the 1758–60 tableaux we ﬁnd the word Reproduit total; the third edition of the Tableau and that of L’Ami des hommes of 1760 have more detailed comments, while the ﬁrst two editions of 1758 present more synthetic comments (Kuzcynski and Meek 1972). If reproduction is at the core of all the tableaux the emphasis on various aspects changes through time. In the ﬁrst zigzag versions of 1758–60 Quesnay deﬁnitely wants to emphasise the indirect eﬀects of expenditures and of the circulation of revenue, while after 1763 ‘reproduction’ comes to the fore.13

THE FREE EXPORT OF FRENCH CORN AND ITS IMPACT ON PRICES The general system of expenditures and reproduction described in the Tableau provides the general framework to investigate the eﬀects of various policies as we see in Quesnay’s Premier and Second problème économique, in the 1760 tableau of L’Ami des hommes and in the Philosophie Rurale. However, France needs to increase the productivity of cultivation. There will be more subsistence goods, but Quesnay is not satisﬁed with an analysis in purely material terms. The physiocratic principle of wealth requires wealthy tenants who reinvest their proﬁts in the more advanced techniques of cultivation. One of the main themes of the articles of Grains and Hommes, that chronologically, but also logically, we ﬁnd between Fermiers and the Tableau, is to explain how to enrich French farmers. In Fermiers as in Grains and Hommes Quesnay largely adopts the scheme of ‘polarity’, the method of contrasting a backward situation with an advanced one. Quesnay uses data and charts to show that where the domestic and foreign commerce of corn is free, as it is in England, there are more remunerative prices for the farmers than in France and hence there is a higher proﬁtability of the investments in cultivation (INED, 1958, pp. 462, 474, 532–3). Notice that this higher price does not carry with it famines or the impoverishment of the urban population. This is due to the fact that Quesnay wants

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to achieve the increase of the prix du vendeur. This is the price on the wholesale market which regulates the ﬁrst sale of corn: the market where the farmers are the sellers and the corn merchant the buyers. The prix de l’acheteur, the retail price, will not rise, hence the people of Paris do not have to be frightened of a policy of free export of corn.14 As a matter of fact the closing of the gap between the prix du vendeur and the prix de l’acheteur implies that there will be the same price on both the retail and the wholesale market, or at least the diﬀerence between the two prices will be quite small. Of course this is the case only when free trade has displayed all its eﬀects. The English model can be implemented by adopting policies that allow for the export of French corn and eliminate the monopoly of the corn merchants, who gain to the detriment of both producers and consumers. We have already seen that for Quesnay resale trade is a sterile activity and this has a strong implication on Quesnay’s national accounting: the annual output of agriculture has to be evaluated using the wholesale prices, the prix du vendeur. In the Réponse au Mémoire de M.H. of January 1766 we read: La recette totale des ventes de la première main faite par la classe productive dans l’année, est la measure des richesses renouvelées dans cette meme année (INED, 1958, p. 750).15

In the very opening sentence of the Analyse of 1766, the ﬁnal version of the Tableau, the productive class itself is deﬁned with respect to the notion of ﬁrst-hand prices (INED, 1958, p. 794). Du Pont is even more explicit in identifying the prix du vendeur and the prix de la première main (Du Pont, 1764, p. 9). The free export of French corn requires the elimination of commercial intermediaries and the increase of the average selling price for French farmers. In this case they will then have higher resources, that is, proﬁts, to reinvest in cultivation and to increase the advances, in particular the avances primitives which incorporate the ‘best technology’. A further beneﬁt for the farmers is the fact that free trade tends to bring French prices in line with those prevailing on the international market and hence it stabilises the level of the prix du vendeur. This is a decisive element to stimulate investments and it is particularly important in contemporary France, where the cultivators have to cope with huge price ﬂuctuations. An analysis of corn trade in France and England similar to that of Hommes and Grains appears in other two physiocratic works, both of which have been clearly written under the close scrutiny of Quesnay. In Pattullo’s Essai sur l’amélioration des terres of 1758 we have two tables,

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referring respectively to France and England, which are identical to those in Hommes; they provide the basis for the calculation of the prix du vendeur, the prix fondamental and the prix de l’acheteur in the same way as in Hommes (Pattullo, 1758, pp. 231, 235). In Du Pont’s De l’exportation et de l’inportation des grains of 1764 we ﬁnd again two tables describing the conditions of the corn market in France and England respectively; these tables are not exactly like those of Hommes, but quite similar to them. Here too as in Pattullo’s Essay and in the article Hommes we ﬁnd the calculations of the various price notions: prix fondamentale, du vendeur and de l’acheteur (Du Pont, 1764, pp. 10–18). There is a strong link between these three works, and Du Pont explicitly says that his calculations derive from the article Grains and from Pattullo’s Essay (Du Pont, 1764, p. 10, footnote). The work by Du Pont is interesting in many ways. He uses the term prix commun du marché général to indicate the average price of corn on international markets, which is the level France should try to achieve (Du Pont, 1764, p. 14). Du Pont has a long footnote on Sully and Henry IV, where he describes the problems of corn trade in the ﬁrst years of the seventeenth century. He also includes in the note two letters by Henry IV to Sully on corn policy (Du Pont, 1764, pp. 24–5). However, the most interesting thing in this work is the fact that the calculations of corn prices in France and England are followed by a description of how the free export of corn does eventually lead to higher revenues and to the modernisation of French agriculture, a point to which we shall come back later, and which is only a hint in the 1756–57 articles. Du Pont’s work is of 1764 when a substantial evolution had already taken place in physiocratic analysis. It must be pointed out that according to the physiocrats it is not necessary to actually export a lot of corn, a step that would worry both the rulers and the people for fear of famine. Pattullo shows that the simple fact that France takes part in international trade even with a small amount of corn will bring about the advantages of a higher and more stable price for the farmers. He writes: ce prix commun des bleds & des autres grains procureroit par lui-même, indépendamment du produit que nous pourrions retirer du débit des grains que nous pourrions vendre à l’étranger, environ 100 millions de plus à l’agriculture du royaume (Pattullo, 1758, p. 237).

This statement by Pattullo is consistent with Quesnay’s notion of ‘ﬁrsthand prices’ and with the peculiarity of his national accounting: in fact, according to Quesnay resale trade does not add to social product; this view explains why by itself the increase of the prix du vendeur generates an increase in both the gross and net product of the nation. This addition to the net product is totally free; it is a surplus which does not have to be taken

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from anybody, not from the foreigners, nor from the landlords, nor from the people of Paris. In a sense no income redistribution is needed to bring new resources to the farmers and hence to have additional investments; of course this is true only because resale trade is considered to be a sterile activity, and is not included in the social product. If we use a more conventional national accounting we see that Quesnay envisages a modiﬁcation in the price structure, which implies a redistribution of income from the merchants to the farmers, from one class of citizens to another class, the class which is in charge of the process of investment in agriculture.16 For the physiocrats the argument is a very simple one: by not taking part in international trade France prevents herself from being more prosperous and, notwithstanding her much larger territory and more fertile soil, gives an advantage to England; it is time to seize these opportunities. The foreign producers of corn will eventually suﬀer competition by wealthy French farmers, who will increase their share in the world market. This is a necessary step to increase both the prosperity and the power of France. It is important to point out that Quesnay has a very peculiar view of laissez faire, a view which must not be confused with generalised support for a policy of free trade. As we have just seen he is not concerned with the well-being of the trading partners of France and in general he does not want to liberalise the imports of foreign goods; nor does he care about the export of manufactured commodities. Quesnay only wants to achieve the free export of French primary commodities, a necessary step to increasing the prix du vendeur. It is in this speciﬁc sense that we use the term laissez faire in the context of physiocracy, whose trade policies must not be confused with the economic liberalism which will dominate the following century.

THE DISTRIBUTION OF THE BENEFITS OF FREE CORN TRADE At the time of Quesnay the prescription of a policy of free export for corn is not such a revolutionary and innovative element; it is already part of economic policy debates. Since the beginning of the century several authors had already asked for a free trade policy, from Pierre le Pesant de Boisguilbert to Claude-Jacques Herbert in his Essai sur la police générale des grains of 1753 (pp. 370–71). However, Quesnay’s analysis has a peculiarity: in it we ﬁnd a clear link between this policy and the problems of accumulation of capital and of the modernisation of agriculture, the two main sources of surplus and wealth. In Quesnay’s analysis the free export of French corn represents a sort of

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‘squaring of the circle’, or nearly so. Quesnay has established how to enrich the French farmers, but how does the process leading from free export of French corn to the modernisation of French agriculture take place in practice? And how will the landlords and the government beneﬁt from it? As a matter of fact the physiocrats also oﬀer a more detailed analysis of the relationships between free export of corn, the improvements in French agriculture and the increase in the revenues of the landlords and of the King. In Grains (INED, 1958, pp. 463, 475) Quesnay says that with free trade of corn the produit net will increase from 17 livres and 8 sous to 40 livres; this implies also an increase in the rents of the landlords and of the taille of the King, but he provides no justiﬁcation for these statements.17 How is this to be achieved? The answer is not to be found in Quesnay’s own writings, but primarily in some works written under his direct inﬂuence. Loïc Charles has convincingly shown that a ﬁrst attempt to describe the general sequence of events of free export of corn can be found in Quesnay’s notes to Pattullo’s Essai sur l’amélioration des terres of 1758 (Pattullo, 1758, pp. 235 ﬀ.). This is a clear indication that already in 1758 the physiocrats have in mind the problem of explaining to the landlords and to the King the advantages they would derive from free trade. In the Essay Pattullo tries to explain how the increase in expenditures and the expansion of domestic demand produce further increases in corn output, in surplus and in population (Charles, 2000). Quesnay’s notes and the Essay itself are an intermediate step between the articles of the Encyclopédie and the ﬁrst Tableau économique. Eltis stresses the importance of another physiocratic work, the Tableaux of Part VI of L’Ami des hommes of 1760: these tableaux help to understand the general mechanism of expenditures. Quesnay uses these Tableaux to evaluate the overall impact of diﬀerent policies both on domestic demand and on population – a typical problem of the zigzag versions of the Tableau (Eltis, 2001, p. 18). Another short description of the ﬁnal eﬀects of an increase in the price of corn is in Mirabeau’s Mémoire sur l’Agriculture of 1760: la facilité & la liberté du débit procure le bon prix: le bon prix anime la culture & amène l’abondance. L’abondance & le bon prix forment les revenus, favorisent la population, & procurent l’aisance des habitants (Mirabeau, 1760a, p. 47).18

However there are two places where we ﬁnd a more detailed description of the overall eﬀect of free export of corn: they are in Mirabeau’s Philosophie Rurale of 1763–64 and in Du Pont de Nemours’ De l’exportation et de l’inportation des grains of 1764. In these works we ﬁnd two tables which describe the analytical process which should lead from a higher price of corn to the increase in rent and taxes (Mirabeau, 1764, vol. II, pp. 366–7

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and Du Pont de Nemours, 1764, pp. 20–21). These two tables must not be confused with the Tableau économique itself even though there are clear linkages between them. The table by Du Pont is less well known, but in many respects is more explicit and richer of content and material than that of the Philosophie Rurale. Du Pont’s table appears in the appendix and we shall dedicate more comments to it.19 Both Du Pont and Mirabeau describe the sequence of events which follows from an initial increase in the price of corn, which here is clearly the prix du vendeur. Both authors say that the whole process takes time; ﬁrst of all the domestic price of corn requires ﬁve to six years to reach the level of the international price (Mirabeau, 1764 p. 358; Du Pont, 1764, p. 21). However, here there is the ﬁrst diﬀerence; in the table of the Philosophie Rurale there is a once-and-for-all price rise, while Du Pont assumes a moderate but continuous increase in the price of corn over six years. The second step is to show how this price rise produces an increase in both the annual and primitive advances employed in agriculture, hence in circulating and ﬁxed capital, capital accumulation and the embodied technical progress being the main feature of the process of transition from backward to advanced agriculture. Both authors agree that the transformation from la petite to la grande culture requires eight to nine years, mainly because nine years is the average length of land rental contracts (Mirabeau, 1764, p. 367). However, the calculations of the two tables present a diﬀerence; in fact in the Philosophie Rurale, notwithstanding Mirabeau’s remark about the nine years required by the process, from ‘year two’ onwards cultivation yields a net product of one hundred per cent of the annual advances, which is the typical ratio of modern agriculture: hence it appears as if the transition to modern techniques of cultivation had already been achieved. On the other hand in the example by Du Pont this ratio increases slightly year after year from the initial thirty per cent to a bit more than seventy per cent. This seems to better correspond to the letter and spirit of the text, but it is not clear why the ratio of the net product to annual advances stops at seventy per cent instead of reaching the target one hundred per cent. Therefore thanks to the reinvestment of part of the net product by the farmers, agriculture becomes more productive, but at the same time from ‘year two’ onwards part of the net product goes to the landlords as rent, to the King as taxes and to the Church as tithes. This happens when the rents, the baux, are renewed; given the fact that the average length of lease is nine years, both authors assume that every year 1⁄9 of the contracts is renegotiated. At the time of the renewal the farmer passes on to the landlord the initial increase in the net product due to the price rise.20 After nine years the cycle of renewal of leases has been completed and the landlords, the King

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and the Church receive the entire new revenue, thus the First and Second States are the ﬁnal beneﬁciaries of a laissez faire policy. There are signiﬁcant mistakes and faults in the two tables, including a double counting in the table of the Philosophie Rurale and serious inconsistencies in the deﬁnitions of surplus and of net product in the work of Du Pont (Vaggi, 1987, pp. 160–61).21 Another problem derives from the fact that it is not clear how la grande culture does actually spread throughout France; moreover at a certain point growth comes to a standstill, a sort of high level stationary state with no further increases in the net product (on these problems see Eltis, 1996 pp. 34–5 and Charles, 2000, p. 8). Let us examine Du Pont’s table more closely. This table is made up of two sections; on the left-hand side, apart from the ﬁrst column which refers to the periods (years), there are eight columns which describe the process which leads from the price increase in the ﬁrst column to the increase in the net product in column eight: Accroit total du produit net. The last ﬁve columns indicate the way in which the surplus net product is distributed between the landlords, the King and the Church (décimateurs) on one side and capital accumulation on the other. Du Pont assumes as exogenous variables the following magnitudes: ● ● ● ●

the price of a setier of corn, the initial amounts of annual and original advances, the ratio between the net product and the annual advances, the overall cost (reprise) of a setier of corn.

The last ﬁgure appears in column two and remains more or less constant throughout the nine-year period and this is a problem for a theory which ascribes a decisive role to technical progress, because one would expect a reduction in this unit cost.22 As a result of the price rise all the other magnitudes on the left-hand side of the table increase. From the price rise we move to higher values for the gross and net output in columns three and four. The new additional surplus is in column eight. From here we must move to the right-hand side, where is shown the way in which this surplus net product is distributed. Part of it goes to the landlords and to the other component of the ﬁrst and second estate, column one, while another part is reinvested, columns two and three. This additional capital generates a new net product in column four and this is clearly indicated by the curved dotted lines which join column three to column four. Columns two and three of the right-hand side of the table are of extreme importance because they represent the actual size of capital accumulation in agriculture, the annual addition to capital, that is, the investments. These columns are also clearly related to columns ﬁve and six of the left-hand side where we have

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Figure 8.1

Du Pont’s table

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the stock of ﬁxed and circulating capital. Therefore the two sides of the table are kept together by the advances. They link income distribution to capital accumulation. Finally, in this table we ﬁnd a role for technical progress; the increase in the net product clearly depends on the accumulation of capital, columns three and four of the right-hand side, but also column seven of the lefthand side, which gives the ratio of net product to annual advances. Notice that this ratio is clearly in value and not in physical terms, because it increases from the very ﬁrst year when the only change has been the price rise, but no accumulation has taken place yet. However, Du Pont clearly knows the diﬀerence between the additional value of surplus and the new physical surplus; the physical increase of the net product is in column four of the right-hand side and this is the physical addition to the net product which is clearly due to capital accumulation. Notwithstanding the many ﬂaws, the tables by Du Pont and Mirabeau provide a clear and even convincing message, at least in terms of the simple argument that at the renewal of land leases the proprietors receive the entire increase in the net surplus,23 but a more detailed analysis of the two tables is beyond the purpose of this chapter.

FREE TRADE FOR ALL? There is an area regarding the general eﬀects of free trade where the works of Mirabeau and Du Pont on one side and that of Pattullo on the other seem to have diﬀerent implications. Pattullo’s 1758 Essay presents a view of the role of foreign trade remarkably diﬀerent from that we ﬁnd in the comments to the two tables by Mirabeau and Du Pont respectively. Pattullo says that free trade produces a double advantage: ﬁrst, there is the increase in the price of corn which increases the revenue of the Kingdom by one hundred million livres; second, there is a further sale of French corn abroad earning another one hundred million (Pattullo, 1758, pp. 237–9).24 And ‘tous les ans une pareille exportation de grains procureroit un nouveau surcroît de richesses, de 100 millions payés par l’étranger’ (ibid., p. 240). Hence it seems that France will directly beneﬁt from foreign commerce also because she will increase her market shares at the expense of her trading partners.25 The Philosophie Rurale and above all Du Pont’s De l’exportation et de l’inportation des grains do not ascribe such a decisive role to the increase in the volume of corn exported. In particular Du Pont seems to subscribe the view that free trade will be beneﬁcial to all trading nations. He assumes that there will always be enough foreign demand for French corn (Du Pont,

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1764, pp. 40–41), but there is no need to gain at the expense of the other countries. On the contrary in foreign trade there is a balance between the two trading countries parce que les vrais principes du Commerce sont bons à rappeler dans ce siècleci, que tous négoce supposait équilibre, balance de ventes et d’achats (Du Pont, 1764, p. 42).26

The passage continues by saying that even large imports of foreign goods from other countries are favourable to France ‘parce que c’est le moyen de s’enrichir en l’enrichissante’ (ibid.). A view which reminds us of a possible inﬂuence by Hume, but which is also consistent with the idea that the origin of wealth has to be searched for in the process of production and in technical progress and not in foreign trade. Free trade provides the initial stimulus to the process of transformation of French agriculture; the accumulation of capital in cultivation generates a new net product – it is the new cause of wealth: ‘en haussant le prix de la denrée, on augmente un peu les reprises et beaucoup le produit net’ (ibid., p. 23, Du Pont’s italics). In 1764 the general principles of reproduction had already been revealed by the Tableau économique and we know that the initial increase in the net product is magniﬁed thanks to the circuit of circulation and expenditure: ‘l’aisance fait naître de nouveaux consommateurs qui contribuent à soutenir le bon prix de la denrée, assurent, par-là même, les revenus qui les mettent dans le cas de la payer’ (ibid., p. 36, also p. 37). In the French economy there is a principle of eﬀective domestic demand, a multiplier eﬀect, which derives directly from the analysis of the Tableau, and it is based on the expenditure of the new revenue. The continuous increase in domestic consumption sustains the process of growth and absorbs the new output which derives from the increase of agricultural productivity. To the physiocrats the emphasis on domestic demand provides further reason to underline the pernicious role of the merchants both in domestic and in foreign trade. In the Tableau économique of 1760 Mirabeau writes that a nation must be careful about the activity of these traders who make a fortune en gagnant sur les Concitoyens dans les ventes des marchandises qu’ils rapportent; car alors l’accroissement de fortune de ces Commercantes est un retranchement dans la circulation des revenus, qui est préjudiciable à la distribution & à la reproduction (Mirabeau, 1760b, p. 184).

The gains of the merchants are a subtraction from the general circuit of circulation and expenditure of income; the gains of the merchants are not

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a component part of national revenue; they are outside the process of creation of wealth, which ends with ﬁrst-hand sales. The physiocrats do not envisage a purely supply-side economy, even if the fact that there is no limit to the export of French corn is surely a very convenient condition, particularly when agriculture yields a surplus over domestic consumption.

CONCLUDING REMARKS: HISTORY AND INCOME DISTRIBUTION AGAIN The tables by Du Pont and by Mirabeau are written under the direct inﬂuence of Quesnay; they reﬂect his views about the likely impact of an initial increase in the price received by the farmers for the sale of their corn, and they are certainly useful to support the policy of free export. The advocacy of free trade for corn is no revolution and this is the only physiocratic policy which is partly adopted in France at the time of Quesnay. Between the end of 1763 and July 1764 the Controlleurs Généraux Bertin and de L’Averdy proclaim the partial liberalisation of domestic and foreign trade of corn (Weulersse, 1910, vol. II, pp. 222–4). This is not the ﬁrst attempt and it will not be the last one to implement such a policy in France; indeed in 1770 the new Controlleur Général Terray revokes the 1763–64 edicts (Braudel and Labrousse, 1970, pp. 380–81). The free trade experiments of the 1760s do not produce the desired results, also for reasons which are well described by Galiani in the Dialogues sur le commerce des bleds, published in 1770 by Diderot. Galiani shows that all the measures need time to produce their eﬀects, perhaps more than the sixteen years envisaged by Mirabeau (Mirabeau, 1764, vol. II, p. 371); during this period the initial conditions of the economy may change, and in any case France is not England, so what is good in theory may be wrong in practice (Galiani, 1770, pp. 12, 153). In the late 1760s the reform programme of physiocracy suﬀers some setbacks; there are the criticisms by Galiani and the repeal of the 1764 edicts in 1770. Moreover Madame de Pompadour, the great protector of the physiocrats and of the Enlightenment, dies in 1764. The physiocrats advocate another main economic measure: the single tax on land. Quesnay asks for the abolition of the numerous taxes on the gross output of agriculture and on farmers, because they prevent capital accumulation in agriculture. He wants to show that in the natural order of society the taxation of landlords’ income does not damage the aristocracy. This is the outcome of the process of circulation of the social product, of capital accumulation and of technical progress and of the overall complex mechanism of reproduction. After some periods (years) the income of the proprietors, net of taxes, will be higher than before. In short, it is better to

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abolish the taxes on the farmers than stop the modernisation of agriculture and kill the ‘chicken which lays the golden eggs’ (INED, 1958, vol. II, p. 871).27 The Tableau is used also as an instrument of persuasion to convince the ruling classes of the essential goodness of the physiocrats’ ﬁscal policy. However, a timid attempt to liberalise the export of French corn is undertaken, but for taxation things do not go that far; the schemes of the Tableau do not convince the rulers to modify the ﬁscal system. Coming back to free trade it is worth noticing that Quesnay’s economic and political ‘squaring of the circle’ is entirely based on the merchants bearing the full burden of the redistribution of income which follows the free export of French corn. Thus all classes beneﬁt at the expenses of corn traders and in particular no contrast emerges between farmers and landlords. But this view is based on very speciﬁc assumptions and on very feeble grounds. In another work we have presented a more detailed model of physiocratic classes; there workers and merchants appear together with farmers, landlords and the sterile activities; there are ﬁve major social groups and two sectors, agriculture and the artisans.28 Relative prices regulate the distribution of the gross and net product among the ﬁve classes. It can be shown that the free export of corn may produce conﬂicting interests among the ﬁve classes and that some of these conﬂicts may be particularly unwelcome to the physiocrats. Relative prices change following the free export of corn, but if the merchants can resist the tendency for the retail price to decrease and for the wholesale price to increase, then there may be very undesirable outcomes for income distribution. The real wages of workers may diminish and the farmers and the landlords may end up being in direct opposition in the appropriation of the net product which is originated by the free export of corn. This clearly contradicts the numerical examples of Mirabeau’s and Du Pont’s tables and the arguments by Pattullo. Quesnay and the physiocrats did not emphasise these possible conﬂicts in the distribution of income; possibly they were not fully aware of their existence, but the physiocratic analysis show that the road to modernity requires not only economic reforms but also social and political innovations. However, they have a clear diﬃculty or unwillingness to proceed on the road to modernity in political terms and this also has consequences for their economic analysis. The tables of the Philosophie Rurale and of De l’exportation et de l’inportation des grains provide one of the clearest examples of these limitations, in particular concerning the ambiguous role of farmers’ proﬁts insofar as they are just a temporary share in the net product.29 Farmers go on accumulating advances in large-scale cultivation even if they know that in the end, at the renewal of the leases, all the net product will accrue to the landlords and to the King – a very peculiar situation. The two tables by Mirabeau and Du Pont may be another exercise in

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persuasion, but they also highlight some major analytical diﬃculties in singling out the fully-ﬂedged role of proﬁts in a capitalist society.

NOTES 1. 2. 3. 4. 5. 6. 7. 8. 9. 10. 11. 12.

13. 14. 15. 16. 17. 18. 19. 20.

21. 22. 23.

On the Seven Years’ War and the role of the navy in wars see Charles and Steiner (2000), pp. 9–11. It must be pointed out that in France this is also a time of censorship, even if of a relatively mild kind (Delmas, 2000, chapter 1). On the idea of a royaume agricole and on the role of subsistence in the Traité de la Monarchie by Quesnay and Mirabeau see Cartelier (1999b), pp. 9–10 and Charles and Steiner (2000), p. 27. In 1767, in an article published in the Ephémérides du citoyen, Turgot uses a similar argument to explain the importance of having a modern and eﬃcient agriculture (Turgot, 1767). The Seven Years’ War was very much about the control of the colonies of France and England (Charles and Steiner, 2000). Of course the analytical answers lead directly to speciﬁc policy measures. A slightly diﬀerent interpretation of Quesnay’s price analysis is in Steiner (1994). We must also remember the various tableaux in disequilibrium, which depict situations which are closer to the conditions prevailing in France; these tableaux are extensively analysed in Eltis (1975). A careful analysis of the evolution of the tableau économique is in Herlitz (1996). These texts are carefully analysed in Eltis (2001). In Meek (1962) there is a full chapter on this point. On the use of terms like productions, reproduction and produit net by Quesnay see Cartelier (1999a), pp. 81–5. In the Philosophie Rurale the column referring to the sterile class sometimes has the heading avances annuelles and in other cases there is only the word avances. From the Analyse onwards the heading of the sterile sector is avances only. In the Philosophie Rurale, at least in the 1764 Amsterdam edition, there is a Tableau similar to that of L’Ami des hommes; this tableau is attached after the preface and before page 1 (Mirabeau, 1764), but it is never discussed as such in the text, where we ﬁnd several tableaux in the form of précis. This point is also highlighted in Herlitz (1996), pp. 1–2. On the diﬀerent price notions used by Quesnay see Vaggi (1983) and Vaggi (1987). Delmas (2000) has an extensive analysis of the role of prices (see chapter 4). See a very similar passage in INED (1958), pp. 791–2. This point is further analysed in the ﬁnal section of this chapter. Notice that the proportion of the proﬁts of the farmers in the produit net increases from 1 ⁄5 to 1⁄4. In the very same page Mirabeau violently attacks the merchants who subtract wealth from circulation. A similar point is in the Tableau économique avec ses explications (Mirabeau, 1760b, p. 184). For a more detailed analysis see Vaggi (1987), pp. 157–61. The lengthening of the lease contracts, the baux, is another measure advocated by the physiocrats; see Hommes in INED, 1958, vol. II, p. 560, Mirabeau Mémoire sur l’agriculture in Part V of L’Ami des hommes (Mirabeau 1760a, p. 99). Pattullo goes as far as to maintain the necessity of lifetime contracts (see Patullo, 1758, pp. 278–9). The table of the Philosophie Rurale has been analysed in Meek (1962), pp. 142–5, Barna (1976), pp. 326–30 and Vaggi (1987), pp. 155–7. Eltis has dedicated a larger comment to this table; see Eltis (1996), pp. 30–36. This is not the only ‘mistake’ in Du Pont’s table. This device solves some problems but it creates new ones; in particular it is not clear why

Structural change and social transformation in physiocracy

24. 25. 26. 27. 28. 29.

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the farmers should continue to invest all their share of the surplus during nine years if in the end they are bound to give all the surplus to the landlords (see also Vaggi, 1987, pp. 142 ﬀ.). This point is extensively analysed in Charles (2000). This is also the position of Quesnay in Grains; see INED (1958), vol. II, p. 502. Mirabeau too says that France has an advantage in foreign trade because it is much better to sell the products of land than those of manufactures (Mirabeau, 1760b, p. 184). This point is similar to Quesnay’s remark that in trade values are exchanged for equal values; thus commerce cannot be a genuine source of wealth. Quesnay was much less preoccupied than Du Pont about the impact of free trade on countries other than France. Free export of corn and the single tax on land rent are related. As a matter of fact the tables by Mirabeau and Du Pont show that the landlords largely beneﬁt from the increase in revenue and hence they should be prepared to bear the burden of taxes. The fully-ﬂedged version of the model is in Vaggi, 1985. On the ambiguities concerning Quesnay’s treatment of farmers’ proﬁts see Vaggi (1985).

REFERENCES Braudel, Fernande and Erneste Labrousse (eds) (1970), Histoire économique et sociale de la France, vol. II, Quadrige/Presses Universitaires de France, 1991. Cartelier, Jean (1999a), ‘Produit, production reproduction dans le Tableau économique’, Revue Economique, vol. 50, no. 1, January. ——— (1999b), Les Fondements politiques du Tableau Economique. Mimeo. III ESHET Conference, Valencia. Charles, Loïc (2000), ‘From the Encyclopédie to the Tableau économique: Quesnay on freedom of grain trade and economic growth’, European Journal of the History of Economic Thought, vol. 7, no.1, Spring. Charles, Loïc and Philippe Steiner (2000), ‘La politique de Quesnay’, mimeo. Delmas, Bernard (2000), ‘François Quesnay et la naissance de l’économie politique’, doctoral thesis, University of Lille. Du Pont de Nemours, Pierre Samuel (1764), ‘De l’exportation et de l’inportation des grains’, in Collection des Economistes et des Réformateurs Sociaux de la France, Paris: Paul Geuthner, 1911. Eltis, Walter (1975), ‘Francois Quesnay: a reinterpretation. 2. The theory of economic growth’, Oxford Economic Papers, vol. XXVII, no. 3. ——— (1996), ‘The Grand Tableau of François Quesnay’, European Journal of the History of Economic Thought, vol. 3, no. 1, Spring. ——— (2001), ‘How Quesnay’s Tableau économique oﬀered a deeper analysis of the predicament of France’, mimeo, ESHET Conference, Darmstadt. Galiani, Ferdinando (1770), ‘Dialogues sur le commerce des bleds’, in Mélanges d’Economie Politique, vol. II, Paris: Guillaumin Libraire, 1848. Hect, Jacqueline (1958), La vie de François Quesnay, in INED, 1958, vol. I. Herbert, Claude-Jacques (1753), Essai sur la police générale des grains. Reprinted in Fernande Braudel and Erneste Labrousse (eds), Histoire économique et sociale de la France, vol. II, Quadrige/Presses Universitaires de France, 1970. Herlitz, Lars (1996), ‘From spending and reproduction to circuit ﬂow and equilibrium: the two conceptions of the Tableau économique’, European Journal of the History of Economic Thought, vol. 3, no. 1, Spring. Kuzcynski, Marguerite and Ronald Meek (1972), Quesnay’s Tableau économique, edited for the Royal Economic Society, London: Macmillan.

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INED (Institut National d’Etudes Démographiques) (1958), François Quesnay et la Physiocratie, 2 volumes, Paris: Presses Universitaires de France. Meek, Ronald (1962), The Economics of Physiocracy, London: Allen and Unwin. Mirabeau, Victor Riqueti (1760a), ‘Mémoire sur l’agriculture envoyé à la trèslouable société d’agriculture de Berne’, in L’Ami des Hommes, vol. II, Part V, reprinted from the 1758–60 edition of Avignon, Aalen: Scientia Verlag, 1970. ——— (1760b), ‘Tableau Economique avec ses explications par François Quesnay’ in L’Ami des Hommes, vol. II, Part VI. Reprint. Aalen: Scientia Verlag, 1970. ——— (1764), Philosophie rurale, ou économie générale et politique de l’agriculture, Amsterdam: Les Libraires Associés. Reprint. Aalen: Scientia Verlag, 1972. Pattullo, Henry (1758), Essai sur l’amélioration des terres, Paris: Durand. Petty, William (1662), A Treatise of Taxes and Contributions, in The Economic Writings of Sir William Petty, 2 vols. Edited by Charles Hull. Cambridge: Cambridge University Press, 1899. Steiner, Philippe (1994), ‘Demand, price and net product in the early writings of F. Quesnay’, European Journal of the History of Economic Thought, vol. 1, no. 2, Summer. Turgot, Anne Robert (1766), Sur la grande et la petite culture. Reprints of Economic Classics series, number 2, Sydney: University of Sydney, 1983. Vaggi, Gianni (1983), ‘The physiocratic theory of prices’, Contributions to Political Economy, 2. ——— (1985), ‘The role of proﬁts in physiocratic economics’, History of Political Economy, vol. 17(3), Fall. ——— (1987), The Economics of François Quesnay, London: Macmillan. Weulersse, George (1910), Le Mouvement physiocratique en France (de 1756 à 1770), 2 volumes, Alcan Editeur, 1910. Reprinted, Paris: Mouton, 1968.

9.

The kingdom of Ponthiamas – a physiocratic model state in Indochina: a note on the international exchange of economic thought and of concepts for economic reforms in the 18th century Rainer Klump

INTRODUCTION Pierre Poivre (1719–86), a French agronomist, missionary and diplomat, can certainly be considered as a ‘minor classic’ of the French enlightenment in the middle of the 18th century. His book Voyages d’un philosophe (Travels of a Philosopher) published in 1768 (Poivre, 1768) and based on his personal experience in South, Southeast and East Asia contains, however, an episode which reveals a very interesting international exchange of economic thought and of concepts for economic reform in the ﬁrst half of the 18th century. It is the tale of the kingdom of Ponthiamas, now known as the port of Ha Tien in the very south of Vietnam. In France, Poivre had learnt the ideas of physiocracy and had become an convinced disciple of François Quesnay. One of the main but almost forgotten roots of the physiocratic movement can be found in Chinese political and economic philosophy which had become popular in France via a steady stream of publications by missionaries and travellers. Given the usual time-lag, these were certainly the ideas of the late Ming and early Quing (or Mandschu) period which characterized European knowledge about China at the beginning of the 18th century. When the Ming dynasty was replaced by the Mandschu in the middle of the 17th century, representatives of the old system spread all over East Asia. One of these Chinese emigrants became the founder of Ponthiamas and by means of a sound economic policy following the ‘natural order’ he led his state very fast to a 173

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high level of development. Pierre Poivre had never visited Ponthiamas himself, but he described it as a physiocratic model state and a much more perfect example of the positive eﬀects of obeying the natural order than any European state. By doing this he conﬁrms implicitly the strong impression of Chinese economic thought on the ﬁrst European school of economists. At the same time Poivre explicitly expresses his conviction that concepts for wealth-creating economic policy reforms can be transferred internationally and can be implemented successfully in other countries. The present chapter is organized as follows: it starts with some biographical remarks on Pierre Poivre and a short summary of his Voyages d’un philosophe. In the next part Poivre’s description of the kingdom of Ponthiamas is presented and compared to other contemporary sources about this particular state in Indochina. The following part investigates in more detail the inﬂuences of Chinese economic philosopy on French physiocracy. In the ﬁnal part the tale of Ponthiamas is considered as an example for the international exchange of concepts for substantial economic reforms.

PIERRE POIVRE AND THE VOYAGES D’UN PHILOSOPHE Pierre Poivre (1719–86) was a typical representative of the French bourgeoisie during the era of the Enlightenment. Almost forgotten for two centuries, his life and work were rediscovered at the end of the 20th century by Louis Malleret (1974) in France and Jürgen Osterhammel (1997) in Germany. Osterhammel (1998) included Poivre’s writings, in particular the Voyages d’un philosophe, published in 1768, in his monumental study of European visions, illusions (and increasing disenchantments) of Asia during the 18th century which were expressed in a steady stream of reports from missionaries and travellers and in a series of philosophical essays. Poivre was born in Lyon. His family being engaged in the silk trade had long-lasting contacts with East Asia. Poivre was ﬁrst educated at the Missionaries of St. Joseph in Lyon and from 1736 at the Seminar of the Société des Missions Etrangères in Paris. In 1740 he was sent to Macau, Canton and Tongking (the northern part of Vietnam), but after having spent some months in the two Chinese ports he ﬁnally arrived in 1742 in Cochinchina (the southern part of Vietnam with the capital Hué). On his way back to France, where he arrived in June 1748, he visited Batavia on Java and Pondichéry in the South of India and also stopped at the island of Mauritius (Île-de-France). In October 1748 Poivre had already sailed back to Vietnam as a representative of the Compagnie des Indes which wanted to expand trade rela-

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tions with Indochina. He arrived in Hué in August 1749 and started his negociations with the Vietnamese Emperor Vo Vuong. He had to leave Vietnam in February 1750 without any signiﬁcant success for the Compagnie des Indes. On his way back to France he stopped again at the island of Mauritius where he became involved in the ambitious project of growing spices and other valuable tropical plants on the island. In 1756 Poivre sailed back to France and settled down in Lyon for the next decade. During these years Poivre was a corresponding member of the Académie des Sciences in Paris and a regular member of the Académie des Sciences, Arts and Belles-Lettres in Lyon. He was a member of the founding committee and soon became president of the Société Royale d’Agriculture of Lyon. He was mostly interested in agricultural innovations and in the acclimatization of exotic plants in France. In a series of lectures and memoranda he described the diﬀerent agricultural regimes in the Asian and Indian economies which he had personally seen. A compendium of his lectures was published without his consent in 1768 under the title Voyages d’un philosophe, ou Observations sur le mœurs et les arts des peuples de l’Afrique, de l’Asie et de l’Amerique. In 1767 Poivre returned to the island of Mauritius where he acted as ‘Royal Intendant’ until 1772. He continued his eﬀorts to acculturate spices and other tropical plants on the island but it was in the South American colony of Guyana where Poivre had sent plants, that the French were ﬁnally successful in cultivating pepper on a large scale. In 1786 Pierre Poivre died in his home town of Lyon. As a philososphical writer of the French Enlightenment Poivre was certainly inﬂuenced by Voltaire’s ‘Essai sur les Mœurs’ (1756) and by Montesquieu’s ‘De l’Esprit des Lois’ (1748) and other treatises dedicated to a comparative study of Asian and European countries and cultures. What makes Poivre’s report valuable is his much more practical view, based on very deep personal experiences on political, social and economic life abroad. His special interest was without any doubt the diﬀerences in agricultural productivity among the diﬀerent states. He always tried to relate the state of agriculture in a country which he was able to consider with the professional eyes of an educated agronomist to the existing laws and institutions. And his conclusions are not biased in any way against Europeans or Asians. While he praises the Chinese economic and political system in which he saw the reason for the great economic success of the country, he criticizes the unwise rule of the King of Siam or of the Dutch governor of Batavia. Poivre’s treatise on the travellings of a philospher ends with a long description of China. Poivre is particularly impressed by the Chinese state of agriculture and tries to show to his readers that the many agricultural

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innovations and the high agricultural productivity were entirely due to a wise government which obeyed the natural order. Personal liberty and private property are guaranteed, there is only one single tax on land, and all state oﬃcials are engaged in permanently fostering agriculture all over the country. Poivre considers the Emperor of China not only the most powerful but also the happiest ruler in the world, since he contributed to the happiness of his people. He is worshipped like a god because he behaves like a man.

THE TALE OF THE KINGDOM OF PONTHIAMAS In addition to the praise of China the second part of the Voyages d’un philosophe also contains a long description of the Indochinese empires of Cochinchina, Cambodia and Champa, their political systems, their agriculture and their particular agricultural policies. Poivre set high importance on the techniques which were used in the cultivation of rice and sugar cane. Both had been improved in Vietnam by a steady stream of innovations which Chinese immigrants had introduced (Needham and Daniels, 1990, p. 427 ﬀ.). It is in this context of Chinese migration along the coasts of Indochina and the spreading of Chinese knowledge and technologies among other nations that Poivre comes to tell the tale of the kingdom of Ponthiamas. The name of this area along the very south of the Vietnamese–Cambodian border, where today the Vietnamese port of Ha-Tien (Athiene) is located, comes from the Khmer word Panday mas, meaning the hinterland; it was also known as Cancar, a name going back to the Cantonese Jiangkou (Kiang-k’eou), meaning the port. Already the diﬀerent names show clearly that the region was a melting-pot of the various people and cultures living around the South China Sea. Khmer, Siamese and Vietnamese rulers had invaded the area at diﬀerent times while Chinese, Malay and Philippine traders had been engaged in trading activities. In the French original Poivre’s tale of the kingdom of Ponthiamas, its origin and its spectacular development reads as follows (Gaspardone, 1952, p. 367 ﬀ.): En quittant les isles et les terres des Malais, on trouve au nord un petit territoire nommé Cancar, et connu sur les cartes marines sous le nom de Ponthiamas. Il est enclavé dans le royaume de Siam, que le despotisme dépeuple sans cesse, entre celui de Camboye, dont le gouvernement n’a aucune forme stable, et entre les terres de la domination des Malais, dont le génie, sans cesse agité par leurs loix féodales, ne peut souﬀrir la paix, ni au-dedans, ni au-dehors. Environné de tels voisins, ce beau pays était inculte, et presque sans habitants, il y a environ cinquante années.

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Un négociant chinois, maître d’un vaisseau qui servait à son commerce, fréquentait ces côtes avec ce génie réﬂéchi, et cette intelligence qui est naturelle à sa nation. Il vit avec douleur des terres immenses condamnées à la stérilité, quoiqu’elles fussent d’un sol naturellement plus fertile que celles qui faisaient la richesse de son pays; il forma le projet de les faire valoir. Dans ce dessein, il s’assura d’un certain nombre de cultivateurs de sa nation et des nations voisines; puis il commença par se ménager, avec art, la protection des princes les plus puissants du voisinage, qui lui donnèrent une garde à sa solde. Dans ses voyages aux isles Philippines et à Batavia, il avait pris des Européens ce qu’ils ont de meilleur, suivant les Chinois, dans la science politique, l’art de se fortiﬁer et de se défendre. Bientôt les proﬁts de son commerce le mirent en état d’élever des remparts, de creuser des fossés, et de se pourvoir d’artillerie. Ces premières précautions le mirent à couvert d’un coup de main, et le garantirent des entreprises des peuples barbares qui l’environnaient. Il distribua les terres à ses cultivateurs en pur don, sans aucune réserve de ses droits, connus sous le nom de servis, lods et ventes; droits qui ne laissant aucune propriété, sont le ﬂéau le plus terrible de l’agriculture, et dont l’idée n’est jamais tombée sous le sens commun des peuples sages. Il ajouta à ce premier bienfait, celui de procurer à ses colons, tous les instruments nécessaires pour faire valoir les terres. Son territoire devint le pays de tous les hommes laborieux qui voulurent s’y établir. Son port fut ouvert à toutes les nations; bientôt les forêts furent abattues avec intelligence, les terres furent ouvertes et ensemencées de riz; des canaux tirés des rivières inondèrent les champs, et des moissons abondantes fournirent d’abord aux cultivateurs la matière de leur subsistance, puis l’objet d’un commerce immense. Les peuples barbares du voisinage, étonnés de la promptitude avec laquelle l’abondance avait succédé à la stérilité, vinrent chercher leur nourriture dans les magasins de Ponthiamas. Ce petit territoire est regardé aujourd’hui comme le grenier le plus abondant de cette partie orientale de l’Asie. Les Malais, les Cochinchinois, le Siam même, ce pays naturellement si fertile, regardent ce port comme une ressource assurée contre les disette. Si le négociant chinois, fondateur de cette société de laboureurs négociants, imitant le vulgaire des souverains de l’Asie, avait établi des impôts arbitraires, . . . s’il avait traité ses associés comme des esclaves; s’il avait reçu dans son port les étrangers autrement comme ses amis; les terres de son territoire seraient encore en friche et dépeuplées, ou ses malheureux habitants mourraient de faim . . . Mais le sage Kiang-tse, c’est le nom du négociant chinois dont je parle, . . . n’établit qu’un droit médiocre sur les marchandises qui entraient dans son port; le revenu de ses terres lui parut suﬃre pour le rendre puissant. Sa bonne foi, sa modération, son humanité, le ﬁrent respecter. Il ne prétendit jamais régner, mais seulement établir l’empire de la raison. Son ﬁls, qui occupe aujourd’hui sa place, a hérité de ses vertus comme de ses biens. Il est parvenu par l’agriculture et le commerce des denrées qui produit son territoire, à un tel degré de puissance, que les barbares ses voisins lui donnent tous le titre de roi qu’il dédaigne . . .

In order to understand the true character of Poivre’s tale it is useful to look at other descriptions of Ponthiamas. There is ﬁrst of all an earlier description by Pierre Poivre himself going back to his voyage to Cochinchina in

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1749. His ‘Journal d’un voyage à la Cochinchine depuis le 29 aoust 1749, jour de notre arrivée, jusqu’au 11 février 1750’ must be considered as the historical basis for the tale that later appears in the Voyages d’un philosophe (Gaspardone, 1952, p. 369 f.): Le royaume de Cambodge qui avait autrefois plusieurs ports n’a plus aujourd’hui sur les bords de la mer que le port de Ponthiamas situé dans le golfe de Siam; les Cochinchinois ont tellement opprimé ce pays-là qu’un simple marchand mestisse chinois, et né en Cochincine, vient de s’emparer de la rivière d’Athiene qui restait encore au Cambodge et où les Portugais faisaient autrefois un grand commerce. Ce metisse s’est établi là une petite souveraineté en payant tribut au Roy de Cochinchine qui l’a mis sous sa protection et lui a donné une centaine de soldats pour sa garde, et en payant également un moindre tribut au Roy de Cambodge qui est obligé de le souﬀrir. Le nouveau souverain n’oublie rien pour s’aﬀermir. Il traite ses sujets avec douceur et reçoit les étrangers avec politesse. . . . Il se loue beaucoup de politesses qu’il en reçut, et convient que c’est un homme d’esprit, capable de se rendre un jour respectable au Roy même de la Cochinchine qui le protège. Déjà son port est fréquenté par quelques bateaux cochinchinois qui vont y acheter du riz, de la cire, de l’ivoire et diverses autres marchandises.

From a Chinese source in 1747 one learns that in Ponthiamas the rules were the same as in China under the old dynasty (the Ming) (Gaspardone, 1952, p. 365 f.) and from a Vietnamese source published in 1844 one ﬁnally gets some information about the foundation and the fate of the kingdom. The story starts with Mac Cuu (Mo Jiu) a Chinese oﬃcial who had ﬂed his native province of Guangdong after the replacement of the Ming dynasty by the Quing (or Mandschu) and ﬁnally arrived in the South (Reid, 1993, p. 315). In about 1700 he obtained from the Khmer ruler the farm of gambling revenues at the port of Ha-Tien, at that time a kind of a piratic frontier. The port ﬂourished, attracted many other Cantonese as well as Vietnamese and Khmers ﬂeeing dynastic troubles and built a little state that embraced a string of ports along the eastern shore of the Gulf of Siam. In 1708 Mac Cuu transferred his loyality to the rising power of Cochinchina but he retained his own armed force and administrative structure until his death in 1735. Under his rule Ponthiamas is described by European visitors as a ‘place of pretty good trade for many years’ (Gaspardone, 1952, p. 371) despite one serious attack by the Siamese army and ﬂeet in 1717 which was countered by a joint eﬀort of Cambodia and Cochinchina. Mac Cuu’s Sino-Vietnamese son, Mac Thien Tu (Mo Tianxi or Kiangtse as he appears in Poivre’s text where he is most evidently mixed up with his father), born in 1718, continued the tradition. He minted his own coins, built fortresses, set up markets and even conducted an independent foreign policy generally opposing Siam and frequently intervening in Cambodia.

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In his capital he insisted, as Poivre correctly reported, on Ming-style dress for his oﬃcials, built in a Chinese style and established a Confucian temple and schools. As a contemporary Vietnamese source tells us: ‘His place (Ha Tien) became crowded with traders from everywhere’ (Li Tana, 1993, p. 131). During the 1760s, however, the equilibrium of the greater powers in the region became fragile. Ha Tien was seized and destroyed in 1769 by Siamese invaders. Although he was able to rebuild the town, Mac Thien Tu was ﬁnally forced to ﬂee to the Siamese court in 1777 as a result of the Tayson revolt in Cochinchina. There he died in about 1780 (Gaspardone, 1952, p. 384).

CHINESE ROOTS OF FRENCH PHYSIOCRACY Poivre’s praise for the Chinese system of governance stands as may be expected not alone in the physiocratic writings (Rougier, 1929, p. 9). In fact according to Maverick (1938, p. 54), the inﬂuence of the Chinese upon the physiocrats was probably more extensive and more signiﬁcant than it has generally been appreciated. This hypothesis can be proved at several levels. At ﬁrst sight there are strong similarities in the philosophical and political ideas of the physiocrats and some of the classical Chinese sages like Confucius or Mencius (Binswanger, 1998). These are, for example, the high esteem of agriculture as the only source of wealth, the superiority of the natural order as the guideline for the government and the importance of education for the continuous defence of the natural order. It is also well known that leading physiocrats had devoted some of their most important books to China or the Chinese people. Quesnay named his political testament ‘Le Despotisme de la Chine’, published in the Ephémérides du Citoyen in 1767 (Quesnay, 1965, p. 563 ﬀ.). According to Dupont de Nemours Turgot wrote his main economic treatise ‘Réﬂexions sur la formation et la distribution des richesses’ in 1766 (Turgot, 1970, p. 121 ﬀ.) for two young Chinese, Ko and Yang, who had been educated by the Jesuits in France. At a second look one also remarks that the physiocrats had been deeply inﬂuenced by Chinese ideas themselves which had become known in France via the reports of Jesuits and travellers since the end of the 17th century. On the occasion of Quesnay’s funeral ceremony the Marquis de Mirabeau not only praised his teacher as the European Confucius (Quesnay, 1965, p. 9) but he also quoted from Du Halde, a Jesuit missionary who had written one of the most inﬂuential books about China in the ﬁrst half of the 18th century. This quotation underlined that for Confucius in old China, just as

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for Quesnay much later in France, ‘the great law of the natural order’ was the focal point of his political philosophy. Quesnay himself was probably much more inﬂuenced by Chinese thought than is evident from quotations in his works alone (Reichwein, 1923, p. 109 ﬀ.; Fox-Genovese, 1976, p. 96 f.). With the fact that Du Halde and others had widely published about China, Chinese style had become fashionable not only among French philosphers but also among the members of the court and society (Pinot, 1906/07). Since many innovations in agriculture had made their way from the Far East to Europe in this century and contributed signiﬁcantly to the increase in European agricultural productivity (Needham and Bray, 1984), it is quite natural that those economic thoughts and theories which had been devoted to agriculture were also transferred internationally. In particular, it is interesting to focus on those ideas that developed in China under the late Ming and the early Quing (Mandschu) dynasty and to compare them to the central themes of French physiocracy. Since the end of the 16th century some antitraditional economic thought can be found in China (Jichuang, 1988, p. 462 ﬀ.). The author Li Zhi (1527–1602) underlined the necessity of private property rights and defended the ‘thought of self’. Also the conservative intellectuals had gradually been won over to the cause of oﬃcal restrictions on commerce, including the ban on foreign trade. After a fundamental tax reform in 1581 China had come to unite into a single monetary payment all the taxes then existing. In 1713 the Quing dynasty prescribed a poll tax for each province as ﬁxed quite independently of population growth. Various kinds of feudal levies were ﬁnally combined into one single tax, named the land tax. One can only speculate about the direct or indirect inﬂuence which Chinese sources had on the centrepiece of physiocratic theory, Quesnay’s ‘Tableau Economique’. It was rediscoverd by Rieter (1990) that the invention of the ‘zigzag’ model for the ﬂow of annual income between the sectors of the economy and the annual reproduction of investments in agriculture was mainly inﬂuenced by contemporary (baroque-style) clocks. Again one can prove today (Needham, 1991, p. 131 ﬀ.) that the development of clockmaking in Europe was extremely challenged by Chinese innovations which became known during the 17th and 18th century. These innovations had already been applied in Su Song’s great clock-tower built in the 11th century and were rediscovered in China in the middle of the 17th century. They were based on the same principles as water mills and installations for the lifting of water which had been developed in Chinese agriculture; and they were intensively studied by the Christian missionaries at the Chinese court.

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CONCLUSIONS The economic ideas which Pierre Poivre pronounced in his Voyages d’un philosphe are both inspired by Chinese tradition and French physiocracy where the latter was again strongly inﬂuenced by the former. As was the case with agricultural and other innovations, a steady stream of knowledge on an adequate agricultural policy spread from China to the West via the writings of the Jesuits and travellers during the 17th and early 18th centuries. Important elements of a succesful agricultural policy included the introduction of a single land tax, the security of private property rights, personal freedom of the farmers and the free trade of grain. The close relation to the physiocratic principles of an ‘agricultural kingdom’ are evident. One can even speculate that the ‘zigzag’ scheme of Quesnay’s ‘Tableau économique’ owes much to Chinese innovations in clock-making which had become popular in Europe at this period of time. The French philosophers and economists, like Quesnay and his disciples, were not the only ones who were inspired by the idea of agriculture as the sole source of wealth. Due to the almost complete isolation during this period of time it is hardly known that a kind of physiocratic movement (‘nohonshugi’) also developed in Japan from the middle of the 17th century (Distelrath, 1996, p. 63 ﬀ.) This school had a wide political inﬂuence in Japan until the end of the 18th century. It was strongly inﬂuenced by diverse Chinese sources of the late Ming and early Quing dynasty. In this sense Poivre’s treatise stands for the international transfer of economic thought in early modern times. But the impressive tale of the kingdom of Ponthiamas, where the power of agriculture had been awakened by a wise economic policy following the ‘natural order’, has still another dimension. It proves that economic policy reforms can successfully be implemented all over the world. Poivre did not see any particular geographical, political or cultural obstacles which could prevent the victory of the physiocratic model. Compared to the many other, mainly unsuccessful attempts to implement the ideas of Quesnay in other European countries – in some German states like Baden and Austria or in Russia (Gömmel and Klump, 1994; Klump 2000) – the case of Ponthiamas under the Ming Chinese rulers sends a clearly optimistic message. As an example for the successful international transfer of concepts for economic policy reform in the 18th century, the tale of the kingdom of Ponthiamas should also be related to Pierre Poivre’s other main ﬁeld of interest (Malleret, 1968). It should be remembererd that Poivre, like other agronomists of his time, had studied the numerous innovations of Chinese agriculture which revolutionized Europe (Bourde, 1967; Needham and Bray, 1984). These included the acculturation of plants in other countries

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besides their countries of origin. In particular when Poivre visited the colonial plantations on the island of Mauritius he learnt a lot about the practical problems and possibilities of these projects. And again it seems he has been inﬂuenced by one important Chinese source. Through his studies in the seminar of the French Missionaries and from his personal experiences in China, Poivre had certainly learnt about the writing of Hsü Kuang-Chhi or Paul Hsü (1562–1633), the ﬁrst Chinese oﬃcial of high rank who came to know Western science from the Jesuit missionaries and one of the most inﬂuential agronomists in Chinese history. Hsü’s main work, the Principles of Agricultural Administration (Nung Cheng Chhüan Shu) was remarkable for its ﬁght against the traditional doctrine of locality. This doctrine taught that every plant had its own suitable district and should not be transferred to other regions. Hsü rejected this view and pointed out that he saw no reason why the ﬁtness of land for a given plant should be ﬁxed and should never be changed (Jichuang, 1988, p. 477 f.). The tale of Ponthiamas can thus be read as a conﬁrmation that in agricultural and economic policy also the doctrine of locality is not valid. According to Poivre every country should be able to implement a regime which by obeying the natural order fosters agricultural development and thus leads to a signiﬁcant increase in wealth.

REFERENCES Binswanger, Hans Christoph (1998), ‘Chinesische Ökonomik: Fünf ordnungspolitische Denkrichtungen in der chinesischen Tradition’, in Hans Christoph Binswanger (ed.), Die Glaubensgemeinschaft der Ökonomen, München, Gerling Akademischer Verlag, pp. 91–106. Bourde, André J. (ed.) (1967), Agronomie et agronomes en France au XVIIIe siècle, 3 vols, Paris, S.E.V.P.E.N. Distelrath, Günther (ed.) (1996), Die japanische Produktionsweise. Zur wissenschaftlichen Genese einer stereotypen Sicht der japanischen Wirtschaft, München, Iudicum Verlag. Du Halde, Jean-Baptiste (ed.) (1735), Description géographique, historique, chronologique, politique, et physique de l’Empire de la Chine et de la Tartarie chinoise, 4 vols, Paris. Fox-Genovese, Elizabeth (ed.) (1976), The Origins of Physiocracy: Economic Revolution and Social Order in Eighteenth-Century France, Ithaca and London. Gaspardone, Emile (1952), ‘Un Chinois des Mers du Sud: Le fondateur de Hàtiên’, Journal Asiatique, 240, pp. 363–85. Gömmel, Rainer and Rainer Klump (eds) (1994), Merkantilisten und Physiokraten in Frankreich, Darmstadt, Wissenschaftliche Buchgesellschaft. Jichuang, Hu (ed.) (1988), A Concise History of Chinese Economic Thought, Beijing, Foreign Languages Press. Klump, Rainer (2000), Johann Georg Schlosser [1739–1799]: Leben und Werk, in

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Rainer Klump (ed.), Johannn Georg Schlosser, Xenocrates oder Ueber die Abgaben (1784), Marburg, Metropolis, pp. 87–112. Malleret, Louis (1974), ‘Pierre Poivre’, Publications de l’Ecole Française d’ExtrêmeOrient, Paris. Malleret, Louis (1968), ‘Pierre Poivre, l’Abbé Galloys et l’Introduction d’Espèces Botaniques et d’Oiseaux de Chine à l’Ile Maurice’, in Proceedings of the Royal Society of Arts and Sciences of Mauritius, vol. 3, pp. 117–30. Maverick, Lewis A. (ed.) (1938), ‘Chinese inﬂuences upon the phyiocrates’, in Economic History, vol. 4, pp. 54–67. Needham, Joseph (ed.) (1991), Dialogue des Civilisations Chine-Occident. Pour une Histoire Oecuménique des Sciences, Paris, Édition la Découverte. Needham, Joseph and Francesca Bray (eds) (1984), Science and Civilisation in China, vol. 6, Biology and Biological Technology, Part II: Agriculture, Cambridge, Cambridge University Press. Needham, Joseph and Christian Daniels (eds) (1990), Science and Civilisation in China, vol. 6, Biology and Biological Technology, Part III: Agro-Industries: Sugarcane Technology, Cambridge, Cambridge University Press. Osterhammel, Jürgen (ed.) (1998), Die Entzauberung Asiens. Europa und die asiatischen Reiche im 18. Jahrhundert, München, Beck. Pinot, Virgile (1906/07), ‘Les Physiocrates et la Chine au XVIIIe Siècle’, in Revue d’Histoirie Moderne et Contemporaine, VIII, Paris, pp. 200–214. Poivre, Pierre (ed.) (1768), Voyages d’un philosophe, ou Observation sur les mœurs et les arts des peuples de l’Afrique, de l’Asie et de l’Amérique, Yverdon. Poivre, Pierre (ed.) (1997), Reisen eines Philosophen 1768, eingeleitet, übersetzt und erläutert von Jürgen Osterhammel, Sigmaringen, Thorbecke. Quesnay, François (ed.) (1965), Oeuvres économiques et philosophiques, publiées avec une introduction et des notes par Augustes Oncken, réimpression de l’édition Francfort 1888, Aalen, Scienta Verlag. Reichwein, Adolf (ed.) (1923), China und Europa im achtzehnten Jahrhundert, Berlin, Oesterheld & Co. Reid, Anthony (ed.) (1993), Southeast Asia in the Age of Commerce 1450–1680, vol. 2: Expansion and Crisis, New Haven and London, Yale University Press. Rieter, Heinz (1990), ‘Quesnays Tableau Economique als Uhren-Analogie’, in Harald Scherf (ed.), Studien zur Entwicklung der ökonomischen Theorie IX, Berlin, Duncker and Humblot, pp. 57–94. Rougier, Louis (1929), ‘La Chine, les Physiocrates et la Révolution Francaise’, in Annales Franco-Chinoises, X, pp. 1–10. Tana, Li (1965), The Nyguen Chronicle to 1777 (Translated Excerpts), in Li Tana and Anthony Reid (eds), Southern Vietnam under the Nguyen. Documents of the Economic History of Cochinchina, 1602–1777, Singapore, p. 127 ﬀ. Turgot, Anne-Robert Jacques (ed.) (1970), Ecrits économiques, Préface de Bernard Cazes, Paris, Calmann-Lévy.

PART III

Co-evolution of Political Ideas and Economic Thought in Diﬀerent Countries and Periods

10.

Cleomenes III’s politico-economic reforms in Sparta (235–222 ) and Cercidas’ economic thought Christos P. Baloglou*

INTRODUCTION The period between the battle of Corupedion (281) – death of Seleucus – and the battle of Sellasia (222) is generally accepted as the most obscure in the history of the Hellenistic World.1 The leading historical work on this period, that of Phylarchus of Athens,2 is lost except for a few fragments and for the extensive use that Plutarch and Polybius made of it. None of the secondary sources which gave a continuous narrative of the events of the period, such as Diodorus Siculus or Pompeius Trogus, is preserved. The only bright spots in the darkness are the biography of Pyrrhus by Plutarch, the history of the Achaean League in Polybius, Plutarch’s life of Aratus based on Aratus’ memoirs (υποµνη µατα)3 and the work of Phylarchus, and the history of Sparta under Agis and Cleomenes in Plutarch’s biographies of these kings, based mainly on Phylarchus. The purpose of this chapter is to investigate the relation and inﬂuence of the reforms made by Cleomenes III (263–219, r. 235–222), King of Sparta, on the socio-economic thought of his time, and especially on the Cynic Cercidas of Megalopolis. After a brief description of the socio-economic conditions in Greece and especially in Sparta during the second half of the third century, we describe the reforms made by Cleomenes. The spiritual environment which possibly inﬂuenced Cleomenes’ ideas is also investigated in the next section. It is worth noting that these reforms, which had great success, led to an attack by Cercidas, who extensively wrote on the unequal distribution of wealth. We analyse Cercidas’ socio-economic ideas with emphasis on his Cynic background.

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ECONOMIC CONDITIONS IN GREECE: A BRIEF DESCRIPTION The third century was a period of economic decline for Greece – on the whole, at any rate, for there were brief periods of recovery.4 The centres of prosperity which were now Alexandria, Antioch, Rhodes and Pergamum beneﬁted from being closer to the new trade routes, and beneﬁted also from the concentration of power and economic resources. Local industry and agriculture expanded in Egypt, Syria and Asia Minor, to the detriment of agriculture and industry in Greece. Egypt developed the vine and the olive. By the year 250 the period of natural expansion of the new kingdoms was coming to an end, but the centralized control made protection almost inevitable and imports from Greece were heavily taxed. Within the great monarchical States (other than Macedonia) the rulers never succeeded in attaining stabilization and consolidation. They never found a way to escape from the great antinomy in the political, social and economic life of their dominions, to which the conquest of Alexander had given rise: the conﬂict between the two leading forms of civilized life, the Eastern and Western, between Greek ‘poleis’ and Oriental monarchies – between Greek ‘politai’ and Oriental subjects; between the Greek economic system, based on freedom and private initiative, and the State economy of the East, supervised, guided and controlled. And ﬁnally they were faced with the great eternal problem of human society as acute in the ancient world as it is in the modern one: the antinomy between the rulers and the ruled, the ‘haves’ and the ‘have-nots’, the rich and the poor.5 The problem of the distribution of wealth and of antagonism between rich and poor was a critical problem during the third century in Greece.6 It is characteristic, too, that the leading Hellenistic schools were aware of the existence and importance of the problem. But they took it up and treated it from their own point of view according to their general philosophical tenets. It must remembered that Hellenistic philosophy was not interested in social and economic problems as such. The main concern of the Hellenistic schools was to guide the individual in his inner life, to show him how to live as an individual and, to a certain extent, as a member of society, in accordance with the law of nature, so as to achieve internal peace and undisturbed balance, that is to say, individual perfection equivalent to wisdom. Such being their chief aim, they viewed the problem of poverty and riches, not as an important social and economic issue, but as a question of individual morals.7 Directly connected with the problem of the unequal distribution of wealth in the poleis of the third century  was the problem of securing soldiers, which was a permanent one. The poleis turned to condottieri, who

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received large remunerations: an issue which inﬂated the problem of the unequal distribution of wealth.8 The social problem in Sparta is of particular interest. The antagonism between the rich and the poor has been demonstrated as especially catastrophical in Sparta because of its peculiar agricultural economy, in the context of which each Spartan citizen was a processor of a ‘cleros’, which was cultivated by Helots, while all the productive sectors of the economy were in the hands of the ‘perioeci’, who were not citizens. A law was passed in Sparta by an ‘ephor’ named Epitadeus9 legalizing the alienation of land, perhaps so as to encourage emigration;10 after the loss of Messenia in 370, there must have been increasing pressure on relatively small land resources. In general, over all the mainland of Greece the rich landowners were becoming fewer and richer. Many of those who had once been powerful were now in debt. A consequence of Epitadeus’ law was the decrease of the population of the Spartiates with full political rights.11 Parallel to all these socio-economic phenomena, the traditional ‘agoge’, the common meals, had become outdated and Sparta sank into obscurity. It was a situation in which change had to come. Plutarch, when speaking of the wealth of the Spartan kings in the time of Agis and Cleomenes, remarks that the slaves of the Oriental satraps and of the stewards of Ptolemy and Seleucus were richer than all the Spartan kings taken together.12 The conditions in Sparta were typical of those prevailing throughout Greece in the third century. The contrast between rich and poor led to acute conﬂicts in many cities, both in Greece proper and on the islands. The revolutions – in the oﬃcial terminology – took various forms, the most usual being the establishment of a tyranny supported by the poor. Some of the tyrants of that time were excellent rulers, such as Aristomachus of Argos and Aristodemus of Megalopolis. Yet none of them was ever able to establish his rule on a ﬁrm basis. Their rule was generally ended by assassination, and strife began again within the ‘polis’, a strife mainly of a political character, but often governed in part by social and economic considerations. The programme of the redistribution of property and abolition of debts was never carried out in full in any Greek ‘polis’ even with the help of the tyrants. The poorer people without assistance from the outside were helpless, and those who had military resources at their disposal were not friends of social revolution.13 It is characteristic that from the reign of Agis IV onwards (243–240 ) Sparta became, for nearly half a century, a home of revolution. It was a reduced and humbled Sparta that went through this phase of history. In the north of Peloponnese the Achaean League, under its general, Aratus, menaced Sparta with defeat and possible absorption. If Sparta was to head oﬀ these dangers, it had to replenish a depleted civic body: if it was to do that,

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it had to redivide the land, which had fallen into the hands of a few owners, and to grow a new crop of Spartan citizens with a stake in the country. Sparta was thus driven into social revolution in order to restore its old self.14 The social revolution in Sparta, and especially the successful reforms which were made by King Cleomenes III, inspired discussions on social theories and ideas.

CLEOMENES’ SOCIO-ECONOMIC REFORMS15 The ancient evidence available for the description and evaluation of Cleomenes’ reforms is tendentious. Polybius, whose practice did not always measure up to his principles, is biased in favour of Aratus, and thus against Cleomenes. Our main source, Plutarch, took his basic narrative from the Athenean Phylarchus,16 who may have had some Cynic sympathies, and was a strong apologist for the revolution. We are thus confronted with two sources leaning in diﬀerent directions. There were others, and Plutarch no doubt had access to some of them, including Sphaerus himself, the Stoic philosopher, who was somehow involved.17 The only hope for Sparta to regain her important standing in Peloponnese was for her to mobilize all her inner strength and deal with the urgent social problems which beset her. Cleomenes,18 who became King of Sparta on the death of Leonidas in 235,19 seems to have understood this very early, and instead of following the example of his father and his father’s cousin Areus, he decided to emulate Agis. The attitude of Leonidas II in acting towards Agiatis, Agis’ IV widow, as ‘kyrios’, shows his illegal behaviour and the social and political disturbances in his time in Sparta.20 It came as a surprise to his contemporaries to see the principles of Agis adopted by the son of his most bitter enemy, and Phylarchus therefore took pains to explain how the ideas of the young Cleomenes came to turn in this direction. He tells us that Cleomenes loved the widow of Agis, Agiatis, ‘by birth and by her beauty far above all the other women of Greece’,21 and often questioned her about Agis and his ideas, listening spellbound to her account of the stirring time through which Sparta had just passed. He also turned for information about Agis to his older friend and ‘lover’ Xenares.22 Cleomenes bided his time. For eight years after his accession in 237 he learned his trade of ruling. Cleomenes was a practical politician. He was determined to solve the urgent social problems of Sparta in order to increase the political and military power of his country, and at the same time to strengthen his own position. He knew very well that he could not carry out the necessary reforms by persuasion only, and therefore tried to gain for himself the popularity and fame of a great military commander.

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Cleomenes provoked a war with the Achaean League, which was a Great Power in the North of Peloponnese and intended to unite all the cities of Peloponnese.23 Cleomenes made an alliance with the Aetoleans24 and captured three cities of Peloponnese: Mantineia, Tegea, Orchomenos. During the so-called Cleomenic war – spring 22825 – he defeated Aratus, the leader of Achaeans, in Lykaion (227),26 captured Megalopolis (summer 227)27 and returned with a mercenary force back to Sparta. He thought that the time was mature for reforms. It is quite clear from what Plutarch says next that Cleomenes regarded the reforms as a means of restoring the military and political power of Sparta.28 For the purposes of evaluation and better understanding of the reforms it will be convenient to distinguish between the socio-economic and political measures. Cleomenes was dissatisﬁed with the neglect of public interests by King and citizens alike out of love of luxury and idleness; as far as one can see there is in this a hint of a social concern. In his speech, held to justify the deposition of the ‘ephors’, Cleomenes accused them of obstructing the restoration of the ancient constitution based on equality without poverty and wealth. ‘If then it had been possible’, said Cleomenes, ‘without bloodshed to rid Sparta of her imported curses, namely luxury and extravagance and debts and usury and those elder evils (τα πρεσβυ τερα ... κακα ), namely poverty and wealth (πενι αν και πλου τον), he would have thought himself the most fortunate king in the world’.29 He goes on to say that, since it was impossible to get rid of these ‘curses’ by peaceful means, he was obliged to use force.30 The ‘επει σακτοι’ κη ρε, that is, social evils which found their way into Sparta, were luxury, extravagance, debts, and money-lending. But all these are here, it seems, merely symptoms; the root of evil was to Cleomenes the very existence of ‘poverty and wealth’. It appears from this passage that to Cleomenes the very existence of economic inequality was the prime source of the social evils oppressing Sparta; this, again, was in keeping with his actions.31 The speech concludes with the statement that the ‘anaplerosis’, that is the replenishment of the citizen body in order to restore it to its real or assumed original number, will give Sparta enough men to defend herself against Aetolians and Illyrians.32 Of the group of reforms that may be properly styled political, the most important was the abolition of the ‘ephorate’.33 He claimed that the ‘ephors’ had been instituted to support the kings and were otiose if they did not do so.34 Further, Cleomenes weakened the inﬂuence of the Gerousia by changing it to a yearly elected body, as it was to be in Roman times. He exiled eighty citizens on whose sympathy he could not rely. The total loss of life was 14.35 He abolished the dual kingship, which was of immemorial antiquity, only thinly veiling his purpose by the appointment of his brother,

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Eukleidas, as second King. It is worth noting that he organized the institution of kingship after the patterns of a Hellenistic monarchy.36 It is signiﬁcant to note at this point that Cleomenes later claimed to be related to Heracles. The Kings of Sparta were traditionally descended from Heracles;37 Polybius amusingly remarks that one usurper became a descendant of Heracles by distributing money amongst the ‘ephors’.38 So Plutarch tells us that, when envoys were confronted with Cleomenes ‘who was really a king and not just called king . . . they could not resist him and said that he alone was of the stock of Heracles’.39 Cleomenes put the image of Heracles on his coins.40 The point is that Heracles represented the ideal of the Stoic sage who is also the only true king; even Polybius could accept the image: his ﬁnal comment on Cleomenes is that he was ‘a born leader and king by nature’.41 Cleomenes established a new authority, the ‘patronomoi’, a new board of magistrates, evidently to protect the laws.42 While the political reforms of Cleomenes were safeguarded by the concentration of power in his own hands and by the elimination of the ruling class of his own time, these measures would not be suﬃcient to prevent the recurrence of those economic and social processes which had undermined the earlier ‘Lycurgan’ polity. A vested authority was needed to guard the renewed ‘patrioi nomoi’, once Cleomenes and the generation that had resurrected them had gone. If one assumes that the ‘patronomoi’ were charged with this task, we would have a satisfactory explanation of the name of the new magistracy as well as of the fact that it became the most important one in Sparta, because the task with which the ‘patronomoi’ were entrusted was also the most important of all. The ﬁrst board of ‘patronomoi’ may have been charged with the execution of the reforms in detail.43 As far as the social and economic reforms are concerned, they involved a redistribution of the land, the establishment or reestablishment of equal ‘kleroi’; the abolition of debts, possibly only of those on land, the ‘anaplerosis’, that is, the replenishment of the citizen body in order to restore it to its real or assumed original number; and of course the reanimation of the ancient way of life and education, the Spartan ‘diaita and agogè’. The ﬁrst step towards the realization of these measures was the cancellation of debts.44 Cleomenes then put all his own wealth into the common fund and the example was followed by Megistonous, his stepfather, and his other friends, and then by the other citizens.45 The land was divided into 4000 ‘kleroi’, or 500 less than the number proposed by Agis.46 The number of citizens was made up from the ranks of the ‘most valiant perioikoi’. In the speech he is said to have made to the assembled citizens, however, Cleomenes proposed that ‘foreigners should be selected and tested, so that

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the best of them might become Spartans and defend the polis with their arms’.47 It is an interesting point that land lots were also assigned to the men who were sent into exile, and that Cleomenes ‘agreed that they should all return when things had settled down again’.48 Twice Africa49 says that Cleomenes enfranchised Helots, but there is no foundation for this statement in the sources. Plutarch, the only one to mention this matter,50 only states that Cleomenes liberated those Helots who paid ﬁve ‘minae’ and armed 2000 of them. The liberation of helots in time of danger was no new departure on the part of Cleomenes; he only had the ingenious idea of making them pay for it on top of recruiting some of them.51 We would like to add that this measure, the liberation of Helots, was carried out for ﬁnancial reasons, if we consider that Cleomenes collected 500 talents,52 an amount which would help him to ﬁnance the war against the Achaeans and Macedonians. Cleomenes tried next to revive the ancient Spartan education and the traditional discipline, including the ‘syssitia’. It is signiﬁcant that he had Sphairos at his elbow for this.53 Equal education, equal discipline, a common taking of meals, an equal style of life – these were the social aspects of equality as envisaged by the reformer. With the redistribution of land we pass to the economic aspects of equality. Cleomenes’ programme was based on redivision54 and he aﬀected a full redistribution of land immediately after his revolution.55 Some forms of distribution of land were based on the principle of equal shares (ισοµοιρι α); such were, for instance, the division of land in new settlements, and again the redivision of the entire territory coupled with comprehensive ‘ﬁlling-up’ of the body of citizens.56 Other forms, such as the redistribution of land consequent on the banishment of a party defeated in a ‘stasis’, or the redistribution of only a small part of the territory, coupled with a relatively restricted ‘ﬁlling-up’, were not based on the idea of equality.57 A new and ﬁxed number of citizens was envisaged58 and the entire territory was to be redivided . Moreover, Cleomenes left eighty ‘lots’ for opponents temporarily exiled, which shows that he conceived the redivision not as expropriating one party – ‘the rich’ – for the beneﬁt of another – ‘the poor’ – but as supplying every citizen with a basic allotment.59 In fact, the idea of equal shares is clearly implied in Cleomenes’ demand ‘to put the property of the citizens into a common stock, and rouse and incite the Spartans thus put upon a foot of equality . . .’.60 The redivision by Cleomenes, revolutionary in its application, is therefore to be classiﬁed with certainty as based on the concept of ‘ανη ρ και κλη ρο’,61 that is, an equal ‘lot’ for every citizen.62 Was this redistribution of the land in fact in accordance with the πα τριο πολιτει α, the traditional Lycurgan constitution which Cleomenes was

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proposing to uphold or restore? Many modern critics have denied the claim, and indeed have suggested that Cleomenes, like Agis before him, was appealing to a mere philosopher’s fancy about Sparta, the legend of onetime equality, to bolster a scheme which was wholly subversive and was now being introduced into Sparta for the ﬁrst time.63 The 4000 lot-holders did not represent the whole number of Spartan citizens in Cleomenes’ constitution, but only a privileged section of them. This is proved by Plutarch’s statement that ‘Lacedaemonians’ (meaning in this case Spartan citizens) fought in the battle of Sellasia.64 Some of these additional citizens were no doubt ex-Helots from among the 6000 of that class who received the franchise shortly before Sellasia, and therefore a few years after the redistribution of the land, on payment of ﬁve ‘minas’ each.65 But the rest cannot simply all have been part of those who received the 4000 ‘kleroi’, for Polybius’ account of the battle distinguishes, among the Spartan contingent who fought with Cleomenes, between those armed with the ‘sarissa’ (the heavily-armed), the ‘euzonoi’ (the lightly-armed) and the horsemen.66 The lightly-armed soldiers must be regarded as a less privileged political class, the horsemen (Cleomenes’ reforms in the same way as before) as a social and political élite. This interpretation is suggested by what is known of earlier Greek oligarchical constitutions, and will ﬁnd its conﬁrmation in the social divisions of Sparta in a later period.67 The goal of Cleomenes’ reforms was to increase the number of Spartan citizens and thus make the army more active and more eﬃcient. This fact is not indeed explicitly stated in regard to Cleomenes’ reform, but it is so stated in regard to the projected scheme of Agis IV,68 upon which that of Cleomenes was obviously based. It is signiﬁcant that Plutarch also mentions in his chapter on Cleomenes’ reforms that the Spartan soldiers received new equipment of the Macedonian type.69 As modern writers suggest,70 Cleomenes’ purpose was neither economic nor political but military. It was carried out in order to bring the Spartan army up to date, at a time when Cleomenes already had reason to expect that Aratus would call in the assistance of Macedon.

THE SPIRITUAL BACKGROUND OF CLEOMENES’ REFORMS: THE ROLE OF PHILOSOPHERS Cleomenes, who became King of Sparta on the death of Leonidas, seems to have understood the fact that the only hope for Sparta of regaining her important standing in Peloponnese was for her to mobilize all her inner strength and deal with the urgent social problems which beset her.71 Apart from the emotional inﬂuences of Agiatis,72 mentioned above,

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Cleomenes was also aﬀected by the ideas of the Stoic philosopher Sphairos of Borysthenes (Olbia) (285–221).73 Sphairos was a disciple of Zeno (333/32–October 261),74 the founder of the Stoa himself. Sphairos was in Sparta at that time and helped to organize a system of education.75 The Stoics were undoubtedly interested in Sparta, and especially in Lycurgus’ constitution. We have evidence that Zeno used Lycurgus’ constitution as a model for his ‘politeia’.76 It is also no accident that both his distinguished disciples, Persaios (305–243/42)77 and Sphairos,78 wrote treatises on Spartan constitution and history. Sphairos, in particular, wrote two studies on the subject, one on the Spartan constitution – περι Λακωνικη πολιτει α – and one about Lycurgus and Socrates in three books – περι Λυκου ργου και Σωκρα του τρι α.79 It has been suggested that Sphairos’ Περι Βασιλει α (on Kingship) was devoted to Sparta and to Cleomenes in particular.80 The views81 that Cleomenes’ reforms had a Stoic inﬂuence are supported by the fact that both Cleomenes and the Stoics propagated the idea of a ‘politeia’ which was to be based on the equality of education, discipline and property. The only objection and diﬀerence between the Stoic ideals and Cleomenes’ reforms exists in the way of the application of these ideas: the Stoics did not support any violent revolution.82 The most obvious explanation of Sphairos is that his interest in the Spartan constitution was inspired not by antiquarianism but by a theory about Sparta as a political model or low utopia, and that his activities in Sparta were connected with this theory. It seems doubtful that the Spartan reform owed anything to Stoicism originally. It was based on native Lycurgan traditions. But it produced a movement unlike anything ever seen in Greece, and some Stoics (like Sphairos) saw in this the low utopia towards which they had been groping. The movement had something for everyone: monarchy, democracy, land redistribution, reaﬃrmation of the independent ‘polis’, the mixed constitution again. What appealed to Sphairos was probably its unprecedented eﬀorts to achieve social and economic equality. Sphairos probably believed in some such idealized and egalitarian version of the Spartan model and saw the reforms as an opportunity to put into practice the collectivist principles of Zeno’s Republic.83 It has also been suggested that Cleomenes was inﬂuenced by the Cynics.84 Such a statement does not recognize the diﬀerences within the Porch itself. Zeno, after all, wrote his Πολιτει α (Republic) ‘under the tail of the dog’.85 There was always a radical wing of the Stoics who were almost indistinguishable from the Cynics; witness, among others, Musonius Rufus or Epictetus. Concord (homonoia), community (koinonia) and equality (isotes) were also Stoic catchphrases. The only connection with the Cynic ideals is the relationship between Cleomenes and Heracles,86 which we have

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mentioned above. It is known that the Cynics adopted Heracles as the only king. Cynics had cultivated an idealized version of the Spartan constitution that emphasized its egalitarian features. Teles of Megara described the Spartan system as open to talent.87 Michell88 suggested that the two famous Utopian works, ‘The Panchaea’, written by Euhemerus89 and the ‘Sun State’, written by Jambulus,90 were also the model for a realization of these ideas by Cleomenes. The distinctive diﬀerence between Cleomenes’ reforms and these Utopian states, which also adopted the ideals of concord, community and equality, lies in the revolutionary character of the reforms. And this revolution was successful indeed and became famous in Greece.

CERCIDAS’ IDEAS ON THE EQUAL DISTRIBUTION OF WEALTH Cleomenes did establish a citizen army, sustained by the ancient discipline, and seems to have been remarkably successful in ridding them of campfollowers, army brothels, and, in general, of relaxations which he regarded as enervating. The success of Cleomenes was infectious: he had turned a dream into a reality.91 The cry ‘Cancellation of debts and redistribution of land’ rang through other cities . The war, which Cleomenes now waged, was not a duel between two hostile powers, Sparta and the Achaean League, but a triumphant march by the Spartan King through the once-powerful federation of north Peloponnesian cities, as it gradually fell to pieces. First the Achaean garrison was driven out of Pellene, and soon afterwards the Spartans took Pheneos in northern Arcadia. Cleomenes captured Argos in July 225, one of the most important cities in Peloponnese.92 It could be said that the fall of Argos set up a chain reaction among the cities of the Achaean League. Phleious and Kleonai came over to the Spartans, and then Cleomenes gained control over the towns of the east of Argolis, Epidaurus and Hermione.93 Aratus tried in vain to hold together the League he had spent so much energy on creating, but even in his native city of Sikyon there were people who sympathized with Sparta and were ready to negotiate with Cleomenes. The fall of Corinth – except Acrocorinth, once the focal point of Macedonian power in Greece – was the ﬁnal blow to the Achaean League, which had lost one stronghold after another, and now withdrew its centre to Sikyon. The reforms of Cleomenes had regenerated the citizen army and increased its military eﬃciency, which of course explains the military successes of the Spartans. Phylarchus was already anxious to determine why

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the prestige of Sparta had increased so much, and what made it so attractive. He suggests that the people hoped Cleomenes would divide up the land in their communities too, and cancel their debts, while the leaders of the cities mistrusted Aratus because he wanted to bring the Macedonians into Peloponnese.94 It is not an exaggeration, we think, to adopt W.W. Tarn’s statement that Cleomenes’ reforms and war were ‘a wave of revolutionary enthusiasm such as Greece had never seen’,95 while Cary thinks that the policy of Cleomenes ‘was correspondingly welcome to the debtor class in the cities of Peloponnesus’.96 The magistrates in some cities began to make concessions. In Boeotia, an otherwise unknown Opheltas was instrumental in the use of state resources to help the needy.97 The most characteristic attack against Cleomenes’ reforms came from Megalopolis, and especially from the aristocrat Cercidas.98 Few ﬁgures in the Hellenistic world were more impressively versatile than Cercidas of Megalopolis (ca. 290–217),99 who combined the roles of statesman,100 military commander – he was the commander of the thousand Megalopolitan exiles who fought on the Achaean side against Cleomenes of Sparta at Sellasia (222 ),101 – legislator,102 poet and Cynic philosopher.103 From this point of view it is not an exaggeration, we believe, if we compare Cercidas with Solon who combined in his time the art of the poet and philosopher with that of the statesman. The paradox and ‘provocative’ aspect of his poem is that a citizen of one of the cities of the conservative Achaean League should have been so radical an exponent of the idea of social justice. The explanation could be that Cercidas was a Cynic thinker and as such an egalitarian. After the destruction of the city in the course of a war with Sparta, and when plans for rebuilding it were being mooted, a proposal was made – which led to disputes – that one third of the estates of the land-owing class should be divided among new owners.104 In the most interesting of the fragments, the most extensive, known as the ‘second meliamb’, we see how his lyric leanings inﬂuenced his political views: (Why does not God) choose out Xenon, that greedy cormorant of the well-lined purse, the child of licentiousness, and make him the child of poverty, giving to us who deserve it the silver that now runs to waste? What would prevent it (ask God that question, since it is easy for him to bring about whatever his mind resolves) that the man who ruins wealth by pouring out what he has or the ﬁlthydross-stained usurer, should be drained of their swinebefouled wealth, and the money now wasted given to him that has but his daily bread, and dips his cup at the common bowl? Has Justice then the sight of a mole, does Phaethon squint with a single pupil, is the vision dimmed of Themis the bright? How can one hold them for gods that lack eyes to see and ears to hear? Yet men say that the dread king, lord of the lightning, sits in midolympus holding the scales of justice and

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never nods. So says Homer in the Iliad. ‘He doth incline the scale to the mighty of valour, when the day of fate is at hand’. Why then does the impartial balancer never incline to me?105

Cercidas dissatisﬁed with the existing order exhorted his wealthy friends to meet the threat of social revolution by healing the sick and giving to the poor. So he emphasized the fact that for sharing-with-others is a divinity, and Nemesis is still present on earth.106

‘Nemesis’ is a word which in its original sense means a proper distribution of shares. He is warning the ruling class to be generous and help the poor before they are overwhelmed. W.W. Tarn thinks that this ‘meliamb’ is a reaction to the revolution wrought be Cleomenes and that the poet’s intention was to arouse the wealthy men of Megalopolis to give of their riches to the poor and thus avert the coming catastrophe.107 This statement seems to miss the bitterness of the passage: Cercidas does not speak of himself as one of the governing classes, but rather as one oppressed by the unequal distribution of wealth. ‘Why not give to us the wealth that ﬂows in useless expense?’ and again ‘Why does the impartial balancer never incline the scales to me?’ Dudley suggests that the poem is a call to the party of reform not to wait for the vengeance of Heaven to strike the rich, but to act themselves under the inspiration of a new triad of deities, Paean and Sharing, and Nemesis.108 The tone in which the false deities of popular belief are assailed is essentially Cynic, as is the attack on luxury. H. Michell tried to see more in the poet’s words and deals particularly with another poem, the sixth ‘meliamb’.109 Unfortunately the fragment110 is much smaller than that of the second ‘meliamb’ and badly damaged, particularly in the second part. It is particularly interesting that Cercidas does mention two Stoic philosophers Sphairos and Kallimedon. Besides the two philosophers there is mention of evil (πονηρα ), virtue (ει αρετα ν), and harvest (ε ροντ’ οπω ραν). From this fragmentary material Knox111 has put together a complete English translation the tenor of which is critical of Sphairos. This reconstruction is based on guesswork,112 however, and Michell quotes it as though it were the authentic text of Cercidas’ poem. He seems to feel that the good intentions of Cercidas ‘were rudely shattered when he saw his native city of Megalopolis threatened by Cleomenes’.113 The name of Cercidas was gratefully remembered by his fellow citizens; and in Stephanus of Byzantium the notice under Megalopolis reads ‘that is where Cercidas came from, that excellent lawgiver and meliambic poet’.

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Gregory of Nazianz refers to him as o ‘Φι λτατο’114 and his verses are echoed by Lucilus and Horace. In the years after 240, Megalopolis produced a succession of noteworthy men, the far-seeing tyrant Lydiadas, Philopoemen, ‘the last of the Hellenes’ and the historian Polybius. To their company one must admit Cercidas, ‘α ριστο νοµοθε τη και µελια µβων ποιητη ’.

CONCLUSIONS It was tragic that the two great Greeks of the time should clash. Aratus of Sicyon had liberated his city from autocracy. He was himself incorruptible. He believed passionately in political freedom; he saw that in the conditions of the day this was best fostered by federalism, and from 245 he was the dominant ﬁgure in the Achaean League. In economic redress he had no interest. In Cleomenes a passion for economic justice was overlaid with Spartan nationalism. Aratus was seen as the liberator from Macedon. Cleomenes was seen as the liberator from injustice. Many cities would like to follow his ideas and reforms. Cercidas, an aristocrat and friend of Aratus, had been inﬂuenced by Cleomenes’ reforms and declared for social justice and philanthropy. Cleomenes’ programme had been violently interrupted in Sellasia in summer 222,115 when the Macedonians and their allies defeated Cleomenes.

NOTES *

1. 2.

3. 4. 5. 6. 7.

A preliminary version of this paper was submitted to the V. Annual Conference of the European Society for the History of Economic Thought (Darmstadt, February 2001). I acknowledge the criticisms and positive notes of the discussant Dr Helge Peukert and the oﬀer of Mr Kerantzakis towards the improvement of this article. M. Rostovtzeﬀ ([1941] 1998), vol. 1, p. 24. Pozzi (1968), p. 383: ‘possiamo considerare limiti di quest’ epoca, la più oscura nella storia del mondo ellenistico, la battaglia di Curupedion (281) e quella di Sellasia (222)’. FGrH II A 81 T1: ‘Suda: s. Φυ λαρχο. Αθηναι ο η Ναυκρατι τη. οι δε Σικυω νιον, α λλοι δε Αιγυ πτιον <αν>ε γραψαν. ιστορικο . Την επι Πελοπο ννησον Πυ ρρου του Ηπειρω του στρατει αν (272) εν βιβλι οι κη-κατα γει δε και µε χρι Πτολεµαι ου του Ευεργε του κληθε ντο (247/6–221/0) και τη Βερενι κη τελευτη (220) και ε ω του θανα του Κλεοµε νου του Λακεδαιµονι ου (220/19), επιστρατευ σαντο αυτω Αντιγο νου. Τα κατα Αντι οχον και τον Περγαµηνο ν Ευµε νη. Επιτοµη ν Μυθικη ν. Περι τη του ∆ιο επιφανει α. Περι Ευρηµα των. Παρεµβα σεων βιβλι α Θ’. Aratus’ Memoirs covered the period 251–221 and were written between 221–13. FGrH II B 231 F1–6. For the economics of this period see especially Heichelheim (1970), vol. III. Kahrstedt (1949). Rostovtzeﬀ ([1941] 1998), vol. I. Rostovtzeﬀ ([1941] 1998), vol. II, pp. 1030–31. Pozzi (1968), p. 394. On the special problem of wealth and poverty as viewed in the pre-Hellenistic period,

200

8. 9. 10. 11. 12. 13. 14. 15.

16. 17. 18. 19. 20. 21. 22. 23. 24. 25. 26. 27. 28. 29. 30. 31. 32. 33. 34. 35. 36. 37. 38. 39. 40. 41. 42. 43. 44. 45. 46. 47.

Co-evolution of political ideas and economic thought see the Utrecht dissertation of Hemelrijk (1925) (in Dutch with summary in German). The Hellenistic period – together with that of the Empire – has been examined by another Utrecht dissertation, van Manen (1931). Cf. M. Rostovtzeﬀ ([1941] 1998) vol. III, p. 1603, n. 61. Mossé (1989), p. 200. Niese (1907), col. 217–18. Plutarch, Agis 5, 2–3. Cf. Toynbee (1913), pp. 272–5. Asheri (1961), pp. 45–68. Christien (1974), pp. 196–221. Schütrumpf (1987), pp. 441–57. Aristotle, Politics II 9, 1270 a23–25. Plutarch, Agis 5,4. Plutarch, Agis 7. Rostovtzeﬀ ([1941] 1998), pp. 209–10. Tarn (1954), p. 885. Barker (1956), pp. 50–51. The literature which deals with Agis IV’ eﬀorts and Cleomenes III’ reformations is quite extensive. See, in chronological order, Niese (1899), pp. 305–10, 360–64. Kazarow (1907), pp. 445–51. Niccolini (1909), pp. 87–99. Lenschau (1921), col. 702–10. Bux (1925), pp. 413–31. Hadas (1932), pp. 65–8 and pp. 73–6. Treves (1935), pp. 27–30. Ollier (1936), pp. 536–70. Chrimes ([1949] 1999), pp. 12–22. Michell (1953), pp. 246–8. Porter (1953), pp. 1–15. Gabba (1957), pp. 3–55, 193–239. Africa (1961). Fuks (1962), pp. 161–6 and his references at p. 166, n. 4. Shimron (1964), pp. 146–55. Shimron (1966), pp. 452–9. Oliva (1971), pp. 208–68. Shimron (1972), pp. 37–48. Ferguson (1975), pp. 130–37; Mendels (1978), pp. 161–6. Dawson (1992), pp. 200–205. Rodakis (1994), pp. 200–225. Phylarchus, Ιστορι αι in FGrH IIA 81 F 42–44. Ferguson (1975), p. 131. Beloch ([1904] 1927), p. 116. Lenschau (1921), col. 702. Leonidas, Cleomenes’ father, murdered Agis IV, the King of Sparta who attempted to promote reforms during the years 241–235 without success. The sources for the reign of Cleomenes were listed by Klatt (1877), pp. 6ﬀ. Bernini (1978), pp. 30–35. Karnezis (1982), pp. 23–5. Plutarch, Cleomenes 1. Plutarch, Cleomenes 1,2; 3,2. For the establishment of the Achaean League, see Polybius, Histories II 41, 1–12. Ehrenberg (1960), pp. 125–6. For the targets of the League, see Plutarch, Philopoimen VII 10–3. Polybius, Histories II 46, 1–3. Polybius, Histories II 46, 7. Plutarch, Aratus XXXVI 1. Plutarch, Cleomenes VI 2–4. Plutarch, Cleomenes VII 2. Plutarch, Cleomenes 10,7. Plutarch, Cleomenes 10,8. Fuks (1962), p. 165. Shimron (1972), p. 33. Plutarch, Cleomenes 7. Plutarch, Cleomenes 10. Plutarch, Cleomenes 10. Plutarch, Cleomenes 11. Plutarch, Lycurgus 1,3. Polybius, Histories IV 35,14. Plutarch, Cleomenes 13,2. Head (1911), p. 436, quoted in Ferguson (1975), p. 132. Polybius, Histories V 39,6. Pausanias, Corinthiaca 9.1. Shimron (1972), pp. 39–40. Plutarch, Cleomenes 10,11. Plutarch, Cleomenes 11,1–2. Oliva (1971), p. 222, 244. Plutarch, Cleomenes 10,11. Idem, Cleomenes 11,3.

Cleomenes III’s politico-economic reforms in Sparta 48. 49. 50. 51. 52. 53. 54. 55. 56. 57. 58. 59. 60. 61. 62. 63. 64. 65. 66. 67. 68. 69. 70. 71. 72. 73. 74. 75. 76. 77. 78. 79. 80. 81.

82.

201

Plutarch, Cleomenes 11, 2. Africa (1961), p. 15, 26. Plutarch, Cleomenes 23,1. Daubies (1971), pp. 665–95 found excessive the number of 2000 Helots which is referred to by Plutarch. An opposite view has been adopted by Urban (1973), pp. 95–102. Africa (1961), p. 65. Shimron (1966), p. 458. Plutarch, Cleomenes 23,1. Plutarch, Cleomenes 11. Plutarch, Cleomenes 7,1. Plutarch, Cleomenes 11, 1–2. Ibid. Aratus 38,4. Polybius, Histories IV 81,12. The best known example of equal division in a new foundation is that of the Panhellenic colony of Thurii: ‘την χω ραν επ’ ι ση ε νεµον . . .’. Diodorus Siculus, Historical Library 12, 11, 2. That was the usual practice in new settlements. For redivisions after ‘stasis’ cf. e.g. Aristotle, Athenaion Politeia 40. 3; Thucydides 8.21. Fuks (1962), p. 162. 4500 by Agis; Plutarch, Agis 8.1. The 4000 soldiers of Cleomenes (Plutarch, Cleomenes 11.3) may be tantamount to 4500 citizens of Agis. Plutarch, Cleomenes 11,2. Plutarch, Cleomenes 7,1. Plato, Laws V, 737E. A. Fuks (1962), p. 162. Andreades (1933), p. 46, where references to other authorities are given; Ollier (1933), p. 5. Chrimes ([1949] 1999), p. 13. Plutarch, Cleomenes, 28: ‘αποθανει ν δε και των ξε νων πολλου λε γουσι και Λακεδαιµονι ου α παντα πλην διακοσι ων, εξακισχιλι ου ο ντα’. Plutarch, Cleomenes, 23. Polybius, Histories II 69. Chrimes [1949] 1999, pp. 14, 102–3. Plutarch, Agis 8. Plutarch, Cleomenes 11,3. Andreades (1933), p. 46. Chrimes ([1949] 1999), pp. 15–16. Oliva (1971), p. 231. Plutarch, Cleomenes 1.2; 3.2. Reesor (1951), p. 16. Murray (1970), pp. 238–42. Isnardi–Parente (1980), pp. 73–4, quoted by Scholz (1998), p. 324, n.25.Kraus (2000), pp. 53–96. Plutarch, Cleomenes 2. Plutarch, Cleomenes 11. Plutarch, Lycurgus 31: ‘ταυ την (sc.Λυκου ργου Πολιτει αν) [...] ε λαβε τη πολιτει α υπο θεσιν και [...] Ζη νων’. Diogenes Laertius, Lives of Eminent Philosophers VII 36. Cf. Athenaeus, Deipnosophistai IV 140e. IV 140b: ‘πολιτει α Λακωνικη ’. Diogenes Laertius VII 177: ‘περι Λακωνικη πολιτει α’, ‘περι Λυκου ργου και Σωκρα του τρι α’. Tarn (1954), p. 752 suggested that Sphairos wrote his treatise ‘On the Lacedaemonean constitution’ for Cleomenes. Diogenes Laertius, Lives of Eminent Philosophers VII 177–8. Hobein (1929), col. 1684. Ollier (1936), pp. 536–70, deals in detail with Sphairos’ writings. Cf. Scholz (1998), pp. 324–5, 341–2. Pöhlmann (1925), vol. I, p. 370. Gabba (1957), pp. 48–55. Bidez (1932). Hadas (1932), p. 65. Treves (1935), pp. 27–30. Tarn (1939) pp. 41–70. Ollier (1936). Michell (1953), pp. 247–8. Oliva (1971), pp. 231–2. Ferguson (1975), pp. 132–3. Erskine (1990), pp. 122–49. Kraus (2000), pp. 93–4. The connection between Stoicism and Sparta is minimized by Tigerstedt (1974), vol. II, pp. 69 ﬀ. Rawson (1969), pp. 91–2. David (1981), pp. 162–9 is guarded in his conclusions but doubts that Stoicism could have been a decisive inﬂuence on the reform. This is a signiﬁcant argument which has been overlooked by most scholars. Scholz (1998), p. 324.

202 83.

84. 85. 86. 87.

88. 89. 90. 91. 92. 93. 94. 95. 96. 97. 98.

99.

100. 101. 102. 103. 104. 105. 106. 107. 108. 109. 110. 111. 112. 113. 114.

Co-evolution of political ideas and economic thought Tarn (1930), p. 742 that Sphairos ‘may perhaps have dreamt of himself as Plato’s philosopher king in action’. But see his later opinion in Tarn (1954), p. 332. Cary (1959), p. 156 wrote that Sphairos ‘expanded theoretical communism’ to Cleomenes. Cf. Dawson (1992), p. 203. Africa (1961), pp. 18ﬀ. Diogenes Laertius, Lives of Prominent Philosophers VII 4. Gabba (1957), p. 51. Teles of Megara, On Exile (Peri phyges), Fr. III, Hense ([1909] 1969), p. 128. It has been questioned by Mendels (1979), pp. 111–15, who points out that Teles does not refer speciﬁcally to Agis’ reforms, but to an older Spartan custom of granting citizenship to foreigners or Helots who had passed ‘the agoge’; and that Teles is unlikely to speak in these terms of a reform that had already failed. Michell (1953), p. 248. Winiarczyk (1991). Diodorus Siculus, Historical Library II 55–60. Cf. Baloglou (2000), pp. 159–72. Plutarch, Cleomenes 13; Polybius Histories V 39,6; IX 23,3 Athenaios, Deipnosophistai IV 21 p. 142. Plutarch, Cleomenes 17, 6–8; Plutarch, Aratus 39,4. Plutarch, Cleomenes 19, 1;6. Polybius, Histories II 52,2. Plutarch, Cleomenes 17,5. Tarn (1930), p. 136. Cary (1959), p. 158. Polybius, Histories XX 6,4. On Cercidas of Megalopolis, cf. Gerhard (1921), cols 294–308. Knox (1929), p. 195, Meliamb II. Dudley ([1937] 1973), pp. 74–84; Rostovtzeﬀ, ([1941] 1998), vol. III, p. 1367, n. 34. Barker (1956), pp. 52, 58–9. Pennacini (1955–56), pp. 257–83, quoted in Billerbeck (1991), p. 16. Michell (1953), pp. 248–9. Oliva (1971), pp. 248–50. Ferguson (1975), pp. 134–5. Williams (1984), pp. 351–7. Livrea (1986). Lomiento (1993). Goulet-Cazé and J.L. López Gruces (1994), pp. 269–81. López Gruces (1995), pp. 3–37 with a critical and detailed analysis of all the sources. The biographical tradition never gathers all of Cercidas’ functions into one notice, with the exception of the late source Stephanus of Byzantium (sixth century ). In his article entitled ‘Μεγα λη πο λι’ he writes: ‘αφ’ η (sc. Μεγα λη πο λεω) Κερκι δα α ριστο νοµοθε τη και µελια µβων ποιητη ’. Cf. López Gruces (1995), p. 35. Polybius, Histories II 48.3–4; 50–3; Aelian, Varia Historia XIII 20. Polybius, Histories II 65.3–4. Porphyrius, in Eustathius of Thessalonica, Ad Iliadem II 494; Photii, Biblioteca, vol. III, ch. 190, p. 65, 14–15 Henry. Diogenes Laertius, Lives of Prominent Philosophers VI 76–7. Dudley ([1937] 1973), pp. 78–9. López Gruces (1945) p. 251, VV 1–21, with a French translation. Cf. Dudley ([1937] 1973), p. 79 for a translation in English. López Gruces (1995), p. 251, VV 31–2. Tarn and Griﬃth (1952), pp. 111 and 279. Dudley ([1937] 1973), p. 80. Michell (1953), p. 249. Livrea (1991), p. 224; López Gruces (1995), pp. 258–9 with a French translation. Knox (1929), pp. 212–15. Oliva (1971), p. 249. Michell (1953), p. 249. Gregory of Nazianz ‘De virtute 595–600’, in: Migne (1862), vol. XXXVII, col. 723: ‘α παντα δ’ ε ρπειν ει βυθο ν τα τι µια των γαστριµα ργων σι τα, µηδε σιτ’ ε τι των ευτελεσατα των λε βητο εξ’ ενο , ορθω λε γει που Κερκιδα ο φι λτατο,

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τε λο τρυφω ντων, αυτο εσθι ων α λα, αυτη τρυφη τε αλµυρο ν καταπτυ ων’. 115. Polybius, Histories II 65.1; 65,2–5. For the chronology of the battle, see Tarn (1957), p. 760; Cary (1959), p. 161 and 166; Kanellopoulos (1982), p. 123.

REFERENCES Africa, T. (1961), Phylarchus and the Spartan Revolution, University of California Publications in History 68. Andreades, A.M. (1933), A History of Greek Public Finance, Engl. translation by C.N. Brown. Introduction by C. Bullock, Cambridge: Harvard U.P. Asheri, D. (1961), ‘Sulla Legge di Epitadeo’, Athenaeum, 39, 45–68. Baloglou, C. (2000), ‘The social and economic organization of Iambulus’ “Sun State”’, SKEPSIS, XI, 159–72. Barker, E. (1956), From Alexander to Constantine. Passages and Documents Illustrating the History of Social and Political ideas 336 B.C.–A.D. 337, Oxford: Clarendon Press. Beloch, J. ([1904] 1927), Griechische Geschichte, vol. III, 2: Die Griechische Weltherrschaft, Berlin und Leipzig. Bernini, U. (1978), ‘Studi su Sparta ellenistica. Da Leonida II a Cleomene III’, Quaderni Urbinati di Cultura Classica, 27, 29–59. Bidez J. (1932), La cité du monde et la cité du soleil chez les Stoiciens, Paris. Billerbeck, M. (ed.) (1991), Die Kyniker in der modernen Forschung. Aufsätze mit Einführung und Bibliographie, Amsterdam: Grüner. Bux, E. (1925), ‘Zwei sozialistichen Novellen bei Plutarch’, Klio, 19, 413–31. Cary, M. (1959), A History of the Greek world from 323 to 146 B.C., London. Chrimes, K. ([1949] 1999), Ancient Sparta. A re-examination of the evidence, Manchester: Manchester University Press. Christien, J. (1974), ‘La loi d’Epitadeus: un aspect de l’histoire économique et sociale à Sparte’, Revue histoire de droit français et étranger, 52, 196–221. Daubies, M. (1971), ‘Cléomène III, les hilotes et Sellasie’, Historia, 20, 665–95. David, E. (1981), Sparta between Empire and Revolution (404–243 B.C.), Salem. Dawson, D. (1992), Cities of the Gods. Communist Utopias in Greek Thought, New York and Oxford: Oxford University Press. Dudley, D.R. ([1937] 1973), A History of Cynicism from Diogenes to the sixth century A.D., London [Hildesheim: Olms]. Ehrenberg, V. (1960), The Greek State, Oxford. Erskine, A. (1990). The Hellenistic Stoa – Political Thought and Action, London. Ferguson, J. (1975), Utopias of the Classical World, London: Thames & Hudson. FGrH: Felix Jacoby (ed.), Die Fragmente der griechischen Historiker, 4th edn, New York, Köln and Leiden: E.J. Brill, 1997. Fuks, A. (1962), ‘Agis, Cleomenes and Equality’, Classical Philology, VII, 161–6. Gabba, E. (1957), ‘Studi su Filarco. Le biograﬁe Plutarchee, di Agide e di Cleomene’, Athenaeum, 35 (I–II), 3–55 and 35 (III–IV), 193–239. Gerhard (1921), ‘Kerkidas’, Pauly’s Realencyclopädie der classischen Alterthumswissenschaft, XI (I), 294–308. Goulet-Gazé, M.O. and J.L. López Gruces (1994), ‘Cercidas de Mégalopolis’, in R. Goulet (ed.), Dictionnaire de philosophique antique, vol. II, Paris, pp. 269–81.

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Hadas, M. (1932), ‘The social revolution in third-century Sparta’, The Classical Weekly, XXVI (9), 65–8; (10), 73–6. Head, B.V. (1911), Historia Nummorum, 2nd edn, Oxford. Heichelheim, F.M. (1970), An Ancient Economic History, vol. III, Leyden. Hemelrijk, J. (1925), Πενι α en Πλου το, Utrecht (in Dutch with summary in German). Hense, O. ([1909] 1969), Teletis Reliquiae, Tübingen [Hildesheim – New York: G. Olms]. Hobein (1929), ‘Sphairos’, Pauly’s Realencyclopädie für die classiche Altertumswissenschaft, III (2A), 1684. Isnardi-Parente, M. (1980), ‘La politica della stoa antica’, Sandalion, 3, 67–98. Kahrstedt, U. (1949), Geschichte des griechisch – römischen Altertums, Munich. Kanellopoulos, P. (1982), Ιστορι α τη Αρχαι α Ελλα δο (490–146 π.X.) [History of Ancient Greece (490–146 B.C)], 3 vols, 2nd edn, Athens: Giallelis. Karnezis, J. (1982), ‘Kleomenes’ I Gorgo-Gylippos’ Agiatis’, Λακωνικαι Σπουδαι , 6, 14–27 (in Greek with summary in English). Kazarow, G. (1907), ‘Zur Geschichte der sozialen Revolution in Sparta’, Klio, 7, 45–51. Klatt, M. (1877), Forschungen zur Geschichte des Achäischen Bundes, Berlin. Knox, A.D. (1929), Herodes, Cercidas and the Greek Choliambic Poets. Kraus, J. Xerxes (2000), Die Stoa und ihr Einﬂuss auf die Nationalökonomie, Marburg: Metropolis. Lenschau, T. von (1921), ‘Kleomenes III’, Pauly’s Realencyclopädie für die classiche Altertumswissenschaft, XI (1), 702–10. Livrea, E. (1986), Studi Cercidei (POxy 1082), Bonn [Papyrologische Texte und Abhandlungen 37]. Livrea, E. (1991), Studia Hellenistica, Firenze: Gonnelli [Papyrologica Florentina 21]. Lomiento, I. (1993), Cercidas, Rome. López-Gruces, J.L. (1995), Les Meliambes de Cercidas de Megalopolis. Politique et tradition littéraire, Amsterdam: Hakkert. V. Manen, J.J. (1931), Πενι α en Πλου το in de periode na Alexander, Dissertation, Utrecht. Mendels, D. (1978), ‘Polybius, Cleomenes III and Sparta’s Patrios Politeia’, Past and Present, 180, 161–6. Mendels, D. (1979), ‘Sparta in Teles’ Peri Phyges’, Eranos, 77, 111–15. Michell, H. (1953), Sparte et les Spartiates, trans. by A. Coeuroy, Paris: Payot. Migne, J.P. (1862), Patrologiae Cursus Completus Series Graeco-Latina, vol. XXXVI, Parisiis. Mossé, Claude (1989), La tyrannie dans la Grèce antique, Paris, 1969, Greek transl. Athens: Asty. Murray, O. (1970), Περι βασιλει α – Studies in the Justiﬁcation of Monarchic Power, D. Phil., Oxford. Niccolini, G. (1909), ‘Plutarco nella vita di Cleomene’, Studi Storici per l’Antichità Classica, 2, 87–99. Niese, B. (1899), Geschichte der griechischen und makedonischen Staaten seit der Schlacht bei Chaeronea, 2. Teil: Vom Jahre 281v.Chr. bis zur Begründung der römischen Hegemonie im griechischen Osten 188 v. Chr., Gotha. Niese, B. (1907), ‘Epitadeus’, Pauly’s Realencyclopädie für die classische Alterthumswissenschaft, VI (1), 217–18. Oliva, P. (1971), Sparta and her Social Problems, Amsterdam and Prague.

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Ollier, F. (1933), Le Mirage spartiate. Étude sur l’idéalisation de Sparte dans l’Antiquité grecque de l’origine jusqu’aux Cyniques, Paris: Boccard. Ollier, F. (1936), ‘Le philosophe stoïcien Sphairos et l’œuvre réformatrice des rois de Sparte Agis IV et Cléomène III’, Revue des Études Grecques, 49, 536–70. Pennacini, A. (1955–56), ‘Cercida e il secondo cinismo’, Atti della Academia delle Scienze di Torino, Classe di Scienze morali, storiche e ﬁlosoﬁche, 90, 257–83. Pöhlmann, R. von (1925), Geschichte der sozialen Frage und des Sozialismus in der antiken Welt, vol. I, Munich; C.H. Beck. Porter, H. (1953), ‘The antecedents of the Spartan Revolution of 243 B.C.’, Hermathena, 49, 1–15. Pozzi, F. (1968), ‘Le riforme economico-sociali e le mire tiranniche di Agide IV e Cleomene III re di Sparta’, Aevum, 42(V–VI), 383–402. Rawson, E. (1969), Spartan Tradition in European Thought, Oxford: Clarendon Press. Reesor, M.E. (1951), The Political Theory of the Old and Middle Stoa, New York. Rodakis, P. (1994), Klεοµε νη Γ’ τη Σπα ρτη. Ηµεγα λη κοινωνικη επανα σταση [Cleomenes III of Sparta. The Great Social Revolution], 3rd edn, Athens: Kastaniotis. Rostovtzeﬀ, M. ([1941] 1998), The Social and Economic History of the Hellenistic World, 3 vols, Oxford: Clarendon Press. Scholz, P. (1998), Der Philosoph und die Politik. Die Ausbildung der philosophischen Lebensform und die Entwicklung des Verhältnisses von Philosophie und Politik im 4. und 3. Jh.v. Chr., Stuttgart: Franz Steiner. Schütrumpf, E. (1987)‚ ‘The Rhetra of Epitadeus: A Platonist’s Fiction’, Greek Roman and Byzantine Studies, 28, 441–57. Shimron, B. (1964), ‘Polybius and the reforms of Cleomenes III’, Historia, XIII (2), 147–55. Shimron, B. (1966), ‘Some remarks on Phylarchus and Cleomenes III’, Rivista di ﬁlologia e di Istruzione Classica, 94, 452–9. Shimron, B. (1972), Late Sparta. The Spartan Revolution 243–146 B.C., Arethusa Monographs. Tarn, W.W. (1930), Hellenistic Civilisation, 2nd edn, London: Arnold. Tarn, W.W. (1939), ‘Alexander, Cynics and Stoics’, American Journal of Philology, 60, 41–70. Tarm, W.W. (1954), ‘The Greek Leagues and Macedonia’, in Cambridge Ancient History, vol. VII, Cambridge: University Press. Tarn, W.W. and G.T. Griﬃth (1952), Hellenistic Civilization, 3rd edn, London. Tigerstedt, E.N. (1974), The legend of Sparta in Classical Antiquity, vol. II, Uppsala. Toynbee, A. (1913), ‘Epitadeus and Cleomenes’, Journal of Hellenic Studies, 33, 272–75. Treves, P. (1935), ‘Studi di Antigono Dossone’, Athenaeum, XIII, 22–56. Urban, R. (1973), ‘Das Heer des Kleomenes bei Sellasia’, Chiron, 3, 95–102. Williams, F. (1984), ‘Two notes on Cercidas of Megalopolis’, Apophoreta Philologica. Festschrift M. Fernández-Galiano. Estudios Clássicos, 26, No. 87, 351–7. Winiarczyk, M. (ed.) (1991), Euhemerus Messenius Reliquiae, Stutgardiae et Lipsiae: Teubner.

11.

Economic theory as political philosophy: the example of the French Enlightenment Jean Cartelier

The fact that economic theory has not developed in a political vacuum tends to be forgotten today. Specialisation in a growing number of increasingly narrower ﬁelds together with a generalised use of sophisticated quantitative techniques has progressively convinced most economists that they are not even remotely engaged either with politics or with political philosophy. Some go as far as to assert that economic theory is politically neutral, notwithstanding the fact that even the most cursory examination of the history of economic thought invalidates such a thesis. Political and social crises have frequently presented economists with the occasion not only to propose practical remedies but also to develop highly abstract theories with more or less open and strong political commitments. In the middle of the 18th century, subsistence problems, taxes and the necessity of reforming the French monarchy prompted Quesnay to develop his Tableau économique. Half a century later in England, the passage of the Corn Laws, which provided for the prohibition of corn imports and thereby the maintenance of its price – that is the coexistence of landlords and capitalists – motivated Ricardo’s original and abstract theory of the rate of proﬁt and prices of production. Even Walras’ general equilibrium theory, which models a certain idea of justice, may be considered as taking a position in the political debate in France between socialists and conservatives at the end of the 19th century. Walras is viewed sometimes as a ‘scientist reformer’,1 a description which could equally apply to Quesnay. A high level of abstraction should not therefore be interpreted as evidence that an economic theory is free of political content. Indeed, the opposite generally obtains. This being the case, I would go so far as to suggest that the emergence of economics as a recognised scientiﬁc discipline and the pretension of economists to be engaged in hard science are in themselves important political developments. From its very beginnings, concerns about political issues have permeated economic thought. The determination of the legitimate balance between 206

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the powers of the State and individuals’ prerogatives has been – and remains – a permanent concern for practitioners and theoreticians. The very distinction between politics and economics is itself the outcome of an historical process, the sense of which has to be interpreted. In proclaiming its autonomy through the use, from the middle of the 18th century, of its own principles, the discipline of economics would appear to have solved the problem of demarcating the boundaries between economics and politics. Yet the precise location of these boundaries remains unclear. For instance, it has been maintained that production is ruled by economic laws but not distribution, a proposition echoed in general equilibrium theory where initial endowments are considered as a political matter but not the market allocation which is derived from them. Another view is that economics is concerned with production, circulation and the distribution of wealth whereas politics is concerned with the organisation of public authorities. Very common nowadays is the idea that economics is to be distinguished from politics in that the latter indicates the ends – which has nothing to do with rationality – and the former determines the best means by which these ends might be achieved – which is properly speaking politically neutral and rational. However, all of these views are arbitrary for they each neglect the following basic question: How is it possible to think of economics and politics together and yet consider them as two speciﬁc domains in our societies? It would appear that such a problem could not have been raised before the cultural revolution that occurred in England in the 17th century and spread shortly afterwards to France and to the rest of Europe. That cultural revolution essentially consisted in considering society in the same way as the physical world. Conceiving society as being part of the natural order – no longer being a moral or religious entity – is at the root of modern social sciences. As many commentators have pointed out, in this new political philosophy based on the idea of natural law, it is not easy to draw a distinction between politics and economics. This is true for almost all the stories told about the formation of human society, be it that of Hobbes or that of Locke to consider only two opposing versions of the idea of a natural order. I would go further and insist that once it is admitted that there exists a natural order, and one that may be known through reason and science, then politics and economics cease to be speciﬁc, separate and specialised domains but rather two diﬀerent ways of dealing with the same problem: elaborating a coherent social philosophy. Indeed, an examination of the nature of political economy at the time of its ‘invention’ in France in the 18th century2 brings into sharp relief a characteristic clearly visible in the ﬁrst attempt at systemisation, Quesnay’s Tableau économique,3 namely that economic theory is another way of thinking of and practising politics.

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The distinction between politics and economics is an inherent feature of modern political philosophy, one which stems from the ‘naturalisation of society’. Following this line of reasoning leads one to the view that economics should be thought of neither as the study of a speciﬁc sector of social activity nor as a speciﬁc feature of human behaviour but rather as a particular approach to political projects for society as a whole. If it makes sense to bring out the diﬀerences in the approaches of Quesnay and Montesquieu, for instance, it is not because the former dealt with subsistence and material production whereas the latter was concerned with alternative forms of government, but rather because they had opposing views about the very nature of social organisation and therefore the principles which should govern it too.4 Despite its aﬃnity with political philosophy, economic theory is considered nowadays as being an autonomous discipline. This is reﬂected in the organisation of academic institutions and the fact that the general public consider economists as forming a distinct group among social scientists. This is the most obvious success of economics and economists. Most of them rightly claim that their knowledge is speciﬁc and cannot be substituted by that oﬀered by sociology or political science. With rather less professional consensus, they also tend to maintain that economics is politically neutral.5 Since the writing of the Tableau économique, there has existed a basis for the conviction that society can be represented in quantitative terms and be objectively studied, in much the same way as the natural world is modelled by physics. The link into this next sentence needs to be much better: for all that, one should not forget that most abstract economic theories, from Ricardo to Arrow–Debreu, share a common feature, namely the submission of political institutions to a superior rationality derived from the conditions of greatest happiness of individuals or of best working practices of the whole of society. In any case, a rational view of a society made up of ‘possessive individuals’ in which ‘every man has a “property” in his own “person’’’, to use Locke’s formulation,6 ultimately means that individuals are not the means but the ends of society. In modern economics, Pareto optimality makes this point crystal clear since it supplies the unique social criterion compatible with individualism given Arrow’s impossibility theorem. This being the case, even though it might present itself as the fruit of an autonomous discipline, most advanced economic theory should properly be understood as belonging to political philosophy. Fundamental economic theory and political philosophy both deal with the ‘happiness of people’ and with the best means to achieve it. They diﬀer less in the questions they treat – which concern to greater or lesser degrees the nature and the rationality of society – than in the formalism and the techniques they use. These techniques might lead one to think of econo-

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mists as being ‘social engineers’ or even physicists but this would be to forget that abstract economic theory is not an experimental science. Quesnay’s Tableau économique and Arrow–Debreu’s competitive general equilibrium theory are more works of rational political philosophy (at diﬀering levels of axiomatisation) than models of a ‘social physics’, which could be falsiﬁed. There would be no point in submitting the theory of produit net (net product) or the existence and optimality of general competitive equilibrium theorems to empirical veriﬁcation. Both are rational and normative intellectual constructions, advocating the fundamental principles on which society as a whole should rely. This is why I venture to suggest that the mere acceptance of economics as an autonomous scientiﬁc discipline is less a scientiﬁc than a political event. The mere fact that economists consider themselves as entitled to intervene in social debates in the name of science, with the agreement of public opinion, has profoundly modiﬁed the way in which politics is discussed, justiﬁed and accepted. The emergence of economics as a social science is itself a signiﬁcant political development. Here the word ‘science’ is essential. During the mercantilist era (supposing it ever really existed as such), politics and economics could not be distinguished from one another and economic propositions were openly political in nature. Commerce was conceived of as war by other means. Economics, if any, was not considered then as a science despite the sophisticated character of many views about the balance of trade or the rate of interest, to give but two examples. The idea of a natural order, one present in political philosophy, was lacking in mercantilist thought. This prevented economists from presenting themselves as scientists. The naturalisation of society necessarily preceded the apparition of the ‘science nouvelle’, to borrow Dupont de Nemours’ formulation. Before trying to illustrate this general idea with an example drawn from 18th-century France, two important remarks are in order. First, the implicit conviction that an objective order rules society as it rules nature renders inherently contradictory any attempt at reforming society on a scientiﬁc basis. Physicists do not try to change the state of the world they study. Economists generally do. Liberals wish to keep the State out of certain domains (those that they regard as purely economic) and reformers or interventionists tend to promote new rules. In any case, they have to overcome a fundamental problem: How is it possible for the natural order not to spontaneously re-impose itself ? Is this natural order so artiﬁcial that it has to be consciously implemented by enlightened people? That question is relevant for Quesnay’s Tableau économique, for Marx’s historical materialism as well as for modern advocates of free-market globalisation. The answer is well-known: laws of natural order diﬀer from those of physics in that they need to be known in order to be eﬀective. This amounts

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to saying that the discovery of these laws only becomes eﬀective once they have been taught and accepted and that the people who discover them have to teach them and make other people accept them. In many cases, the task of enlightened people is to convince the most inﬂuential groups in society, or even the whole of public opinion, to adopt a certain model of society. Mirabeau and Quesnay tried to convert the authorities to their views. This has sometimes also be done by an ‘elite’ with the help of re-education camps or, which is obviously far better, via the use of modern techniques of persuasion (an obvious example of the employment of this latter method has been in making people voluntarily adhere to a hedonistic materialism). But, in any case, the message delivered by scientiﬁc knowledge about society is an important element of social power. Second, the reference to natural order requires one to think of politics as dealing with a composition of interests. Such a view, combined with the belief in the possibility of scientiﬁc knowledge of society, tends to strongly push into the background irrational values derived from ethics and religion. Once accepted as being a science, economics quite naturally becomes the rational core of political philosophy. To raise (and settle!) fundamental political questions once they have ﬁrst been formulated in economic terms is well accepted nowadays. We even forget that the acceptance of such a practice is a fundamental political feature of modern society. This is the case not because economics is believed to produce reliable knowledge, as physics is believed to, but rather because people have progressively ceased to think of society as founded on moral or religious values. One could be tempted to go as far as to maintain that economics has been successful not because of its scientiﬁc achievements or its eﬃciency – as a matter of fact laymen are rather sceptical about it in this regard – but rather because it has replaced ethics and religion as the main reference in political philosophy. Modern discussions in that ﬁeld, which are centred on the works of Rawls and of Nozick, are outstanding examples of this general tendency. That the emergence and acceptance of economics as an autonomous scientiﬁc discipline is above all a political event is clearly apparent when one looks at France in the middle of the 18th century. A comparative study of Quesnay and Rousseau illustrates the point. It can be demonstrated straightforwardly,7 that the Tableau économique is above all a quantiﬁed and objective version of a political discourse on the reform of French monarchy. Quesnay oﬀers a positive example of the capacity of economics to reformulate old problems in new and very abstract terms, ones which could be presented as being scientiﬁc. By contrast, Rousseau rejected the idea of a natural order for human societies. As a consequence, he promoted a view of economics which is utterly diﬀerent to that of other thinkers of his time.

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Unlike Quesnay, he made no pretence to be engaged in science and unlike Forbonnais and Quesnay did not support enrichment as a desirable objective. Accordingly, Rousseau developed a conception of society which cannot be adequately expressed in economic terms. He oﬀered a counterexample of the straight relation between economics and political philosophy. The example of Quesnay’s work is especially interesting. As the ﬁrst global representation of society in purely quantitative terms, the Tableau économique has been admired by some, has irritated others and was not understood by most of his contemporaries. Later generations of economists have extensively analysed its structure and proposed reformulations, which may be taken as implicit or explicit recognitions of its importance as an outstanding achievement in economic theory. Commentators have also warned their colleagues that the Tableau cannot be properly understood except in relation to the state of French society at the time. Although the Tableau was associated with a speciﬁc economic policy, few have been willing to interpret it as a piece of political philosophy. Such an interpretation is, however, diﬃcult to reject when the Tableau is confronted with Mirabeau’s and Quesnay’s Traité de la monarchie, the writing of which took place at exactly the same time as the Tableau. The Traité, free from any selfcensure since it was not intended for publication, is the political counterpart of the Tableau. On its own, it reveals its inspiration and orientation but not its complete meaning since part of the latter relies on the language itself and its novelty. The Tableau makes an important addition to the Traité, not by dealing with new questions, not by suggesting new solutions but simply by using a radically new approach and formulation. McLuhan’s celebrated dictum ‘the message is the medium’ applies perfectly here. In other words, Mirabeau’s and Quesnay’s works presented both a project for reforming the monarchy and a new approach to political discourse. That these two messages cannot be considered in isolation from one another due to the novelty of the language employed and the structure of the argument make the Tableau a symbol of the invention of political economy, notwithstanding its limited impact at the time. A simultaneous study of the Tableau and the Traité suggests two levels of ‘instrumentalisation’ of economics by politics. The ﬁrst is apparent through the long chain of reasoning which starts by examining a conventional political question – the necessity of reforming the French monarchy – and proceeds to provide an objective and scientiﬁc answer – the economic representation of the Tableau – which is supposed to solve the problem politically. At a deeper level, a second interpretation emphasises the hierarchical complementarity of politics and economics in Quesnay’s thought. The term of hierarchical complementarity8 denotes the following complex

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relation: in the Tableau, political institutions (monarchy, tax system, etc.) are subject to the economic rationality of the theory of net product but this subordination is itself contained in a broader hierarchy which submits the whole of the Tableau (and the theory of net product itself) to a vast political attempt at restoring or preserving a traditional social order. The emphasis on the economic character of the social structure (social classes are deﬁned in terms of their role in the production process) is controlled by the nature of the political project. The apparent primacy of economics reﬂects a hidden and more fundamental primacy of politics. It is only for the sake of the monarchy’s restoration that political institutions are shaped under objective economic considerations. It is not possible to develop the whole argument here.9 Two points in particular are worth mentioning. A comparison of the Traité with the Tableau discloses the relationship that exists between the very simple and traditional question about monarchy, expressed in political terms,10 and the introduction of the idea of a natural order. The notion of ‘natural law’ is less a good answer than a good way of raising the question of monarchy. It enables one to draw a distinction between the king as a person and the monarchy as an institution. In order to be a true monarch, the king must submit himself to a superior authority. Of course, that authority cannot be a human one. But human beings can know it. How? According to Quesnay two roads may lead to a perfect knowledge: evidence and faith. The natural order is discovered either thanks to reason enlightened by God or else is revealed by religion. Once religion has been disqualiﬁed, being at the origin of too much political trouble, there remains only the idea of a natural law, physical in nature, which can be discovered by scientiﬁc enquiry. Evidence, to which Quesnay devotes an article published in the Encyclopédie, is an essential part of the intellectual apparatus set out in the Traité. Quesnay’s favouring of reason and evidence is crucial in that it places science at the heart of the political question of power. Discovering the Creator’s intentions is a necessary condition to respecting them. This discovery is the task of science and the teaching of science is the most important obligation for enlightened people. Ignorance is responsible for the fact that positive laws may be contrary to natural order. Ignorance leads to arbitrariness, which in turn paves the way to tyranny. The objectivity of science – social and natural science are alike in this respect – protects society from tyranny. Knowledge of the movement of planets allows one to predict eclipses and tides. Knowledge of the natural order of society informs us of the laws governing the production of wealth. It is not possible to reject either the former or the latter. In fact, knowing the natural order of society, which is also the most socially advantageous, amounts to voluntarily submitting to it. How does one go from ‘know’ to ‘submit’?

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For Quesnay, the natural order rests upon subsistence: ‘subsistence is the primary object of all societies. This object must be kept in mind when considering the constitution of governments. . . . Disorder, barbarity, ferocity, heroism, domination, order, politics, urbanity, patriotism, humanity, sciences, arts, economic government, legislation, guaranteed possession of properties, customs are nothing but means and results of diﬀerent forms of societies following diﬀerent ways, more or less appropriate, of providing for their needs’ (‘. . . la subsistance est le premier objet de toutes les sociétés. C’est cet objet qu’il ne faut point perdre de vue dans la constitution des gouvernements. Tout le reste n’est que modiﬁcation. Le désordre, la barbarie, la férocité, l’héroïsme, la domination, l’ordre, la politique, l’urbanité, le patriotisme, l’humanité, les sciences, les arts, le gouvernement économique, la législation, la possession assurée des propriétés, les mœurs ne sont que des moyens et des résultats de diﬀérentes formes de sociétés occupées à satisfaire de diﬀérentes manières, plus ou moins abondamment, plus ou moins facilement ou diﬃcilement, à leurs besoins’ (p. 53).) Among the many possible forms of government, which is to be considered as the best ? Subsistence will give the right answer. Economics is therefore the relevant science for the government of society. Like any form of government, monarchy must be evaluated in terms of its suitability with regard to the situation of the nation considered. Quesnay drew a clear distinction between nations which subsist through agriculture and those that subsist through commerce. The rationale for this distinction is the theory of net product, that is the proposition that only agriculture produces value, commerce and industry being sterile. The theory of net product, kept in the background in the Traité, is brought to the fore in the Tableau. But in both cases it is at the core of the argument since it commands the ﬁscal system and the political structure of the nation. The notion of an agricultural monarchy (royaume agricole) is the most synthetic expression for that integrated set of political and economical relations which is to be found in the Formule arithmétique (1766) but which was already present in the Tableau of 1758. Starting from a traditional question concerning the nature of monarchy, Quesnay ended up with an economic theory, which in itself is a political answer to the initial question. What had been gained was a change of battleground and a space for rational argument. Monarchy ceased to be justiﬁed as being the historical consequence of the conquest of Gaul by the Franks, as Boulainvilliers, inter alios, maintained. Monarchy becomes the political system, which an objective knowledge points to being evidently the most suitable system of government for nations subsisting through the use of their soil. Quesnay sketches out a typology of political systems: ‘Monarchy is better suited than republican government to agricultural

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states, especially to large states’ (p. 172) while ‘the government suitable for a purely commercial state can only be republican’ (p. 177). In addition to the parallel between a hidden political discourse and an economic model to be actively disseminated by disciples, a second correspondence exists between the Traité and the Tableau at a less obvious level. Some elements left indeterminate in the Tableau are related to others, similarly indeterminate, in the Traité. These theoretical gaps are to be solved at a ‘metapolitical’ level which has nothing to do with science and reason. It is here that the aforementioned ‘hierarchical complementarity’ comes into play. More precisely, the scientiﬁc argument, viz. the theory of net product, cannot by itself justify the political stance adopted by Mirabeau and Quesnay. Two indeterminations are to be found in the Tableau which deprive the political discourse of the Traité of its proclaimed scientiﬁc foundations as shown by a critical study of the internal consistency of the Tableau (Cartelier, 1991, 1998; Eltis, 1996; Herlitz, 1996): (i)

(ii)

The idea that only agriculture is productive, far from being a conclusion derived from the Tableau, is merely an axiom upon which Quesnay’s economics relies. As a consequence, the theory of net product cannot justify anything concerning the nature of a normative social order. It is simply the economic expression of a political belief or a philosophical position, which requires its own justiﬁcation. That landlords rather than farmers get the net product is not based on any acceptable economic argument. The idea that landlords are responsible for the providing avances foncières has no counterpart in the analytical apparatus of the Tableau. Hoarding is a hindrance to reproduction, but there is no reason to think that landlords would be any less reluctant than farmers to keep money idle. Moreover, landlords are more obviously inclined to engage in luxury expenditure than farmers. In short, the question of which group receives the net product is left, from the point of view of economic theory, undetermined. From this indetermination follows that of who should pay the taxes.

These two ﬂaws in Quesnay’s economics, largely obscured by the quantitative character of the Tableau, may be interpreted as being symptomatic of weaknesses in his political argument in favour of the social order of the Ancien régime and the reform of monarchy. This is clearly visible in his treatment of the tax system and the status of the nobility. Quesnay’s annotations to Mirabeau’s Traité demonstrate convincingly that there is no political justiﬁcation for a noble class. In his attempt to provide a rationale for the pre-eminence of the nobility Quesnay relates it to their wealth and,

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more precisely, to their ownership of the land, the only kind of wealth compatible with an agricultural monarchy. This tour de force, consisting in basing the hereditary character of nobility on landed property rather than on blood and on military virtue would allow Quesnay to justify both the receipt by the nobility of the net product and the payment by them of taxes. Yet the owners of land are no more economically entitled to receive the net product than their pre-eminence over other people is politically justiﬁed. As a result, the nobility, deﬁned as the landlords, have no clearly deﬁned position, either political or economic. This conclusion would not however have appeared obvious at the time. The diﬃculty in deciphering the Tableau made people forget that its basic premises were arbitrary. Moreover, the key postulate, that only agriculture is productive, ought to be considered as a result. It is likely that the complexity of his economic analysis was largely responsible for this confusion. The interpretation in terms of ‘hierarchical complementarity’ between the Traité and the Tableau sheds some light on the physiocrats’ autonomisation of political economy. The autonomy of economics does not come from its apparent object – subsistence as related to a speciﬁc set of social relations – but from the idea that the global order of society rests on subsistence. Economics does not furnish subjective knowledge. It tells the truth about the very nature of society and its order. This order is both objective and providential. The nice properties of this order make it consciously preferred to all others as soon as, courtesy of science, it is discovered. The extraordinary abstraction of Quesnay’s thought, which ultimately expresses social relations as mere monetary ﬂows, is strongly motivated by a political view which is not reducible to a pure quantitative logic. This is probably true for most abstract theories of political economy. But this is the subject of another debate to which Quesnay’s analysis is little more than an introduction. If it is true that the idea of a natural order is a prerequisite for the autonomy of political economy then it is amazing that Rousseau was chosen to write the article Economie politique in the Encyclopédie. The surprise does not derive from the fact that the article is essentially devoted to the organisation of political institutions – this is merely further proof that the French term Economie belongs to political philosophy11 – but rather from the fact that Rousseau was particularly reluctant to accept the idea of a natural order. Rousseau rejected the notion of a natural order for human societies and consequently adopted a view of the subsistence of a nation which cannot be rationalised by political economy. The opposition between Rousseau’s Economie politique and Quesnay’s Tableau économique is not internal to political economy but rather to political philosophy. They do not develop two diﬀerent views about that subset of social

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interactions concerned with the production of wealth, but rather two radically distinct political conceptions of society in its entirety. In contrast to Montesquieu and his theory of society as a set of organised forces in multiple intermediate groups, neutralising each other in a very complex equilibrium, Rousseau and Quesnay, in developing their respective arguments, mentioned only individuals and society with no intermediate groups in between. The opposition between the two authors is therefore clear-cut. They both sought to conceptualise a society composed of individuals only but the solutions they proposed were radically diﬀerent. Whereas Mirabeau and Quesnay resorted to science and reason, Rousseau invoked ethics and virtue. For him, personal interest is not a relevant criterion for action. Quite the contrary: only voluntary actions, free of any speciﬁc or egoistic passions, and aimed at justice, may lead one to behave in an acceptable way. ‘When we aim at nothing but justice we are sure to follow what the general will commands’ (Economie politique, p. 93). ‘Do you want that general will be accomplished? Make sure that all singular wills take it as a reference; and as virtue is nothing but this special conformity to general will, to say it shortly, make that virtue rule everything’ (‘Voulez-vous que la volonté générale soit accomplie? Faites que toutes les volontés particulières s’y rapportent; et comme la vertu n’est que cette conformité particulière à la générale, pour dire la même chose en un mot, faites régner la vertu’ (idem, p. 94).) Personal interest would surely be a criterion more easily understood than that which Rousseau advocates; it therefore seems wise to leave to experts in Rousseau’s thought the explanation of how he later overcame in the Contrat social many problems left unsettled in the 1755 article. What is essential at this point is to emphasise that the general will does not rest on a natural order and that any social order is essentially artiﬁcial. Men cannot just guess what the natural order is and comply with it; they have to shape society for themselves. What seems to be at the root of Rousseau’s position is his deep conviction – in opposition to the general opinion of political philosophers in the 18th century – that there is nothing to be found as a possible composition of interests. Here, Rousseau parts company with most economists and especially with Quesnay. More than any other point, the question of the composition of interests is crucial for our discussion. Opinions about the relative importance of reason and passion in people’s behaviour or about the appropriateness of a certain form of government may diﬀer. But, as soon as there is an agreement about the existence of a natural order in which the interests of diﬀerent classes or groups can be adequately combined, it becomes clear that political issues may be settled in economic terms. A space is created for the intervention of economics – i.e. science – in political aﬀairs. The myth of the formation of human society may thus

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be expressed by a general agreement advantageous to everybody. The metaphor of voluntary exchange pervades the stories told by Hobbes, Locke and others philosophers of natural law and gives them an economic ﬂavour. In expressing his opposition, Rousseau was quite sarcastic. He summed up what others had called ‘the social pact’ as follows: ‘You need me, because I am rich and you are poor; thus let us reach an agreement between us: I will allow you to have the honour of being useful to me, provided that you give me the little which you have left for the trouble that I will take to have control over you’ (‘Vous avez besoin de moi, car je suis riche et vous êtes pauvre; faisons donc un accord entre nous: je permettrai que vous ayez l’honneur de me servir, à condition que vous me donnerez le peu qui vous reste, pour la peine que je prendrai de vous commander’ (Economie politique, p. 114).) As a matter of fact, neither Rousseau nor Quesnay referred to an ‘early and rude state of society’ to justify, by showing them in contrast, private property and other institutions in our modern societies. Both thought that the greatest threat to society was not a return to primitive conditions but rather the reign of tyranny in modern ones. Following the general will rather than complying with a natural order is the correct defence against tyranny. However, for Rousseau, the problem is that inequality makes it impossible for the general will to exist and therefore be expressed. Whereas Quesnay accepted inequalities as an inevitable component of the natural order, beyond any idea of just or unjust, Rousseau aﬃrmed that inequalities per se preclude any unanimity in society, any general agreement about what is socially desirable: ‘What is the most necessary in government, and perhaps what is also the most diﬃcult, is a perfect honesty in doing justice to everybody and, above all, to protect the poor against the tyranny of the wealthy. The greatest evil is already done when there are poor people to defend and rich people to hold in check’ (‘Ce qu’il y a de plus nécessaire, et peut-être de plus diﬃcile dans le gouvernement, c’est une intégrité sévère à rendre justice à tous, et surtout à protéger le pauvre contre la tyrannie du riche. Le plus grand mal est déjà fait, quand on a des pauvres à défendre et des riches à contenir’ (idem, p. 100).) Inequalities are responsible for ‘vested interests replacing the common good, mutual hatred between citizens and indiﬀerence to the commonwealth’ (‘de l’intérêt particulier substitué à l’intérêt public, de la haine mutuelle des citoyens, de leur indiﬀérence pour la cause commune’(idem, p. 101). As a rule, some particular interests will dominate at the expense of others. Things may be so bad that some interests could be sacriﬁced for the proﬁts of the richer. ‘If it were admitted that government could sacriﬁce an innocent to save the masses, I would consider such a maxim as one of the most abominable among those tyranny has invented, the falsest one could ever put forth . . . and the most directly

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opposed to the fundamental laws of society.’ (‘Mais si l’on entend qu’il soit permis au gouvernement de sacriﬁer un innocent au salut de la multitude, je tiens cette maxime pour une des plus exécrables que jamais la tyrannie ait inventée, la plus fausse qu’on puisse avancer . . . et la plus directement opposée aux lois fondamentales de la société’ (p. 98).) A modern economist might be tempted to interpret Rousseau’s position as meaning that a Pareto optimum cannot be attained in a society composed of free individuals if too much heterogeneity exists among them since inequality in initial endowments would render meaningless any idea of a composition of interests.12 Invoking the virtues of the market is not suﬃcient to save society from chaos and tyranny. Economics ceases to be relevant. Political problems have to be settled in a diﬀerent way, beyond the temptations of science. On this view, any rational plea in favour of a natural order associated with great inequalities should be considered with suspicion. Despite its apparent objectivity, such an argument would look like a political attempt at rationalising a social prejudice rather than a scientiﬁc proposition. Or, even worse, as an illegitimate use of science in order to strengthen the balance of power in favour of the rich. One cannot help thinking that some of the abstract propositions put forward within the framework of general equilibrium theory two centuries later could be considered as strong political arguments as well. When rigorously demonstrating welfare theorems economists tend, perhaps inadvertently, to make one believe that there is no point in opposing the current order. It would be as foolish to ﬁght against gravity as it would be to struggle against the laws of the market. Rousseau does not state explicitly that economics is nothing but a kind of scientiﬁc rhetoric in defence of a social order depicted as providential and natural. But it would not be too great a distortion of his thought to ascribe to him such a view. The most abstract theory, be it Quesnay’s Tableau économique or the Arrow–Debreu welfare theorems, is far less remote from political debate than is nowadays commonly supposed. To return to Rousseau, it does not come as a surprise to learn that what he had to say about economics was diametrically opposed to the dominant approach of his contemporaries, for example Quesnay and Forbonnais to name but two. Not for logical or analytical reasons. For political ones! Rousseau’s economics, so to speak, is not free of political prejudice. Quite the contrary. Like that of Quesnay, his economics was the expression of a political project. But, and this makes all the diﬀerence, Rousseau’s economic propositions were not presented as being scientiﬁc and objective. Not only did they tend to reject the prevailing social order, they were, moreover, in favour of a society where equality of wealth would free its currently poorer members from subordination to the rich. There is no determinism, no fatality, concerning human societies.

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Societies have no predetermined form. It does not make sense to embark upon a scientiﬁc investigation in search of the ‘correct’ model of society. Human beings have to experiment and discover for themselves the means by which to secure their happiness. Education is absolutely essential here but not for the reasons emphasised by Quesnay. Its purpose is not to make widely known the eternal laws of the composition of interests but to mould citizens and to inculcate them with virtue. ‘If it is good to know how to use human beings as they are, it is better to make them become what we need: the most absolute authority is the one that has been built in the man himself and that rules his wills and actions’ (‘S’il est bon de savoir employer les hommes tels qu’ils sont, il vaut beaucoup mieux encore les rendre tels qu’on a besoin qu’ils soient; l’autorité la plus absolue est celle qui pénètre jusqu’à l’intérieur de l’homme, et ne s’exerce pas moins sur les volontés que sur les actions’ (Economie politique, p. 93).) As Rousseau conceived of it in 1755, virtue is at the bottom of the ‘general will’.13 The general will is not to be discovered through any conformity with great abstract principles, like justice or virtue. There is nothing to be gained in substituting a natural with a transcendental moral order, both of which are arbitrary. So how, then, can we come to know the general will and make explicit what it commands? According to Vargas, in the Economie politique the general will is less a set of positive propositions than acts of opposition to some intentions or actions of government. The general will would be, accordingly, the ability of citizens to resist. It looks to me that there is a problem here of categories: act action, ability capacity for engaging in action. ‘The general will is not the social mode of existence of a group of human beings but the creation – even the constitution – of its existence as a response to a political threat. Far from being a “natural” expression of a spontaneous solidarity of its diﬀerent parts, the general will is the mobilisation of a distressed social body’. ‘La Volonté générale s’annonce non comme mode d’existence social du groupe . . . mais comme révélation – ou même constitution – de son existence sous la menace politique. Loin d’être l’expression “naturelle” de la solidarité spontanée des parties du corps, la Volonté générale est la mobilisation du corps en détresse’ (Vargas, 1986, p. 34).) Of course, such an interpretation does not free ‘the general will’ from its ambiguities. Rousseau took up this point again in The Social Contract and modiﬁed slightly his position. But, even with these further qualiﬁcations, the general will still remains independent of any presupposed superior order, either natural or metaphysical. The general will is political in a fundamental sense: it precedes any further distinction between economics and politics. Symmetrically, one could say that the idea of a natural order is economic in that it determines/commands the further structure of society, with the political institutions being submitted to economic principles.

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Quesnay and Rousseau both fought against tyranny. But their methods were radically diﬀerent, as an analysis of their economics makes clear. Quesnay’s economic ideas are well-known, Rousseau’s far less. Indeed, an explanation of Rousseau’s economics does not require a great deal of space. He made no pretence to be engaged in scientiﬁc endeavour; he did not present himself as having objectively studied society and discovered its underlying laws. His economic propositions are not presented as natural laws but as direct expressions of a political stance. Unlike Quesnay, Rousseau did not resort to the rhetoric of science. In both cases, however, it must be made clear that the choice of whether or not to resort to the rhetoric of science is clearly one based on an attitude towards politics rather than to science. A quick reminder is suﬃcient to realise how far Rousseau’s views are from the tendencies of modern society. His championing of public domain revenues over taxes in ﬁnancing the State’s activities, the primacy of taxes in kind rather than in money bear witness to a suspicion not only vis-à-vis the way the Ancien régime ﬁnanced itself, one shared by Quesnay, but above of all, vis-à-vis the monetary character of social relations. But the most important point is probably the idea that citizens must content themselves with what is strictly necessary to live and must not strive for superﬂuities. The quest for making oneself better oﬀ, which Adam Smith would later prize as a cause of the wealth of nations, is considered here as a threat to society. ‘The most important guideline for the administration of ﬁnance . . . is to prevent needs (from growing) rather than to increase incomes’ (Economie, p. 108). Growth in the net product is clearly not the right objective to pursue! As a consequence, Rousseau was opposed to the free trade of corn and preferred a policy of its public storage. Luxury is criticised but for reasons very diﬀerent from those of Quesnay. For him there is no good luxury. He does not advocate a ‘conspicuous consumption’ and criticises any luxury. Rousseau goes as far as proposing an extreme taxation policy in order to equalise the standard of living of all citizens and to come close to ‘this state of equality at a mediocre level of wealth which is the real strength of a society’ (Economie politique, p. 119). At ﬁrst sight, the relationships between politics and economics are totally diﬀerent in Rousseau’s and Quesnay’s thought. In the latter, politics seems to disappear behind the zigzag and, as far as the Maximes associated with the Tableau are concerned, politics is strictly determined by the requirements of economics. The form of government and its sphere of action, ﬁscal policy, indeed everything, has to conform to the natural order and to the idea of a Royaume agricole as described in the Tableau. The opposite appears to be the case in Rousseau’s article. Economics is requested not to be an obstacle to the expression of the general will, which would be the case

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were individual incomes and wealth to grow too unequally. Enrichment is a political evil when it is accompanied by increased inequality. Since the two appear to be inextricably bound, enrichment has to be considered as politically undesirable. For Quesnay, it is quite the opposite. As Catherine Larrère reminds us, the invention of political economy by the physiocrats was related to enjoyment and possession. The ‘pact of subsistence’ between the sovereign and the nation, which had justiﬁed for a long time a strict control over the trade in corn, is replaced by the quest for net product, indeed, more precisely, the quest for a maximal value of the net product. ‘More than a freedom to act, natural law gives an ability to enjoy’ (‘Plutôt qu’une liberté de faire, le droit est, pour Quesnay, une capacité de jouir’ (Larrère, p. 197).) Rousseau’s and Quesnay’s ethics are incompatible. For the latter ‘justice consists in allowing everybody to take part, in the most eﬃcient way, in the process of multiplying total income’ (‘la justice consiste . . . à donner à chacun ce qui lui permettra de contribuer le plus eﬃcacement possible à la multiplication du revenu total’ (Citton 2000, p. 166)) – while ‘installing pity at the centre of his system, Rousseau ﬁrmly rooted his ethics in emotion and compassion, to which physiocrats deny any relevance for political economy’ (‘en mettant la pitié au cœur de son système, Rousseau ancre son éthique dans cet ordre de l’émotion, de la (com)passion auquel les physiocrates dénient toute portée en matière d’économie politique’ (idem, p. 173).) The opposition between Quesnay and Rousseau is clear and well-known. But it must be kept in mind that this opposition cannot be reduced to diﬀerences in economic propositions or in political preferences for certain forms of government. Their most fundamental diﬀerence is to be seen in their views about the relationships between politics and economics or, to put it restrictively, in their positions about the place of economics in the knowledge societies have about themselves. What is perceived as the domination of economics in Quesnay’s thought and the pre-eminence of politics in that of Rousseau comes less from a divergence in economics or in politics in their narrowest senses than from a deep-rooted diﬀerence in their conceptions of society as a whole. What is at stake is neither the form of government nor the theory of the origin of wealth but rather the general view about society. It is according to speciﬁc representations of society as a whole that the respective positions of economics and politics are determined. Economics, speciﬁcally, can hardly appear as a science in this context. The choice of a rhetoric of science follows from the hierarchical complementarity between economics and politics. The apparent domination of economics in Quesnay’s thought and its evident subordination in Rousseau’s article, both express a general philosophy of society. There would be little sense in taking at face value Quesnay’s claims to be engaged

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in scientiﬁc endeavour and to uncritically accept the emergence of a quantitative modelling of society as a fact belonging to the history of science. It is rather an important turning point in the history of social philosophy, a turning point which Rousseau unsuccessfully opposed. The apparent autonomisation of an economic science – epitomised by the Tableau économique – has to be interpreted more as the beginning of a new approach in dealing with political questions than as a sign of progress in society’s scientiﬁc knowledge of itself. The fact that economics as a science has contributed to political debates since the Tableau should not make us believe that economics can solve society’s problems. To put it mildly, holding such a belief would simply be to take a special position in political philosophy. That politics is nowadays thought of as dealing with the composition of individual interests (and not with moral or political values) attests to the success of economists in convincing people that (i) society is ruled by objective laws and (ii) research in economics is the correct procedure for discovering these laws. Today, the accepted economic laws are not those claimed by Quesnay. The social philosophy underlying the Tableau is quite diﬀerent from that underlying general equilibrium theory and mainstream economics. Nevertheless, Quesnay and modern theoreticians would agree with points (i) and (ii). To some extent, the conclusions drawn from the limited case of Quesnay and Rousseau may be valid in a more general context. The above analysis shows that economics cannot be said to be autonomous in a strong sense. Not only is the economics of the Tableau partly dictated by Quesnay’s political programme but Quesnay’s pretension to science is in itself a mere proposition in political philosophy. The same is more or less true of modern theorists. They defend an individualistic social philosophy – think of Pareto optimality – and state their propositions in a way that mimics the practices adopted by physicists and mathematicians. Although some of these propositions are highly normative (welfare theorems or real business-cycle theory for example) they are presented as theorems or with impressive econometrics. Most economists allege, like Quesnay, that economics provides scientiﬁc knowledge. Some of them are not very far from thinking that economists are not consulted enough about public aﬀairs. It would appear, however, that economics is in no way comparable to physics.14 The claim to be engaged in science could be suspected as being mere rhetoric. One might even be tempted to suggest that the more economists openly pretend to be scientiﬁc the closer they are to being political philosophers. Should they believe that this is not the case it would prove nothing, though it would point to the risk they are running of being bad political philosophers. The ongoing process of diversiﬁcation and specialisation in economics proves the ﬂexibility of this approach. Its methodological principles are

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very simple. They consist in ﬁnding equilibria, deﬁned as a state of coordination of individual rational choices such that nobody has interest in diverging if all others hold their choices of action constant, and in studying the diverse properties of such situations. Potentially relevant for a large range of problems, it is applied to domains far removed from its initial ﬁeld. Versatile and well-suited to an extensive use of sophisticated mathematics, the tools of economics are used to solve problems in criminology, law, political sociology, etc. Moreover, the basic individualistic inspiration of economists seems to be in accordance with the evolution of modern societies. Most people now think of themselves as being subjects striving for individual happiness, which in turn is related to the volume of their consumption or to the monetary evaluation of their wealth. This contrasts with many conceptions which prevailed in the past in which individuals sought to save their soul or to serve the community.15 Chastellux’s well-known dictum, ‘there exists at all social strata an irresistible urge to the highest state of wellbeing; and here lies the physical revelation which should be the guide for all legislators’, is certainly more readily accepted today than in 1772 when it was written. The pursuit of self-interest, which economists have very often considered as a blessing for society as a whole, is becoming increasingly legitimate. Such egoistic tendencies are not limited to monetary or material relations; they are well-accepted in an increasing number of domains in social life, like the choice of spouse and political behaviour. If economics is progressively becoming the preferred mode of analysing and interpreting social life it is not primarily because it satisﬁes scientiﬁc criteria (how many economists change their mind when empirical evidence fails to conﬁrm their theories or when pure theory shows that global stability is not ensured by the law of supply and demand?) or because laymen consider economics to be on the same scientiﬁc footing as physics or biology (we are very far from that!). It is rather because economics is in phase with the way people tend now to think of themselves, sometimes with regret, but also without having an alternative vision at their disposal.

NOTES 1. 2. 3. 4. 5.

See A. Rebeyrol (1999). I allude to the title of Catherine Larrère’s book (1992). When Smith considers the works of his predecessors, he must invent the ‘mercantile system’ which did not exist at the time, whereas the ‘agricultural system’ had been entirely achieved. On the cleavage between Montesquieu and physiocracy see Charles and Steiner (2000). ‘It does not seem necessary to retread familiar ground to show that economics as a positive science is ethically – and therefore politically – neutral. The corpus of economic analysis can be turned to a thousand contradictory ends. But by and large it is not: my

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6. 7. 8. 9. 10.

11.

12.

13.

14. 15.

Co-evolution of political ideas and economic thought thesis is that the professional study of economics makes one politically conservative’ Stigler (1959). Locke (1977), p. 130. This has been facilited by the recent publication of the previously largely unknown manuscript of the Traité de la monarchie due to Gino Longhitano (see references, Marquis de Mirabeau and François Quesnay (1999)). This term is borrowed from Louis Dumont. See G. Longhitano’s introduction to Traité de la monarchie; see also Cartelier (1998) and W. Eltis (1998). ‘The monarchy is an organised body which continually changes its head, which renders this kind of government very forbidding, and experience only too often proves that unfortunate eﬀects arise from this. It should be the organisation of the body that regulates the head, but it has still proved impossible to securely establish this organisation, because monarchic government is in its origins a military government which has gained control of civil and economic government’ (Traité, p. 181, quotations in bold characters are Quesnay’s annotations; other quotations are from Mirabeau). ‘Economie’ did not have the same meaning in the 18th century as it does today, as evidenced by the deﬁnitions contained in the Encyclopédie and the dictionaries of the time. In the Encyclopédie the entry reads as follows: ‘ECONOMIE ou OECONOMIE, (Morale & Politique) ce mot vient de, maison, & de, loi, & ne signiﬁe originairement que le sage & légitime gouvernement de la maison, pour le bien commun de toute la famille. Le sens de ce terme a été dans la suite étendu au gouvernement de la grande famille, qui est l’état. Pour distinguer ces deux acceptions, on l’appelle dans ce dernier cas, économie générale, ou politique; & dans l’autre, économie domestique, ou particulière. We have to look at the entry ‘Commerce’ to ﬁnd what is now considered as belonging to political economy. It would not be impossible, however, considering Rousseau’s views in retrospect, to rationalise them by invoking the second welfare theorem: politics would ensure that individual endowments are more or less equal and competitive markets would ensure the optimal allocation of resources. Such an interpretation amounts to accepting that economic laws govern the whole of society, and even determine what are the respective spheres of application of politics and economics. Rousseau’s insistence on the artiﬁciality of human societies and on the importance of general will pleads against accepting such an interpretation. As noted above, the point made by Rousseau is not very clear. We do not know whether individuals succeed in distinguishing ‘general will’ from their own ‘special will’ or whether it is the government’s task to help them. On the one hand, citizens are invited to comply with positive laws in order to avoid tyranny, but, on the other, they have to participate in the process of law-making. It is by no means sure that Rousseau’s reasoning is free from any circularity. How could emerges ‘between the masses and the government the unity of interest and will’ (idem, p. 89)? See, for instance, Benetti and Cartelier (1997). Montaillou, village occitan, a book by Leroy Ladurie, inspired by the records of interrogations by the Inquisition, shows how such preoccupations permeated the daily life of ordinary people in the 12th century.

REFERENCES Primary Sources: Texts from the 17th and 18th Centuries François Quesnay et la Physiocratie, vol. II (1958), INED, Paris. Locke, John (1690), Two Treatises of Government, Everyman’s Library, 1977.

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Marquis de Mirabeau and François Quesnay (1999), Traité de la monarchie, edited by G. Longhitano, L’Harmattan, Paris. Quesnay, François (1991), Physiocratie, edited by J. Cartelier, GF-Flammarion, Paris. Rousseau, Jean-Jacques (1755), ‘Economie politique’, in L’Encyclopédie, PUF, Paris (1986).

Secondary Sources Benetti, Carlo and Cartelier, Jean (1997), ‘Economics as an exact science: the persistence of a badly shared conviction’, in Is Economics Becoming a Hard Science, A. d’Autume and J. Cartelier eds, Edward Elgar Publishing, Northampton MA, USA and Cheltenham, UK. Cartelier, Jean (1984), ‘De l’ambiguïté du Tableau économique’, Cahiers d’économie politique, 9, 39–59. Cartelier, Jean (1991), ‘L’économie politique de François Quesnay ou l’Utopie du Royaume agricole’, introduction to François Quesnay, Physiocratie, GarnierFlammarion, Paris. Cartelier, Jean (1998), ‘Quesnay, François, and the Tableau économique in The Elgar Companion to Classical Economics, H. Kurz and N. Salvadori eds, Edward Elgar Publishing, Northampton, MA, USA and Cheltenham, UK. Cartelier, Jean (1998), ‘The political foundations of the Tableau économique’, ESHET, Valencia, mimeo. Charles, Loïc and Steiner, Philippe (2000), ‘Entre Montesquieu et Rousseau. La Physiocratie parmi les origines intellectuelles de la Révolution française’, Etudes Jean-Jacques Rousseau, no. 11, Musée J.J. Rousseau-Montmorency. Citton, Yves (2000), ‘Rousseau et les physiocrates. La justice entre net product et pitié’, Etudes Jean-Jacques Rousseau, no. 11, Musée J.J. Rousseau-Montmorency. Dumont, Louis (1977), From Mandeville to Marx, The Genesis and Triumph of Economic Ideology, The University of Chicago Press, 1977. Dupont de Nemours, Pierre-Samuel (1992), De l’origine et des progrés d’une science nouvelle, CUECM [1768]. Eltis, Walter (1996), ‘The Grand Tableau of François Quesnay’s economics’, The European Journal of the History of Economic Thought, 3, 21–43. Eltis, Walter, (1998), ‘Quesnay’s advocacy of government by constitutional monarchy’, ESHET, Valencia, mimeo. Herlitz, Lars (1996), ‘From spending and reproduction to circuit ﬂow and equilibrium: the two conceptions of Tableau économique’, The European Journal of the History of Economic Thought, 3, 1–20. Larrère, Catherine (1992), L’Invention de l’économie au xviiième siècle, PUF, Paris. Locke, John (1977), Two Treatises of Government, Everyman’s Library, London. Perrot, Jean-Claude (1992), Une histoire intellectuelle de l’économie politique, EHESS, Paris, 496 pp. Rebeyrol, Antoine (1999), La Pensée économique de Walras, Dunod, Paris. Rousseau, Jean-Jacques (1986), ‘Economie politique’, in L’Encyclopédie, PUF, Paris [1755]. Stigler, George J. (1959), ‘The Politics of Political Economists’, Quarterly Journal of Economics, 73, November, reprinted in Essays in the History of Economics, University of Chicago Press, 1965. Vargas, Yves (1986), ‘L’article de 1755 et son contexte’, Introduction to Rousseau (1986).

12.

Economic theory and economic policy in Italy during the second half of the eighteenth and the ﬁrst half of the nineteenth century Herbert Pruns

EARLIER DEVELOPMENTS The various Italian states, like the Holy Roman Empire as a whole, cannot be said to have already had uniform economic policies by the 18th century. Up to the beginning of the 16th century there had been cultural landscapes with ﬂourishing commerce and manufacturing industry and intensive farming in many parts of Italy. But after 1522 French, Spanish and Austrian invasions brought destruction, maladministration and high taxes. They left behind a crippled economy. The impoverishment of the people and the collapse of the once ﬂourishing economy had been accelerated in many states by an economic depression beginning in the second half of the 16th century and later by those eﬀects of the Thirty Years’ War which extended south of the Alps. In 1630 came the pestilence as a catastrophic plague from Asia. Montesquieu remarked in his treatise on the Causes of the Grandeur and the Decadence of the Romans 1734, on the condition of the Italian states: ‘And in our own times, the Italian republics who pride themselves on the lasting quality of their form of government ought rather to pride themselves on the lasting quality of their abuses. Thus they have no more liberty now than Rome at the time of the Decemviri.’ This critical assessment is chieﬂy a manifestation of over 200 years of foreign rule in Italy. The depression was worsened by the once beneﬁcial Roman-style system of food distribution practised in most Italian principalities. Although the ‘annona’ system was still common in the 18th century, it had reduced agriculture in almost all Italian states to a rigid, highly regulated sector with relatively low producer and consumer prices and numerous export bans, particularly on corn and cattle. It limited not only supply, but also quality and prices. From the middle of the 18th century, as conditions deteriorated and shortages leading to hunger and internal revolt became 226

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increasingly frequent, individual states came under growing pressure to reform. Italian economic writers and the reforms they proposed must be viewed against this background of decline and impoverishment of the population. Social and economic policy thinkers formed an increasingly closed and selfconﬁdent front of protest against the catastrophic conditions of the day. These thinkers were by no means all outsiders to the administration; indeed, some were leading functionaries and even sovereigns themselves. Inﬂuenced in particular by France’s Pierre de Boisguilbert (1645–1714), François Quesnay (1694–1774) and A. Jacques Turgot (1727–81), England’s William Petty (1623–87), Thomas Mun (1571–1641) and John Locke (1632–1704) and Scotland’s David Hume (1711–76) and Adam Smith (1723–90), Italy nourished a large and sophisticated body of economic writings, drawn in part on prevailing economic thought and in part adapted to contemporary political conditions.

ECONOMIC THINKING AND ECONOMIC LIFE IN THE SECOND HALF OF THE 18TH CENTURY Equipped with this preliminary overview, we will select for closer scrutiny only a few of the large number of contemporary writers1 – those whose writings contain ideas and reforms relating in particular to manufacturing, the monetary system, ﬁscal policy, rational agriculture and trade, while at the same time laying the foundations for early industrialization. The selected writers are Antonio Genovesi, Salustio Antonio Bandini, Ferdinando Galiani, Giammaria Ortes, Francesco Mengotti and Grand Duke Leopold of Tuscany. The Neapolitan Antonio Genovesi (1712–69) remains, even in a modern appraisal of 18th-century economic literature, a reformer of great intellectual inﬂuence. As early as 1829, Giuseppe Pecchio described him as the restorer of philosophy, theology and economics. ‘He desired to liberate reason from scholasticism, religion from superstition, his sovereign from foreign rule, and his fatherland from humiliation, corruption and poverty.’ Genovesi held the world’s ﬁrst professorial chair of commerce and mechanics in Naples. Of the eighteen volumes of Genovesi’s mostly philosophical and theological oeuvre, ﬁve volumes deal with economics; of these ﬁve, three are translations of and commentaries on the foremost English mercantilists, and two are an academic treatment of his ﬁndings on civil economy, Lezioni di Economia Civile. Genovesi taught applied economics as it related to Great Britain and in particular British trade, commerce, manufacturing and agriculture. Due to the strong reception met by the

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British mercantilists, his knowledge in this ﬁeld was considerable. As early as 1764, he prophesied the imminent liberation of the British colonies and the formation of independent states in North America. Genovesi also studied the French physiocrats. He praised agriculture as a ‘rich and enduring source of public wealth’. Unlike his physiocratic contemporaries, however, he welcomed commerce, manufacturing and trade as being productive because they multiply the output of goods, lighten the work of farmers with improved technology, and bring agricultural produce to the consumer. He approved of free trade and in particular export trade in corn and the setting of long-term interest rates on a free credit market. In the interests of a free market in real property, he opposed the establishment of ﬁdeicommissa.2 Genovesi’s teachings were not to see practical application in his own lifetime. All the same, by virtue of his enlightened philosophy and economic teachings, he met with considerable respect and approval not only in the world of theory, but also gradually in practice in the states of central and northern Italy – as witnessed by the reforms in Tuscany and Lombardy upon which Genovesi had at least indirect, fortifying inﬂuence. One of his theoretical and practical followers was Giovanni Rinaldo Count Carli (1720–95) in Lombardy. One senior contemporary of Genovesi who did have direct inﬂuence on the reforming states was Salustio Antonio Bandini (1677–1760). He was a leading intellectual ahead of his time in theory of money. His inspirational pamphlet Discorso sopra la maremma siense (1737) contained speciﬁc, practical proposals for reforms and improvements. Bandini, a cleric, came from a respected family of rural aristocrats from Grosseto in Tuscany. He was all too familiar with the prevailing agricultural conditions and failings, particularly in the Maremma, the coastal area and wetlands of Siena which had become increasingly waterlogged since the 17th century and to which the title of his pamphlet expressly referred. The lakeland Maremma, rendered fertile by irrigation since antiquity, ﬂourished as arable land into the 16th century. For want of regular public maintenance and dredging, however, the drainage channels had since silted up. The cultivated landscape degenerated to sparse grazing. People in the mosquito-infested low-lying areas succumbed to malaria. It is here that Bandini started out with his practical suggestions. Aiming for root-and-branch reform, Bandini recommended leaner administration with few and simple laws based on personal, economic, commercial and transport-policy freedoms for the individual. He ascribed great importance to contractual price-setting freedom in both agriculture and commerce. One particularly forward-looking concern of Bandini’s in this regard was that of replacing the wide variety of confusing taxes and

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duties with a single tax that would be appropriate in economic terms and be precisely calculable in amount. The demand for a single, moderate tax accords in its approach with the economic and ﬁscal programme of the physiocrats in France. As Bandini had already published his demands at the end of the 1730s, it was possible for Quesnay and his physiocratic followers to have known not only the liberal economic thinking of de Boisguilbert, but also Bandini’s pamphlet, and to have drawn encouragement from him in their own calls for an impôt unique, even though his demands for a single tax had a diﬀerent intellectual background to that of the physiocrats. Bandini was astonishly ahead of his time in promoting what is now known as money velocity as a measure of national wealth. What was important, he said, was not the quantity of money but the rate at which it circulates. He thus underlined the time factor as what was to be an increasingly important mark of a rational and progressive economy. He had to recognise from the example of Spain that the quantity of precious metal is no protection against inﬂation and economic decline. The thinking of the important Italian philosopher, diplomat, economist and abbot Ferdinando Galiani (1728–87) was predicated on the maxim of the relative value of political action in economic life. Galiani came to early fame and recognition across Europe through his Della Moneta [1751], a work of importance to monetary theory and dogmatic history. This was followed by a set of dialogues in letter form in 1770, Dialogues sur le Commerce des Blés and in 1775 followed the treatise Analyse de l’ou rage intitulé: De la Législation et du Commerce des Grains. In Galiani’s observation and perception, a country’s economic, agricultural and trade policies should not be dogmatic in nature, but should be adapted to the constant changes of time and the speciﬁc features of the country in question; they must change in line with the needs of the population – in particular the needs of consumers, but also those of producers – and in this sense are relative and of relative value. Policies are also relative in that a country’s polity also inﬂuences its economy through economic policies derived from it. His Swiss biographer Eduard Ganzoni chose to paraphrase Galiani’s propositions with the term ‘The doctrines of relativism’. He criticized Quesnay, his physiocratic followers and Turgot. Although Galiani called for liberal reforms, he warned that these should not be instituted with undue haste, but should be undertaken incrementally. Galiani’s doctrine can be summed up as follows: instead of committing oneself to one speciﬁc dogmatic position, whether it be absolute free trade or export bans, every decision must be attuned to the reality of a speciﬁc country and its policies. Not only Jacques Necker (1732–1804), Louis XVI’s (1774–92) Genevese ﬁnance minister, but also several governments of the 19th and 20th centuries

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applied Galiani’s political principles to their actions. Gunnar Myrdal also follows Galiani’s perception that the economy and state economic policy, especially of the Third World, critically depend on the situational condition of the state. Giammaria Ortes (1713–90) originally came from Venice. After joining and leaving a monastic order, he spent many years of his life travelling Europe to study the social and economic policies of the various states. To a certain extent he compares as a traveller to Montesquieu (1689–1755). Ortes recorded his observations and perceptions in writings with a socioeconomic bias. Although he became acquainted with the vanquishers of mercantilism in Great Britain and France, the notions he pursued diverged in part from theirs. His work of 1774, Dell’economia nazionale, was highly controversial at the time. Its very title is remarkable in that Ortes focuses on ‘national’ economic policy. At the time of the small Italian states, ‘national’ implied a process of integration extending across the borders of the republics and principalities. The later meaning of ‘relating to a nation state’ was not yet implicit in the word as used here. Ortes’s deliberations were not nationally focused. Instead, he was enquiring into the underlying behaviour of individual people in economic life, detached from state borders. The objective of commercial trade among states, he thought, must necessarily be unfettered free trade, guided by the economic interests of the trading partners. In a given nation state, reasons Ortes, goods are in a speciﬁc proportion to the size of the population. In the long term, they cannot exceed that quantity of food resources which is absolutely necessary to feed the population. The larger a state and the larger its population, the larger the wealth and welfare gap between rich and poor. Resignedly, he regards it as a law of nature that human society will always exhibit such a gap. He was criticised for this attitude by Guiseppe Pecchio as early as 1829, when he lived in asylum in London. Poverty, said Pecchio, must not be a law of nature, when confronted with the social reality of labourers in England. His contemporaries’ criticism of his early work on the ‘national’ economy urged Ortes on to further thoughts on poverty and wealth. The result of his deliberations was his Reﬂections on the Population of 1790, titled Errori Popolari intorno all’ Economia Nazionale: ● ● ●

Population growth depends on the output of goods Population growth depends also on the extent, greater or smaller, of people’s liberty Excessive taxation does not just burden the population: it decimates it.

These notions make Ortes an important precursor of Thomas Robert Malthus (1766–1834) and his theory of population.

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In 1787 a treatise was published in Florence that was to become known outside the Italian-speaking world, and in particular in southern Germany. It was a tractate by Francesco Mengotti (1749–1830), Del commercio de romani ed il Colbertismo, which was to be translated and published 1791 in Munich by Joseph von Utzschneider, economist and civil servant to the Bavarian Elector Palatinate, with the title Abhandlung über den Kolbertismus, oder die Freiheit des Kommerzes. In the preface to his translation, Utzschneider remarks that he had come across Mengotti’s outstandingly lucid treatise by coincidence. He had decided to translate it into his native German there and then ‘because barring the excellent classical work of Adam Smith on the Wealth of Nations, I have yet to read anything better on the national economy. Mengotti portrays the truth so purely, clearly, brieﬂy and beautifully that everyone can read and understand him with pleasure.’ The treatise builds upon the critics of mercantilism, and speciﬁcally the French school as represented by Colbert, and then goes on, using Adam Smith as the starting point, to present with outstanding clarity and concision the compelling need for free trade. It also goes into the economic conditions and political interests of Tuscany. According to Mengotti the ability of a state to ﬂourish depends not on its holdings of precious metal, but on its manufactures, the quality of its products, the skills of its citizens and workers, and its success in foreign trade. A successful manufacturing economy, he goes on, itself requires rational agriculture to secure the supply of food for the population. He makes special reference in his critique to Spain. His tractate is a protest too against the realities of the states and their economic policy at the end of the 18th century. We can gain a detailed impression of social, economic, agricultural and trade policies from the mid-18th century to 1789 by taking the example of Tuscany under Francis I (1708/1737–65) – the husband of Empress Maria Theresa (1717–80) – and their second son, Grand Duke and later Holy Roman Emperor Leopold II (1790–92). Tuscany, with its centres of Florence, Pisa and Siena, had been the ‘key to the balance of Italy’ and, after its decline in the 16th century, was to become so again in the second half of the 18th century. The ﬁrst phase of the Tuscan revival is associated with Francis I. He had called two Lotharingian noblemen and high-ranking public servants, Counts Cameron and Richecourt, to Florence to reform the economy and administration of the economically and administrationally desolate Tuscany. As early as 1738, these two leading, reform-bent ministers enacted the ﬁrst steps towards implementing Bandini’s ideas – of which they were well aware – by passing a decree granting lakeland Maremma the freedom to export corn for an initial 12 years. After manifest success in the Maremma, free export of corn was extended for a further 12 years in 1750.

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As his father’s deputy and regent of his mother Empress Maria Theresa, Leopold took over the throne as Grand Duke of Tuscany upon his father’s death in 1765. Bandini’s work on the Maremma, which we discussed earlier, is in many passages a faithful mirror image of the reforms Leopold applied to large parts of Tuscany. Fully in the spirit of the Enlightenment, Leopold aimed to lay open to public scrutiny his own governmental, budgetary, economic and agricultural policies by the year 1789. He did so in 1790, in a two-volume work that has become rare almost to the point of oblivion in today’s public-sector and national economic literature both in Italy and elsewhere. This work bears the Italian title Governo della Toscana, sotto il Regno di sua Maestà il Ré Leopoldo, and is a rare example of such a programme being at least for the greater part personally drawn up by a sovereign3 and implemented from the seat of power. First, still in the time of Francis I, all territories within state borders were brought under uniform administration and important powers transferred to the state proper in order to create a state territorial unit, Tuscany, as the foundation for an integrated administration and economy and for free trade. This led to a single market in which existing internal customs duties and border dues between the former state territories were abolished. Uniform external customs duties were established at the same time. In favour of consumers, the salt tax was abolished and other monopolies and privileges curtailed. A further objective of Leopold was to revive commerce and manufacturing by way of incentives, to allow the greatest possible degree of free trade, and to open up agriculture to intensive arable farming by abolishing the old feudal system and in particular by eliminating feudal tenure, socage and serfdom. To invigorate commerce and manufacturing, premiums were awarded for technical improvements in manufactures, and in particular for the silk and wool manufactories that were famed throughout Europe. Public subsidies and loans were granted for innovative factories and manufacturing methods, and experts were attracted from abroad by the promise of tax breaks and other perks. Expansion of infrastructure and transportation was promoted by building new roads, digging navigable canals and substantially extending and improving the harbour at Livorno. Leopold’s policies and administration were characterised by the principle of relative freedom based on the Enlightenment, Bandini and the physiocrats.

NAPOLEON’S ECONOMIC POLICIES IN ITALY The Italian Republic – including Venice – came into being in 1802 under the rule of Napoleon (1769–1821). In 1805 the Kingdom of Italy was born

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out of the former upper Italian principalities. In 1806, Napoleon conquered Bourbon Naples including Sicily and granted them as a kingdom to his brother Joseph and later to Gioacchino Murat (1767–1815), the husband of his sister Carolina. Although Napoleon’s administration of Italy was an instance of foreign rule, for many Italians it meant the end of the centuries-old multiplicity of small states. To modern eyes, the Kingdom also appears as a prologue of the Risorgimento, the Italian uniﬁcation that was to follow in 1861. The Code Civil brought systematic harmonisation of the law and the end of feudal burdens. Weights and measures were standardised on the French model. The uniﬁcation of the principalities created a single economy without internal customs duties, though the continental blockade simultaneously meant isolation, in particular from Great Britain. By way of compensation, Napoleon instituted a uniform economic development plan for the technical and industrial rearmament of Italy in the image of France. Chambers of Industry and Commerce were established to accelerate the modernisation process. Napoleon devoted special attention to economic societies and academies of the natural sciences. The commercially focused agronomist Filippo Re (1763–1817) taught in Bologna from 1803 to 1814. The academically important Annali di agricultura italiani came into being under his patronage. This political and economic unity was destined to remain without eﬀect, however, since the economic resources were used above all to supply France with Italian luxury goods and to support its armaments industry. Despite its outward unity, the new Kingdom lacked inner stability and a national identity, as there was no free production of or free trade in goods. Controls, rising taxes and conscription quashed any hope of political and economic freedom. At the beginning of the 19th century, the demands of Italian economists such as Melchiorre Gioja from Piacenza thus went unheard.

THE EUROPEAN ECONOMIC CRISIS (1815–27) The liberation of Europe from Napoleonic rule in 1814 did not deliver Italy the hoped-for political and economic freedom. The former Italian principalities and their dynasties were restored at the Congress of Vienna (1815) under the prevailing inﬂuence of Fürst von Metternich (1773–1859). For Metternich, Italy was merely a ‘geographical’ concept and not a political one. At about the same time, the European economy sank into crisis in the wake of the wars and a series of worsening crop failures followed by crop surpluses that brought about a catastrophic collapse in the price of produce. The crisis exhibited all the features that would later move Kondratieﬀ

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(1812–1930) to speak of an economic crisis in Europe. The crisis was also structural. Some proposals for economic reform such as those of Melchiorre Gioja were short-term measures to overcome starvation; others called for longterm liberal economic reforms to establish ﬂourishing export trade. The Austrian agronomist Johann Burger (1773–1842) called for long-term structural reforms in agriculture speciﬁcally for the Kingdom of LombardyVenice, particularly in arable farming and in favour of the socially weak tenants or husbandmen.

THE POLITICAL AND ECONOMIC ROAD TO THE RISORGIMENTO Metternich’s restoration policies lost credibility and resolve as individual rulers, seeking concord with their people, succeeded during the 1830s in initiating domestic reforms and gradually also in overcoming Vienna’s opposition. Grand Dukes of Tuscany from the House of Habsburg, grandchildren and great-grandchildren of Emperor Leopold II, resumed the reforms in Tuscany. Liberal economic policies were followed in particular by the Tuscan minister Fossombroni, who had become acquainted with Leopold’s programme in his own lifetime and had promoted it at a theoretical level. In the Emilia-Romagna region, the commercially focused agronomist Carlo Cattaneo taught at the University of Bologna. He had become familiar with and learned to value the rationality of British agrarian economics from his own convictions. His writings were not discovered until the late 1930s, after which they were published by Luigi Einaudi (1874–1961) in Milan. The main political and economic stimulus came, however, from Piedmont and its King Charles Albert (1831–49) and his government. Here, the young Camillo Count Benso di Cavour (1810–61) found fertile intellectual soil for a long, successful career as an economist and politician. As a landowner he had studied agriculture and economics. As a practitioner of economics he ran the family farm, established industrial enterprises and had a stake in a freight shipping company. In his economic thinking he promoted the objectives of moderated liberalism. On his travels through Great Britain he met Robert Peel (1788–1850) and Richard Cobden (1804–65). As Minister of Agriculture (1850) and later Prime Minister of Piedmont (1852), Cavour gathered extensive political and practical experience in administration. His political backing in the royal court enabled him to realise, only months before his death in June 1861, the programmatic goal of Giusepppe

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Mazzini (1805–72) and Vicenzo Giobertis (1801–52): the Risorgimento. Cavour became the ﬁrst Prime Minister of Italy, under Victor Emanuel II (1820–78), King of Italy (1861–78). The uniﬁcation of Italy and his oﬃce as Prime Minister gave Cavour a foundation from which to implement his liberal economic programme on the British model of Cobden, with trade agreements containing most favoured nation clauses for uniﬁed Italy.

CONCLUSIONS ●

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The importance of Italian economic thinkers has long been underestimated in Europe. In modern eyes, some even became the intellectual precursors of British, French and German economists. Some of them were clerics inﬂuenced by the Enlightenment. Economic thinking during the Enlightenment in Italy was also an expression of the multifaceted protest against foreign rule. After the Peace of Aix-la-Chapelle in 1748 came a phase of relative quiet in Italy that allowed various individual principalities to institute economic reforms. The centre of reform activity was Tuscany under the Grand Dukes from the House of Habsburg-Lorraine. Napoleonic rule in Italy brought ﬂeeting territorial unity which, despite progressive plans for industrial reform, could not be turned to economic advantage owing to high taxes and the burdens of war. A European economic crisis and Fürst Metternich’s restorational state policies prevented the rapid economic development of a number of restored principalities. It was not until the uniﬁcation of Italy in 1861 as a result of the Risorgimento that it was possible to begin introducing the moderate liberal economic policies initiated by Count Cavour shortly before his death that year. During the ﬁrst half of the 19th century there were many political movements in Italy, but there was no economic thinker of originality.

NOTES 1. The following stand out among the many writers of the time: Davanzati (1529–1606), Scrofani (C17th), Agostino Gallo (C17th), Gulio Alberoni (1664–1752), Alessandro de Borro (1672–1760), Lione Pascoli (1674–1744), Salustio Antonio Bandini (1677–1760), Carlo Antonio Broggia (1683–1767), Antonio Zanon (1696–1770), Pompeo Neri (1706–76), Antonio Genovesi (1712–69), Giammaria Ortes (1713–90), Giovanni Francesco Pagnini (1715–89), Ferdinando Paoletti (1717–1801), Giovanni Rinaldo, Conti

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di Carli (1720–95), Giuseppe Palmieri (1721–94), Filippo Briganti (1725–1804), Ferdinando Galiani (1728–87), Pietro Verri (1728–97), Gian Battista Vasco (1733–96), Adeodato Ressi, Domenico Grimaldi (1735–1805), Cesare Beccaria (1738–94), Giambattista Gherardo Conti d’Arco (1739–91), Giambattista Corniani (1742–1813), Melchiorre Delﬁco (1744–1835), Francesco Mengotti (1749–1830), Gaetano Filangieri (1752–88), Giovanni Fabroni (1752–1822), Vicenzo Dandolo (1758–1819), Filippo Re (1763–1817), Paolo Balsamo (1764–1816), Francesco Fuoco, Luca de Samuele Cagnazzi, Luigi Valeriani Molinari, Domenico di Gennaro Cantalupo, Melchiorre Gioja, Carlo Bosellini, Marchese Carracioli, Carlo Cattaneo (1801–69) and Ricasoli. 2. Civil-law entailed trusts. 3. Co-author was Francesco Maria Gianni.

REFERENCES (IN CHRONOLOGICAL ORDER) Bernardo Davanzati-Bostichi, Lezione delle monete; Firenze 1588. Salustio Antonio Bandini, Discorso sopra la maremma siense; Siena 1737. Antonio Genovesi, Della Diceosina osia Della Filosoﬁa; Napoli. Antonio Genovesi, Lezioni di Economia Civile; Napoli. Ferdinando Galiani, Della Moneta Libri cinque; Napoli 1751. Ferdinando Galiani, Dialogues sur le Commerce des Blés; London and Paris 1770. Giammaria Ortes, Dell’economia nazionale; Venezia 1774. Ferdinando Galiani, De la Législation et du Commerce des Grains; Amsterdam 1775. Francesco Mengotti, Del commercio de romani ed il Colbertismo; Firenze 1787. Giammaria Ortes, ‘Errori Popolari intorno all’Economia Nazionale’. Considerati sulle presenti controversie tra I Laici e I Chierici; Venezia 1790. Leopoldo II, Francesco Maria Gianni, Governo della Toscana, sotto il Regno di sua Maestà il Ré Leopoldo II; Firenze 1790. Franz Mengotti, Abhandlung über den Kolbertismus, oder die Freiheit des Kommerzes (German translation by Joseph von Utzschneider); München 1791. Leopold II, Die Staatsverwaltung von Toskana unter der Regierung seiner Königlichen Majestät Leopold II. (Translated from the Italian and with notes provided by August Friedrich Wilhelm Crome), vol. 2; Gotha 1795; vol. 3; Leipzig 1795–97. Thomas Robert Malthus, An Essay on the Principle of Population as it affects the Future Improvement of Society; London 1798. Pietro Custodi, Scrittori Classici Italiani di Economia Politica (Parte Antica, Tomo I–VIII, Parte Moderna, Tomo I–XLII); Milano 1803–05. Melchiorre Gioja, Nuovo Prospetto delle sienze economiche; Milano 1815. Melchiorre Gioja, Problema: quali sono i mezzi piu spediti, piu eﬃcaci, piu economici per alleviare l’attuale miseria del popolo in Europa, 2nd edition; Milano 1817. Johann Anton Müller, Chronologische Darstellung der italienischen Klassiker über National-Oekonomie nebst einigen Abhandlungen über die Freiheit des Getreidehandels und die Ausfuhr der rohen Produkte; Pest 1820; Neudruck Frankfurt/M. 1968. Giuseppe Pecchio (Pechio), Storia dell’Economia pubblica in Italia, ossia epilogo criticodegli Economisti italiani, preceduto da un’indroduzione; Milano 1829, 2nd edition, Lugano 1832. Adolf Blanqui, Geschichte der politischen Oekonomie in Europa (translated by F.J. Buss); Karlsruhe 1841.

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Vicenzo Gioberti, Rinovamento civile degl’Italiani; Paris 1851. Joseph Massari, Cavour. Biographische Aufzeichnungen (German translation); Leipzig 1874. Carl Theodor Eheberg, ‘Agrarische Zustände in Italien’; in: Schriften des Vereins für Sozialpolitik, vol. XXIX; Berlin 1886. Wilhelm Eduard Biermann, ‘Der Abbé Galiani als Nationalökonom, Politiker und Philosoph, nach seinem Briefwechsel’; in: Volkswirtschaftliche und wirtschaftsgeschichtliche Abhandlungen (Festgruß für Wilhelm Stieda); Leipzig 1912. Ferdinand Galiani, Die Dialoge des Abbé Galiani. Aus dem Franzosischen übertragen und eingeleitet von Franz Blei. Mit einer Bibliographie Galianis; München and Leipzig 1912. Sartorius v. Waltershausen, Die sizilianische Agrarverfassung und ihre Wandlungen 1780–1912; Leipzig 1913. Herman Büchi, Finanzen und Finanzpolitik Toskanas im Zeitalter der Aufklärung (1737–1790) im Rahmen der Wirtschaftspolitik; Berlin 1915. Rudolf Leonhard, ‘Die landwirtschaftlichen Zustände in Italien’; in: Beiträge zur staats-und rechtswissenschaftlichen Fortbildung, vol. 14; 1915. Sigmund v. Frauendorfer, Agrarwirtschaftliche Forschung und Agrarpolitik in Italien Entwicklung vom 18.Jahrhundert bis zur Gegenwart; Berlin 1942. Wilhelm Weigand, Der Abbé Galiani. Ein Freund der Europäer; Bonn 1948. Franco Venturi, Settecento riformatore (several volumes); Milano 1969–90. Walter Braeuer, Galiani, mein Freund; Marburg 1989. Christina Nardi Spiller, ‘La Théorie Economique et la Stratégie Politique de Genovesi, Galiani, Bandini, Baccaria, Verri et Ortes’; in: Rivista Internazionale di Scienze Economiche e Commerciali, Anno XXXVIII, No. 4, Aprile 1991, pp 369–83; Padova 1991. Ferdinand Galiani, Über das Geld (German translation of Della Moneta by Werner Tabarelli); Düsseldorf 1999. Riccardo Faucci, L’economia politica in Italia; Torino 2000. Cosimo Perrotta, Produzione e lavoro produttivo nel mercantilismo e nell’illuminismo; Lecce 1988. Daniela Parisi, Advocation of freedom and justiﬁcation of governmental interference in Western economic thought – The case of two liberal economists: Francesco Ferrara and Henry Ch. Carey; Milan 2001 (manuscript for the conference of the European Society of the History of Economic Thought; Darmstadt 2001). Cosimo Perrotta, Bullionists and mercantilists in 16th century Italy (manuscript for the conference of the European Society of the History of Economic Thought; Darmstadt 2001).

13.

Advocacy of freedom and justiﬁcation of governmental interference in Western economic thought – the case of two liberal economists: Francesco Ferrara and Henry C. Carey Daniela Parisi

INTRODUCTION Eighteenth-century scientists considered economics to be part of a more general discipline concerning man and society. However, they did not always succeed in making their reasoning on economics completely autonomous. In order to give a deﬁnition of individual good and common good they necessarily made reference to a comprehensive vision of the world and, in particular, to a vision of the phenomenon around which their scientiﬁc analysis could be developed (Crombie, 1976, 1996). The idea of liberty was an integral part of this vision, and this idea often ended up being assigned the role of means to achieve one’s personal gain and at the same time improve society. In other words, freedom for activities which one was convinced could be rewarding for oneself and advantageous for the community. That is to say that, in general, the most important economists ‘in supporting the concept of a limited state . . . were not doctrinaire advocates of laissez-faire’. And they saw the economic role of government as arising primarily from the facts that in some areas the laws of the market could not operate and that in other areas individuals could deliberately obstruct the workings of the market for personal gain. In eﬀect, classical liberals proposed not laissez faire, but a functional division of labor between an important but limited public sector . . . and a private sector, functioning within this framework . . . (Elliott and Cownie, 1975, pp. 5–6).

Since economics deals not only with the economic phenomenon but also with the agent, economists could not avoid confronting themselves with the 238

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diﬃcult issues of ordered liberty and order in liberty. We know that in the nineteenth century the idea of liberty permeated the arguments of laissezfaire theorists and these arguments entered the political debates and the decisions on economic policy. Historians have investigated many ﬁelds related to this general topic; they tried to ﬁnd out the linkage between every case of advocacy of freedom and the arguments set out by the groups who supported or patronized it: a close linkage between the defence of a speciﬁc kind of freedom and the justiﬁcation of the proper kind of intervention, a ﬁt form of governmental intervention or interference. In any case, in the history of the Western world, liberty and control have always been advocated together in an unremitting eﬀort for a compromise between freedom and domestic market, freedom and international trade, freedom and occupational choice, freedom and investment. A compromise between progress prosecuted by means of individual activities and the principle of economic control. This argument was debated by classical economists who enlarged the idea of natural law, and used this principle to attack bondage put upon individuals and their activities. One might as well also state that the core of nineteenth century classical economic thought was not laissez-faire as such, but the best way to divide activities between an appropriate suitably restricted public role and the private initiative, something like ﬁnding a strategic role for government. We shall see that this task, and the way to pursue it, is from time to time strictly related to the implementation of diﬀerent political systems. In other words, we agree with a statement such as this: ‘At the heart of the genius of the classical economists . . . was a theory of economic policy, one vital to the understanding and analysis of contemporary Western society’ (Samuels, 1966, p. 1). When, in the nineteenth century, some economists began to recognize the real threat that big business represented for freedom, and started advocating an adequate role for the government in encouraging new industries and contrasting the idea of an automatic self-regulating economy, they labelled themselves as liberals precisely in the sense of advocates of liberty. We agree that, whatever the ideas, practice was hardly ever laissez-faire and that every idea grew out of its surroundings. Therefore it would be dangerous for the historian to label anything with the word liberty without adding a detailed note. Considering this fact, I do not want to ask if, or to what extent, political economy entered the political debates, and if political interests were defended by economists connected or even bound by local connections and interests. I would like to point out how frequently in the history of economic thought we come across expressions of advocacy of liberty on the part of economists, each of whom either attaches very diﬀerent meanings to the same word, or mixes it with very widely diverging ﬁelds of activity and rights.

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HENRY CHARLES CAREY AND FRANCESCO FERRARA: A COMMON FAITH IN FREEDOM My chapter shall be focused especially on the Italian Francesco Ferrara and the North American Henry Charles Carey. Their correspondence, in the name of their common faith in freedom, remained at a superﬁcial level and did not bring them to detail this faith and the economic concepts related to it. The ﬁrst direct contact between an Italian and a North American economist occurred at the precise moment when it would have been essential to recognize that the principle of liberty needed a rational translation according to the historical situation and the development of the political system; this translation depended on the choices that the political system decided to make upon the promotion of freedom among diﬀerent groups in society and about the development of one species of liberty rather than another (Henrich, 1943). I already had the opportunity of concentrating on the contacts between these two economists on a number of occasions. Undoubtedly, both the sources and historiography show that the strong call for liberty that they made raises questions and political proposals that are deeply rooted in their environments.1 Despite the radical diﬀerence between the two historical contexts, one cannot help considering that there are aspects that make the two traditions alike as far as the history of ideas is concerned. Between the eighteenth and nineteenth centuries these were developed on the grounds of scientiﬁc sensitivity, which was the result of their speciﬁc tradition, as well as of the issues arising from local reality, and from the knowledge acquired through the circulation of works by foreign authors. In particular, the circulation of the works by the classical economists was of great importance for the economic culture building up at the time in North America as well as in Italy, though this can be said only of some speciﬁc aspects of the classical debate, rather than of the theoretical core of classicism. In substance, the classic works were welcomed but read from an incomplete perspective, through ﬁlters, and not in their entirety. In eighteenth-century Italy, for example, alongside the sharing of the spirit of the Enlightenment and so-called anglomania, culminating in the indubitable charm coming from the work of Adam Smith,2 particularly impressive were the widespread works of the subjectivists (French and English), as well as a deep interest in the historicist perspective; moreover, the re-proposal of some aspects of Smith’s doctrine through French vehicles continued in the early nineteenth century, when Say’s work, where one seemed to ﬁnd satisfactory answers to traditional questions, had a great impact. On the other hand it is from Say, Saint Simon, Chaptal and Dunoyer, that the idea of industry, and of the use of intelligence for the

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purpose of progress, were assimilated. Again, during the ﬁrst decades of the nineteenth century, once Smith’s analysis of industry was put aside, people started to read carefully the works of Lauderdale, of Malthus as the theoretician of population, and of Babbage, and the ‘overproduction of commodities’ which would hinder the equilibrium of the system and put public happiness at risk was already being traced as a fearful outcome. Within this picture we could say that, except for a few debates, Ricardo’s theory had little success, since it appeared too reﬁned from the analytical point of view, and too distant from the perspective of the analysis of the value of goods. As for the situation in North America during the second half of the eighteenth century, the main inﬂuence undoubtedly came from French naturalism, due to the relationship that Franklin and Jeﬀerson entertained with Buﬀon, Dupont De Nemours, Turgot, Du Bourg and de Tracy. The works of Petty, Stewart, Smith, Whately and Malthus and, later, Ricardo and James Mill, were also widely circulated, of course. But these works, quite surprisingly, had little impact. Apart from the wide echo of Lauderdale’s Inquiry and the publication in Philadelphia of Babbage’s On the Economy of Machinery and Manufactures, the most important events were without doubt the 1821 translation and the further 14 editions of Say’s Treatise, used as a textbook in many universities and described as the foremost American textbook until 1880. In both cases it is clear that David Ricardo and the topics of the classic theoretical debates par excellence between 1815 and 1825 were left in the background. Historical events without doubt caused the United States and the Italian territories to be quite far from being directly connected to British economic science; on the other hand, they brought rather close connections with the French and German tradition. As far as the United States is concerned, a long tradition of academic contacts with German Universities was started in that period, causing some interesting results to appear around the end of that century. In both cases the practical trend taken by the work of economists also played a part in making them concentrate less on the reading of complex theoretical systems on the one hand, and in making them more willing to ﬁnd hints in foreign works, hints which proved to be more apt to be passed on through France. Thus, reﬂections on the search of an equilibrium among the parts of the system were well received, together with those deﬁning wealth in terms of the supply of useful goods insofar as they are able to satisfy demand, and those making a distinction between personal and social wealth and questioning the advantages that society can gain from machine application. In fact, in his Principles, Carey aﬃrms that everywhere in the social world, as in the physical world, it is demand that causes supply, and Ferrara builds

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up his own entire system on the belief that the economic act arises from the agent; the latter discovers the utility for the satisfaction of his own needs and wants in speciﬁc goods and he decides to obtain those goods by means of exchanges where the expected utility may compensate for costs. The connection with Say is evident in both authors, since the economic system is conceived as a tissue of exchanges between products and services; however, while according to Say it is the production that governs the working of the system, as far as Carey and Ferrara are concerned it is the consumers’ demand that determines the objectives and the scale of production. It is the demand for goods made by those who oﬀer work and raw materials that governs the growth of factory activities. This harmonious relationship between production and consumption works out in such a way that a crisis due to overproduction or underconsumption may not occur in the system. And this is the general vision which some historians refer to, while dealing with Carey, although many of them are not stingy with their own criticisms towards him and his prolixity.

TWO DIFFERENT VIEWS OF THE MEDIATION BETWEEN INDIVIDUAL INTERESTS AND SOCIAL NEEDS On the other hand, it must be acknowledged that the similarities that can be found between the approaches of North American and Italian thought may well be considered to be features that the two traditions show due to the fact that they developed on the margins of the British classical current, and sometimes even in contraposition to it. Having said this, one cannot but point out that the two traditions diﬀer greatly in a fundamental aspect. They are usually included in the panorama of the liberal expressions of thought. Indeed, they both propose a vision of the economic system where each individual makes a decision on how to pursue his own interest and where the eﬀects on the individuals deriving from each action taking place within society is of great importance. On the basis of the historical analyses on eighteenth and nineteenth century economic thought,3 it seems to me that Italian economists face the topic of the protection of each single individual along the line of public, rather than personal, hedonism: well-being, the good-living, is at the same time public happiness. This concept is wide-ranging and is often not clearly expressed, but it becomes clear whenever each author tries to ﬁnd a mediation between the needs of the individual and the necessities resulting from social living; economic liberty is conceived as the ability to freely express natural rights. In short, the assumption is that individuals agree to frame

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their decisions and behaviours within a moral law that provides for solidary living-together, and not competitive individualism. Francesco Ferrara fully expresses this need and in this sense he is against the aﬃrmation of group interests and in particular their setting themselves up as monopolies or privileged interests. It is in this sense that the laws are required to protect public interest (Faucci, 2000, p. 188). Carey’s liberalism, on the other hand, is part of an understanding of the system where individuals express their natural instincts through competition. In this perspective, economics is a tool in the hands of the individual, who acts freely, by virtue of his capabilities and of the warranties granted to him by the institutional system; in this case institutions do not appear to be a historical datum springing from social living, but a pre-established order guaranteeing individual expression (even if) within social living. In the latter case, then, economics is the discipline of the economic agent, of that business community which Carey represents and which in 1881 generated the ﬁrst business school in the United States, the Wharton School of Finance and Economy. Therefore, the pragmatic path that economic science has taken ever since the eighteenth century, becomes, within the North American environment, the voice and expression of the business world; in the name of business promotion economic policy turns into social engineering, a useful discipline to increase sympathy between capital and labour, and to reduce conﬂicts within a system shaken by war and rapid industrialization.4 This means that the advocates of liberty were also supporters of ‘the free competition of all enterprises’, of what is now called the ‘crude’ harmony doctrine (Streeten [1954] 1975, p. 162). This is quite diﬀerent from a model of reﬂection on the economic phenomenon where pragmatism is a form of theorization based on historical research and statistical analysis, while at the same time taking institutional factors into account; where theorization is deemed to be useful, not only in order to draw the functioning laws of the system, but also to ﬁnd tools to improve it as a whole. This kind of improvement can be made by applying the principle of utility, closely connected with that of justice, that is to say by balancing the utility of individuals and the real exercise of their right to freedom, within a complex framework that tries to take into consideration both the dimension of the individual and the social dimension of living together, in view of gradual progress. Today, so as to better understand Francesco Ferrara’s position with reference to North American authors, it is useful to outline the diﬀerences between these two conceptual frameworks. It is in fact true that he is deeply appreciative of some of the cultural features and institutional aspects of the North American system: a secularized State, religious freedom, party alternation in government, the ﬁscal system (Faucci, 2000, p. 188); from the point

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of view of economic literature, he is above all interested in the personage of Mr. Carey from Philadelphia and the Canadian John Rae. This interest of his evolves and gets progressively clear in the course of the years. The enthusiastic welcome of the Principles of Political Economy (1851), is followed by the expression of his ﬁrst doubts on the theoretical fundamentals of socalled American protectionism and, in the same decades, by the interest in Rae’s Statement of some New Principles on the Subject of Political Economy. In the subsequent twenty-year period, Ferrara, on the one hand, continues to express favourable opinions on the theoretical contributions of the two authors and, on the other, withdraws, with ever-increasing determination, from the so-called Americanism, until its ﬁnal condemnation in 1879. By Economic Americanism Ferrara means the tariﬀ system characterizing the economic policy of the United States and that was fostered and supported above all by Carey’s works and by the group of intellectuals and politicians sharing his ideas, also known as the School of Pennsylvania. His criticism never involves the contribution to the economic theory made by Carey in the ﬁrst period of his career, the one unanimously considered as basic and essential; he never repudiates the value ascribed in the 1850s to some speciﬁc theoretical contributions of his American colleagues and, in particular, to the ones on the theory of value and rent contrasting with the Ricardian doctrine. Mr. Carey is always at the head of the American school, with his good principles, on value, rent and credit. Therefore it is necessary to keep these two features of Ferrara’s criticism quite distinct: one of them concerning the economic theory and the other relative to the implications of economic policy. According to Ferrara the two features can be separated, but both of them are constitutive elements of the judgement on the scholar’s work: in fact the economist conducts theoretical researches to get acquainted with the natural economic phenomenon, but his task is not limited to that cognition, since his activity as a man of the government and as a businessman must descend and conform to the principles expressed on his scientiﬁc chair. From that second point of view, Carey, according to Ferrara’s opinion, has certainly been unsuccessful in trying to achieve his task; probably this judgement on Carey’s general personage would have assumed even more critical tones should the Italian economist have had the opportunity of reading Carey’s letters written in reply to the London Times in 1876.

CONCLUDING REMARKS My opinion is that Ferrara, on the one hand, found some theoretical ideas in the work of the American economist that he considered to be qualiﬁed

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both for the reﬁnement of his own criticism towards David Ricardo and for the ripening of his own conception of the economic phenomenon, which is conceived by him as a set of human acts that are responsibly undertaken by agents and that are aimed at coping with expressed wants or to attain set goals. On the other hand, Ferrara acknowledged in the works of American protectionists his usual enemy, the overseas correspondent of the German Kathersozialisten and the Italian Socialisti della Cattedra, with whom, in the 1860s and 1870s, he engaged a scientiﬁc struggle, no holds barred. I may conclude admitting that this new approach to North American economic literature (the one by Ferrara, I mean) is an absolute novelty. Ferrara evaluates Carey from a theoretical point of view and this is a novelty of great signiﬁcance, from a historical point of view: since the eighteenth century, the characteristics of the North American experience had been considered with interest mainly due to the novelty of its political model; and contribution to foster this myth came both from the works of Italian authors such as Ludovico Antonio Muratori, Antonio Genovesi, Francesco Algarotti, Ferdinando Galiani, Gianmaria Ortes, Pietro Verri, Gianrinaldo Carli, Gaetano Filangieri, Paolo Frisi and from some periodicals such as Il Politecnico, Annali Universali di Statistica, Antologia by Viesseux, as well as from correspondence from diplomats, travellers and academicians. In the second half of the nineteenth century this interest follows some diﬀerent tracks that are still mostly open to investigation.

NOTES 1. The results stated here are based on the body of knowledge achieved and gathered on the occasion of previous researches. Therefore, the references listed below are just an indication of the wide historiography that represents the setting of the subject and that supports this chapter. 2. Smith circulated in a way that is deﬁned as partial, moderate, lacking, and, what is more, through French mediation (Gioli, 2000). 3. See author’s publications on the subject and the enclosed bibliographies (Parisi, 1989, 1990, 1996, 2001). 4. The debate on the development of social sciences in France and England contained in Past and Present (February 1987 and November 1988) is a very interesting contribution to this subject.

REFERENCES Barber, William J. (ed.) (1988), Breaking the Academic Mould. Economists and American Higher Learning in the Nineteenth Century, Wesleyan University. Crombie, Alistair Cameron (1976), ‘Alcuni atteggiamenti nei confronti del progresso scientiﬁco: Antichità, Medioevo, inizi dell’Era Moderna’, in Agazzi,

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Evandro (ed.), Il concetto di progresso nella scienza, Milano: Feltrinelli, pp. 15–36. Crombie, Alistair Cameron (1996), Science, Art and Nature in Medieval and Modern Thought, London and Rio Grande, Ohio: Hambledon Press (Ch. 1: ‘Designed in the Mind: Western Vision of Science, Nature and Humankind’, pp. 1–12). Duchini, Francesca (1970), ‘Presentazione’, in Salin, Edgar [Tubingen, 1967], L’economia politica. Storia delle idee da Platone ai giorni nostri, Milano: Vita e Pensiero, pp. 1–5. Elliott, John E. and John Cownie (1975), Competing Philosophies in American Political Economics, Paciﬁc Palisades, CA: Goodyear Publishing Co. Elwitt, Sanford and Lawrence Goldman (1988), ‘Social reform and Sociology’, in Past and Present, November, pp. 209–19. Faucci, Riccardo (2000), L’economia politica in Italia, Torino: Utet Libreria. Gioli, Gabriella (2000), ‘The Knowledge of Adam Smith’s Wealth of Nations in Italy in the Eighteenth Century’, in Cheng-chung Lai (ed.), Adam Smith across Nations. Translation and Receptions of the Wealth of Nations, Oxford: Oxford University Press, pp. 150–62. Goldman, Lawrence (1987), ‘A Peculiarity of the English? The Social Science Association and the Absence of Sociology in Nineteenth-Century Britain’, in Past and Present, February, pp. 133–71. Henrich, F.K. (1943), ‘The Development of American Laissez-Faire. A General View of the Age of Washington’, in The Tasks of Economic History, Dec., Suppl. Issue of the Journal of Economic History, pp. 51–4. Morrison, Rodney J. (1986), ‘Henry C. Carey and American Economic Development’, in Transactions of the American Philosophical Society, LXXVI, 3. Parisi, Daniela (1989), ‘L’American System of Political Economy e la storiograﬁa economica dell’Otto-Novecento’, in Rivista Internazionale di Scienze Sociali, 3–4, pp. 487–97. Parisi, Daniela (1990), ‘Nascita e sviluppo dell’American System of Political Economy. Il pensiero economico nordamericano tra Settecento e Ottocento’, in Rivista Internazionale di Scienze Sociali, 4, pp. 547–81. Parisi, Daniela (1996), ‘Internazionalità della scienza economica lombarda’, in Quadrio Curzio, Alberto (ed.), Alle origini del pensiero economico in Italia. 2. Economia e Istituzioni – Il paradigma lombardo tra i secoli XVIII e XIX, Bologna: Il Mulino, pp. 147–63. Parisi, Daniela (2001), ‘The Spread of Italian Economic Thought in the USA’, in Asso, Pier Francesco (ed.), From Economists to Economists. The International Spread of Italian Economic Thought, 1750–1950, Florence: Edizioni Polistampa, pp. 299–326. Samuels, Warren J. (1966), The Classical Theory of Economic Policy, Cleveland: The World Publ. Co. Streeten, Paul (1954), Keynes and the Classical Tradition, reprinted in Elliott, John E. and John Cownie (1975), pp. 162–88.

14.

The end of an era: the Austrian Zeitschrift für Nationalökonomie in the interwar period Kurt W. Rothschild

Some hundred and thirty years ago economic theory was revolutionized by a new approach which had been hinted at by several economists before (e.g. Thünen, Gossen, Cournot) but which only around 1870 was presented in a compact and consistent version simultaneously and independently by three important pioneers of economic theory. I am of course talking of the socalled marginal revolution and of Jevons, Menger and Walras. Though fundamentally closely related each of these approaches represents a special version of the basic ideas. But while these basic ideas soon became an important and lasting element in economic theorizing all over the world, the special versions had their own history and their own fortunes. In the decades which followed the ‘discovery’ of the new approach it was at ﬁrst the English and the Austrian versions which caught on and were soon adopted by a large section of the scientiﬁc community. Walras’ mathematical exposition was not adapted to an economic theoretical establishment which had either no mathematical training at all or – even when some mathematical knowledge existed – was largely used to adopt a verbal presentation. Thus Walras could to begin with only take second place with regard to recognition and utilization. Only when later the conditions for an understanding of his formal language had improved, not least under the inﬂuence of John Hicks’ stimulating work Value and Capital (published in 1939), did Walras’ approach experience a revival and a broad appreciation which it has maintained ever since. In contrast to Walras’ fate Jevons’ and Menger’s ideas were immediately taken up by a large and growing number of economists which could provide a suﬃcient critical mass to set in motion continuous discussion and development. A particularly favourable inﬂuence was also provided by the fact that in both cases the new ideas were picked up almost immediately by extremely gifted colleagues and pupils who deepened and diﬀused the new ideas. Marshall in England, Böhm-Bawerk and Wieser in Austria certainly 247

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had their share in the success story. Thus it has been maintained that at the beginning of last century and right up to World War I and several years beyond Vienna and Cambridge (England) were, together with Stockholm, the three best places to study economics (Craver, 1986, p. 2). From the 1920s onwards, however, the two successful entrants parted company. While in England the new ideas acted as a stimulant for a growing scientiﬁc community leading to a lively development which created the basis for fruitful confrontations with classical theories and laid the foundations for further ‘revolutions’ (the imperfect competition and the Keynesian theories), the Austrian tradition as a living institution gradually came to a standstill and was practically non-existent after World War II. Its later revival in a modiﬁed neo-Austrian approach had lost its Austrian base: it had and it has its roots mainly in the United States (Dolan, 1974; Vaughn, 1994). There are probably several reasons for this bifurcation. Let me ﬁrst stress one factor which could have been but was not responsible for the diﬀerence: a lack of a gifted second generation to carry on the work of the ‘fathers’. While there is no doubt that in England an exceptional accumulation of talent populated the interwar period – names like Kahn, Keynes, Robbins, the Robinsons, Hicks, Harrod come to mind – the density of talent in little Austria was almost as impressive. In addition to the somewhat older and special case of Schumpeter the so-called ‘younger Austrian School’ contained economists who – as was proved by their later careers – could be counted as valuable assets to any university in any country. The names which come immediately to mind are, of course, Hayek, Haberler, Mises, Morgenstern, Tintner, Steindl, Wald. With so much talent around it is no wonder that Tintner could say in an interview: ‘There was a terriﬁc intellectual ferment in Austria when I was a student. It was incredible’ (Craver, 1986, p. 1). So it was not the lack of talent that was responsible for the gradual loss of proﬁle of the Austrian tradition, but rather political and economic circumstances which hampered the access to and the development of these human resources in universities and research institutions. The stiﬂing economic constraints in postwar Austria meant that only very few opportunities existed in the law faculties (which housed the economic institutes) of the three Austrian universities (an additional Economics University in Vienna was mainly concerned with applied and business economics – ‘Betriebswirtschaftslehre’) and these were largely reserved for candidates who could meet the conservative and antisemitic prejudices which dominated the government and even more the universities. None of the famous Austrians I just named obtained a full professorship at an Austrian university, and even the admission to a ‘Habilitation’ and an unpaid lectureship

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(‘Privatdozentur’) was granted only reluctantly to some of them who had to earn their living elsewhere. These adverse political and economic circumstances were aggravated by the fact that Austria (like some other countries) had no social science faculties before 1966; economics was part of the studies of law and political science and had therefore a restricted diﬀusion. A further factor which distinguishes the Austrian development from the English one seems to me to have to do with the great impact which Marshall had on coming generations both as a teacher and particularly through his unique textbook which provided a unifying and research-intensive basis for English economists. Nothing comparable existed for an Austrian-inspired approach. Menger never ﬁnished his planned text and the one that took its place, two volumes by the Austrian economist Eugen von Philippovich – a solid piece of work which helped to spread the new marginal theory in Austria and also in Germany, where the historical school had been preponderant – could not match the intellectual challenge which Marshall’s work provided (Rothschild, 1998). No wonder that Marshall’s last edition is still in print while Philippovich’s ‘magnum opus’ had its last edition in 1911 and has not been reprinted since then. The roots of the decline of the Austrian tradition began to show fairly soon after World War I. Important reasons were the deaths of the founding fathers (Böhm-Bawerk, 1914; Menger, 1921; Wieser, 1926), followed later by the gradual emigration of the most talented economists in the early thirties (Schumpeter, Hayek, Haberler, Machlup). But there was a last sign of lost glory – a sort of ﬁn de siècle of economics in the general Viennese ﬁn de siècle atmosphere – which found its materialization in the remarkable role which the Austrian Zeitschrift für Nationalökonomie could play in those years not only in Austria but as a highly estimated journal on a world scale.1 Judged by its articles, its contributors, and its inﬂuence it was – in today’s language – one of the world’s core journals.2 The fact that the interwar issues of the ‘Zeitschrift’ could obtain an important place in the international ﬁeld is – seen from today’s perspective – the more surprising since almost all articles were published in German. Contributions in foreign languages (mainly English, French and Italian) were normally tanslated into German. This, by the way, illustrates the fundamental change in the second half of last century when English (or, better, American?) established itself fully as the lingua franca of international discourse among economists. Knowledge of other languages is no longer regarded as a useful, let alone a necessary requirement. In what now follows I shall try to give a short overview of the pre-1939 history of the Zeitschrift für Nationalökonomie and its theoretical standing. It is a frequent phenomenon in social and cultural aﬀairs that a certain development reaches a particularly impressive state when a process of decay

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has already begun to set in. The Zeitschrift für Nationalökonomie is a good example of such a scenario. It was founded – as a successor to the previously leading Austrian economics journal (Zeitschrift für Volkswirtschaft und Sozialpolitik) whose publication had been stopped earlier because of internal quarrels – in 1930, in a year, that is, when the heyday at the university was a thing of the past and the economy had begun its catastrophic downward path towards the abolition of democracy in 1934. That the Zeitschrift für Nationalökonomie could nevertheless ‘blossom’ in this unfavourable environment was a consequence of the determined eﬀort of the editors to create a quality journal with a strong theoretical orientation, which echoed the still smouldering controversy of the Austrian Menger-inspired theoryorientation versus a German Schmoller-inspired history-orientation. The main editor was Hans Mayer, a former assistant of Wieser and – in 1930, as professor at the University of Vienna – the main representative of the old Austrian School. Mayer was a theoretically-minded economist who had produced a few interesting papers on Austrian themes (methods, needs, ‘Zurechnung’, productivity) but – being rather lazy – he had never produced a book or even a great number of articles. But he was willing to encourage the creation of a predominantly theoretical and internationally open and open-minded journal in order to continue Austria’s presence among the leading countries in the world of economic science. In this he was helped enormously by two talented young managing editors (‘Schriftführer’), the later famous Paul Rosenstein-Rodan and Oskar Morgenstern. In addition to Mayer there were on the editorial board also the president of the National Bank, Richard Reisch, and a high-ranking civil servant, Richard Schüller (who later taught at the New School of Social Research and died at the age of 102 in 1972), both with professorial titles and lecturing at the university. This group of ﬁve editors managed right from the beginning to mobilize – as we shall see – a remarkable regiment of ﬁrst-class contributors. After Rosenstein-Rodan’s departure for a professorship at University College, London, in 1934 Morgenstern remained – under the unchanged editorial board – the sole managing editor for volumes V to VIII (1935–37), the last volumes to appear before the occupation of Austria by Germany. Let me now try to give a bird’s-eye view of the Zeitschrift für Nationalökonomie in this interwar period, i.e. the volumes I to VIII (1930–37). I start with a ‘statistical’ description of the anatomy of the journal. Each of the eight volumes consisted of four to ﬁve issues containing a total of 700 to 800 pages. This was a respectable size at the time and is so even today though it is modest compared to today’s American Economic Review or Economic Journal whose annual volumes come to more than double that size. On average each volume contained 26 articles, some of

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which were of considerable length and running over two issues. A shorter ‘Miscellaneous’ section was discontinued in 1934. A speciﬁc feature was the very extensive review section with informative reviews written by prominent economists and with ‘combined reviews’ (Sammelbesprechungen) covering several publications on a certain subject and thus acquiring a bit of a survey character. The mixed Austrian-international character of the Zeitschrift für Nationalökonomie is mirrored both in the contents and in the authorship. Taking all eight volumes together a third of the articles came from Austrian authors (including those who left Austria in those years) and two-thirds from non-Austrians, mainly German, British and Italian economists. The comparatively high proportion of Italians is explained by the fact that ‘Finanzwissenschaft’, i.e. public ﬁnance, was a special subject in Austrian universities, and Italian economics was rather prominent in this ﬁeld before the war. About one ﬁfth of the papers dealt with Austrian themes while the rest had no close relationship to the Austrian approach or dealt with empirical and policy questions. That only a ﬁfth of the authors were Austrians can be seen as an expression of the successful endeavour of the editors to make the Zeitschrift für Nationalökonomie a truly international journal. But the comparatively small proportion of Austrian contributors should not distract from the fact that it meant in absolute numbers 32 diﬀerent Austrian contributors. Considering the smallness of the new Austrian republic (seven million inhabitants; an analogous proportion in a country like Britain today would mean a group of more than 250 contributors) and the fact that there were no special economics faculties and economics curricula at the universities this is quite an impressive number. It illustrates the stimulus which the Menger–Böhm-Bawerk–Wieser era had left, which found its continuation in university seminars run by Mayer, Haberler and Morgenstern and particularly in the famous private seminar run by Mises outside the University (until 1935), which was not only attended by academic economists but also by former students who, though working in various other professions, had kept an active interest in economic theory (Browne, 1981; Haberler, 1981). This was a source of several studies which later found a home in the Zeitschrift für Nationalökonomie. When we look at the individuals who contributed to the Zeitschrift für Nationalökonomie we obtain a list which looks like a ‘Who’s Who’ of leading economists. Not less than twelve of the 32 Austrian contributors and 34 of the non-Austrian authors – i.e. 66 authors in all – can be found in Schumpeter’s monumental History of Economic Analysis. Eight of them received the Nobel Prize in economics after it was inaugurated in 1969. It would take too much time to enumerate them all, let alone include some of the others who could

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also deserve mentioning, but let me name some of the particularly well-known authors. On the Austrian list we ﬁnd all the ‘stars’ of the younger Austrian School: Haberler, Hayek, Machlup, Mises, Morgenstern, Rosenstein-Rodan, the less known, but important Karl Schlesinger, further the mathematicianphilosopher Karl Menger with a K, son of the Carl Menger with a C, and the outstanding statistician and mathematician Abraham Wald. They all – with the exception of Schlesinger, who committed suicide after the invasion of the Nazis – landed ultimately abroad. None of them returned to Austria after the war. The list of important foreign contributors is far too long to present even just the outstanding names. Here is a shortened list (in alphabetic order): Aftalion, Akerman, Allen, Einaudi, Ellis, Fellner, Frisch, Hicks, Knight, Lange, Lederer, Leontief, Marget, Myrdal, Ohlin, Ricci, Joan Robinson, Schneider, Schultz, Stackelberg, Tinbergen, Zeuthen. The broad range of these foreign economists which is increased when the remaining – here not specially mentioned – authors are included indicates the variety of traditions and subjects which found a prominent place in this Austrian journal. To some examples we shall turn immediately. Here it should only be noted that in the list just mentioned there is an obvious gap; not only can one ﬁnd Keynes missing, which by itself might not mean very much, but there is also no contribution from two other pioneers of a macroeconomic approach, Kalecki and the less known German economist Föhl (who in 1937 published an original, though not easily digestible monograph – Geldschöpfung und Wirtschaftskreislauf – whose main ideas had a close aﬃnity to Keynes’s new concepts). Not only that, apart from Joan Robinson (who contributed a paper on ‘The long-period theory of employment’ in 1936) there are no authors who sympathized with the Keynesian revolution or transmitted the excitement which the new developments kindled in the Anglo-Saxon and Scandinavian countries in those years of ‘high theory’ (Shackle). Only Josef Steindl, at the time a young researcher in the Austrian Institute of Economic Research, remarked in 1937 – in a short note on the German translation of the General Theory – ‘that it would be desirable that Keynes’s hope that his book will provide a new stimulus for theoretical considerations will be fulﬁlled’. Before him – in the 1936 volume – two of the already well-established Austrian economists, Haberler and Schüller, wrote an article each dealing with certain aspects of the newly published General Theory without, however, providing a full-length review of the book as a whole. Both authors recognize the originality of the work and the importance of Keynes as an economist. But the underlying tone is one of criticism and irritation. Haberler, in his article ‘Mr. Keynes’s theory of the “multiplier”’ makes a rather impatient complaint that the multiplier is a merely formal addition to deal with the important question of secondary

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eﬀects of investment without laying bare the complex psychological elements which lie behind it. ‘His central theoretical idea about the relationship between the propensity to consume and the multiplier’, he concludes, ‘. . . turns out to be not an empirical statement which tells us something about the real world, but a barren algebraic relation which no appeal to facts can either conﬁrm or disprove’. Schüller’s article on ‘Keynes’s theory of demand and employment’ is much friendlier and recognizes the importance of many ideas but is mainly concerned with a critical regret about the alleged extreme one-sidedness of Keynes’s analysis and recommendations. A critical to negative reception of the General Theory was, of course, not just a Zeitschrift für Nationalökonomie phenomenon; other economists and other journals also found faults with the new theory or were baﬄed by it. But the negative attitude and even more the obvious neglect of the new perspectives in the Zeitschrift für Nationalökonomie had probably some connection with its Austrian bias. More than other theories the Austrian School was married to a methodological individualism and its microeconomic basis which made it diﬃcult to appreciate the possibilities and the yields of a direct macroeconomic analysis. After this general characterization of the Zeitschrift für Nationalökonomie I now want to give some idea of the breadth and quality of its contents. This can, of course, only be a rough and subjective aﬀair like a visit to a large picture gallery where one stops only at a few exhibits which catch one’s attention. Nevertheless I hope that the few indications – taking two to three examples from each of the eight prewar volumes – will show that those issues of the Zeitschrift für Nationalökonomie have a place in the history of economic thought and that some of the papers can even be read with proﬁt from a contemporary point of view provided one can battle with the German language. Starting with the ﬁrst Zeitschrift für Nationalökonomie volume of 1930 one might ﬁrst mention as an interesting item dealing with the preKeynesian discussions around the post-1929 depression: a very extensive article (running to 43 pages) by Hayek with the title ‘Does there exist a paradox of saving?’. Though mainly directed against a – at the time – rather popular American underconsumption theory by Foster and Catching, it is a spirited attack against all propositions to mitigate the economic crisis by stimulating consumption at the cost of saving or by credits. With echos of Böhm-Bawerk a theoretical argument is developed (which later was a bone of contention between Hayek and Kaldor) that leads to the conclusion that a stimulation of consumption would create shortages in the time-consuming investment stages and will end in inﬂation and an ever deeper crisis. ‘It is questionable’, Hayek concludes, ‘whether it is sensible to try to mitigate unemployment through public works, productive unemployment assistance etc. once a depression has set in. . . . The appearance of unemployment and

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the reduction in consumption connected with it may be the only way to free at least to some extent the means for ﬁnishing the construction of a greater production apparatus’. In a paper entitled ‘The time-moment in the mathematical theory of economic equilibrium’, Rosenstein-Rodan criticizes the neglect of the time factor in the Lausanne tradition. By starting oﬀ with equilibrium and investigating the interdependence of all relevant (supply and demand) factors the process of coming to an equilibrium is neglected. If this process is acknowledged time and diﬀerences in time perspectives and time requirements come into play. Rosenstein-Rodan then tries to deal with this problem with the aid of diﬀerent time coeﬃcients and thereby touches on several modern problems of a dynamic theory including problems of pathdependence (‘irreversible dependencies’ in his terminology) and the possibility of permanent moving disequilibria. Rosenstein-Rodan stresses that the Austrian theory always allowed more room for time considerations by starting with individual motivations and actions and their ongoing interaction instead of taking a determinate end-equilibrium for granted. This early special interest in time among the Austrians is reﬂected also in later issues of the Zeitschrift für Nationalökonomie, particularly in an extensive study by Morgenstern in ‘The time factor in the theory of value’ (Zeitschrift für Nationalökonomie, 1934) and in shorter papers on ‘Time and production’ and ‘The time factor in the theory of productive interest’ by Strigl (1935) and Mahr (1936) respectively. Methodological problems – since the Menger–Schmoller controversy a recurring Austrian theme – ﬁnd a prominent place in three lengthy treatments in the 1931 volume. The Swedish economist Johan Akerman writing about ‘Dynamic problems of value’ deals extensively with the various attempts and failures to introduce time and dynamic elements into economic theory in general and into business cycle theory in particular. His paper gives a good insight into the state of the art in those days both in Europe and in the USA and into the problems to be solved. The role of psychology particularly is stressed. A similar concern about the failure to come to terms with dynamic problems is voiced by Knight in the same volume in a paper on ‘Statics and dynamics. The problem of mechanical analogy in economics’. Directly dealing with a methodological question which has not lost its topicality (though from a diﬀerent angle) is a thoughtful paper by the Austrian economist-philosopher Felix Kaufmann3 with the title ‘What can the mathematical method achieve in economics?’. His balanced discussion of the merits and shortcomings of mathematical approaches which was then meant to defend the use of mathematics where it can fulﬁl a useful function might today sometimes be helpful for discouraging it when it becomes unnecessary or counterproductive. Also in the

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1931 volume we ﬁnd a paper on ‘The relation between international trade and international movements of capital and labour’ by Ohlin which foreshadowed some of the themes which were elaborated in his famous ‘Interregional and International Trade’ volume two years later. The years between 1926 and 1933 saw a lively debate among economists on the question of costs, production and market forms starting with Sraﬀa’s seminal Economic Journal article ‘The laws of return under competitive conditions’ in 1926 and culminating in Edward Chamberlin’s and Joan Robinson’s ‘revolutionary’ books on monopolistic or imperfect competition in 1933. The 1931 and 1932 volumes of the Zeitschrift für Nationalökonomie contain some important contributions to that worldwide debate. Thus in 1931 Oskar Morgenstern reviews in a 42-page article on ‘Open problems in the theory of costs and returns’ the discussions that were going on mainly in England but also in Austria and tries to achieve a critical synthesis. In the same issue Erich Schneider (‘Three problems of the theory of monopoly’) analyses special forms of monopoly: bilateral monopoly, duopoly under conditions of monopolized factors of production, and ﬁnally ‘universal monopoly’ with monopolists both in the ﬁeld of production and among the factors of production. Three further contributions on this theme followed in 1932. Erich Schneider continues his study of all sorts of monopoly conditions and their relation to cost and demand developments (‘Cost theory and monopoly problem’). In two very long articles which at almost eighty pages practically amount to a full-blown monograph, Heinrich von Stackelberg tries to lay down the ‘Foundations of a pure cost theory’ (thus the title of his paper). It is an ambitious attempt to cover a large number of diﬀerent situations from which general conclusions are derived which are captured in 38 fundamental propositions. Stackelberg’s terminology (e.g. production speed, jumping costs etc.) and argumentation are sometimes unusual, but the material is interesting and gives a ﬁrst indication of his famous later contributions on duopoly and other market forms. In stark contrast to Stackelberg’s complex and idiosyncratic exposition we ﬁnd – in the same volume – Jacob Viner’s comprehensive and transparent treatment of ‘Cost curves and supply curves’ which rightly became a classic and laid the foundations for diagrammatic expositions for a long time to come. A diﬀerent ﬁeld is treated in a seminal article by Jan Tinbergen in the 1932 volume. In ‘A problem of dynamics’ he introduces concepts like ‘economic horizon’, ‘expectance’, ‘retardation’ and uses them to show how they inﬂuence individual actions over consecutive periods in each of which new expectations are formed on the basis of previous results leading to a sequence of ‘temporary equilibria’. In the 1933 volume a paper by Hicks on ‘Equilibrium and business

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cycles’ gives a good idea of the theoretical uncertainites and considerations that were on the way on the eve of Keynes’ General Theory. Starting with observations on Marshall, Pareto, Hayek, and Keynes, Hicks develops his own ideas on dynamics and the inevitability of cycles as a consequence of recurring disequilibria originating from imperfect foresight, expectations, risk and the non-neutrality of money in this environment. The roots of several ideas which were more fully developed in later years can be detected in this essay. A paper very much at the heart of the Austrian version of the marginal revolution is an article by Oscar Lange (‘The general interdependence of economic elements and the method of isolation’) in which he defends Menger’s method of ‘declining abstraction’ (‘abnehmende Abstraktion’) and Marshall’s partial analysis approach against the ‘arrogant claim’ (Lange’s words!) of the Lausanne School that they alone take all relevant factors into consideration. He argues that a proper handling of the ‘nonmathematical’ theories of Marshall and the Austrians leads to permissible and helpful simpliﬁcations which nevertheless allow a recognition of the overall interdependence of economic phenomena. Finally we may mention from this volume a contribution by Myrdal (‘The idea of purpose and means in economics’) where he expands on a theme which occupied an important place in his book on The Political Element in the Development of Economic Thought which had appeared a short time before. It raises questions concerning the impossibility of separating a completely ‘pure’ theory from societal valuations. Theories have an inﬂuence on valuations and these in turn inﬂuence the formation of theories. Myrdal’s well-known way out is the recommendation to include the study of values in economic theory and to lay open one’s own values behind one’s studies. In 1934, at the height of the depression, the economic crisis ﬁnally begins to show up as a central problem. The Swiss economist Alfred Amonn – in an article ‘The present situation of the crisis and the inﬂationistic methods against the crisis’ – adopts a position which will sound familiar to presentday neoliberals. Inﬂationary or reﬂationary stimulation of demand (including public works) is rejected as a means against the depression which is diagnosed as a consequence of an artiﬁcially distorted price structure. Liberalization of the markets in order to permit competition to restore economic equilibrium is recommended as the only hope for recovery. In a similar liberalistic vein the French author Mentor Bouniatian, writing on ‘Depression and devaluation’, denounces the use of devaluation and the abolition of the gold standard as unsuitable and harmful attempts to attack the depression from the monetary side. Wilhelm Röpke contributes a paper attacking Roosevelt’s New Deal policy. But the 1934 volume does not only

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contain these one-sided policy-oriented articles. ‘Normal’ theory is continued with a number of important contributions. Thus Roy Allen (‘Demand functions for goods with correlated utility’) deals with a special aspect from the – then – newly developed Hicks–Allen approach to consumer demand, Wassily Leontief (‘Retarded adjustments of demand and partial equilibrium’) adds precision to earlier papers on dynamics and equilibrium by Ricci, Schultz, Tinbergen, and Rosenstein-Rodan, and the Austrian economist Gertrude Lovasy, in an article on ‘Tariﬀs and imperfect competition’, introduced one of the ﬁrst steps for a proper integration of the new theory of imperfect competition into the theory of international trade. The 1935 volume contains an article by an American author on one of the weaker specialities of the Austrian theory. Howard Ellis writes on ‘The signiﬁcance of the period of production for crisis theory’ where he distinguishes at least eight diﬀerent concepts of ‘period’ in the literature and discusses their possible meanings, limitations and contradictions. This gives quite a good insight into diﬀerences in business cycle approaches in those days including diﬀerences within the Austrian School. Two further papers in the volume also carry important evaluations of economic doctrines. Frank Knight deals under the modest title ‘Remarks on utility and cost’ extensively with these basic elements of economic theory juxtaposing the approaches of the leading classical and neoclassical economists with his own non-orthodox proposals. And from Redvers Opie comes a long article ‘Professor Pigou’s theory of unemployment’ in which he tries to improve the accessibility to this last big work on unemployment before Keynes which he both admires for its ‘exciting’ qualities and criticizes for its cumbersome treatment of the matter. Finally a very long review by Zassenhaus may be mentioned which – running in small print over ten pages – deals with a collection of papers and essays by Ludwig Mises which had appeared in 1933 under the title ‘Grundprobleme der Nationalökonomie’ (‘Basic Problems of Economics’). The contents of the book are concentrated on the methodological, sociological and philosophical background of economics and Zassenhaus’ review provides a critical insight into the deviations of Mises’s basic outlook from that of other members of the Austrian School and from economists in general. As regards the 1936 volume the three papers by Haberler, Schüller and Joan Robinson relating to Keynes’s General Theory have already been mentioned. Here I only want to draw attention to two contributions which illustrate the intellectual atmosphere of prewar Vienna where exciting philosophical (Wiener Kreis, Wittgenstein), psychological (Freud, Adler), political (Austro-Marxism, Otto Bauer), and not least economic (Austrian School) ideas could and – occasionally – did meet. The economist Oskar Morgenstern contributes an article on ‘Logistics and social sciences’ which

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tries to show how economics could beneﬁt from the new ideas in the theory of knowledge (Wittgenstein, Russell, Carnap etc.) and particularly from a semi-philosophical book from Carl Menger’s son, the mathematician Karl Menger (Morals, Will, and the Shaping of the World. A Basis for a Logic of Morals); and the mathematician Karl Menger in turn presents a minute dissection of the sometimes sloppy and contradictory deductions of the ‘law’ of diminishing returns in economics (‘Remarks on the laws of returns’). We ﬁnally come to the last volume of the Zeitschrift für Nationalökonomie which appeared in an independent Austria under the old editorship: the 1937 volume. It mirrors – more than earlier volumes – the vitality of the macroeconomic discussions which had begun to dominate Western European economics. Three full-length articles deal respectively with Haberler’s Prosperity and Depression (written by Karl Bode), Harrod’s The Trade Cycle (by Josef Steindl) and Lundberg’s Studies in the Theory of Economic Expansion (by Roy Harrod). Further lengthy reviews are concerned with publications by Meade, Henderson, Roll, Phelps Brown and others. Also in this volume there are two articles on methodological issues by Terence Hutchison (‘Theoretical economics as a language system’ and ‘Expectation and rational conduct’) presaging his later life-long career as a methodological critic (which was properly started a year later with his book The Signiﬁcance and Basic Postulates of Economic Theory); and a paper by Ludwig Lachmann (‘Price expectations and intertemporal equilibrium’), an economist who can be regarded as providing a bridge between the old Austrian School and its modern variant, the American-based Austrian economics. Early in 1938 Austria was invaded by the German army. Nazi policies took immediate eﬀect politically and economically and not least in the universities and the scientiﬁc sphere in general. The Austrian Economic Society and the law faculties were immediately aﬀected and an orderly continuation of the ‘Zeitschrift für Nationalökonomie’ was disrupted. Morgenstern, who had been in the United States when the occupation took place, decided not to return to Austria, Schüller as a Jew and Reisch as a political ﬁgure of the former regime were not acceptable to the new rulers. Thus from all the editors only Hans Mayer remained untouched and though not a Nazi himself he made his peace with them. After the disruption in 1938, the next volume of the Zeitschrift für Nationalökonomie – volume IX – came out in 1939, again under Mayer’s editorship but with a change in all other positions. The editorial board now consisted of representative economists from Nazi Germany and fascist Italy: Walter Eucken, Heinrich von Stackelberg and Guglielmo Masci. Alexander Mahr, assistant of Hans Mayer and later Professor of Economics at Vienna University, became managing editor. The link with the Austrian tradition and particularly with the younger Austrian

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School was broken and the outbreak of World War II cut oﬀ what had remained of the international connection. The reappearance of the Zeitschrift für Nationalökonomie as an Austrian journal after liberation in 1945 did not – and probably could not – lead to a return to the outstanding quality mixture of outgoing Austrian traditions and incoming new ideas which had characterized the interwar period. The Zeitschrift für Nationalökonomie became one respectable journal among many, with no particular proﬁle. In line with general developments English became an increasingly accepted language; in 1970 Journal of Economics was chosen as a subtitle to Zeitschrift für Nationalökonomie and ﬁnally, in 1986, Journal of Economics became the main title with Zeitschrift für Nationalökonomie as a subtitle and – together with its Viennese editor – the editorial oﬃce moved to Bonn. The link with Austria and the Austrian School was a thing of the past. The revived modern Austrian economics had to create their home and their outlets elsewhere.

NOTES 1. The ‘last sign of glory’ which I claim here for the ‘Zeitschrift für Nationalökonomie’ in the 1930s can, of course, not compensate for the dissolution of the community of Austrian economists. Looking at this side of the picture one can say of the same period: ‘For Austrian economics . . . this was a tragic decade’ (Lachmann, 1986, p. 225). 2. As an illustration we might mention that, in a relatively short list of references in an article by Paul Samuelson (Samuelson, 1998) on the genesis of his famous Foundations of Economic Analysis, the Zeitschrift für Nationalökonomie is, together with Economica, the most-quoted European journal (with three quotations each). 3. The somewhat neglected Kaufmann is praised in a footnote in Schumpeter’s History, but only occasionally mentioned in methodologically or philosophically oriented works, as for instance in Hausman (1994).

REFERENCES Browne, S. (1981), ‘Erinnerungen an das Mises Privatseminar’, Wirtschaftspolitische Blätter, 28(4), pp. 110–20. Craver, E. (1986), ‘The emigration of Austrian economists’, History of Political Economy, 18(1), pp. 1–32. Dolan, E.G. (1974), The Foundation of Modern Austrian Economics, Kansas City: Sheed and Ward. Haberler, G. (1936), Prosperity and Depression, Geneva: League of Nations. Haberler, G. (1981), ‘Mises’ Private Seminar’, Wirtschaftspolitische Blätter, 28(4), pp. 121–6. Harrod, R. (1936), The Trade Cycle, Oxford: Oxford University Press. Hausmann, D.M. (1994), The Philosophy of Economics: An Anthology, second edition, Cambridge: Cambridge University Press.

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Hicks, J.R. (1939), Value and Capital: An Inquiry into Some Fundamental Principles of Economic Policy, Oxford: Oxford University Press. Hutchison, T.W. (1938), The Signiﬁcance and Basic Postulates of Economic Theory, New York: A.M. Kelly. Lachmann, L.M. (1986), ‘Austrian economics under ﬁre: The Hayek–Sraﬀa duel in retrospect’, in Grassl, W. and B. Smith, Austrian Economics. Historical and Philosophical Background, London: Croom-Helm. Lundberg, E. (1937), Studies in the Theory of Economic Expansion, Stockholm: Norstedt. Menger, K. (1934), Moral, Wille und Weltgestaltung. Grundlegung zur Logik der Sitten, Wien. Myrdal, G. (1932), Das Politische Element in der Nationalökonomischen Doktrinbildung, Berlin: Junker & Dünnhaupt. Rothschild, K.W. (1998), ‘Marshall and Philippovich’, in Baltzarek, F., F. Butschek and G. Tichy (eds), Von der Theorie zur Wirtschaftspolitik – ein österreichischer Weg, Festschrift für Erich Streissler, Stuttgart: Lucius & Lucius. Samuelson, P. (1947), Foundations of Economic Analysis, Cambridge, MA: Harvard University Press. Samuelson, P. (1998), ‘How Foundations came to be’, Journal of Economic Literature, 36(3), pp. 1375–86. Schumpeter, J. (1954), History of Economic Analysis, New York: Oxford University Press. Sraffa, P. (1926), ‘The laws of returns under competitive conditions’, Economic Journal, 36 (December), pp. 535–50. Vaughn, K.I. (1994), Austrian Economics in America. The Migration of a Tradition. New York: Cambridge University Press.

PART IV

Political and Economic Continuity and Discontinuity in Russia

15.

Patristic legacies in Russian economic thought and their signiﬁcance for the transformation of Russia’s economy and society Joachim Zweynert

THE DISCUSSION ABOUT A ‘RUSSIAN ECONOMIC IDEA’ In the early 1990s an attempt was undertaken to transform Russia quickly into a Western-style society. After it became obvious that this attempt had failed, there has been a movement among Russian elites since approximately the mid-nineties to reconsider their own cultural heritage. Former President Boris Yel’tsin’s demand to develop a ‘national idea’ has recently sparked the noticeably increasing interest of Russian economists in the history of Russian economic thought. However, this interest is not entirely of an academic nature. The authors now doing research in this area hope from the history of Russian economic thought to derive the basis for a strategy of reform which is more strongly related to the country’s cultural heritage. L. Goricheva appears to speak for the majority of them when she puts forth the following maxim: ‘To comprehend the deep roots of the national economy in its entirety (tsel’nost’), to formulate a national economic idea and then realise it – how simple and yet how incredibly diﬃcult this task seems to be!’ (Goricheva, 1996, p. 157). This chapter takes into consideration that the search for a national ‘economic idea’ is to a remarkable extent politically motivated. After a short methodological introduction I shall look at the traditions of Russian economic thought. After that I shall examine the relations between these traditions and the diﬃculties of implementing a market economy in Russia and then take a brief look at Germany’s experiences following World War II. In the last part of the chapter I will take a short look at the opportunities and risks of a reform programme which attempts to make use of the traditions of Russian economic thought.

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SOCIO-PHILOSOPHICAL TRADITIONS AND ECONOMIC THOUGHT Following Karl Pribram I assume that ‘the struggle over the fundamental aspects of economic analysis is due to factors outside the scope of economics strictly speaking’ (Pribram, 1983, p. xlix). Contrary to the Marxist philosophy of history, Pribram maintains that a society’s predominant habits and traditions of thought not only inﬂuence the intellectual approach to economic problems, but also the economic organisation of the society in question. If it is true that there is a signiﬁcant correlation between the prevailing general patterns of thought, economic thought and the organisation of the economic system, then one may conclude ‘that prerequisite to any change in social or economic institutions or organisations is a change of the prevailing pattern of reasoning which had provided the background to the predominant forms of social and economic life’ (Pribram, 1983, p. 40). The question raised by Karl Pribram regarding the socio-philosophical determinants of economic reasoning in various countries or cultural regions was most recently taken up again by Mark Perlman and Charles R. McCann Jr. On the assumption that in every country or every cultural region, certain people or institutions can be found who have an exceptional inﬂuence on the development of that particular country’s or cultural region’s thinking due to their religious- or secular-based authority, Perlman and McCann raise the central question: ‘By what line of thinking do you hold or believe or act or claim?’ (Perlman and McCann, 1998, p. 3) This question is the cornerstone of the authors’ concept of ‘patristic legacies’ which leads them to a distinction between an English, a German-Austrian, a French and an American tradition of economic thought. Picking up on this, I would like to consider whether one or more patristic legacies can be found which would justify speaking of a Russian tradition of economic thought.

THE PATRISTIC LEGACY OF THE RUSSIAN ORTHODOX CHURCH There is no doubt that the generally prevailing patterns and traditions of Russian thinking can be traced back to the legacy of the Russian Orthodox view of the world. I should like to conﬁne my examination to the analysis of the signiﬁcance of two of its essential elements which, in my opinion, are of decisive importance for the connection between Russian socio-philosophical traditions, economic thought and the organisation of social and economic life in Russia: holism and anthropocentrism. The ideal of a unity between belief and thought, individual and society,

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state and church, in short, fully-ﬂedged holism, actually represents the essence of Russian religious thought. And the contradiction between the Russian orthodox ideal of a homogenous, undiﬀerentiated society and the rationalistic ‘fragmentation’ of Western culture within various clearly deﬁned areas of life and levels of consciousness was discussed as a central issue again and again up to the 18th century by Russia’s church authorities. In addition to holism, the anthropocentric perspective represents the most obvious characteristic of Russian religious thought (see Zen’kovskii, [1948] 1999, vol. 1, p. 16). This even led to a deﬁnite ﬁxation on moral and social questions in medieval church dogma, as is similarly visible in the Russian social movements of the 19th century (see Fedotov, [1946] 1965, vol. 1, p. 395n). The heritage of the Russian orthodox view of the world is evident in the Russian socio-philosophy as a strange symbiosis of holism and anthropocentrism: the holistic criticism of the ‘fragmentation’ (razdrobleniye) or ‘atomisation’ (atomizatsiya) of society is always justiﬁed by the necessity of guaranteeing an extensive and complete development of the human personality. Yet the diﬀerentiation of contrasting levels of existence and consciousness within the society conceals the danger of a ‘fragmentation’ of individuals which hinders their all-round development. This unique combination of holism and anthropocentrism, which both complement and strengthen each other, includes, in my opinion, the all-decisive heritage of the Russian orthodox church which deeply inﬂuenced a Russian social philosophy as well as Russian economic reasoning.

THE RUSSIAN TRADITION OF ECONOMIC THOUGHT The way in which Russia adopted Western economic teachings shows that Russia is no ‘empty ﬁeld of experimentation’ (Groys, 1995, p. 7) between Europe and Asia. A good example of that can be seen in the Russian version of classical economic thought. It is characterised particularly by the idea of ‘internal goods’ as propagated by Heinrich von Storch, ‘a Russian classic of German heritage’ (Schumann, 1989). This is all the more remarkable considering that Heinrich von Storch’s Cours d’Économie politique (1815) was one of the most popular political economics textbooks in Europe at that time. But his theory of ‘internal goods’, a fascinating contribution to the theory of human capital when viewed from today’s perspective, could gain a lasting foothold only in Russia. Despite the fact that Russian classical economics developed its own contours, the above-mentioned main characteristics of Russian economic

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thought, holism and anthropocentrism, experienced their breakthrough at ﬁrst among the Slavophiles in the 1840s. The attempt to create a synthesis of the teachings of orthodox Christianity and the later works of Schelling makes up the foundation of Kireevskii’s and Khomyakov’s religious– philosophical search. The traditional Russian orthodox church’s ideal of the integral whole became even more pronounced among the Slavophiles than among the German romanticists (see Berdyaev, [1955] 1990, p. 24). In the writings of Kireyevskii and Khomyakov ‘the romantic vision . . . of a universal synthesis was transformed into the utopia of a holistic Russian orthodox church culture’ (Zen’kovskii, [1948] 1999, vol. 1, p. 264). Very much in line with medieval Russian orthodox Church ideology, Kireyevskii contrasts the cultural ideal of a uniform (tselostnyi) society with the destructive ‘fragmentation’ of the West: there a division of the mind, a division of thought, a division of the sciences, a division of the state . . . a division of every individual aspect of the human, social and personal being; contrary to that, in Russia there is primarily an eﬀort to achieve a unity (tsel’nost’) of the internal and the external, the social and the personal . . . way of life. If what has been said thus far is correct, then division and unity, rationalism (rassudochnost’) and wisdom (razumnost’) will be the best expressions of Western European and old Russian education (Kireyevskii, [1852] 1911, vol. 1, p. 218).

In a uniform society as envisioned by the Slavophiles there is no room for a special economic sphere of social life, and, as such, the mere existence of a science like political economy is proof that society is undergoing an alarming disintegration: If the science of political economy had existed at that time [in the Russian Middle Ages, J.Z.], it undoubtedly would not have been understandable to the Russians. With their holistic Weltanschauung, they would not have comprehended why a specialised science of economics is necessary. They would not have understood how it is possible intentionally to stimulate people’s desire for external needs simply in order to increase their eﬀorts to produce material goods. They knew that multiplying one’s wealth was only one of the secondary conditions of social life and should therefore not only be placed in close connection with the other primary conditions, but play a completely subordinate role (ibid., p. 215).

The Slavophiles passionately fought to maintain the obshchina, the Russian rural commune, because they hoped to utilise that institution to slow down or completely halt the growing diﬀerentiation of Russian society. The following statement by A. Koshalyov, who was considered to be the most liberal representative of the second-generation Slavophiles, makes this very clear:

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This kind of cultivation [communal, J.Z.] unites the members of the individual obshchina as well as everyone else [the members of society, J.Z.] as an integral and indivisible whole. Is anything wrong with that? Or does it conceal some kind of unpleasantness or even danger? We, for ourselves, see it only as an advantage for the country and the people. If someone could prove to us that the goal of every society is to carry out its own disintegration (razedineniye) and that this represents society’s salvation, then, not sooner, we shall give up our conviction (Koshalyov, 1857, p. 163 n.).

Whereas holism represents the most decisive element of the Slavophile doctrine, it is the Russian atheistic intelligentsia that returns to the anthropocentrism of the Russian orthodox church. This can be seen speciﬁcally in Aleksandr Gertsen, whose Weltanschauung was ﬁttingly characterised as follows by G. Shpet: ‘Gertsen’s view of the world is, on the whole, an apotheosis of personality. His relationship to personality reaches the level of religious tension. It is no coincidence that he creates the expression “religious worship of the personality” and consciously speaks of “my human orthodoxy”’ (Shpet, 1921, p. 16). Since Gertsen must be clearly understood as a Russian orthodox thinker, it is no wonder that we encounter in him that combination of holism and anthropocentrism which one may consider to be the decisive tradition of Russian economic thought: The strangest thing, however, is that the human being in this new science [political economy, J.Z.] does not appear as a human being, but as some kind of miserable creature. . . . Understanding the expanse and the reality, the entire sacredness, the rights of the personality, to comprehend and not to destroy society, not to chop it up into atoms – that is the most diﬃcult social task (Gertsen, [1847] 1955, vol. 5, p. 62).

After the Slavophiles and Gertsen had applied the rhetoric of the medieval church to speak out against the ‘division’ (razdvoyeniye), ‘fragmentation’ (razdrobleniye) or ‘atomisation’ (atomizatsiya) of society, the intellectual founder of the narodnichestvo, the Russian populist movement, N.K. Mikhailovskii, was the ﬁrst representative of the Russian intelligentsia to strike out explicitly against the diﬀerentiation of society. In an extensive critique on Herbert Spencer, Mikhailovskii, taking a radical anthropocentric position, criticised the use of the organism analogy for the social sciences: it was his belief that only the individual human personality should be taken into consideration as the object of study for sociology. According to this point of view, Spencer’s social progress by diﬀerentiation is transformed into the very opposite: social diﬀerentiation leads to a division of labour, which reduces the human being to just a few manual motions. According to Mikhailovskii, this is the equivalent of a decrease in the level of diﬀerentiation of the individual, which, on

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the other hand, increases with less division of labour. These considerations led him to his famous ‘formula of progress’: Progress is the gradual approach to the individual, to the fullest possible and the most diversiﬁed division of labour among man’s organs and the least possible division of labour among men. Everything that impedes this advance is immoral, unjust, pernicious, and unreasonable. Everything that diminishes the heterogeneity of society and thereby increases the heterogeneity of its members is moral, just, reasonable, and beneﬁcial (Mikhailovskii, [1869] 1911, vol. l, p. 150, translation according to: Walicki 1989, p. 53).

In Mikhailovskii’s formula of progress we are dealing with the most complete expression of what I should like to call the Russian tradition of economic thought. Although until then there had been a gap between the left-wing intelligentsia and academic science, the teachings of Mikhailovskii had such a powerful impact on Russian thinkers in the 1860s and 1870s that it led to a vast fusion of non-academic and academic thinking which also found its expression in A.I. Chuprov’s school of economics. The only possible way of explaining why Mikhailovskii’s teachings had such an overwhelming integrative power is by realising that it was a genuine expression of typical Russian patterns of thought. Yet in spite of the dominance of Mikhailovskii’s teachings in regard to the socio-philosophical conceptions of Russian economists between 1870 and 1890, there still arose a scream of protest from a younger generation born around 1870 against the subordination of rational thinking to the religious ideal of a holistic society. But the very development of the sociophilosophical ideas of the so-called ‘legal Marxists’ now clearly shows how deeply rooted the holistic and anthropocentric tradition of Russian thinking was. The legal Marxists had appeared, according to S.N. Bulgakov, ‘to march from the East to the West’, because ‘the time had come’ (Bulgakov, 1897, p. 57). Pyotr Berngardovich Struve, the intellectual father of legal Marxism, clearly stated in his famous ‘Critical remarks’ that the ‘march from the East to the West’ that Bulgakov called for should be part of a development that led from a homogenous society to one that became more diﬀerentiated. Referring to the German sociologist Georg Simmel and his work ‘Über sociale Diﬀerenzierung’ (On social diﬀerentiation, 1890), Struve argued that an insurmountable conﬂict existed between cultural development and the uniformity (tselostnost’, Ganzheitlichkeit) of society: ‘The more homogenous . . . a social group is, the less individualistic are its members; the more diﬀerentiated a group is, the more individualistic are its members. . . . In an undiﬀerentiated world, the individual is “harmoniously whole” . . . in his monotony and shapelessness (bezlichnost’)’ (Struve, 1894, p. 38). The realisation that capitalism is not only an economic system but

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also a form of civilisation which enables cultural evolution through social diﬀerentiation (see Hayek 1988) eventually led Struve to make his famous appeal to the Russian intelligentsia, to give up not only their antagonistic attitude towards capitalism but also their antagonistic attitude towards civilisation: ‘No, let us admit our lack of culture and enrol in the school of capitalism’ (Struve, 1894, p. 288). In trying to understand legal Marxism in the context of a liberation of Russia’s intellectual elite from the intelligentsia’s panmoralistic bondage, it seems that Struve was right when he immodestly spoke of ‘my legal Marxism’ (Struve, 1933–34, p. 586): Among its three main representatives, he was the only one who succeeded in freeing himself from the intellectual traditions of the Russian intelligentsia. That is why Izhboldin hits the nail on the head when he states that Struve’s methodological approach was more similar to the English than to the Russian tradition of thought (see Izhboldin, 1944, p. 349). At the turn of the century, Struve’s most important ally during the 1890s, M.I. Tugan-Baranovskii, on the basis of a purely anthropocentric interpretation of Kant’s dictate of the ‘absolute value of the human personality’ returned to Mikhailovsky’s position (see TuganBaranovskii, 1909, p. 50). The return to the patristic legacy of the Russian orthodox view of the world indicated by Tugan-Baranovskii, was ultimately completed by S.N. Bulgakov. That man who in 1897 had called for the ‘march from the East to the West’ six years later wrote in an article about Gertsen: The excitement for the West, which nearly negates everything that is Russian, and the reservations towards the West, which still do not exclude the recognition of the West’s cultural greatness, the belief in Russia’s future and the conviction to that future; to a certain extent, Gertsen’s development reﬂects the typical development of a Russian intellectual’s (intelligent) way of thinking, and the order of these phases is based on a deep moral necessity (Bulgakov, 1903, p. 184).

In accordance with the traditions of the Russian orthodox view of the world, Bulgakov castigates the ‘new humanistic age’ as a corrupting ‘variety without unity’; it is characterised by ‘a pluralism which will not last but must be drawn into a unity of thought, emotion and perception – into a form of individualism that strives to overcome fragmentation, atomisation . . .’ (Bulgakov, [1907, 1911] 1997, p. 107). His demand for a ‘synthesis of medieval and modern times’ (ibid., p. 110) bears witness to the fact that Bulgakov had ﬁnally reached the East. I have thus shown that the existence of the patristic legacy of the Russian orthodox world view, the symbiosis of holism and anthropocentrism, can be conﬁrmed in the socio-philosophical conceptions of Russian economic thinkers from the mid-19th century up to the pre-Revolutionary years. The

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‘Struve case’ shows that there have certainly been outsiders, even rebels, in the history of Russian economic thought. Naturally, such outsiders exist within every cultural territory – in Germany, for example, the outstanding classical economist Johann Heinrich von Thünen. And yet, in my opinion, such exceptions do not raise doubts about the validity of speaking of national traditions of economic thought.

HOLISM, ANTHROPOCENTRISM AND THE TSELOSTNYI WORLD OF THE CENTRALLY PLANNED ECONOMY In order to emphasise the signiﬁcance of the Russian ideal of a holistic society for the organisation of Russian social and economic life, Luhmann’s version of the sociological systems theory (see Luhmann, 1984) seems to be especially useful. According to Luhmann, the market economy can be understood as a social system in which the economy has transformed itself into – to a large extent – an autonomous subsystem of society (see Luhmann, 1989, chapter 2). The uncoupling of the economic system from society requires the establishment of private property, which extracts the economy from the range of direct state inﬂuence. Nevertheless, the actual transformation of the economy into a subsystem of society only takes place when communication within the system is specialised for economically relevant aspects by excluding social and political aspects of economic interaction: the ‘language’ of an economic system, the prices, says something about economic shortages, but it does not contain any information about the social or political status of the interacting persons. A planned economy, on the contrary, is an integral part of a primarily undiﬀerentiated society. And since there is no systematic boundary separating its political and economic components, there is no specialised communication about economic aims. Whereas, in an economic sense, the individual is essentially deprived of power, the decisions made by the planning authorities are more strongly oriented towards ideological and political criteria than towards economic shortages. In this sense one could say that there was no economic system in the Soviet Union. The task of transformation, seen from the vantage point of the sociological systems theory, then, is to establish the essentials so that an economy is able to emerge in Russia as a largely autonomous subsystem (see Dietz, 1993, p. 151). Let us now combine the systems theoretical interpretation of market and planned economy with Pribram’s hypothesis which I have already quoted, ‘that prerequisite to any change in social or economic institutions or organ-

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isations is a change of the prevailing pattern of reasoning which had provided the background to the predominant forms of social and economic life’ (Pribram, 1983, p. 40). We then derive the following general statement about the connection between thought traditions and economic systems: the development of a market economy, which is understood here as the emergence of a largely autonomous subsystem, is only possible if this process is not prevented by holistic patterns of thought which aim to thwart the uncoupling of the economy from the whole of society. If all areas of society are subordinated with the same mode of communication, the specialisation of communication in speciﬁc areas of society and also the extraction of subsystems from society are prevented. And exactly herein is to be seen the crux of the institutional structure of the Soviet Union. I do not want to examine the much discussed question whether Bolshevik totalitarianism was a necessary result of Russia’s prevailing patterns of thought. However it should be obvious from the present analysis that the planned economy as an essentially undiﬀerentiated system conspicuously corresponds to the Russian dream of a uniform society. If it is true that a society’s prevailing patterns of thought determine the economic and social organisation of that society, it follows that the transformation of Russian society to a market economy can only have enduring success if the Russian elites overcome the holistic and anthropocentric patterns of thought which created the intellectual background of the planned economy.

THE EXAMPLE OF THE FEDERAL REPUBLIC OF GERMANY AFTER THE THIRD REICH AND ITS SIGNIFICANCE FOR RUSSIA If I am of the opinion that a long-lasting reconstruction of Russian society requires fundamental changes in the pattern of thought predominant among Russia’s elites, I still do not want to be misunderstood as calling upon people to negate their own intellectual tradition, to reject their own history. On the contrary, I believe that these traditions must be taken into consideration for a future Russian economic and social order so that a market economy will ﬁnd widespread acceptance. How a system based on freedom can be implemented by paying regard to holistic traditions is visible in Germany’s post-World War II experience. Of course I do not think that this experience can simply be imitated by Russia, but it could oﬀer valuable hints for future Russian reforms. The frequently mentioned intellectual relationship between Russia and Germany can be seen in the fact that the socio-philosophical traditions in both cultures are inﬂuenced by holistic patterns of thought. The decisive

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constant of German economics, from the Cameralists to the Historical Schools, can be seen in the demand for a fusion of state and economy and primarily for a negation of an autonomous economic system which works according to its own principles. So the question arises, whether there is a connection between the totalitarianism of the Third Reich and the holistic ideal of German social philosophy. But, what I am particularly concerned with here is the question of how Germany has succeeded in uniting the traditional holistic ideal with a social system in which there is a clear system border between the society and the economy. From a systems theory point of view Walter Eucken’s dictate that the state may establish and defend the economic order, though it should not interfere with economic processes (see Eucken, 1940, 1952), can be interpreted as an attempt to gain recognition of a clearly deﬁned system border between politics and the economy. Yet the ‘weasel word’ (Hayek, 1988, p. 114) ‘social’ implies that Müller-Armack’s concept of the ‘social market economy’ (Soziale Marktwirtschaft) – and this represents the decisive diﬀerence to Eucken’s theory of economic order – paid tribute to the holistic tradition of German socio-philosophical and economic thought. On the one hand, it helped to free the economy from the squeeze of politics, but it also wanted to prevent the economy from breaking away too far from the other aspects of social co-operation: the social market economy is autonomous in that the state – at least according to the original conception – does not interfere directly with the economic subsystem. But the autonomy of the economic system is also limited so that it will, by no means, be relieved of its responsibility to serve the social goals of society (Müller-Armack, 1975, p. 83). The social responsibility of the economic system, whose origin can be found in the holistic traditions of German social philosophy, enabled capitalism in post-war Germany not only to become decisively accepted by society, but it also clearly distinguishes the social market economy up to the present from the Anglo-American system of capitalism, which corresponds to the atomistic tradition of AngloSaxon philosophy and is characterised by a stronger autonomy of the economic system.

OPPORTUNITIES AND RISKS OF A NATIONAL REFORM STRATEGY IN RUSSIA The example of the German social market economy shows that the recognition of the system border between politics and the economy in no way encompasses the total uncoupling of the economy from every other aspect of society. Rather, there are signiﬁcant diﬀerences between the various soci-

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eties with market economies in regard to the relationship between the economy and the society. Despite these far-reaching diﬀerences, however, there is something fundamentally common to all of them: the economy is seen as a distinctly deﬁned subsystem that follows its own rules and should not directly be inﬂuenced by the political system. As the present analysis has shown the feverish search for a reform strategy that bears in mind the national socio-philosophical traditions oﬀers both opportunities and risks. The decisive danger is to be seen in a Russian elite’s uncritical relapse to holism, which consequently led the Slavophiles and Bulgakov to demand a return to the Medieval Age. If it is true that there is a connection between this tradition of Russian social philosophy and the planned economy, I come to the conclusion that no market economy will work in Russia as long as the Russian elites refuse to recognise a system border between politics and the economy. The opportunity which lies in the recollection of national traditions consists of establishing a market economy which corresponds to Russian traditions and systems of values. In my opinion, this is the decisive requirement needed by the market economy in Russia to ﬁnd a widely based acceptance within society. Let me refer once again to the quote I made at the beginning: to be aware of the necessity of social diﬀerentiation, to accept the economy as a primarily autonomous subsystem but to give the system a form that bears in mind the traditions of Russian social philosophy and to realise such a concept – how simple but yet how incredibly diﬃcult this task seems to be!

REFERENCES Berdyaev, Nikolai ([1955] 1990), Istoki i smysl russkogo kommunizma, Moscow: Nauka. Bulgakov, Sergei N. (1897), ‘Prostaya rech’ o mudryonykh veshchakh’, in Novoe slovo, 9, p. 47–57. ——— (1903), ‘Dushevnaya drama Gertsena’, in Ot marksizma k idealizmu, St. Petersburg: Tovarishchestvo ‘Obshchestvennaya pol’za’, pp. 161–94. ——— ([1911] 1997), ‘Srednevekovyi ideal’ i noveishaya kul’tura’, in Dva grada. Issledovaniya o prirode obshchestvennykh idealov, St. Petersburg: Izdatel’stvo Russkogo Khristiyanskogo Gumanitarnogo Instituta, pp. 95–110. Dietz, Raimund (1993), ‘Eigentum und Privatisierung aus systemtheoretischer Sicht. Ein Beitrag zur Theorie der Transformation’, in Thieme, H. Joerg (ed.), Privatisierungsstrategien im Systemvergleich, Berlin: Duncker & Humblot, pp. 151–82. Eucken, Walter (1940), Die Grundlagen der Nationalökonomie, Jena: Fischer. ——— (1952), Grundsätze der Wirtschaftspolitik, Bern and Tübingen: Francke. Fedotov, Georgii P. ([1946] 1965), The Russian Religious Mind, 2 vols, second printing, Cambridge, MA: Harvard University Press. Gertsen, Aleksandr ([1847] 1955), ‘Pis’ma iz Frantsii i Italii’, in Polnoe sobraniye sochinenii, vol. 5, Moscow: Izdatel’stvo Akademii Nauk SSSR, pp. 7–224.

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Goricheva, L. (1996), ‘K voprosu o tselostnosti natsional’nogo khozyaistva’, in Voprosy ekonomiki, 9, pp. 149–57. Groys, Boris (1995), Die Erﬁndung Rußlands, München: Hanser. Hayek, Friedrich A. v. (1988), The Fatal Conceit. The Errors of Socialism, London: Routledge. Izhboldin, Boris S. (1944), ‘P.B. Struve kak ekonomist’, in Novyi zhurnal, IX, pp. 349–57. Kireyevskii, Ivan V. ([1852, 1911] 1970), ‘O kharaktere prosveshcheniya Evropy i ego otnoshenii k prosveshcheniyu Rossii, pis’mo E.E. Komarovskomu’, in Polnoe sobraniye sochinenii pod redakcii M. Gershenzona, Moscow 1911, reprint: Farnborough: Greg, 2 vols, vol. 1, pp. 174–222. Koshalyov, Aleksandr (1857), ‘Po povodu zhurnalnykh statei – o zamene obyazannoi raboty nayomnoi i o pozemel’noi obshchinnoi sobstvennosti’, in Russkaya beseda, 4, pp. 109–71. Luhmann, Niklas (1984), Soziale Systeme. Grundriss einer allgemeinen Theorie, Frankfurt am Main: Suhrkamp. ——— (1989), Die Wirtschaft der Gesellschaft, Frankfurt am Main: Suhrkamp. Mikhailovskii, Nikolai K. ([1869] 1911), ‘Chto takoe progress?’, in Polnoe sobraniye sochinenii, ﬁfth edn, St. Petersburg, vol. 1, pp. 2–150. ——— ([1875–76] 1911), ‘Bor’ba za individual’nost’, in Polnoe sobraniye sochinenii, ﬁfth edn, vol. 1, pp. 422–594. Müller-Armack, Alfred (1975), ‘Die Wirtschaftsordnung, sozial gesehen’, in Müller-Armack, Alfred, Genealogie der Sozialen Marktwirtschaft, Bern and Stuttgart: Haupt, pp. 73–89. Perlman, Marc and R. Charles McCann Jr. (1998), The Pillars of Economic Understanding. Ideas and Traditions, Ann Arbor: The University of Michigan Press. Pribram, Karl (1983), A History of Economic Reasoning, Baltimore and London: The John Hopkins University Press. Schumann, Jochen (1989), ‘Heinrich von Storch: ein russischer Klassiker deutscher Herkunft’, in Rieter, Heinz (ed.), Studien zur Entwicklung der ökonomischen Theorie XII: Osteuropäische Dogmengeschichte, Schriften des Vereins für Socialpolitik 115/12, Berlin: Duncker & Humblot, pp. 33–63. Shpet, Gustav (1921), Filosofskoe mirovozzreniye Gertsena, Petrograd: Kolos. Simmel, Georg (1890), Über sociale Diﬀerenzierung. Sociologische und psychologische Untersuchungen, Leipzig: Duncker & Humblot. Storch, Heinrich v. (1815): Cours d’économie politique ou exposition des principes impériaux qui déterminent la prospérité des nations. Ouvrage qui a servi à l’instruction de Leurs Altesses, les Grand-Ducs Nicolas et Michel, 6 vols, St. Petersburg: Pluchart. Struve, Pyotr B. (1894), Kriticheskiye zametki k voprosu ob ekonomicheskom razvitii Rossii, St. Petersburg. ——— (1933–34), ‘My Contacts and Conﬂicts with Lenin’, in The Slavonic and East European Review, 12, pp. 573–95. Tugan-Baranovskii, Mikhail I. (1909), Osnovy politicheskoi ekonomii, St. Petersburg: Pravo. Walicki, Andrzej ([1969] 1989), The Controversy about Capitalism. Studies in the Social Philosophy of the Russian Populists, Notre Dame, IN: University of Notre Dame Press. Zen’kovskii, Vassilii V. ([1948] 1999), Istoriya russkoi ﬁlosoﬁi, 2 vols, Moscow and Rostov on Don: Feniks.

16.

Speciﬁc interrelations of politics and economics in Russian history Vladimir Avtonomov

GENERAL TENDENCIES The topic of this section allows for dual interpretation. It can involve political inﬂuence on economics as well as the role of economists in policy-making. In this chapter I will try to touch upon both aspects but predominantly upon the second one. Interrelations between economics and policy-making have been changing signiﬁcantly in the history of economics. To follow this process I ﬁnd it useful to employ the old Schumpeterian distinction between professional economic analysis and ‘lay’ economic thought (Schumpeter, [1954] 1997, p. 7,38). The separation of both (this means emancipation of economic analysis from economic thought which coincided with its emancipation from moral philosophy) probably ﬁrst became obvious through the physiocrats. Prior to that there did not exist any tension between economics and policymaking because economists pursued practical ends and served political leaders directly. With the emergence of professional economic analysis equipped with speciﬁc tools of research inaccessible to laymen the gradual process of separation began which accelerated tremendously in consequence of the marginalist revolution in economics. Since then policymakers have always needed some sort of translation from the language of professional economists. In general the inﬂuence of prevalent economic theory upon state policy most often came to the fore in periods of economic reforms because in times when the status quo prevailed and the economy developed smoothly the authorities usually didn’t need any special economic policy measures, let alone advice, from professional economists. But when the changes in society became too radical and political revolutions occurred the role of economists was never very signiﬁcant, because throughout revolutions the political problems of seizing and maintaining power, winning support from inﬂuential social forces, are far more important than economic questions. The only economic problem that really occupies the revolutionaries is that 275

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of securing state revenue ﬂows and this could be done without any ‘high theory’. Another feature of revolutions is the abstract character of proposed measures worked out under quite diﬀerent conditions, often secretly and therefore not having a chance to be tested in advance at least in an open theoretical discussion (Starodubrovskaya and Mau, 2001, pp. 124–5). The inﬂuence in the opposite direction, that is the impact of economic policy on economic theory, is to my mind a fairly recent phenomenon and could be found only in the 20th century when active government regulation had become a permanent phenomenon. It would be more accurate to say that the failure of a particular kind of economic policy induced changes in the realm of ‘high theory’. Probably the most spectacular example of this kind is the so-called neoclassical counterrevolution of the 1970s–80s which followed the demise of Keynesian-style economic policy in the USA. It goes without saying that periods of such inﬂuence must be characterized by great economic troubles, in this case the oil shocks of the 1970s. Finally there is a speciﬁc aspect of politics inﬂuencing economics that is characteristic of totalitarian regimes putting ideological pressure upon the scientiﬁc community.

SPECIFIC FEATURES SHAPING THE SITUATION IN RUSSIA Besides these general trends and ﬂuctuations there have always been more or less pronounced diﬀerent national traditions. My topic here concerns the interrelations of politics and economics in Russia which have always displayed some speciﬁc features due to the generic conditions of historic development of the country, its political system and cultural heritage. This speciﬁcity is often attributed to the inﬂuence of Russian Orthodox Church, but this inﬂuence was rather negative in the sense that it widened the gap between economic thought and policy by making the former less practicalminded. In my opinion most important for us here is the mystical bent of the Orthodox Church emphasizing ascetic values of moral perfection and preparing for the true life after death. The ideal of ‘vita contemplativa’ was much more characteristic of Russian Orthodoxy as a whole than of the Roman Catholic Church. This factor inhibited the development of Russian economic thought as such and is responsible for the fact that Russian scholars’ recommendations to Russian policy-makers were often clad in moral and religious garments. In my opinion the two major factors shaping the historic conditions of interrelations between economics and politics in Russia were the prolonged existence of serfdom and higher degree of absolutism compared with other

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European nations. The existence of serfdom entirely contradicted the logic of economic thought (not even to mention economic analysis). Every person with economic bent of mind certainly had to oppose the ineﬀectiveness of non-voluntary work whereas every moral person had to detest its atrocities. But this automatically put economists (though there were not many ‘professional economists’ in Russia until the end of 19th century) in opposition to rulers of the country where the economic system was based on serfdom until the 1860s and absolute monarchy did not allow for any legal expression of dissenting views. Most often the protest centred, of course, not on the serfdom as such (this was very dangerous) but on its most notorious components such as obligatory work for landlords which should be provided by peasants (barshina) and the practice of selling peasants without land. From the beginning of 18th century these protests and corresponding reform projects were often encountered among Russian scholars but did not inﬂuence government policy-making till the 1850s when the reforms were already long overdue. Taking the importance of agriculture for the Russian economy and the persistence of serfdom it should not surprise us that major reforms in Russian history had to be concentrated around agricultural problems and to be dealing with their social consequences. (We must add that even today the problem of private property of agricultural land is still hotly debated in the society and causes real ﬁghting in Parliament.) Other kinds of reforms (which were very much like reforms undertaken in other countries) centred on problems of balancing the budget and monetary stabilization. One of the paradoxes of absolutist power lies in the fact that the tsars and their closest associates were sometimes well aware of the economic drawbacks of serfdom and even organized secret committees to investigate the matter. At least for the reign of Alexander I and Nicholas I it can be asserted that the government and its opponents conducted parallel work of that kind in total secret from each other! This deep cleavage and mutual distrust between the political authorities and learned knowledge due to the autocratic way of governance remained characteristic of Russia including during the Soviet period when the situation became even worse because under a totalitarian communist regime state/party control extended over research and education to an unprecedented degree. Hence the general tradition present in Russia till our time: economists warn society about some serious problem, the government reacts to these warnings as to an outright political revolt and suppresses ‘the dissidents’ for as long a time as possible. Actually quite a lot of Russian economists beginning with Ivan Possoshkov who submitted his work to Peter the Great were conﬁned to prison. At last, when the situation gets worse, and especially after military defeats, the dissenting economists are

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incorporated into special government commissions headed by high government oﬃcials and organized to investigate the matter in question and propose a solution. But the voice of the economists in these commissions is seldom heard and the solution is shaped mostly by political considerations (this does not mean, of course, that economists always had some ready-made superior alternative solution). No doubt that the blame is always laid on consultants. As a result Russian economic and social reforms happen to be in most cases seriously delayed, aborted, and often followed by uprisings and revolutions. This probably is one of the characteristic features of Russian historic development, certainly caused by autocratic government: the reforms (ﬁrst of all agrarian ones) are postponed until they become inadequate to cope with increased social tension.

TSARIST RUSSIA The greatest social reform in Russian history where economists were allowed to participate was undoubtedly the abolition of serfdom in the 1860s, accompanied by legal, administrative, military, educational and other reforms. The economic impact of reforms was to facilitate the emergence of a market economy instead of an outdated feudal economy. But this impact was not stated explicitly and could not be realized independently of comprehensive social and political reforms. The most likely incentive for the reformers was the danger of peasants’ revolts, somewhat overplayed by the proponents of reforms (Eidelman, 1989, p. 121) – in the words of Tsar Alexander II peasants had to be liberated from above before it could be done from below. The economic eﬀects of the Great Reforms of the 1860s were to a large extent externalities of socio-political and legal reforms. Correspondingly there were not many professional economists among the reformers, which is all the more understandable because at that time one could hardly speak about a community of professional economists in Russia at all. However, after the death of Nicholas I in 1855, when serfdom had ceased to be a forbidden topic and the new tsar had expressed the will to abolish serfdom, a heated discussion began in Russian society. A great stream of proposals came to the government and later to the special commission which was entrusted with the preparation of the law on the liberation of serfs. This commission, founded in 1859, included besides high government oﬃcials scholars of diﬀerent persuasions. Both ‘Slavophiles’ and ‘Westerners’, liberals and conservatives received the opportunity to express their views to the commission. Fiery debates took place in journals. But the subjects of discussion diﬀered in not very widely publicized oﬃcial proposals and in the ‘mass media’. The main topic of the projects was the

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future of landlords’ estates. To secure the necessary labour after the peasants became formally independent from their masters it was proposed to cut the land given to the liberated below the size they cultivated while serfs. In some provinces these plots were cut by 30–45% (Pashkov, 1958, p. 348). This forced the peasants to rent the land from landlords. There were also other provisions in the Peasants Liberation Act which gave the former landlords many sorts of compensation at the expense of the peasants, which was later the main cause of several Russian revolutions. Of course, there were also the radical revolutionary views of those who opted for elimination of landlords’ land property but they did not write proposals but called the peasants to revolt against landlords. At the same time the open discussion in journals mostly turned around a more abstract question – the historical role of Russian agricultural common (‘obshina’) which remained the principal institution in Russian villages after the peasants gained personal independence from the landlords. The main question debated was whether the obshina was an impediment to capitalist development which had to be removed (this was for instance the opinion of the liberal professor Ivan Vernadsky who edited the journal Ekonomichesky ukazatel) or an alternative to the evils of Western capitalism, which could eventually lead to a socialist society (that was the view of the inﬂuential radical journalist, writer and economist Nicolai Tchernyshevsky writing for the literary magazine Sovremennik). Both authors were strong opponents of serfdom but had diﬀerent perspectives on the future development of Russia. Such a kind of debate, which was quite representative of the Russian situation at that time, was too broad and general to inﬂuence the exact course of reforms though Prof. Vernadsky was for some time working in the government. But its importance consisted in shaping public opinion (which in Russia of the 19th century was expressed through literary magazines). The absolutist government could, of course, ignore views of such kind and it did but in critical moments it could become somewhat more sensitive. Talking about scholars whose work directly inﬂuenced the reforms adopted we should probably mention a signiﬁcant role played by a note written in 1857 for the Tsar Alexander II by a German scholar, baron August Hacksthausen, who was one of the ﬁrst researchers of Russian obshina. Among the radical left-wing opponents of oﬃcial reforms was the above-mentioned Nikolay Chernyshevski. He was well read in political economy and translated John Stuart Mill’s Principles of Political Economy into Russian. But even he used mostly moral and not economic arguments in his struggle against serfdom and tsarist reforms. The most important stabilization reforms in tsarist Russia after the 1860s were associated with the name of Count Sergey Witte, Finance Minister (1892–1903) who succeeded in stabilizing the currency, introducing the gold

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standard, eliminating the budget deﬁcit (by introducing a state monopoly on alcohol production, raising excise taxes and import duties) and encouraging railway construction. It is worth noting that Count Witte was well acquainted with Friedrich List’s ‘national system of political economy’ and even wrote a book about him, though Witte himself was not an economist but a railway engineer. Summing up, we could say that in tsarist Russia the impact of economists on reforms was not very signiﬁcant.

COMMUNIST RUSSIA The October Revolution of 1917 was headed by a Marxist party striving to realize Marxist ideas. In this sense it was highly ideologically inﬂuenced. However, Marxism did not have any coherent economic theory of a desired communist society so the policy pursued in 1918–21, which was labelled ‘military communism’, was something of an improvisation which followed abstract Marxist guidelines. The main ideas were to turn all the means of production into state property and introduce the ‘direct product exchange’ instead of trade. The theorists of military communism: Nikolai Bukharin, Evgeni Preobrazhensky, Yuri Larin emphasized the goal of eliminating money from the economic process. Promoting this goal the Bolshevist government followed the policy of deliberate inﬂation through unrestricted money emission (Timoshina, 2000, p. 212). Of course, this measure also fulﬁlled beside the ideological function the pragmatic function of securing state revenue. As a result the monetary system was ruined, taxes and debts, rents and pay for public transport were abolished and ﬂows of goods were directed by the central and local authorities. Retail trade in bread and other foods was also prohibited. Labour and food supply was performed by coercion. But military communism, ruining the theorists’ hopes, could not displace market economy. Chaos became allpervasive, which explains the success of the subsequent economic reform, restoring the sound functioning of economy. The obvious reasons for this so called ‘new economic policy’ (NEP) proclaimed in 1921 were mass hunger, and uprisings of peasants from whom bread was taken without compensation because the real ‘direct product exchange’ proved impossible to organize and, most importantly, strikes in cities and a revolt in the Navy base of Kronstadt. But it is worth mentioning that even then Lenin, who was in favour of NEP, could hardly convince his ideologically driven party comrades that such a ‘temporary retreat’ was necessary for the ﬁnal victory of communism. Existing materials convince us that NEP was not a theoretically elaborated and thoroughly discussed policy option. The

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plan for a radical policy change was proposed quite unexpectedly for the participants of the X Party Congress, which adopted it, and undoubtedly resulted from the concomitant uprising in Kronstadt and deliberations of Lenin about the dangers of Thermidor (notes about the experience of the French Revolution emerge every now and then in Lenin’s papers of that time (see Starodubrovskaya and Mau, 2001, p. 136)). The NEP measures themselves mostly represented common sense – replacement of conﬁscation of grain by tax in kind, allowing the peasants to keep the rest, subsequent restoration of trade etc. As a corollary a successful monetarystabilizing reform was conducted under the leadership of ﬁnance minister Sokolnikov, but the real fountainhead of the reform was his councillor economist Leonid Yurovsky. The success was spectacular because the old currency was nearly completely ruined after the years of military communism and, after the reform, the new Soviet currency (tchervonets) became convertible into gold and foreign currencies. Not surprisingly the next sharp turn in Soviet economic policy began by rejection of the strict monetary policy and international convertability in favour of ‘credits to socialist industry’. Stalin’s policy of industrialization and collectivization of agriculture that was substituted for NEP and laid the basis of command economy and totalitarian society in the Soviet Union in principle was a continuation of the military communism doctrine. Another oﬃcially proclaimed objective was to get prepared for imperialistic aggression from the West. At that time the change of policy caused intense discussion among Soviet economists and politicians. Probably never before were the questions of economic policy so politically relevant in Russian history. Extreme positions in Bolshevist leadership were represented by the left wing (Zinoviev, Kamenev and Trotsky) pleading for accelerated industrialization at the expense of the peasants and the right wing (Bukharin, Rykov and Tomsky) advocating gradual reforms through the development of the agricultural sector. Stalin, who was famous for his political skills, ﬁrst made an alliance with the right wing against the left and after the defeat of the latter changed direction radically and then eliminated the rightists and pursued the leftist policy in its extreme version. Needless to say all the leaders of both wings were physically eliminated. The political struggle was accompanied by intense discussions among Soviet economists. All of them were Marxists and supported planned economy by that time but some, including Nikolai Kondratiev, wanted the plans to be built upon estimates and forecasts of real economic tendencies and not to destroy the intersectoral balance between industry and agriculture whereas the others, for example Stanislav Strumilin, opted for the unlimited discretionary power of the planners to set the desired objectives anticipating, of course, the preferences of the rulers. The theory of macroeconomic planning was the original invention of Soviet

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economists which enriched the world economic thought (including the input–output analysis of Vassily Leontiev and the growth model of Grigory Feldman which were to some extent a by-product of the theory of planning). But eventually in this case as in so many others economists did not exert much inﬂuence on policy-making. The negligible role of economists in the subsequent epoch of 5-year plans is manifest from the fact that those who expressed any doubt concerning the unrealistic plan ﬁgures adopted by the Central Committee could be easily sentenced to death. Another fact: the chairman of the All-Russian Economic Council (future Gosplan) Valerian Kuybyshev received from Stalin the order to provide the balance of main indicators of the ﬁrst 5-year plan in one night (!) (October 12, 1927) (Vsemirnaya istoriya economicheskoy mysli vol.4 1990, p. 144). In addition we should mention the complete falsiﬁcation of statistics which began at the time of the ﬁrst 5-year plan. After the partial liberalization of the Stalinist totalitarian state and a short period of spasmodic, partial and idiosyncratic economic policy measures initiated by Khrushtchev (they were largely his own invention and professionals were involved only to elaborate the details – a striking example was the adoption of the obviously absurd Programme of the Communist Party declaring fully-ﬂedged communism with free goods for everybody in 20 years), an attempt at a comprehensive economic reform was proclaimed in 1965 (the so-called Kossygin reforms named after the Prime Minister Alexey Kossygin). The easing of totalitarian pressure led to a relative decentralization of the Soviet economy which called for quasi-market reforms. In this case the involvement of Soviet economists was considerable and the reforms were partly inspired by an article by Professor Evsey Liberman which was supported by leading mathematical economists such as L. Kantorovich, V. Nemchinov and V. Novozhilov. The Kossygin reforms envisaged a considerable liberalization of enterprises within the central planning system. The number of centrally determined indicators for an enterprise radically reduced and the latter even had the possibility of retaining a small portion of its ‘proﬁts’ (selling prices remaining ﬁxed) to use for investments, bonuses for workers and social beneﬁts. As a result the controversy emerging between the central planning framework and new incentives for enterprises led to growing tensions (for instance the enterprise tried to reduce the output of nonproﬁtable products which, given the arbitrary and ﬁxed prices, was not necessarily socially optimal). This controversy was settled by restoring stricter planning partly because the developments in Czechoslovakia showed a possible way how ‘market socialism’ could evolve, which was unacceptable to Soviet leaders. But we must also not forget the strong opposition to the Kossygin reforms from powerful bureaucratic circles.

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POST-COMMUNIST RUSSIA An important and most recent example illustrating the interrelationships of economics and politics in Russia is the period of perestroyka and the beginning of market reforms in Russia of the 1980–1990s. At the beginning the objective of Gorbachev’s reforms was some kind of industrial policy called ‘acceleration’ that had to restore the military balance between the USSR and the USA. This could be considered as a parallel to the great reforms conducted by the tsar Alexander II in 1860s. The immediate cause of those thoroughgoing and comprehensive reforms was the military defeat of Russia in the Crimean war of 1854–55 which revealed the industrial weakness and economic ineﬃciency of the country connected with the old feudal organization of agriculture. In the case of ‘acceleration’ the immediate cause was rather a potential than a real defeat: the obvious inability of the USSR to keep pace with the USA in the arms race (though a military defeat also manifested itself in Afghanistan by that time). In any case at the initial stage of reforms nobody could foresee that they would result in a transition from planned to market economy. Accordingly there was no consequent strategy of transformation, at least until 1991. The widening and deepening of reforms under Gorbachev and later under Yeltsin was rather a reaction to the failure of their previous stages. These failures were both of a political and economic nature. Gorbachev, Yakovlev and other Communist Party leaders of the reform-oriented wing obviously thought that the easiest thing to do was to sacriﬁce some communist ideology which apparently was not at that time believed by the majority of the population and introduce some freedom of speech (glasnost). The result of this was eventually the collapse of the whole socio-economic system of communism the elements of which (including the absence of ‘glasnost’) proved to be more coherent than anybody could believe. The party and KGB control over economy and society that was vital for the whole system could not be eﬀective under any kind of freedom of speech or real political democracy. Stalin and Brezhnev seemed to understand that much better than Gorbachev. Especially detrimental for the economy were the attempts of Gorbachev and Prime Minister Ryzhkov to promote freedom and democracy for and within state-owned enterprises (the so called Law on Socialist Enterprise, 1987). The enterprises and their workers received freedoms unheard of earlier. For instance the chief managers received the possibility of spending the proﬁts as they wanted: for raising wages or for investments. It is easy to guess which way was chosen because, according to the same law following the worst Yugoslav example, the workers were allowed to elect their chief managers. On the macro level the struggle for democracy also contradicted economic objectives for the Parliament, dominated by the

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populists, received the power to approve or reject all government proposals (during the Soviet era this power was purely formal). The last phase of Gorbachev’s perestroyka was probably the ﬁrst time in Russian history when a professional economist was appointed to a leading government post: the Deputy Prime Minister of the Soviet Union formally made responsible for economic reform. This was the Director of the Institute of Economics of the Soviet Academy of Sciences, Professor Leonid Abalkin. He proposed a kind of moderate reform policy which was probably closer to the Chinese variant. But at that moment such reforms were no longer politically feasible. Very soon the political pressure from the party hardliners made Abalkin resign. At the second attempt the same position in the government (this time of the Russian Federation) was given to the economist of a younger generation, Grigori Yavlinsky, who in 1990 with other economists from the Academy of Sciences was one of the principal authors of the famous programme of radical market reforms called ‘500 days’. Whether this programme was altogether feasible is another question, but the fact is that the logic of reforms was dissolved in political compromise before actual reforms were allowed to begin. The longest experiment with an economist at the head of the government in the whole of Russian history was the year-long leadership of Yegor Gaidar and his government consisting mostly of economists of the younger generation in 1991–92. Formally the government was at ﬁrst headed by President Yeltsin himself and later Gaidar was appointed the acting Prime Minister because this could be done without getting approval from Parliament. But from that period young reformers were given relative freedom by President Yeltsin only during the ﬁrst three months. The other side of the coin was, however, the complete unpreparedness of Russian (Soviet) economists to handle the problems of economic policy in market or quasi-market environments. The practical economists inherited from the Soviet era knew the initial but not the ﬁnal point of the reforms. The vast majority of academic economists were experts in dogmatic marxism and nothing else. Young and energetic academic economists including Gaidar and his ministers possessed the abstract knowledge of how market economy works and how the reforms in other countries (ﬁrst of all Poland and Latin American countries) proceeded. The latter experience, summed up under the name of the Washington consensus, served as a blueprint for the reforms in Russia. Yeltsin–Gaidar reforms are often considered an example of ideologydriven policy and their opponents tend to draw a parallel between them and Bolshevist economic policy conducted in 1918–21. But certainly political considerations and power play of diﬀerent interest groups played a much more important role than any theoretical or ideological reason. The complex interaction of imported economic theory and adopted reform

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technology with Russian economic and political reality deserves special treatment. Let us take for instance the much discussed issue of Russian privatization. In the speed and scope of mass privatization Russia was ahead of all countries of Central and Eastern Europe, excluding East Germany of course. But its consequences were far from satisfactory both in terms of eﬃciency because control remained with the insiders and no eﬀective corporate governance emerged, and in terms of state revenue because privatization vouchers were distributed free of charge. The reasons Russian privatization took its actual shape were mostly political and had little to do with liberal orthodoxy. On the one hand, given the weakness of government and quasi-independence of formally state-owned enterprises it was considered necessary to give their managers (directors) the control which they already informally possessed to gain their support for other market reforms (a sort of a bribe in Gaidar’s words). On the other hand the reformers decided for a free-of-charge voucher scheme only under the pressure of the communist-dominated Supreme Soviet of Russia because otherwise privatization plans had no chance of passing through the Parliament. Even the price liberalization – the core of any thinkable market reform – was later advocated by the reformers not on ideological but on emergency pragmatic grounds: the consumer markets could not function any longer with ﬁxed prices which meant a threat of famine. An important argument supporting the latter statement is the freezing of prices for energy, milk and bread, home rents and public utilities, which was carried out for political reasons. But there was an item which advocates and adversaries of reform likewise considered an ideologically and theoretically dominated one. It was the monetarist stabilization policy conducted in winter 1992 – severe cutting of government expenditures and contraction of money supply. Its results were estimated very diﬀerently by diﬀerent observers but for our purpose the most important thing is that this probably most theoretically oriented part of the reforms did not survive in a relatively rigorous form longer than spring of the same year. Since then the Russian macroeconomic policy has been much more ﬂexible and prone to compromise due to the considerable political pressures of diﬀerent interest groups. Another example is the formation of the Russian stock market which (according to the initial blueprint) should have proceeded more or less on American lines: the ownership of corporate shares by commercial banks or other corporations should have been prohibited or constrained. But the real vested interests of leading bankers were stronger than the original plans and very soon the so-called oligarchs emerged uniting banks and giant industrial enterprises under their control (Starodubrovskaya and Mau, p. 193).

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This was no doubt a superﬁcial account of the historical facts illustrating the relationships between economics and policy in Russia but it must suﬃce to show that besides replication of general tendencies these relationships displayed a considerable degree of speciﬁcity.

REFERENCES Eidelman N. (1989), Revoluziya sverkhu v Rossii [Revolution from above in Russia], Moscow: Kniga. Pashkov A.I. (ed.) (1958), Istoriya russkoy ekonomicheskoy mysli [History of Russian Economic Thought], vol. 1, Moscow: Sotsekgiz. Schumpeter J.A. [1954] (1997), History of Economic Analysis, London: Routledge. Starodubrovskaya, Irina V. and Vladimir A. Mau (2001), Velikiye revoluzii ot Cromwelya do Putina. [Great Revolutions from Cromwell to Putin], Moscow: Vagrius. Timoshina T.M. (2000), Ekonomicheskaya istoria Rossii [Economic History of Russia], Moscow: Filin. Vsemirnaya istoriya economicheskoy mysli, vol. 4 (1990), [World History of Economic Thought], Moscow: Mysl.

PART V

Polar Reactions to the Great Depression

17.

The Great Depression in Irving Fisher’s thought Giovanni Pavanelli*

INTRODUCTION The Great Depression was, without doubt, a watershed in contemporary economic thought: Keynes’ General Theory can be read in large part as a sophisticated intellectual eﬀort to explain and counteract this unprecedented downturn in economic activity. Nevertheless, major debates and controversies notwithstanding, we are still far from having a complete explanation of this event. The stock market crash of October 1929 and its connection with the subsequent severe contraction of real output have also been the object of conﬂicting interpretations. During the past decade, however, considerable progress has been made. Research, which was traditionally centred on the events internal to the United States, has now broadened in scope and stresses such factors in the spread and worsening of the Depression as the gold standard and the related rules of the game on the one hand and the First World War’s legacy of overall indebtedness and reciprocal mistrust and rivalry on the other (Eichengreen, 1992; Temin, 1993). Some recent studies have focused on the eﬀects of the fall in prices on the ﬁnancial stability of households and ﬁrms (debt–deﬂation eﬀects: cf. Bernanke and Gertler, 1990; King, 1994; Wolfson, 1996). In this framework, a growing number of studies have taken up the theoretical contribution and policy proposals of Irving Fisher (cf. Barber, 1996, 1999; Dimand, 1994, 1995; Steindl, 1995, 1999). Fisher, who is considered the leading American economist of the twentieth century, was also one of the most acute observers of the complex and dramatic macroeconomic events of his day and one of the most active in seeking a solution to the problems they posed for the scientiﬁc community. For Fisher, as for other economic scholars, the Depression was an unexpected event that demanded new answers. As the crisis was gathering, he had voiced a series of optimistic assessments of the fundamental soundness of the American economy and had ruled out any possibility that the stock market would collapse. The 289

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crash of 1929 and the vicious circle of falling prices and the aggravation of real private-sector debt led him to make substantial modiﬁcations of his theory of economic ﬂuctuations and to elaborate a new theory of ‘great’ depressions (debt–deﬂation theory) which, as noted, has gained renewed prominence of late. This chapter oﬀers a critical re-examination of Fisher’s view of the origins of the Great Depression, his ‘debt deﬂationary theory’ and the policy measures he advocated.

INTERPRETING THE STOCK MARKET CRASH AND THE GREAT DEPRESSION On the eve and on the morrow of the stock market crash of 1929 Fisher – who, by the way, had put most of his own wealth in shares – issued a series of reassuring statements on the stock market trend and, more generally, on the state of the American economy. In February 1929, in the face of signs of a reversal of the upward trend in stock prices, he wrote: ‘The reﬂuent wave of trading has left prices of securities, and especially of common stocks, on a shelf where they will remain permanently higher than in past years’ (Fisher, 1929a). And again, and even more explicitly, in September: ‘Stock prices are not too high and Wall Street will not experience anything in the nature of a crash’ (Fisher, 1929b). These pronouncements, which were almost immediately shown to be completely wrong, certainly undermined the Yale economist’s academic credibility as well as public trust in his analyses.1 Yet Fisher’s forecasts were neither naive nor totally unfounded. In brief, he held that share prices incorporated the present value of expected dividends; more generally, the stock market reﬂected expectations on companies’ future performance and that of the economy as a whole. In Fisher’s view, immediately after the First World War the industrialised countries, and the United States in particular, had experienced a great expansion in scientiﬁc and technological research and its systematic application to manufacturing. American industry had thus greatly increased its productivity and was able to develop and market new consumer goods (the automobile, the radio, the telephone). Furthermore, eﬃciency gains had been obtained thanks to better use of productive factors and the improved living conditions of the working class. Therefore, it was reasonable to expect considerable increases in production and proﬁts.2 These elements, according to Fisher, explained ‘between two-thirds and three-fourths of the rise in the stock market between 1926 and September 1929’ (Fisher, 1930, p. 259);3 this apparently ‘healthy’ trend, however, had been altered by risky speculative manoeuvres, facilitated by an excessively permissive credit policy. The stock

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market had therefore become increasingly precarious and vulnerable to bearish speculation, until the crash of October–December, which ended up bringing down even ﬁrst-rate securities. In 1930 and 1931 Fisher remained basically optimistic about the prospects of the American economy and continued to predict the imminent recovery of stock prices. In any case, he aﬃrmed repeatedly, it was not at all inevitable that the crisis in the ﬁnancial markets would spread to the real economy. The Depression, in other words, could be avoided as long as businessmen did not let themselves be dominated by pessimism and did not cut back their production plans. It is also signiﬁcant, in the light of the recent ‘rediscovery’ of the international dimensions of the Depression, that Fisher did not limit his considerations to the American situation. If a rapid recovery of the economy was desired, he wrote, it was necessary to get free of the heavy legacy of the World War, such as the inter-allied debts,4 and to radically review American customs policy, abolishing the 1930 Smoot-Hawley tariﬀ, which had reduced international trade and had worsened the current account deﬁcits of the European countries, preventing them from paying their debts to America in the only way possible, namely by exporting their own products. As the Depression worsened, Fisher became convinced that the crisis could not be simply interpreted as a downturn in the business cycle, however severe, and that it was something radically diﬀerent that demanded a new theoretical explanation. Starting in January 1932, therefore, he began to devise a new theory of ‘great depressions’, based on the interaction of two factors: i) an initial situation of over-indebtedness; ii) a dynamic process of price reduction.5 The ‘over-indebtedness’ could have had many causes and did not necessarily imply the hypothesis of irrationality in the behaviour of economic agents: on the contrary, it could be explained as a rational response to the proﬁt opportunities created by ‘technological improvements’ and ‘inventions’. In any case, according to Fisher, a real shock would usually trigger short-term and not particularly serious adjustment processes. The explosive dynamic process typical of ‘great depressions’ had its origins, rather, in the fact that the initial over-indebtedness was progressively aggravated by deﬂation. In brief, the model considered ﬁrstly a system burdened with debt, but otherwise in equilibrium, albeit an unstable one; in this situation, a minor shock (‘bad news’ or a fall in share prices) was enough to undermine the conﬁdence of ‘either debtors, creditors or both’ and to lead to a ﬁrst wave of liquidation of debts. The rush to ‘liquidate’ led to ‘distress selling’6 and the consequent sharp fall in share prices and a contraction of bank deposits. This triggered deﬂation, which in turn increased the stock of debt in real terms.7 In essence, the attempt by individuals and banks to reduce their debt touched oﬀ a perverse dynamic process that worsened their

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situation in real terms, dragging them towards ﬁnancial collapse. The immediate consequence was a wave of bankruptcies that drove prices still further down. The generalised reduction in prices also damaged the entrepreneurs who were not in debt: their sales prices fell faster than costs, squeezing proﬁts. Now, in a capitalistic system, Fisher writes, ‘it is the proﬁt taker who usually makes the decision as to the rate at which his enterprise is to be run’ (1932a, p. 30). A fall in proﬁts was thus bound to bring a general reduction in output and employment. Taken together, these factors produced a lack of conﬁdence and pessimism that translated into a general rush towards money: phenomena of hoarding thus multiplied, further reducing the velocity of circulation of money and lowering price levels; consumption contracted even further.8 Again in this case, therefore, the eﬀort by each agent to improve his own position led to a worsening of the overall situation: ‘Every man who hoards does it for his own protection; yet by hoarding he aggravates the very condition that started his fear’ (1932a, p. 36).9 In essence, if not adequately countered by the monetary authorities, the deﬂationary process will set in motion a perverse, self-fuelling spiral bound to cause ‘almost universal bankruptcy’ (Fisher, 1932a, 1933). The debt–deﬂation theory, according to Fisher, explained what had happened in the United States and Europe between 1929 and 1932. Referring to the ﬁrst factor, over-indebtedness, Fisher ascertained that on the eve of the stock market crash many ﬁrms and households were heavily indebted. One of the factors behind the enormous pyramid of debt that had been created was certainly the war: ‘To support the most colossal of all wars required prodigies of ﬁnance’ (1932a, p. 71). With reference to the United States, however, it was also necessary to consider other aspects. As already noted, in the 1920s the American economy was characterised by an investment boom, induced by the spread of technological innovations in manufacturing; this had encouraged many ﬁrms to borrow heavily in expectations of higher proﬁts. This process had also involved farming, stimulated by the sharply rising demand for food. Finally, the stock market boom had been accompanied and fuelled by the growing indebtedness of ﬁnancial operators. The Wall Street crash was the detonator, triggering the downward spiral predicted by debt–deﬂation theory. It is in any case worth noting, in the light of today’s debate, that Fisher also examined the international factors that had acted as ‘accelerators’ of the deﬂationary spiral. Booms and Depression accurately reconstructed the dramatic events of 1931–32 that had thrown the world into depression: in particular, the link between bank failures in Austria and Germany, the ensuing crisis of sterling, motivated by the huge amount of short-term credit granted to these countries by the British monetary authorities, and the simultaneous speculative attack on American gold reserves. This in par-

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ticular, wrote Fisher, demoralised the US banking community, spread hoarding and prompted bank runs: ‘Both banks and their depositors began raiding each other in a cut-throat competition’ (1932a, p. 104).

THE ‘STAMPED MONEY’ PLAN In any case – coming to the policy proposal that Fisher drew from his debt–deﬂation theory – at least in the United States the Depression could have been avoided, or at any rate its consequences mitigated, by an expansionary monetary policy. On this question, Fisher maintained that one of the causes of the collapse of the economy was the Federal Reserve’s abandonment of the stabilisation policy that had been pursued during the 1920s by Benjamin Strong, the powerful governor of the New York Federal Reserve Bank, who died in 1928 (Fisher, 1934a;10 see also Steindl, 1995, pp. 103–4 and Cargill, 1992). Once the crisis had started, the right way to get out of it was, in his view, ‘reﬂation’, in other words a monetary expansion to bring prices back up to their pre-1929 level. Monetary policy, according to Fisher, was extremely eﬀective, while ﬁscal policy could at best play an ‘ancillary’ role. On this matter Fisher’s analysis contains some crucial elements that we must consider in some detail. A ﬁrst point is the role that he ascribed to money in the economy. As is evident from his writings of the 1930s, Fisher’s vision anticipates some aspects of the ‘monetary circuit’ schemes recently taken up in the literature (cf. Graziani, 1988). Money, Fisher wrote, had to be considered as the fundamental distributive mechanism in the market economy; it was the ‘bridge’ between the producer and the consumer (1932a, pp. 6–7). ‘Money’, he maintained in a text written in 1938, ‘has become a prime necessity in our civilization. Without it goods cannot be sold, and will not be produced. There may be crying need for the necessities of life; there may be all the iron, steel, coal, lumber and other raw materials needed for manufacturing; there may be millions of able-bodied men anxious to work: Yet, if there is no money, there is no production; there is starvation and unemployment.’11 In advanced economies, of course, what mattered was not ‘pocket-book money’, or cash, but ‘cheque-book money’, or the bank deposits that constituted nine-tenths of the total means of payment. The wave of bank failures of 1931–33 had thrown this mechanism into crisis, depriving the economy of the necessary liquidity. One of the crucial aspects of the Depression, Fisher wrote, was the sudden destruction of more than a third of the ‘circulating medium’ (eight billion dollars out of a total of 23), i.e. a notable part of the money necessary ‘to transact our business’.12

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A second point is the transmission mechanism, which explains how an expansionary monetary policy can induce an increase in output and prices. Now, notwithstanding a few ambiguities, Fisher uses the term ‘money’ to mean ‘purchasing power in monetary terms’: an increase in the means of payment available to agents, in other words, induces an increase in aggregate demand, which in turn pushes prices upwards.13 Now, the ﬁrst causal link in this schema (increase in demand followed by an increase in purchasing power), could certainly not be taken for granted. During a serious depression, agents tend to hoard their own liquid assets; a greater supply of liquidity, therefore, could have no real eﬀect. This crucial point was underscored by Keynes. Money, Keynes wrote in Chapter 17 of the General Theory, is distinguished from other forms of wealth by the fact that its elasticity of production and substitution were zero ‘or at any rate very small’, and that its carrying costs were negligible; it therefore tended to become ‘a bottomless sink for purchasing power’ (Keynes, 1973, p. 231). Fisher, in a diﬀerent theoretical framework, was aware of this point, as is shown by his handling of hoarding in Booms and Depressions.14 In the second half of 1932, the bleakest period of the Depression, he became a supporter – as a ﬁrst concrete measure aimed at counteracting the tendency to hoarding – of a plan for ‘stamp scrip’ or ‘stamped money’. The proposal of stamped money had ﬁrst been made at the end of the nineteenth century by the social reformer Silvio Gesell,15 but the plan was not applied with signiﬁcant results until decades later. The ﬁrst experiments were conducted in two small towns in Germany and Austria in 1931–32 (Blanc, 1998). In brief, ‘stamped money’ was a promise of payment issued by a public body or municipality, usually with the guarantee of a bank, which circulated as a banknote but that, within a given period of time, could be taken out of circulation and converted into legal tender. Its peculiarity was that it was subject to a periodic ‘tax’ (for example two cents per dollar per week) in the form of a stamp that had to be aﬃxed to the back of the note. This made the plan a self-liquidating operation at no cost to the ﬁnances of the authority that issued the notes. The city could thus promote public works, remunerating workers who would otherwise remain idle.16 The notes were obviously characterised by an high velocity of circulation, as every agent had an evident interest in spending the scrip quickly so as to avoid the tax (cf. Fisher, 1933d). During 1932 and 1933 several rural communities in the United States tried to put limited amounts of stamp scrip into circulation in order to reduce unemployment and increase consumption. The ﬁrst experiment took place in Howarden, Iowa, and the example was soon followed by other municipalities and merchant associations in Iowa, Illinois and Kansas. When Fisher learned of the plans in the ﬁrst half of 1932, he endorsed them

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enthusiastically. The information was brought to him by Hans Cohrssen, a member of a ‘Free Economy League’ founded by Gesell (cf. Cohrssen, 1991). In several syndicated columns written between July 1932 and January 1933, Fisher presented the stamped money plan as an eﬀective way of stimulating consumption and putting idle men to work. He included it among ‘other plans for reﬂation and stabilization’ in the British edition of Booms and Depressions published in 1933. In the same year, with the assistance of Cohrssen and of his brother Herbert, he wrote a guidebook on the subject (cf. Fisher, 1933d) and spent a good deal of energy promoting the plan among private associations and communities.17 The Gesell plan also received favourable comment from Keynes: ‘The idea behind stamped money’, he wrote in the General Theory, ‘is sound’ (Keynes, 1973, p. 357). However, he saw a major problem in its large-scale application. Money, wrote Keynes, was by no means the only form of wealth characterised by a liquidity premium; it was therefore likely that, once it was subjected to a tax, agents would try to replace it with other assets, such as gold or silver, banker’s cheques or other means of payment. In 1933, in any case, all forms of substitute money were declared illegal by the Rooosevelt Administration, and the experiments came to an abrupt end. As we have seen, an essential point in Fisher’s plan was that the increase in demand, while necessary, was inevitably only a ﬁrst step. To get out of the Depression, a substantial rise in prices was also necessary. This point was constantly emphasised by Fisher in his writings from these years: The government should have borrowed and spent, thus contributing to reﬂation and to a higher price level. And every climb in the price level would have lowered the real debts, public and private . . . This would have stimulated business (1932a, p. 105).

or again: An increase of prices means, for the producer, an increase of proﬁts or a wiping out of losses. That in turn means an increase of business activity and a decrease in unemployment. This rise of prices tends to save us from the two great evils of Depression – bankruptcies and unemployment (1932d, p. 10).

FISHER’S PROPOSALS DURING THE NEW DEAL Fisher did not tackle the problem of stabilisation only from a theoretical standpoint. Rather, he made great eﬀorts to persuade policymakers and testiﬁed at the main Congressional hearings. In 1932, in particular, he

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strongly supported the Goldsborough Bill, which called on the Federal Reserve ‘to take all available steps’ to raise the price level to its pre-1929 level and then to stabilise it. In addition, he corresponded regularly with President Roosevelt and the leading members of his Administration (cf. Allen, 1977; Barber, 1996). Although it is not easy to determine the exact extent to which Fisher inﬂuenced the policies adopted in these years, it can be hardly denied that at least in the ﬁrst phase of the New Deal in 1933–34 the monetary measures adopted by the Administration went in the direction he suggested.18 In this sense, the ideas expressed by Roosevelt in his well-known July 1933 radio address during the London Conference are revealing: ‘The United States’, Roosevelt asserted, ‘seeks the kind of dollar which a generation hence will have the same purchasing and debt-paying power as the dollar value we hope to attain in the near future’.19 For his part, Fisher commented more and more positively on Roosevelt’s monetary policy measures, in the ﬁrst place on his decision to suspend the gold standard. Fisher’s contribution in this area appears even more important if one considers that many of the most authoritative economists of the day and the most representative bankers tenaciously opposed these measures as dangerous and subversive, advocating the retention of the gold standard at all costs.20 Fisher also openly praised the policy of raising the dollar price of gold, championed by George Warren and Frank Pearson of Cornell University and implemented by the Treasury during the course of the two years 1933–34 with massive purchases of gold (in other words, devaluing the dollar vis-à-vis the currencies that used the gold standard) with the aim of raising the prices of goods (cf. Warren and Pearson, 1933). In practice, however, the monetary-centred policy of reﬂation in 1933–34 only partially achieved its aims.21 In the second half of the 1930s, most economists and the Administration, including the Federal Reserve, came to the conclusion that monetary policy was basically ineﬀective and that ﬁscal policy measures were needed to stimulate economic recovery. Fisher realised that the open market operations promoted by the Federal Reserve had been only partially successful. His response was to promote a radical revision of the credit system, based on the abolition of fractional reserves (Allen, 1993). With this method, wrote Fisher, the ‘circulating medium’ was in fact simply a by-product of the private debt, and monetary policy was unpredictable: an increase of the monetary base could bring about a sustained inﬂation or be almost ineﬀective (Fisher, 1936a, p. 105). This latter was exactly what had happened during the Depression: for fear of bankruptcy, banks had used most of the liquidity obtained from the Fed to inﬂate their own reserves. If the situation improved, these excess reserves could fuel a surge in inﬂation.22

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These dangers could have been avoided by requiring the banks to hold reserves equal to their demand liabilities (so-called ‘100% money’).23 In this way, ﬁnancial institutions’ lending function would be clearly separated from that of money creation. The central bank would thus gain full control over the money supply. Even in this case, however, monetary policy could only be eﬀective if the velocity of money and of the demand deposits (V and V) were stable. Fisher had analysed in detail these fundamental components of the equation of exchange in The Purchasing Power of Money, published in 1911. The main purpose of this book, however, was to set rigorously the theoretical conditions under which the quantity theory held. Fisher, therefore, was basically satisﬁed with the assertion that in equilibrium the causes aﬀecting the velocity of money were exogenous and speciﬁcally that both V and V were ‘independent of the quantity of money or of deposits’ (respectively M and M; Fisher, 1911, p. 154). During transition periods, on the contrary, V and V could ﬂuctuate considerably as a consequence of changes in M and M. In 1931–32, as already mentioned, he was ready to admit that, as a consequence of widespread hoarding, the velocity of money had sharply fallen (cf. Fisher, 1932a, pp. 34–7). In the second half of the 1930s, however, he gradually modiﬁed his position. In a paper presented in 1940 at the Cowles Commission he came to the conclusion that velocity of circulation was ‘fairly constant for unspeculative accounts’ and maintained that ‘the drop between 1929 and 1933 was probably much more apparent than real’ (Fisher, 1940; cf. Dimand, 2000). Presumbly his desire to promote a reform that he considered indispensable to the stability of the economic system had induced Fisher to oversimplify his earlier position.24 The ‘100% money’ project, which Fisher did his best to push with his usual energy (he published a monograph and several articles on this subject; see for example 1936a and 1936b), had been borrowed, as he acknowledged, from his colleagues at the University of Chicago,25 and it marks an important turning point in his stance on monetary policy. Starting in the second half of the decade, Fisher strongly supported a policy of managed money, although limited by rules. It was necessary, he maintained in 1937 before the Committee on Agriculture and Forestry, to get rid of automatic mechanisms that had once seemed desirable, replacing them with ‘a really managed currency’ (Fisher, 1937). In this context he reiterated his account of the role of the gold standard in spreading the Depression internationally. In the 1920s Fisher, together with Keynes, had been one of the main critics of the gold standard, which he saw as unable to guarantee domestic price stability. In the 1930s, he was commissioned by the International Statistical Institute to analyse the inﬂuences exercised by monetary standards on the international propagation of

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economic ﬂuctuations. The results of this research, published in 1935 (cf. Fisher, 1935b), are striking and anticipate much of the research conducted in recent years (cf. Choudri and Kochin, 1980; Eichengreen, 1992). Using data from several nations in diﬀerent monetary systems, Fisher demonstrated that the countries that had abandoned the gold standard earliest or that had never adopted it had performed better in output and employment and the level of prices.26 On ﬁscal policy, Fisher had been very critical of the Hoover Administration’s restrictive measures. ‘Balancing the budget’, he wrote in 1932, ‘by reducing expenditures for many useful services and by extracting larger revenues from reduced income is deﬂationary’ (Fisher, 1932c). In general, however, he maintained that an expansionary monetary policy was suﬃcient to cure the Depression and that there was no need for deﬁcit spending: ‘Public works’, he wrote to Roosevelt in 1934, were ‘the slowest, dearest and usually least beneﬁcial’ way of dealing with the problem.27 Fisher apparently failed to grasp the multiplier eﬀect and interpreted the expansionary impact of deﬁcit spending in terms of his monetary model: in order to ﬁnance public works, government had to borrow from the Federal Reserve, thus increasing the monetary base and stimulating demand.28 On the other hand, Fisher vigorously opposed the New Deal measures to restrict supply and enforce economic planning. In particular, he considered the initiatives to regulate wages and production as totally misguided. He ﬁrmly believed that these policies could jeopardise the results obtained by monetary measures, slowing down the recovery and prolonging the Depression. The policy of high wages, wrote Fisher, was based on the hypothesis that in this way it would be possible to create new purchasing power. The demand for labour, however, was not invariable: ‘Wages’, he wrote in 1936, ‘are aﬀected by supply and demand like any other price. . . . If you raise the price of labor arbitrarily, less labor will be bought. . . . Arbitrary mark-ups never succeed’.29 In Fisher’s opinion, this was why, in a context where the Depression appeared to be fading, the unemployment rate remained high. He concluded that in order to reduce unemployment, it would have been better to grant subsidised loans directly to employers, according to the number of additional workers they hired (cf. Fisher, 1997, pp. 63–4). No less severe were his objections to the policies aimed at restricting production, for the purpose of raising prices: The philosophy of limiting production is particularly out of place at present for we are suﬀering from too little wealth, not too much – notwithstanding popular illusions as to ‘overproduction’. We can scarcely feed the hungry more bread by destroying material of which the bread is to be made nor clothe the naked by destroying the material of which the clothes are to be made (1933c, p. 6).30

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More generally, Fisher strongly criticised the idea that the slump of the 1930s was due to structural ﬂaws of the market economy and that it demonstrated ‘the need for more government in business’. ‘If my analysis . . . in Booms and Depressions is correct’, he wrote in 1935, ‘the depression does not indicate a general breakdown of capitalism. . . . It indicates almost solely a breakdown of our monetary system’ (Fisher, 1935c).

CONCLUSION ‘The events of the 1930s’, writes William Barber in a recent article, ‘presented formidable challenges for Fisher as an economic theorist [and] as an economic policy advocate’ (Barber, 1999, p. 25). On the eve of the stock market crash in October 1929, as mentioned, Fisher was still convinced that share prices were not overvalued and that their unprecedented increase was due to new proﬁt opportunities created by technological innovation and sharp rises in productivity. As the Depression worsened, however, he became convinced that new theoretical explanations were needed. In 1932 and 1933 he presented a new model (debt–deﬂation theory) based on the interaction of real and monetary aspects: starting from an initial situation of over-indebtedness, Fisher demonstrated that a minor shock could induce an explosive dynamic process characterised by reductions in the price levels and by an increase in real terms of the stock of debts. The likely consequences were widespread failures and continuous reductions in output and employment. In Fisher’s opinion, this process could be stopped and reversed thanks to expansionary monetary measures: these would have increased aggregate demand and prices provided that the economic agents would have left unchanged their spending habits. During the Depression, however, there was a widespread tendency for economic agents to hoard their liquid assets; in 1932 the Yale economist became, therefore, an active supporter of a ‘stamped money’ plan aimed at counteracting this process. During the New Deal he lobbied actively the Roosevelt Administration to support expansionary monetary measures and promoted a radical revision of the credit system aimed at abolishing fractional reserves (100% money). In the meantime he strongly opposed any governmental control on economic activity or arbitrary reductions in economic supply. In the end, the dramatic events of the Depression did not shake Fisher’s faith in the fundamental capacity of market economies for re-equilibrium. There was, however, one crucial exception: the money and credit system. In this case the spontaneous interaction of individual actions did not appear to be able to guarantee a stable equilibrium. Furthermore, the institutions adopted up to then, such as the gold standard and fractional banking reserves, had

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turned out to be sources of further disequilibrium. The consequences, given the centrality of money in the production system, had been nothing short of disastrous. The entire sector therefore had to be radically reformed and co-ordinated by government. Once in place, this reform would have provided a dependable guarantee against the recurrence of large-scale depressions and strengthened the economic system.

NOTES *

1. 2.

3. 4.

5.

6. 7. 8. 9.

This paper was presented at the Fifth Annual Conference of the European Society for the History of Economic Thought, Darmstadt, February 2001 and appeared in a different form in History of Economic Ideas, 2003, no. 1. I am grateful to an anonymous referee for helpful comments. The usual disclaimer applies. In the 1930s, Fisher was relatively isolated in the scientiﬁc community, and his policy proposals, which, viewed with hindsight, were in the right direction, were received poorly and in some cases with hostility. In Fisher’s view, another crucial factor was the action of the ‘investment trusts’ (mutual funds): ‘Investment trusts have removed much of the risk inherent in common stocks by spreading the risks over a large number of stocks . . . The elimination of risks has greatly stimulated the demand for the formerly despised common stocks and sent their values up all along the line’ (Fisher, 1929a, p. 64). This stimulating even if controversial thesis has been rediscovered by recent literature (cf., among others, Sirkin, 1975; De Long and Schleifer, 1991). ‘One of the most threatening aspects of the present depression is the staggering burden of international debts left by the World War. These debts are a formidable obstacle to recovery not only because they operate, as all debts do, to intensify depressions, but also because they are so largely political in nature and incite to political unrest’ (Fisher, 1931). The debt–deﬂation theory was illustrated for the ﬁrst time by Fisher in a paper presented at the annual meeting of the American Association for the Advancement of Science in New Orleans in January 1932. The theory was illustrated most fully in a volume published that year (Booms and Depressions). The following year, an abridged but particularly clear version of the theory was published in Econometrica (cf. Fisher, 1932a, 1933a; Dimand, 1994). ‘Distress selling means selling not because the price is high enough to suit you, which is the normal characteristic of selling, but because the price is so low it frightens you’ (Fisher, 1932b). ‘The very eﬀort . . . to pay debt . . . resulted in increasing debts; and the more the American people tried to get out of debt, the more they really got in, when the debts are measured in real commodities’ (Fisher, 1934a, p. 128). In Booms and Depression Fisher clariﬁed that in reality the relationships between these phenomena were more complex. The debt–deﬂation theory has been repeatedly criticised, in that in an economy characterised by ‘inside’ debt (debt and credit are created within an economic system) a reduction in the price level should simply have redistributional eﬀects between creditors and debtors without any consequence at the aggregate level. In an economy characterised by ‘external’ debt, the reduction in prices should lead to an increase in demand through the Pigou eﬀect. However, these results presume that agents are homogeneous, the exact opposite of Fisher’s assumption. If, instead, we assume – more reasonably – that debtors are characterised by a higher marginal tendency to consume than creditors, a reduction in prices translates into a reduction in demand; in most cases, as Tobin notes, this second eﬀect tends to prevail over that of Pigou (Tobin, 1980). Moreover, in Fisher’s analysis

The Great Depression in Irving Fisher’s thought

10.

11.

12. 13.

14.

15.

16. 17.

18.

19.

301

the supply side plays an important role. According to Fisher, the debtor’s class coincided to a large degree with that of entrepreneurs; and, like Schumpeter, he believed that they played a crucial role in the economic system, thanks to their willingness to take risks and to seek out new opportunities for proﬁt. When, as in the event of a protracted depression, a large number of entrepreneurs become insolvent, it can be diﬃcult to replace them; and so one has severe reductions in employment and output. ‘I thoroughly believe that if [Strong] had lived and his policies had been continued, we might have had the stock market crash in a milder form, but after the crash there would not have been the great industrial depression. I believe some of the crash was inevitable because of over-indebtedness, but the depression was not inevitable’ (1934a, p. 151). Irving Fisher Papers (hence IFP), Manuscript and Archives, Yale University Library, III, b. 25, f. 400, Democracy and Monetary Reform. Radio Address, August 1938. ‘Goods’, Fisher wrote in 1933, ‘are not overproduced but deadlocked for want of a circulating transfer-belt called money’ (Fisher, 1933d, p. 3). IFP, Manuscript and Archives, Yale University Library, s. III, b. 25, f. 396, Is a Managed Currency Workable? An Address to the Commerce Club, Chicago, Ill., Feb. 28, 1936, p. 10. ‘It was reported in Chicago that when a big bank there, which had been closed, was ﬁnally opened and the depositors had suddenly more money to spend, the department stores were crowded with customers for several days. Such restoration of buying power is exactly what has long been needed to restore business, raise the shrunken price level . . . and so make possible payment of debts, business at a proﬁt, and re-employment’ (Fisher, 1934b, p. 5). ‘Hoarding is a slowing of currency turnover of the extremest kind. . . . Housewives and their breadwinners then become distrustful of everything except money. Bills and coins are conﬁded to stockings or mattresses, or are put underground, or (in a larger way) stored in safety deposit vaults. Credit deposits may be hoarded too. In such banks as are considered safe, large credit deposits will be kept, but kept idle’ (1932a, p. 35). The following passage is also revealing: ‘To stop hoarding, to take the idle money out from under the mattress, to quicken the turnover of bank deposits are essential parts of the recovery program. We want to re-employ idle money; it will help toward re-employing idle men and idle machines; it will help reﬂate the price level . . .’ (1933b, p. 5). Silvio Gesell (1862–1930) was born in St. Vith, Germany. From 1886 to 1900 he lived in Argentina, where he managed a commercial ﬁrm. His interest in economic and social reform started in the 1880s, after he witnessed a severe deﬂation which nearly brought the economy of the country to collapse. At the beginning of the century he wrote his main contribution, entitled Die natürliche Wirtschaftsordnung, translated into English in 1929 (Gesell, 1929). Gesell considered his stamped money plan as a part of a radical reform of the economic system aimed at abolishing the privileges of landowners and ﬁnancial institutions and at enhancing free competition. Naturally, this presupposes that ‘stamped money’ was accepted as money by all agents as a group. ‘With the help of Mr. H.R.L. Cohrssen I have recently answered four or ﬁve hundred enquiries about it. The letters came from literally every state in the Union and were written by persons, largely in oﬃcial positions, who have a practical interest in introducing stamp scrip in their several towns, cities and states’ (Fisher, 1933d, p. 1). Interestingly, Roosevelt’s two most inﬂuential monetary experts, the economists James Harvey Rogers and George Warren, were both linked to some degree to Fisher. Harvey Rogers was ‘Fisher’s most loyal . . . pupil’ (Dorfman, 1969, p. 302) and became, in 1931, his colleague at Yale. It should be added, however, that Rogers’s analysis of the causes of the Depression was remarkably original and that he did not openly support Fisher’s monetary plans (cf. Rogers, 1931, 1933, 1937; Steindl, 1995, pp. 105–10). Warren (who had been one of the few to predict the deﬂationary process of the 1930s) was a member, together with Fisher, of the advisory council of the ‘Committee for the Nation’, a pressure group whose institutional goal was to promote expansionary monetary policies. The similarity with the concept of ‘commodity dollar’ put forward by Fisher in the 1920s

302

20.

21. 22.

23. 24.

25.

26.

27. 28.

29. 30.

Polar reactions to the Great Depression is indeed striking (cf. Pavanelli, 1997). ‘Your message to the Economic Conference’, wrote Fisher in a letter to Roosevelt, ‘makes me one of the happiest of men’ (Fisher, 1997, p. 61). As we know, Roosevelt’s message was also warmly praised by Keynes. The statement by James Warburg, a prominent banker and one of the US representatives at the London conference, during a meeting of the American Academy of Political and Social Science is revealing: ‘I do not believe that . . . anything other than a gold standard will work satisfactorily . . . ; unfortunately inﬂationist theory was given a stimulus by the speculative rise of prices which took place in the ﬁrst few months of the experiment’ (Warburg, 1934a, p. 146, 149. Cf. also Warburg, 1934b). The Fed’s open market operations, adopted on a large scale only in 1932, did not bring an expansion of production but simply an increase in the reserves of the member banks. Cf. Eichengreen, 1992. ‘Unless these [huge excess reserves] are absorbed by raising the reserve requirements, they will continue to threaten us with an inﬂation ten times their size. These reserves were created in a vain attempt by the Federal Reserve to increase business loans. A chief reason why the attempt failed was the partial reserve system under which the commercial banks feared to lend’ (Fisher, 1936b, p. 417). This reform posed considerable technical problems; for example, to enable the banks to raise their reserves to the level needed, a large amount of circulating medium had to be created and distributed. These aspects will not be dealt with in the present work. ‘The question of whether the velocity of circulation of money is a constant or a variable’, wrote Fisher in his 1940 paper, ‘is of great importance both for monetary theory and monetary policy. . . . So far as monetary policy is concerned, if the velocity of circulation of money is simply a cushion for changes of quantity, any attempt to control the price level or volume of trade by controlling money would be futile’ (Fisher, 1940, pp. 55–6). It was ﬁrst illustrated in a document of November 1933 entitled ‘Banking and Currency Reform’ drawn up by Simons and signed by various Chicago economists, including Aaron Director, Paul Douglas, F.H. Knight, L.W. Mints, Henry Schultz as well as C.O. Hardy of the Brooking Institution (cf. Allen, 1993). Fisher had already made this point in 1933 in a letter to Roosevelt: ‘It was the universal gold standard which made the depression universal, spreading the deﬂation infection from one country to another. Only countries not on the gold standard escaped’ (Fisher, 1997, p. 57). He repeated this point in 1937 during a parliamentary hearing: ‘During the depression the cutting loose from gold by other nations helped them all. I think there is no exception. Those that were helped most were those that cut loose ﬁrst. England, for instance, cut loose in 1931, France in 1936. England is now out of the depression, practically, and France is just beginning to struggle out’ (Fisher, 1937, p. 278). Letter to F.D. Roosevelt, 11 June 1934, in Fisher, 1997, p. 83. ‘It will require something of a wrench later’, added Fisher in the same letter, ‘to get millions of workers out of jobs under government into their normal jobs in industry’. ’Since business wouldn’t borrow, the Government is borrowing. . . . Seven or . . . eight billion dollars have been re-created in this way, and that’s the reason we are getting out of the depression. It isn’t the spending of the Government that is doing it (the Government only spends it once); but it is spent normally 25 times a year after it is once created. The Government spends it, giving it to the contractor or to the people on relief, and they spend it at the store, the store gives it to the wholesaler, the wholesaler to the jobber, the jobber to the manufacturer, and the manufacturer to the laborer . . . When the Government manufacturers the money, that helps, and it is the manufacturing of this money, a by-product of debt and spending, that has gotten us out of the depression’ (IFP, Manuscript and Archives, Yale University Library, 212, s. III, box 25, f. 396, Is a Managed Currency Workable?, cit., p. 10). IFP, Manuscript and Archives, Yale University Library, s. III, b. 25, f. 397, How to Secure Re-employment, New York, May 21, 1936, p. 2. It is interesting to observe that a similar criticism of policy measures aimed at achieving a rise in prices by reducing production was expressed by Keynes in an open letter to Roosevelt in December 1933 (Keynes, 1982, p. 292).

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REFERENCES Allen, R.L. (1993), Irving Fisher. A Biography, Cambridge, MA: Blackwell. Allen, W.R. (1977), ‘Irving Fisher, F.D.R., and the Great Depression’, History of Political Economy, Vol. 9, Winter, pp. 560–87. Allen, W.R. (1997), ‘Irving Fisher and the 100 percent reserve proposal’, The Journal of Law and Economics, October, pp. 703–17. Barber, W.J. (1996), ‘Irving Fisher as a policy advocate’, in M. Rutherford (ed.), The Economic Mind in America: Essays in the History of American Economics, London: Routledge, pp. 31–42. Barber, W.J. (1997), Designs within Disorder. Franklin D. Roosevelt, the Economists and the Shaping of American Economic Policy, 1933–1945, Cambridge: Cambridge University Press. Barber, W.J. (1999), ‘On working with Irving Fisher’s papers’, in H.E. Loef and H.G. Monissen (eds), The Economics of Irving Fisher, Cheltenham, UK and Northampton, USA: Edward Elgar, pp. 22–32. Bernanke, B. (1995), ‘The macroeconomics of the Great Depression: A comparative approach’, Journal of Money, Credit and Banking, February, pp. 1–28. Bernanke, B. and M. Gertler (1990), ‘Financial fragility and economic performance’, The Quarterly Journal of Economics, pp. 87–114. Blanc, J. (1998), ‘Theory and practice of Gesell’s accelerated money’, American Journal of Economics and Sociology, October, pp. 469–83. Brunner, K. (ed.) (1981), The Great Depression Revisited, Boston, MA: Martinus Nijhoﬀ. Cargill, T.F. (1992), ‘Irving Fisher’s comments on Benjamin Strong and the Federal Reserve in the 1930s’, Journal of Political Economy, December, pp. 1273–7. Choudri, E.U. and L.A. Kochin (1980), ‘The exchange rate and the international transmission of business cycle disturbances: Some evidence from the Great Depression’, Journal of Money, Credit and Banking, pp. 565–74. Cohrssen, H. (1991), ‘Working for Irving Fisher’, Cato Journal, Winter, pp. 825–33. De Long, J.B. and A. Schleifer (1991), ‘The stock market bubble of 1929: Evidence from closed-end mutual funds’, The Journal of Economic History, September, pp. 420–45. Dimand, R.W. (1994), ‘Irving Fisher’s debt–deﬂation theory of great depressions’, Review of Social Economy, Spring, pp. 92–107. Dimand, R.W. (1995), ‘Irving Fisher, J.M. Keynes and the transition to modern macroeconomics’, in A.F. Cottrell and M.S. Lawlor (eds), New Perspectives on Keynes, annual suppl. to History of Political Economy, vol. 27, Durham: Duke University Press, pp. 247–66. Dimand, R.W. (2000), ‘Irving Fisher and the quantity theory of money: The last phase’, Journal of the History of Economic Thought, no. 3, pp. 329–48. Dorfman, J. (1969), The Economic Mind in American Civilization, 1918–1933, Vol. IV, New York: A.M. Kelley. Eichengreen, B. (1992), Golden Fetters: the Gold Standard and the Great Depression, 1919–1939, Oxford: Oxford University Press. Fisher, I. (1911), The Purchasing Power of Money: Its Determination and Relation to Credit, Interest and Crises, New York: Macmillan. Fisher, I. (1929a), ‘Has Wall Street gone wild and whirling?’, Liberty, 9 February, pp. 61–4. Fisher, I. (1929b), ‘Fisher doubts market crash’, New York Times, 6 September.

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Fisher, I. (1930), The Stock Market Crash and After, New York: Macmillan. Fisher, I. (1931), ‘Cancellation of war debts’, Southwest Foreign Trade Conference Address, July, 2. Fisher, I. (1932a), Booms and Depressions, New York: Adelphi. Fisher, I. (1932b), ‘The Depression, causes and cures’, Address made before the Committee of One Hundred, Miami Beach, 1 March, 1932. Fisher, I. (1932c), ‘A new corporation formed to salvage securities’, INI Weekly Release, 13 June. Fisher, I. (1932d), ‘Some signs of the time’, INI Weekly Release, 8 August. Fisher, I. (1933a), ‘The debt–deﬂation theory of great depressions’, Econometrica, pp. 337–57. Fisher, I. (1933b), ‘Buy now?’, INI Weekly Release, 14 August. Fisher, I. (1933c), ‘Revolutionary?’, INI Weekly Release, 28 August. Fisher, I. (1933d), Stamp Scrip, assisted by Hans R.L. Cohrssen and H.W. Fisher, New York: Adelphi. Fisher, I. (1934a), ‘Reﬂation and stabilization’, in The Annals of the American Academy of Political and Social Sciences, vol. 171, January, pp. 127–31, 150–51. Fisher, I. (1934b), ‘Rising prices – two sorts’, INI Weekly Release, 4 June. Fisher, I. (1935a), Stabilised Money. A History of the Movement, London: Allen & Unwin. Fisher, I. (1935b), ‘Are booms and depressions transmitted internationally through monetary standards?’, Bulletin de l’Institut International de Statistique. Fisher, I. (1935c), ‘Government put deeply into business by debt’, Republican, Waterbury, CT, 30 September. Fisher, I. (1936a), 100% Money, New York: Adelphi. Fisher, I. (1936b), ‘100% money and the public debt’, Economic Forum, pp. 406–20. Fisher, I. (1937), ‘Statement before the U.S. Congress, House of Representatives, Subcommittee of the Committee on Agriculture and Forestry’, Hearings on S. 1990, a Bill for the Regulation and Stabilization of Agricultural and Commodity Prices through the Regulation and Stabilization of the Value of the Dollar, 3, 4, 5, 10, 11, 12 and 13 August 1937, 75 Cong. I Sess. Washington: Gov. Printing Oﬃce, pp. 267–90. Fisher, I. (1940), ‘The velocity of circulation of money’, in Cowles Commission for Research in Economics, Report of Sixth Annual Research Conference in Economics and Statistics, Chicago, pp. 55–8. Fisher, I. (1997), Correspondence and other Commentary on Economic Policy, in, Works, edited by W.J. Barber assisted by R.W. Dimand and K. Foster, vol. 14, London: Pickering & Chatto. Gesell, S. (1929), The Natural Economic Order, Berlin: Neo-Verlag. Graziani, A. (1988), ‘Il circuito monetario’, in A. Graziani and M. Messori, Moneta e Produzione, Torino: Einaudi, pp. xi–xliii. Keynes, J.M. (1973), Collected Writings, vol. VII, The General Theory of Employment, Interest and Money, London: Macmillan. Keynes, J.M. (1982), Collected Writings, vol. XXI, Activities 1931–1939, London: Macmillan. King, M. (1994), ‘Debt–deﬂation: theory and evidence’, European Economic Review, pp. 419–45. Pavanelli, G. (1997), ‘Il problema della stabilizzazione nel pensiero di Irving Fisher’, Rivista Internazionale di Scienze Sociali, January–March, pp. 49–84. Rogers, J.H. (1931), America Weighs her Gold, New Haven: Yale University Press.

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Rogers, J.H. (1933), ‘The absorption of bank credit’, Econometrica, January, pp. 63–70. Rogers, J.H. (1937), ‘Monetary initiative in a traditional world’, in A.D. Gayer (ed.), The Lessons of Monetary Experience. Essays in Honor of Irving Fisher, London: Allen & Unwin, pp. 99–116. Samuelson, P.A. and N.E. Kroos (1969), Documentary History of Banking and Currency in the United States, vol. IV, New York: McGraw-Hill. Sirkin, G. (1975), ‘The stock market of 1929 revisited: A note’, in Business History Review, pp. 223–31. Steindl, F.G. (1995), Monetary Interpretations of the Great Depression, Ann Arbor, MI: University of Michigan Press. Steindl, F.G. (1999), ‘Irving Fisher, the Quantity Theory, and the Great Depression’, in H.E. Loef and H.G. Monissen (eds), The Economics of Irving Fisher, Cheltenham, UK and Northampton, USA: Edward Elgar, pp. 157–69. Temin, P. (1993), ‘Transmission of the Great Depression’, Journal of Economic Perspectives, Spring, pp. 87–102. Tobin, J. (1980), Asset Accumulation and Economic Activity, Oxford: Blackwell. Warburg, J.P. (1934a), ‘Reply to Senator Elmer Thomas and Professor Irving Fisher’, The Annals of the American Academy of Political and Social Science, January, pp. 144–9. Warburg, J.P. (1934b), The Money Muddle, London: Routledge. Warren, G.F. and F.A. Pearson (1933), Prices, New York: John Wiley. Wolfson, M.A. (1996), ‘Irving Fisher’s debt–deﬂation theory: Its relevance to current conditions’, Cambridge Journal of Economics, pp. 315–33.

18.

Planning for abundance: Nicholas Kaldor and Joan Robinson on the socialist reconstruction of Britain, 1942–45 J.E. King*

INTRODUCTION In the Second World War some British economists enlisted in the armed forces, like Henry (subsequently, Lieutenant-Colonel) Phelps Brown. Others moved to Whitehall; from Cambridge the Civil Service claimed (in addition to Keynes) Richard Kahn, Richard Stone and others. Some, however, remained in academia. Nicholas Kaldor was one. Although he had become a naturalised British citizen in 1934, as a former subject of an Axis power he found himself excluded from all but the most menial administrative jobs. Once his friend Piero Sraﬀa had dissuaded him from volunteering to ﬁght, Kaldor had no option but to remain at the London School of Economics, which in 1940 transferred its operations to Cambridge (Thirlwall, 1987, p. 76). There he became a neighbour, and soon a close friend, of Joan Robinson, who herself stayed in Cambridge for the duration of the war. Before 1939 both Kaldor and Robinson had distinguished themselves primarily as abstract theorists. Although he had published papers in formal welfare analysis Kaldor had shown little inclination to dirty his hands with practical questions of economic policy, even his discussion of wage subsidies as a remedy for unemployment being pitched at a high level of abstraction (Kaldor, 1936; Thirlwall, 1987, pp. 61–4). Initially under the (ultra-)liberal inﬂuence of Friedrich von Hayek, Kaldor also moved freely in socialist circles and soon espoused Keynes’s macroeconomics. Although probably already a member of the Labour Party (his wife was secretary of the local branch), Kaldor was not politically active. Joan Robinson, by contrast, had long-standing connections with the Party, and in particular with the Fabian Society. In the early 1930s she was an active member of the New Fabian Research Bureau’s expert committee on the supply of capital, along with 306

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Colin Clark and Gerald Shove (Durbin, 1985, pp. 98, 164). Robinson had also written a little on macroeconomic policy in her ‘child’s guide’ to the Keynesian Revolution, Introduction to the Theory of Employment (Robinson, 1937). But she, too, regarded herself primarily as a pure theorist, and with the exceptions of the Introduction and a handful of book reviews she remained aloof from political controversy. Inevitably the war changed all this. After the British victory at El Alamein (in November 1942) and the Red Army’s triumph at Stalingrad (in February 1943), the defeat of Fascism seemed assured and increasing attention began to be paid to the question of postwar reconstruction. Public opinion in Britain had already swung sharply to the left between 1940 and 1942, reinforcing the already almost universal conviction that a return to the conditions of the 1930s would be intolerable (Addison 1977, chapter V). Kaldor and Robinson could hardly escape being drawn into the resulting debates. Being neither in uniform nor part of the public service they enjoyed the freedom and – they must also have felt – the responsibility to put their professional talents at the service of the growing movement for economic and social reform. They both discovered a hitherto unexpected ﬂair for pamphleteering, publishing a series of brief and punchy polemics on various aspects of economic policy. They also worked behind the scenes. Robinson was active in both the Reconstruction Committee of the Labour Party and the ‘technical committee’ which advised William Beveridge on employment policy, while Kaldor also served on this committee, and was in fact the principal draftsman of the (second) Beveridge Report on Full Employment in a Free Society (Beveridge, 1944). By 1944, however, the wartime radicalism had passed its peak, and the proposals advanced by Kaldor and Robinson were noticeably more moderate in tone.

JOAN ROBINSON ON PLANNING AND RECONSTRUCTION Joan Robinson’s ﬁrst wartime foray into popular economic writing came in October 1942, in a review article on ‘Industry and the State’ that she published in Political Quarterly, a moderate left-wing journal established in 1931 by Kingsley Martin and William Robson with ﬁnancial backing from George Bernard Shaw and co-edited by Robson and Leonard Woolf (Robson, 1971). Robinson tore into the Federation of British Industries’ report on Reconstruction, with its ‘brutal dogmatism’ and ‘unquestioning faith in the dominance of private enterprise in post-war Britain’ (Robinson, 1942, pp. 400, 404). She was only a little kinder to the industrialist Samuel Courtauld, the author of a book entitled Government and Industry, whose

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urbanity, detachment and willingness to consider concessions to his opponents concealed a fundamentally conservative outlook. Both Courtauld and the F.B.I. called for the suppression of competition and asserted the priority of producer interests over those of consumers. ‘What vision of the future have the socialists’, Robinson asked, ‘to set against this mildly benevolent version of the Corporative State?’ (ibid., pp. 404–5). Ironically the Fabian Society’s recent pamphlet, A Word on the Future to British Socialists, contained several proposals identical to those of the industrialists. What was the explanation for this ‘remarkable convergence of opinion’? Robinson thought that the Fabians imagined the industrialists to have become ‘socialist in spirit’, so that ‘a revolution by consent is just around the corner’ (ibid., p. 405). This she doubted: True enough – the State would have the power. But who is the State? In whose interests will its power be exercised? Unless there is a real change in the balance of forces within society, mere nationalisation of this and that can produce only superﬁcial changes. . . . Here and now, behind the smoke-screen of reconstruction committees and B.B.C. broadcasts on social security, there can be no doubt that the industrial monopolies are becoming more and more strongly entrenched, and, as things are shaping at present, the F.B.I. scheme, tempered perhaps by some of Mr. Courtauld’s benignity, gives an all too plausible picture of the prospect before us (ibid., pp. 405–6).

Thus Robinson saw the growing support for corporatism as a danger, not a sign of the impending victory of socialist planning.1 A few weeks later she took a more positive line in two long articles in The Times, which bore the title ‘Planning Full Employment’.2 Consumer expenditure could be expanded by a combination of minimum wage legislation and improved social security provisions, as proposed in the (ﬁrst) Beveridge report, which had been published in December 1942 (Beveridge, 1942). If public control were established over a large proportion of investment expenditure, Robinson continued, this would also contribute to the stabilisation of eﬀective demand and the maintenance of high levels of employment. To prevent the balance of trade posing an obstacle to full employment, it would be necessary to retain wartime controls over imports and the foreign exchanges, and to introduce ‘a controlled direction and stimulation of exports’ (Robinson, 1943a, p. 5). These measures would suﬃce, she concluded, to solve the unemployment problem ‘on a purely technical level’. But there remained serious political diﬃculties. The ﬁrst was posed by the campaign of the industrialists to restrict government investment to narrow ‘spheres which in no way compete with proﬁt-seeking capital’, thereby giving private investors ‘the ﬁrst pick’. Robinson argued instead for public corporations, run on a non-proﬁt basis, to take over responsibility for investment in

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health, housing, transport, fuel and power. Private investment would be ‘rationed under a system of priorities. A combination of stability with rapid progress in capital accumulation could then be achieved’ (ibid.). In her second article Robinson concentrated on the other political problem posed by full employment. Mass unemployment, she observed, had two vital functions in a capitalist economy: ‘it maintains the authority of master over man’ by making credible the threat of the sack,3 and it also preserves the value of money by restraining union wage demands. The achievement of full employment, Robinson feared, ‘might precipitate a violent inﬂation’ in the absence of both of the two existing solutions to these problems, Fascism and socialism. In Fascism the unions had been broken by state terror, while socialism would instead eliminate class antagonism and could therefore be expected to encourage discipline at work and acceptance of state control over wages. Was there a middle course between these two extremes? She suggested that there probably was. It would involve the imposition of permanent proﬁt controls in what was left of private industry, together with generous social security provisions and ‘an extension of works councils which would give the workers a voice in the day-today aﬀairs of the factory’. These measures might well also suﬃce to persuade trade unions to give up restrictive working practices.4 At all events, Robinson concluded, it was now very clear that ‘unregulated private enterprise and continuous full employment are incompatible’ (Robinson, 1943b, p. 5). Many of these themes reappeared in the four pamphlets that she wrote (or, in one case, contributed to) in the course of 1943. In January she contributed a short article on ‘Planning’ to the Fabian Quarterly, demonstrating her commitment not only to democracy but also to the decentralisation of decisionmaking. ‘Some element of dictatorship was inevitable in [the] USSR’, she suggested, for there it had been ‘necessary to industrialise a backward country in order to make it independent of a potentially hostile world, and to prepare it for self-defence’. But, in an advanced western society, planning would be primarily for consumption, and the needs and tastes of consumers could be made the dominant inﬂuence in framing the plan. Nor does centralised planning imply red-tape bureaucratic control over industry. If a socialist system is to be eﬃcient it must evolve a method of administration that allows a large element of individual responsibility and initiative in matters of detail, within the general framework of the plan (Robinson, 1943c, p. 5).

Robinson distinguished socialist planning, of both Soviet and Western varieties, from capitalist planning; under this heading she contrasted ‘New Deal planning’ and ‘monopoly planning’ (as advocated by the F.B.I.).

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Monopoly planning would lead, inexorably and whatever the intentions of its supporters, towards Fascism, since by restricting output it left government expenditure on armaments, imperialist expansion and war itself as the only means of preventing chronic stagnation. New Deal planning was more benign, relying on public investment and direct payments to consumers to maintain aggregate income.5 ‘Schemes of this kind’, Robinson conceded, ‘may develop in a socialist direction’, with price controls, rationing, subsidies and progressive taxation combined with an agreed wages policy and with workers’ control of industry. More probably, however, they would come to rely on ‘Fascist methods of controlling labour’ to replace ‘the control provided under liberal capitalism by the threat of unemployment’ (ibid., p. 7). The word ‘planning’, she concluded, was increasingly used as a smoke screen to disguise the profound diﬀerences between socialist and non-socialist proposals. Certainly in wartime the idea of planning appealed to intellectuals from a variety of political persuasions, including the conservative sociologist Karl Mannheim, who defended it from a religious viewpoint (Mannheim, 1943; cf. Smith, 1979, part 1). Robinson took a much more hard-boiled approach: for her, the crucial question was cui bonus?, which she translated as ‘Who gets the swag?’ In The Future of Industry, published by Common Wealth,6 she again took issue with the F.B.I. report and with a similar manifesto, A National Policy For Industry, signed by 120 ‘industrial magnates’. In demanding the suppression of competition, the industrialists were ‘asking for unlimited and irresponsible power over British industry, that is, over all our lives and livelihoods’ (Robinson, 1943d, p. 5). They would inevitably use this power to promote their own interests. There might be some minor advantages for their workers, she conceded, ‘domesticated as they will be by pension schemes and welfare institutions’, but there would be no consideration of the broader interests of consumers: For though the workers are the main body of consumers, yet each one feels a strong and concentrated interest in his position as a producer, which outweighs his vague and diﬀused interests as a consumer. Thus each group of workers, separately, as employees, can be relied upon to line up behind the monopolists and encourage them to exploit all workers, collectively, as consumers (ibid., p. 8).

The absence of competition would lead to high proﬁt margins, perpetuating the existing, wasteful and unjust, distribution of income and opportunity. In ‘the industrialists’ Utopia’ (ibid., p. 14), the restriction of mass purchasing power would also reduce the demand for consumer goods and contribute to high unemployment. As an alternative, Robinson advocated common ownership of the means of production. Private enterprise should

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be retained only in areas like retailing and jobbing building, where smallscale activity was still most eﬃcient: In an advanced country, socialism might well begin at the stage of the Russian New Economic Policy, with small-scale enterprise operating within a framework of controlled prices, side by side with the great national trusts. And if small capitalists showed no signs of threatening the system by growing into large ones, the N.E.P. might become permanent. But the main lines of economic activity would have to be laid down according to a general scheme in which the needs of the community, instead of the whims and fancies of the industrialists, would dictate the pattern of production (ibid., p. 15).

This was considerably more radical than the ‘middle course’ that she had advocated in her Times articles. The success of Russian socialism demonstrated, Robinson maintained, that economic criticisms of common ownership were ill-founded. And the objection that socialism was a threat to freedom was especially weak: But whose liberty is threatened by common ownership? Not the liberty of the workers, who have little enough at present and would have still less under the regime of the paternal monopolists. Freedom from the threat of unemployment, economic security and access to education, would immeasurably enlarge the liberties of the mass of the population (ibid., p. 24).

Neither was the freedom of small savers or craftsmen seriously at risk. Only ‘the big investor and the large combine’ would ﬁnd their liberties curtailed.7 Robinson covered much the same ground in another 20-page pamphlet, Private Enterprise or Public Control, written for the Association for Education in Citizenship.8 A ‘system of public control of production’, she argued, ‘represents a return to the direct production of the family farm, but a return on a wider scale and at a higher technical level – a return to the essential simplicity of the pre-capitalist world, without sacriﬁcing the technical complexity which capitalism has brought into existence’ (Robinson, 1943d, p. 9). It would overcome the three main defects of unregulated capitalism, which were inequality, unemployment and monopoly. Discipline in industry would be maintained, not by unemployment and the fear of the sack, but by ‘the development of self-governing institutions among the workers, charged with the details of factory administration’ (ibid., p. 15). Robinson again rejected ‘compromise solutions’ that involved the nationalisation of ‘a few particular industries and resources, such as coal, railways and banking, leaving the rest in private hands’. This would be a small step in the right direction, she admitted, but it would make relatively little diﬀerence: ‘So long as the nationalised industries are surrounded by a world of private enterprise they must conform to its standards’ (ibid., p. 19).

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She brought all these arguments together in her Workers’ Educational Association pamphlet, The Problem of Full Employment. Robinson began with a simple statement of the theory of eﬀective demand, emphasising the importance of an unequal distribution of income in restricting the demand for consumer goods and the inevitable instability of investment expenditure in a private enterprise system. The ‘old disease’ of the trade cycle was now aggravated, she argued, by ‘an even worse malady’ – a tendency to secular stagnation which had manifested itself between the wars. ‘Technical progress had brought about an enormous increase in productive capacity, but consumption had not kept pace with it. . . . There is every reason to expect this situation to repeat itself as soon as the period of post-war readjustment has come to an end’ (Robinson, 1943f, p. 10). She attacked four ‘false remedies’ for unemployment. One was monopoly, which could indeed stabilise output, but only at a low level: ‘It sets out to cure the trade cycle by making the slump permanent’ (ibid., p. 13). The second false remedy was ‘keeping labour oﬀ the market’ by raising the school leaving age, encouraging early retirement and shortening the working week. These measures might be desirable in themselves, but they were not suitable as methods of reducing unemployment. Neither was ‘making work’, that is to say, deliberately using ineﬃcient techniques of production. Finally, Robinson rejected the trade union claim that increased wage rates could eliminate unemployment by raising the purchasing power of the bulk of the population. The principal eﬀect of wage increases, ‘under an uncontrolled proﬁt system’, would be for employers to implement an equivalent rise in prices, allowing them to avoid any substantial change in the distribution of income (ibid., p. 14). Among the ‘true remedies’ for unemployment, Robinson stressed redistribution through ﬁscal policy, together with state control of investment. But the latter required ‘thorough-going planning’, since: The private-enterprise system is irrational, in the sense that it is not based on any conscious plan. Everything happens as a result of innumerable individual decisions. Society is broken up into a variety of groups with conﬂicting interests, and economic life is a general game of catch-as-catch-can. In a rational economic system, the productive resources of society would be used deliberately to meet the needs of the people (ibid., p. 17).

In a planned economy there would be no general problem of unemployment, even if output increased so rapidly as to bring about ‘a real saturation of demand’. This would simply mean that the time had come for reducing the working week, increasing holiday entitlements or allowing longer periods for education. Robinson acknowledged that some inequality of incomes would be necessary to provide incentives, even in a planned economy:

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Some kind of compromise is therefore necessary between the two conﬂicting principles of distribution – needs and the reward of eﬀort. A rational society would certainly not contain the enormous inequalities which exist in capitalist or feudal states, and it would not recognise mere ownership of property as a source of income, but it would have to make use of diﬀerences in income as an incentive to work and to acquire knowledge and skill, so that complete equality could not be attained (ibid., p. 19).

Individuals would also retain complete freedom in the choice of work, with small wage diﬀerentials or diﬀerences in hours of work used to meet shortages of labour in particular occupations. Thorough-going planning, Robinson continued, was the ideal. In practice, however, in an old-established society it is impossible to pool resources without breaking down privileges and property rights, whose possessors will ﬁght to maintain them. And the rights of property include, as things are, the right to direct the economic life of the community – to decide what is to be produced and what work is to be done. A change-over to planning, without revolution, can therefore only be made piecemeal, and the system which results from such a changeover cannot be fully rational, but must be a patchwork of compromises between the public interest and innumerable private rights and privileges (ibid., pp. 20–21).

The priorities must be control over the rate of investment, together with state ownership of housing, transport and public utilities, government provision of education and health services, and rationing of resources for investment by the remaining privately-owned industries. Taxation policy should be used to redistribute income, subject to the maintenance of adequate incentives. In addition, ‘A roundabout attack on inequality can be made by price control’ (ibid., p. 22), which would not only increase the wage and salary share in national income but also squeeze ineﬃcient producers out of existence. Robinson favoured the retention in peacetime of the wartime system of ‘utility’ goods, whereby quality was regulated by the public authorities: ‘Prices could be ﬁxed in such a way as to cover the genuine costs of production, leaving no margin for ineﬃciency or for unnecessary selling costs’ (ibid., p. 23). Control of the monetary system was also necessary if a partially planned system was to succeed, with the Treasury and the Bank of England controlling the allocation of credit and keeping interest rates permanently low (ibid., pp. 27–8). Trade and capital movements must also be controlled. In particular, ‘exchange control is necessary for any country which wishes to carry out any kind of progressive policy in its home aﬀairs’ (ibid., p. 31). Thus ‘partial planning’ entailed a substantial and comprehensive system of state controls.9 Robinson was scornful of the ‘minimum measures’ (that is, increasing public works expenditure in a slump) that had been endorsed

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by the F.B.I. Once again, she emphasised the political diﬃculties with partial planning, which would be strongly resisted by the vested interests that stood to lose from it (ibid., pp. 23–4, 32–3); by comparison, the technical problems were unimportant. ‘The danger of sabotage or noncooperation might become acute’, she suggested, ‘if the objectives of the plan did not meet with the approval of ﬁnanciers’ (ibid., p. 26). She concluded by repeating her worries about the impact of full employment on the authority of the employers, and on the price level: The Nazis succeeded in overcoming the problems created by full employment because they had ﬁrst broken the labour movement. Discipline in industry was ensured by substituting terror, along with a mystical propaganda appeal, for fear of unemployment. The vicious spiral [of wages and prices] was cut at the root by ﬁxing wages. If full employment is to be secured without the sacriﬁce of liberty on the one hand, or the abolition of private property on the other, a way must be found to associate the workers with the planning of industry and to satisfy their sense of justice, so that they will not be tempted to use the bargaining power conveyed on them by full employment in a struggle with their employers which would wreck the experiment at the start (ibid., p. 36).

When she spoke at the Peace Aims Conference of the National Peace Council in Oxford in July, Robinson simply summarised the principal arguments of The Problem of Full Employment. Her address was published by the Council, along with those of Kaldor, E.F. Schumacher, A.A. Evans and P. Lamartine Yates, in its pamphlet Planning for Abundance. ‘It remains to be seen’, she concluded cautiously, ‘whether a way out can be found under private enterprise capitalism’ (Robinson, 1943h, p. 7). Robinson’s other contributions to the popular literature on reconstruction were less polemical. For the professional journal Accountancy she wrote a brief technical article on the operation of monetary policy. She ended by stressing its limitations: ‘Thus the power of the banks, either for evil or good, is not nearly so great as people sometimes imagine, while the real problems, both of checking inﬂation in wartime and of maintaining prosperity in peacetime, are not so simple that they can be solved merely by altering the quantity of money’ (Robinson, 1943g, p. 65). Under the auspices of the Fabian Society she lectured on ﬁscal policy, noting how the prewar buttresses of Sound Finance had crumbled away. Her own proposals, for a separate Capital Budget and for redistribution of income through progressive taxation, were modest and moderate – by her own standards, at least (Robinson, 1944a). Much the same can be said of her defence, in the monthly Socialist Commentary, of the Bretton Woods plan for international currency reform (Robinson, 1944b).

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KALDOR ON POSTWAR RECONSTRUCTION Nicholas Kaldor’s popular writings on reconstruction were fewer in number, narrower in scope and somewhat less radical in tone and content than those of Joan Robinson. The ﬁrst, written with his friend M.F.W. Joseph10 for the Association for Education in Citizenship, was the ﬁfth in a series of ‘Handbooks for Discussion Groups’ that the Association had published under the general title, ‘Unless We Plan Now’ (a phrase taken from a speech by Franklin D. Roosevelt). Joseph and Kaldor began by recognising the widespread fear that economic conditions would deteriorate sharply after the war. To a considerable extent, they suggested, this fear was based on the memory of what had happened after 1918. But the depression that had followed the First World War had been the result of misguided policies. Their pamphlet was therefore ‘devoted to showing what policies will have to be followed to avoid the mistakes of the last demobilisation and to set up an economic system which will enable us to enjoy the full beneﬁts of our economic wealth’ (Joseph and Kaldor, 1942, p. 7). This would require a transitional programme of ‘controlled demobilisation’ in the immediate aftermath of the war, and a plan for ‘economic reconstruction’ in the longer term to overcome the crippling prewar problems of unemployment, poverty and ineﬃciency. As far as demobilisation was concerned, the experience of 1918–20 had demonstrated the dangers of an excessively rapid return to unconstrained private enterprise. Accordingly, Joseph and Kaldor argued for the retention of wartime controls to facilitate an orderly return to peacetime production. This would involve the continued rationing of consumer goods, along with controls over prices, wages (with trade union cooperation), raw materials, production, capital and foreign exchange. Restrictions on the mobility of labour ‘should be relaxed after the war, but must be replaced by machinery for directing the recruitment of labour into diﬀerent industries and re-training labour that has to be transferred from one industry to another’ (ibid., p. 13). Joseph and Kaldor took an elementary Keynesian approach to the problem of unemployment after the war. Full employment could be assured through direct state expenditure on transport, public utilities and the provision of social services, or indirectly through the payment of cash allowances to individual families. ‘Most people are beginning to realise that the problem of increasing employment is a relatively simple one’, they noted. ‘It can be solved once it is understood that increased State expenditure for the purpose of employing idle resources is not wasteful but is actually a way of avoiding waste’. The new but welcome question of how to choose between competing public projects once resources had become scarce ‘will have to be decided by a national plan’ (ibid., p. 16). A national wages policy would have to

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constitute an important part of such a plan. Without it, the existing system of sectional union wage bargaining would soon turn into ‘a tug of war . . . between the workers of diﬀerent industries for larger slices of the national cake, in the course of which wages and prices will continually rise’, threatening the stability of the system as a whole (ibid., p. 18). The abolition of poverty was a matter of no great diﬃculty, they maintained. Before the war child-rearing and old age had been – apart from unemployment – the principal causes of economic distress. Thus Joseph and Kaldor advocated the payment of family allowances to parents and the provision of free education and medical attention to all children. The aged should be paid decent pensions and encouraged where appropriate to remain at work through the reservation of suitable jobs for them. Increasing industrial eﬃciency was an altogether more diﬃcult question. The case for private enterprise was based on the supposed survival of the ﬁttest, Joseph and Kaldor suggested. This, however, rested on the false assumption that ﬁrms competed vigorously with each other on prices. The absence of price competition had the consequence that ‘prices in most industries are much higher than the costs of production with the most eﬃcient methods and are generally high enough to allow many ineﬃcient ﬁrms to exist side by side with eﬃcient ones. And so it comes about that only a fraction of each industry’s output is produced by the most eﬃcient methods’ (ibid., p. 21). It was therefore essential, they argued, ‘for the Government to take over the role which competition was supposed to fulﬁl, and to ﬁx maximum prices at levels suﬃciently low so that only the most eﬃcient ﬁrms (i.e. those securing the largest output from given resources) could survive’ (ibid., p. 22). This, in turn, would require quality controls of the type already in operation under the ‘utility’ system for clothing and furniture. Price controls would also contribute to the raising of real (as opposed to money) wages (ibid., p. 18). These proposals, Joseph and Kaldor acknowledged, would encounter strong resistance from the vested interests that would suﬀer from their implementation. ‘Yet this method of forcing industries to sell at truly competitive prices – and at prices at which only the eﬃcient, and not the ineﬃcient ﬁrms can survive – is the only one by which capitalism could be made to work’. The alternative was socialism (that is, comprehensive state ownership of the means of production), the merits of which they regarded as lying outside their remit (ibid., p. 23). Kaldor also contributed two articles to The Times in its series on employment policy for which Robinson had written, welcoming the wartime abandonment of the previous ‘blind fetish-worship of the “balanced budget”’ (Kaldor, 1943c, p. 5) and calling for the adoption of the Swedish distinction between current and capital expenditure. There was no justiﬁcation, he

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argued, for balancing the capital budget, which should be guided solely by the requirements of macroeconomic equilibrium and the need to close the deﬂationary gap. A system of ‘dual ﬁnancial control’ was therefore necessary (Kaldor, 1943d, p. 5). After 1939, Kaldor had become an expert on war ﬁnance (see e.g. Kaldor, 1942), and he ‘rapidly turned himself into one of the most respected applied economists of his generation’ (Thirlwall, 1987, p. 77). He was a particularly vigorous advocate of the Beveridge proposals for eliminating poverty (ibid., pp. 85–90). In his contribution to the National Peace Council’s pamphlet, Planning For Abundance, Kaldor was at pains to emphasise the ﬁnancially conservative nature of Beveridge: ‘My role and purpose in these discussions is simply to show that the adoption of the Beveridge Plan will make no diﬀerence whatever to the economic position of this country, to the level of its domestic employment, or its international position’ (Kaldor, 1943a, p. 22). The social security provisions entailed a modest general tax increase of approximately 1.5% of post-tax income, and would involve almost no redistribution of income from rich to poor. ‘That does not mean that the Plan is not a good thing’, he continued, ‘but it should not be regarded in any way as a measure towards socialism – a measure which will make the income distribution of this country more equal. It will re-distribute income largely between persons of the same classes’ (ibid., p. 26). And it was not in any sense a ‘burden on industry’, since the cost of the increased employers’ contributions to national insurance would be passed on in its entirety to consumers. Kaldor took the same position in his academic analysis of the Beveridge plan for the Economic Journal (Kaldor, 1943b), in two articles for the Manchester Guardian (Thirlwall, 1987, p. 86) and in a radio broadcast in October 1943 in the series ‘The World We Want: What Must We Give To Get It?’. The transcript of his talk was subsequently published in the Listener and as a pamphlet by the Social Security League.11 It took the form of a dialogue on the cost of social security with Squadron Leader A.K.C. Ottaway, in which Kaldor gently instructed his audience in the basic principles of tax incidence and again maintained the essentially conservative nature of the Beveridge proposals: ‘The whole burden of the social security plan’, he noted, ‘is not much more than the increase in the national income in a single year which is due to the normal rate of progress of society in peacetime’ (Kaldor and Ottaway, 1944, p. 9; original stress).

KALDOR, ROBINSON AND BEVERIDGE Kaldor had concluded his broadcast with the reminder that ‘social security is not everything. To get ‘the world we want’ it must be part of a larger

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pattern of reform – which includes better housing, better education, and the provision of full employment’. The most important of all, he thought, was full employment (ibid., p. 12). Along with Schumacher and Wootton, both he and Robinson were active members of the committee that William Beveridge set up in 1943 to assist him in his private, but immensely inﬂuential, investigation into the economics of full employment (Harris, 1977, pp. 434–41). They seem to have been chieﬂy responsible for converting Beveridge to Keynesian macroeconomics. As a slightly younger contemporary, the future Labour Prime Minister Harold Wilson, recalled: I tried hard to persuade Beveridge to accept some of the basic principles of Keynes’ thesis . . . [but] it was not until after the publication of the Beveridge Report on Social Insurance, and his decision to write the book ‘Full Employment in a Free Society’, that he succumbed to the arguments of more persuasive economists, mainly in Cambridge – and particularly Joan Robinson and Nicholas Kaldor, but also Kalecki, Schumacher and Balogh – that he ﬁnally, with a blinding ﬂash of revelation, accepted that there was and had been a persistent under-demand for labour. And after that there was no holding him and when I met him, as I still did regularly, he was enthusiastic in propagating the doctrine we had so long tried to get him to accept (Wilson, 1966, p. 5).

Beveridge’s Full Employment in a Free Society was much more radical than the anodyne White Paper that was rushed out by oﬃcialdom in response to his inquiry, but it, too, proposed a version of the ‘middle course’ that Robinson had considered in her second article in The Times. Beveridge himself advocated ‘socializing demand rather than production’, and his report, published in November 1944, represented something of a retreat from the strong collectivist position that he had espoused two years earlier (Harris, 1977, pp. 436, 440). To the extent that Kaldor and Robinson were committed to the Beveridge proposals, the retreat was theirs too. It was very clearly exposed in their contributions to a series of conferences at Nuﬃeld College in 1944–5. The Nuﬃeld Reconstruction Survey had been established in Oxford in 1941 on the initiative of G.D.H. Cole, initially with full government backing. In addition to conducting surveys and producing reports and memoranda, Cole organised a series of ‘Private Conferences’ which brought together academics, civil servants and industrialists. The latter included Robinson’s former bête noire, Samuel Courtauld, who was a Visiting Fellow of Nuﬃeld.12 Growing hostility from within the civil service and from conservative elements at Oxford University eﬀectively brought the project to an end by early 1944, but the conferences continued. Given the membership, it was inevitable that discussion centred on the eﬃcient operation of a reformed capitalism and not on its imminent abolition in a postwar socialist Britain (Nuﬃeld College, 1944a, 1944b, 1944c).

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In 1944–45 Kaldor again wrote for the Manchester Guardian on the Bretton Woods proposals and the American loan agrement (Thirlwall, 1987, pp. 95–6), and engaged in a vigorous correspondence in The Times with the industrialist Sir Miles Thomas on the postwar merits of the utility scheme (ibid., pp. 98–100). He seems not to have participated during these years in the Labour Party’s reconstruction discussions. Joan Robinson, however, had been involved in Labour Party debates on monetary policy since the early 1930s. During the war she was a member of the Fabian committee set up ‘to explore the national income implications of providing a wide range of social services’ (ibid., p. 262), and attended the Fabian Society’s conference on full employment, where her paper on ﬁnancial planning originated (Robinson, 1944a). Together with Evan Durbin and Douglas Jay she contributed to the work of the postwar ﬁnance subcommittee of the Labour Party’s Reconstruction Committee, where she argued that a permanent reduction in the long-term rate of interest was not only desirable but also practicable (Howson, 1988, pp. 553–5). This, of course, was nothing more than Keynes’s ‘euthanasia of the rentier’ (Keynes, 1936, p. 376), and implies the continuation after the war of private ownership, not merely of the bulk of productive activity but also of the commercial banks. Howson notes the reaction of the future Chancellor, Hugh Dalton: ‘though most of the men don’t like Mrs. Robinson [she] seems to be extremely able and to have the right approach’ (Howson, 1988, p. 555).

CONCLUSION Robinson’s thinking, of course, did not come out of a vacuum. Interwar Britain had seen a sustained debate on the economics of socialism, which had intensiﬁed after 1929 with the onset of the Great Depression and the apparent success of Stalinist industrialisation. Within the Labour Party, opinion ranged from the ‘liberal socialism’ of James Meade and Evan Durbin to anti-market proponents of comprehensive socialisation and economic planning like Cole (Durbin, 1985; Thompson, 1996, chapters 9–10). There was in all this an ambivalence towards the future prospect of a reformed capitalism, compared with the alternative vision of thoroughgoing socialism, which was evident even in the thinking of radicals like Cole and is perhaps inherent in any form of social democracy (Przeworski, 1986; Wright, 1979, pp. 198–207). Could capitalism be tamed after the war and made to run more eﬃciently, at full capacity and with a modicum of social justice? Was it desirable that this should occur? Would it be preferable to out-and-out socialism? On all these questions the socialist economists of the 1930s had been divided, often within themselves.

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As we have seen, the same doubts and hesitations appeared in the wartime writings of Nicholas Kaldor and Joan Robinson, even when they were at their most radical. They should not, though, be seen as simply revisiting unresolved arguments from the previous decade. Prewar socialists had neglected some of the important issues that Kaldor and Robinson had dealt with, like wage inﬂation13 and workers’ control of industry, until these questions were brought home to them very forcibly by the production crisis of the British war economy in 1940–42 (Tiratsoo and Tomlinson, 1993, chapter two).14 For the most part they had also failed to draw explicit policy conclusions from the very developments in the theory of imperfect competition to which Robinson (especially) and Kaldor had made important contributions. And they had rarely shown the political acumen displayed by Robinson in her uncomfortably perceptive analysis of capitalist class inﬂuence over what was still very much a bourgeois state, open to colonisation by the big corporations (for a wartime example, see Middlemas, 1979, p. 294). She had clearly learned a lot from her friendship with Michal Kalecki and her wartime reading of Marx.15 The Attlee Labour government of 1945–51 conﬁrmed her supicions, yielding to pressure from capital at every step (the classic account is by Miliband, 1964, chapter IX; see also Armstrong, Glyn and Harrison, 1991, part I; Morgan, 1990, chapter three). Only a small proportion of manufacturing industry was nationalised, the commercial banks remained in private ownership, the proposed National Investment Bureau failed to materialise, and wartime rationing and other controls were dismantled as fast as the United Kingdom’s desperate balance of payments situation allowed. ‘Planning’ became a dirty word, competition policy was very largely ineﬀective, and the very idea of workers’ control was abandoned. If the postwar settlement reﬂected a cross-party consensus that dated from the early days of the war (Addison, 1977, chapter X), it was very heavily slanted in favour of the status quo. After 1945 the career paths of Kaldor and Robinson diverged. Kaldor was ‘inundated with requests from newspapers and various organisations both at home and abroad to write commentaries, and to undertake research, on a whole variety of post-war economic problems’ (Thirlwall, 1987, p. 101). He went oﬀ to Geneva to work for the United Nations and then served as adviser to the Treasury in Britain; he became, in fact, the consummate insider. Robinson retreated into academia, returning to the research in pure economic theory that would culminate in her Accumulation of Capital (Robinson, 1956): in political terms, she was now the archetypal outsider. Neither became a public intellectual in the Continental sense, writing for a mass audience and seeking to mould public opinion on important questions of economic policy and social philosophy. Thus ‘the peculiarities of the English’ (Thompson, 1965) were reﬂected also in their economists.

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NOTES * 1. 2. 3. 4.

5. 6.

7. 8.

9. 10. 11.

12.

13. 14.

15.

I gratefully acknowledge the assistance and comments of William Dixon, Fred Lee, Tony Thirlwall and participants at the Darmstadt conference; the usual disclaimer applies. On corporatism in wartime see Middlemas, 1979, chapter 10. The articles were unsigned, but Robinson’s authorship is conﬁrmed both by Cristina Marcuzzo (1996) and by internal evidence (both the content and the language are very similar to the relevant passages of Robinson’s wartime pamphlets). Note the similarity between this argument and that made by Michal Kalecki in his celebrated article, ‘Political Aspects of Full Employment’, which appeared nine months later (Kalecki, 1943). Robinson did not confront the fundamental diﬃculty with works councils, in both private and nationalised industries, which was their tendency to compromise the independence of the trade unions and thereby undermine unions’ ability to operate as an eﬀective opposition to management. An inﬂuential analysis of this dilemma was soon forthcoming from another Fabian socialist, the industrial relations theorist Hugh Clegg (1951). See Reagan (2000) for a detailed account of planning in the USA in the 1930s. Common Wealth was an organisation of socialists opposed to the electoral truce that had been agreed by the main political parties for the duration of the war. It stood candidates against the Conservatives in a number of by-elections, winning three seats and obtaining a very large minority of the vote in several others (Addison, 1977, pp. 159–60, 249–50). In an ‘Author’s Note’ at the beginning of the pamphlet, Robinson explicitly denied that she had any connection with Common Wealth (Robinson, 1943d, p. 1). Robinson’s Fabian colleague Barbara Wootton made a very similar case in her critique of Hayek’s Road To Serfdom (Wootton, 1945). This was one of a series ‘intended for use by the discussion circles which are springing up in bodies such as H.M. Forces, Civil Defence Workers, Youth Groups, Church Groups, and Women’s Societies’ (Robinson, 1943e, Preface). On the rapidly-growing activities of political discussion groups during the war see Addison (1977, p. 150). The words ‘control’ or ‘controls’ appear seven times in one paragraph on p. 26, and three times in a single sentence on p. 28. Peggy Joseph (later Peggy Hemmings) had been a friend of Kaldor’s since 1933 (King, 1998, p. 412). After the war she worked for the National Institute of Economic and Social Research. This broadcast was one of those sardonically foreshadowed by Robinson in ‘Industry and the State’ (above, p. 5). Ironically she herself was producer of the series (Thirlwall, 1987, p. 90). The Social Security League, established to promote the principles of the Beveridge Report, had Sir William himself as President, Barbara Wootton as Chairman and G.D.H. Cole among its Vice-Presidents. For details of the Survey and the conferences, see Chester, 1986, chapter 7; Cole, 1971, pp. 235–52; Middlemas, 1979, pp. 295–7; Young and Lee 1993, pp. 141–5. I am grateful to Fred Lee for making copies of the transcripts of the 1944 Nuﬃeld Conferences available to me. See, however, Meade (1936) and Robinson (1937). ‘The war emergency made labour the ultimate resource. Manpower ﬁnally ranked above both ﬁnance and production, so that [the Minister of Labour, Ernest] Bevin stood where no Cabinet Minister had previously done, rival to the Chancellor of the Exchequer himself’ (Middlemas, 1979, pp. 270–71). On Robinson’s inﬂuences see Harcourt (1990). The contemporary work of Kalecki and his Oxford colleagues is summarised in Burchardt et al. (1944); see also Young and Lee 1993, chapter 6.

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REFERENCES Addison, P. (1977), The Road to 1945: British Politics and the Second World War, London: Quartet. Armstrong, P., A. Glyn and J. Harrison (1991), Capitalism After 1945, Oxford: Blackwell. Beveridge, W.H. (1942), Social Insurance and Allied Services. Report By Sir William Beveridge, London: H.M.S.O. Beveridge, W.H. (1944), Full Employment in a Free Society, London: Allen and Unwin. Burchardt, F.A. et al. (1944), The Economics of Full Employment: Six Studies in Applied Economics Prepared at the Oxford University Institute of Economics, Oxford: Blackwell. Chester, N. (1986), Economics, Politics and Social Studies in Oxford 1900–85, London: Macmillan. Clegg, H. (1951), Industrial Democracy and Nationalization: A Study Prepared for the Fabian Society, Oxford: Blackwell. Cole, M. (1971), The Life of G.D.H. Cole, London: Macmillan. Durbin, E. (1985), New Jerusalems: the Labour Party and the Economics of Democratic Socialism, London: Routledge and Kegan Paul. Harcourt, G.C. (1990), ‘On the contributions of Joan Robinson and Piero Sraﬀa to economic theory’, in M. Berg (ed.), Political Economy in the Twentieth Century, Hertfordshire: Phillip Allan, pp. 35–67. Harris, J. (1977), William Beveridge: A Biography, Oxford: Clarendon Press. H.M.S.O. (1942), Social Insurance and Allied Services, Cd. 6404. Howson, S. (1988), ‘“Socialist” monetary policy: monetary thought in the Labour Party in the 1940s’, History of Political Economy, 20(4), Winter, pp. 543–65. Joseph, M. and N. Kaldor (1942), Economic Reconstruction After the War, London: Association for Education in Citizenship, Handbooks for Discussion Groups, No. 5. Kaldor, N. (1936), ‘Wage subsidies as a remedy for unemployment’, Journal of Political Economy, 44(6), December, pp. 721–42. Kaldor, N. (1942) ‘The White Paper on national income and expenditure’, Economic Journal, 51(202–203), June–September, pp. 181–91. Kaldor, N. (1943a), ‘The economic implications of the Beveridge plan’, in Kaldor, Robinson, Evans, Schumacher and Yates (1943), pp. 22–8. Kaldor, N. (1943b), ‘The Beveridge report II. The ﬁnancial burden’, Economic Journal, 53(209), April, pp. 10–27. Kaldor, N. (1943c), ‘Budgeting for full employment. I. National income and state ﬁnance. Beginnings of a new system’, The Times, 25 March, p. 5. Kaldor, N. (1943d), ‘Budgeting for full employment. II. Closing the “deﬂationary gap”. Need for administrative reforms’, The Times, 26 March, p. 5. Kaldor, N. and A.K.C. Ottaway (1944), The Cost of Social Security, London: Social Security League. Kaldor, N., J. Robinson, A.A. Evans, E.F. Schumacher and P.L. Yates (1943), Planning For Abundance, London: National Peace Council, Peace Aims Pamphlet No. 21. Kalecki, M. (1943), ‘Political aspects of full employment’, Political Quarterly, 14(4), October–December, pp. 322–31. Keynes, J.M. (1936), The General Theory of Employment, Interest and Money, London: Macmillan.

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King, J.E. (1998), ‘“Your position is thoroughly orthodox and entirely wrong”: Nicholas Kaldor and Joan Robinson, 1933–1983’, Journal of the History of Economic Thought, 20(4), December, pp. 411–32. Mannheim, K. (1943), Diagnosis of Our Time: Wartime Essays of a Sociologist, London: Kegan Paul, Trench, Trubner and Co. Marcuzzo, M.C. (1996), ‘The writings of Joan Robinson’, in M.C. Marcuzzo, L.L. Pasinetti and A. Roncaglia (eds), The Economics of Joan Robinson, London: Routledge, pp. 330–63. Meade, J.E. (1936), An Introduction to Economic Analysis and Policy, Oxford: Oxford University Press. Middlemas, K. (1979), Politics in Industrial Society: The Experience of the British System Since 1911, London: Deutsch. Miliband, R. (1964), Parliamentary Socialism: A Study in the Politics of Labour, London: Merlin. Morgan, K.O. (1990), The People’s Peace: British History 1945–1989, Oxford: Oxford University Press. Nuﬃeld College (1944a), Private Conference: International Implications of Full Employment, Oxford: Nuﬃeld College. Nuﬃeld College (1944b), Thirteenth Private Conference: Full Employment, Oxford: Nuﬃeld College. Nuﬃeld College (1944c), Sixteenth Private Conference: Full Employment, Oxford: Nuﬃeld College. Przeworski, A. (1986), Capitalism and Social Democracy, Cambridge: Cambridge University Press. Reagan, P.D. (2000), Designing a New America: The Origins of New Deal Planning, 1890–1943, Amherst, MA: University of Massachusetts Press. Robinson, J. (1937), Introduction to the Theory of Employment, London: Macmillan. Robinson, J. (1942), ‘Industry and the state’, Political Quarterly, 13(4), October, pp. 400–406. Robinson, J. (1943a), ‘Planning full employment. I. The need for a constructive approach’, The Times, 22 January, p. 5. Robinson, J. (1943b), ‘Planning full employment. II. Alternative solutions of a dilemma’, The Times, 23 January, p. 5. Robinson, J. (1943c), ‘Planning’, Fabian Quarterly, 36, January, pp. 4–8. Robinson, J. (1943d), The Future of Industry, London: Frederick Muller for Common Wealth. Robinson, J. (1943e), Private Enterprise or Public Control, London: Association for Education in Citizenship. Robinson, J. (1943f), The Problem of Full Employment, London: Workers’ Educational Association, cited from the revised edition, 1949. Robinson, J. (1943g), ‘Creating money’, Accountancy, 54(1), January, pp. 64–5. Robinson, J. (1943h), ‘Abolishing unnecessary poverty’, in Kaldor, Robinson, Evans, Schumacher and Yates (1943), pp. 3–7. Robinson, J. (1944a), ‘Budgeting in the post-war world’, in H. Morrison, T.W. Agar, B. Wootton, C.E.M. Joad, J. Robinson and G.D.H. Cole, Can Planning Be Democratic? A Collection of Essays Prepared for the Fabian Society, London: Routledge, pp. 75–94. Robinson, J. (1944b), ‘The currency plan’, Socialist Commentary, 9, June, pp. 246–50.

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Robinson, J. (1956), The Accumulation of Capital, London: Macmillan. Robson, W.A. (1971), ‘Introduction’, in Robson (ed.), The Political Quarterly in the 1930s, London: Allen Lane, pp. 9–35. Smith, T. (1979), The Politics of the Corporate Economy, Oxford: Martin Robertson. Thirlwall, A. P. (1987), Nicholas Kaldor, Brighton: Harvester. Thompson, E.P. (1965), ‘The peculiarities of the English’, Socialist Register, pp. 311–62. Thompson, N. (1996), Political Economy and the Labour Party: The Economics of Democratic Socialism, 1884–1995, London: UCL Press. Tiratsoo, N. and J. Tomlinson (1993), Industrial Eﬃciency and State Intervention: Labour 1939–51, London: Routledge. Wilson, H. (1966), The Beveridge Memorial Lecture 1966, London: Institute of Statisticians. Wootton, B. (1945), Freedom Under Planning, London: Allen and Unwin. Wright, A.W. (1979), G.D.H. Cole and Socialist Democracy, Oxford: Clarendon Press. Young, W. and F.S. Lee (1993), Oxford Economics and Oxford Economists, London: Macmillan.

PART VI

The Jérôme-Adolphe Blanqui Lecture

19.

Harrod’s dynamics in the making Daniele Besomi*

Traditional treatments and traditional solutions are being questioned, improved, and revised. In the end this activity of research should clear up controversy. But for the moment controversy and doubt are increased (Keynes, 1928). Economics with its ‘schools’ is still in the phase of quasi-scholastic, in which rivals can persist in their rivalry and mutual invective (Harrod to Knight, 7 July 1937 in Harrod, 2003, vol. 2, p. 708).

When I was invited to give the Blanqui lecture it was understood that the topic would be centred around my book, The Making of Harrod’s Dynamics (Besomi, 1999b). Although I hope to be able to convey its essential thesis, I would also like to spend some time in describing what lay behind the book, and to give you further reﬂections generated by my recent work beyond that research. I begin from the beginning of the story. My research interest has always been the history of ‘formal’ economic dynamics.1 I was ﬁrst struck by the singularity of Harrod’s notion of dynamics when comparing it with other deﬁnitions collected in Machlup’s essay on the semantics of statics and dynamics (Machlup, 1963). While most authors from the early 1930s onwards had adopted the deﬁnition of dynamics proposed by Ragnar Frisch, according to which a theory is dynamics if it explains, by means of functional equations, ‘how one situation grows out of the foregoing’ (Frisch, 1933, 1936), there seemed to be two major exceptions: Hicks, who suggested that dynamics is characterised by quantities being dated, and Harrod, who claimed that a theory is dynamic if its unknowns are the rates of changes of the main variables (output, in particular). Having already studied two major representatives of the ‘mainstream’ – my ﬁrst work was on Kalecki, then I examined Richard Goodwin’s strategy for winning consent on the argument that dynamics should be non-linear2 – I decided to devote some time to these two ‘freaks’ (this was more than ten years ago . . .). After a cursory reading of their major writings on the subject, Harrod’s case seemed to me more intriguing, as along with his notion of dynamics cited by Machlup I found a number of other deﬁnitions, often widely diﬀerent from each other, which he oﬀered in numerous books and articles. 327

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My ﬁrst problem was whether there was any consistency between Harrod’s apparently unrelated statements. One of the deﬁnitions conceived of dynamics as ‘concerned with an economy in which the rates of output are changing’, the unknowns in the equations to be solved not being rates of output per annum, but ‘increases or decreases in the rate of output per annum’ (1948, p. 4; see also 1939a, p. 17). Harrod, however, also deﬁned dynamics as involving the formulation of ‘laws establishing the necessary relationship between various growth factors’ (1955, p. 359), as the study of ‘the relations between the rates of increase (or decrease) of certain magnitudes in a growing economy’ at a given point of time (1960, p. 277) – in particular with regard to the mutual determination and consistency of these rates of change (1962, p. 1009; see also 1938, pp. 402–4, and 1939b, p. 164) – as regarding ‘the formulation of a new set of propositions, relating to the increase of wealth and income’ (1936a, p. viii), as ‘referring to propositions in which a rate of growth appears as an unknown variable’ (1939a, p. 17; 1937a, p. 86), as ‘concerned with the determinants of the rates of increase of the main categories of demand’ (1973, p. 11), and as ‘purporting to specify what the steady rate of growth at a given point of time would be’ (1959, p. 454); in addition he also stressed that the characteristic feature of dynamics as opposed to statics consists in whether or not the rates of change are continuous (1948, p. 6; 1957, p. 193; 1963, p. 402), and whether or not there are savings and investment (1948, pp. 11–12; 1959, p. 454). Second, I was particularly puzzled by Harrod’s idea that dynamic laws refer to one point in time: instantaneous dynamics is surely a paradoxical notion! Yet Harrod seemed to have built high hopes on it, as he claimed he was providing the foundations of a new and revolutionary science of economic dynamics, and systematically and consistently criticised the ‘time-lag theories of the cycle’, a portmanteau expression under which he grouped the approaches of the econometricians (Tinbergen, in particular), D.H. Robertson, the Swedes and John Hicks. What he actually meant, however, never became clear to me in spite of several readings and re-readings of his main published contributions on the subject.3 Thirdly, was Harrod’s claim justiﬁed, that he was saying something intrinsically diﬀerent from, and more fundamental than, dynamics as deﬁned by Frisch? As Hicks pointed out (1950, p. 7), the econometricians’ approach enables us at once to determine the volumes and the rates of growth of the system’s variables, and their mutual determinations, not only at one point of time but – given some initial conditions – at all times. As all of Harrod’s requirements are encompassed within the rival deﬁnition, should Harrod’s dynamics be considered a subset of the more powerful approach of the econometricians?

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I found some of the answers I was looking for in Harrod’s correspondence with Keynes on The Trade Cycle and the ‘Essay in Dynamic Theory’ (Harrod, 1936a, 1939a), printed in Keynes’s Collected Writings (vol. XIV): when he was taken to task by his friend and was asked the right questions, Harrod was forced to provide clear-cut replies. The discussion revolved around two aspects relating to the instantaneousness of Harrod’s dynamics. One was methodological, as Keynes at ﬁrst missed Harrod’s point that his trade cycle theory was based on deviations from an equilibrium status of continuous growth for which the appropriate method of analysis, in Harrod’s view, was to take a cross-section and study the relations between the various magnitudes. The second was analytical, as Keynes questioned that Harrod’s instability result held independently of the interval used for calculating the rate of growth while Harrod, in accordance with his methodological principle, maintained that lags are irrelevant for the study of a moving equilibrium (Harrod, 1939a, p. 20). I place these ﬁrst observations of mine in perspective later in the lecture; for the time being, I only wish to emphasise an immediate consequence of the study of this correspondence: it suggested that if more correspondence was extant, with other colleagues equally intelligent and inquisitive, it could reveal much more about the ideas lying behind Harrod’s cryptic published papers. The excerpts published in Warren Young’s book on Harrod and his Trade Cycle Group (1989) looked promising enough to justify more extended studies. This implied a prolonged stay in Japan, at the Chiba University of Commerce, where most of Harrod’s paper are collected. Fortunately, Harrod turned out to be a passionate hoarder, and to have had a number of intelligent friends who, like him, enjoyed writing letters. Working on Harrod’s papers in Japan was one of the most intellectually exciting times of my life. I arrived only having a few questions, some vague ideas as to the kind of answers I expected and some prior knowledge of the list of papers deposited there. I soon found out that the correspondence was far richer in content than I had expected, as it dealt with a number of issues which were hardly, if at all, mentioned in Harrod’s published essays, and that its arrangement was not conducive to understanding what was going on.4 Additional problems were encountered by ﬁnding unsigned, undated or misdated correspondence, misattributions by the cataloguer or missing correspondence altogether. Besides, the Harrod papers included, rather naturally, the correspondence Harrod received, not what he sent. I was therefore faced with a gigantic jigsaw puzzle (the Chiba collection consists of approximately 15,000 leaves), of which I recognised some pieces, many other pieces I did not expect to ﬁnd, some pieces were missing altogether (for a number of them, however, there was a chance they were preserved in other archives – which turned out to be the case),5 and I did not have an

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overall picture of the ﬁnal composition (which, of course, I could not assume to remain constant, as people’s ideas change from time to time). The correspondence often took the form of comments on Harrod’s or his correspondent’s writings (either published, intended for publication or destined to remain unpublished), and rather often resulted in prolonged debates in which an agreement between the correspondents was not reached. This aspect had already emerged from the exchanges of letters included in Keynes’s Collected Writings, not only those concerned with dynamics but also in the discussion on the Keynesian and traditional theories of interest which was stimulated by the proofs of The General Theory. In spite of Harrod’s ‘horror of public debates’ (which, he believed, ‘lower the prestige of economists in the public estimation’),6 some of the most interesting and informative exchanges were in the form of controversies, a number of which also had an echo in published writings, such as the correspondence with Haberler, Robertson and Kahn on banking policy, the price level, and saving and investment in 1934 (Harrod, 1934, 1935), with Joan Robinson in 1933 on decreasing costs, excess capacity and ‘normal proﬁts’7 and again in 1937 on the classiﬁcation of technological progress,8 and the above-mentioned exchange with Keynes on saving, investment and the theory of interest (Harrod, 1937a). Controversies, whether in private or public, provide an additional challenge for the interpreter: the cause of disagreement is often not clear to the participants in the debate, and the exchanges are characterised by mutual misunderstandings which make it impossible for them to reach an agreement and solicit later readers – who have the beneﬁt of hindsight – to inquire on the implicit assumptions, incompatibilities between concepts or world views, and paradigmatic switches which characterise these debates. This is often a fruitful line of work, and my own research has on several occasions beneﬁted from Harrod’s (and some of his correspondents’) quarrelsomeness, stubbornness and verbosity. I return later to some of the features of archival research which made my inquiry such an exciting time. It is now time to outline the main results I reached – and update them from my most recent work. Depicting the speciﬁc features of Harrod’s thought on dynamics is rather diﬃcult if one wants to keep an eye on the details, especially regarding the genesis and early development of his ideas: Harrod concurrently pursued several interest, not only in the discipline of economics (he wrote on imperfect competition, monetary and banking policy and theory, international economics, utilitarianism, and population) but also in philosophy and politics, and all these aspects inﬂuenced, sometimes crucially, the development of his thought on dynamics. For this reason, in The Making of Harrod’s Dynamics I followed a chronological approach, which enabled me to

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expound the various elements of Harrod’s dynamics in the same order as he came upon them. Here I will follow another route, using as a thread a single principle which, logically and chronologically, organises Harrod’s thought on dynamics, and is therefore the key to understanding it in its making and later developments – namely, the instability principle. As in the book, I will focus principally on interwar years. A theory of the trade cycle, Harrod argued, must include at the outset some destabilising factor. If stabilising forces prevailed, in fact, a disturbed system would tend to return to equilibrium, and the persistence of the cycle should be explained by means of exogenous factors. A proper theory of economic ﬂuctuations should instead be able to provide an endogenous explanation. This principle was developed by Harrod well before he devised his speciﬁc trade cycle mechanism based on the interaction of the multiplier and the acceleration principle: its ﬁrst appearance is in a published article reviewing the ‘Doctrines of Imperfect Competition’ (May 1934), where it was applied to the criticism of Pigou’s psychological theory of the cycle, while the multiplier-acceleration mechanism dates from the end of 1935. Soon after publication, Harrod stressed – in correspondence with Haberler – the epistemic role of this principle, describing it as ‘just the very kind of explanation which a rational account of the trade cycle requires’ (Harrod to Haberler, 19 October 1934; the argument is repeated in the same letter and again in another letter to Haberler of 5 November 1934 in Harrod, 2003, vol. 1, pp. 304 and 333 respectively). Harrod seems to have developed this idea from Hayek’s rendition of the argument originally developed by Adolf Löwe in 1926 (Löwe, 1997). In Monetary Theory and the Trade Cycle (to which Harrod referred in the above-mentioned correspondence with Haberler) Hayek admitted that there is a diﬃculty as trade cycle theory relies on the logic of equilibrium theory, which has to assume that the disturbances to equilibrium are of an exogenous nature, and interpreted the problem of the trade cycle as consisting in understanding why ‘the forces tending to restore equilibrium come temporarily ineﬀective and why do they only come into action again when it is too late’ (Hayek, 1933, pp. 42–4, 65). Harrod radicalised Hayek’s approach, as he saw – like Löwe – the problem as consisting not only in the departure from equilibrium, but also in the persistence of ﬂuctuations.9 Harrod at ﬁrst tried to use imperfect competition as the destabilising factor: if returns are still increasing at equilibrium, a deviation from it would prevent readjustment at the same level as before (Harrod, 1934a, pp. 465–70). However, this road proved impracticable for constructing a theory of the cycle, as a few months later Harrod wrote to James Meade that his ideas on the cycle were still ‘amorphous in the extreme’ (Harrod to Meade, 4 October 1934 in Harrod, 2003, vol. 1, p. 295). The elements for building

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a working model came later: Harrod seems to have learned of the possible use of the acceleration principle for trade cycle theory from Haberler’s League of Nations survey, a draft of which Harrod read during the summer of 1934, and with which he experimented in March 1935.10 As to the multiplier, Harrod ﬁrst appreciated its implications only after having read The General Theory in proof during summer 1935.11 The idea of combining these two principles seems to have occurred to him late in 1935, and the resulting mechanism was shortly described in a paper read on 10 January 1936 in Copenhagen (Harrod, 1936). A few days later, the ﬁrst draft of The Trade Cycle (1936a), the most complete exposition of Harrod’s ideas on dynamics, was sent to Meade for comment. In The Trade Cycle, the instability principle was applied twice: to escape from static equilibrium and make movement possible, and to make the cycle possible by permitting deviations from the moving equilibrium. These steps were taken in turn, as Harrod believed that the study of the laws determining how the level of output is determined should precede the study of its variations.12 For the ﬁrst stage, Harrod recast the partial equilibrium approach, generalised by the introduction of imperfect competition,13 in terms of forces acting on individual entrepreneurs and causing them to increase or decrease their levels of output. These independent vectorial forces, which he called static determinants, are ‘(i) The rates of pay at which prime factors of production can be secured. (ii) The eﬃciency of the prime factors. (iii) The elasticity of demand for commodities. (iv) The general price-level’ (Harrod, 1936a, p. 50). The ﬁrst three of these and their associated laws (the plasticity of prime costs, the law of diminishing returns and the law of diminishing elasticity of demand) act as stabilisers: an increase of production would, for instance, decrease the eﬃciency of labour, and thereby discourage, ceteris paribus, a further raise of output. The fourth determinant is a destabiliser, as an increase in the general price level would – everything else being given – induce entrepreneurs to increase production. The stability of equilibrium depends, of course, on the balance of these forces. Harrod argued, on the basis of the instability principle, that equilibrium cannot be stable, as we actually observe persistent movements in economic variables; nor can it be widely unstable, for otherwise we would observe cumulative growth or depression. Equilibrium must therefore be neutrally stable, i.e. the destabilising eﬀect of the monetary determinant must exactly counterbalance the stabilising eﬀect of the other three determinants. The latter proposition looks like sleight of hand, and Harrod was indeed aware that it involved a ‘change of method’ (1936a, p. 37): while the stabilising eﬀect of the ﬁrst three determinants is derived from introspection, Harrod deduced that money is a destabiliser not because of any of its

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intrinsic qualities, but from the epistemic necessity dictated by the instability principle. The role of this assumption is to make movement possible, and compatible with whatever is decreed by the forces responsible for motion, in strict analogy with a ball lying on a ﬂat surface: the ball would rest wherever it is placed, or would move when subjected to an external force, oﬀering neither resistance nor cooperation. The independent vectorial forces responsible for motion are the dynamic determinants. Instead of aﬀecting individual entrepreneurs, they act on the system as a whole. They are, in fact, the parameters determining the magnitude of the multiplying and the accelerating eﬀects, i.e. the propensity to save, the distribution of income and the quantity of capital necessary for the production of a unit of output. The working of Harrod’s proposed mechanism is well known: expected increases in consumption determine the amount of necessary investment (acceleration principle); new investment implies additional income (multiplier), part of which is spent on consumption goods. One of the possible results is that the actual increase in consumption matches what was expected: in such a case the whole system would be in a state of dynamic equilibrium. This, however, is only one among other possible outcomes, as actual consumption could be in excess or short of what is actually produced. Here is where the instability principle comes in once again: if the moving equilibrium were stable, the natural state of the system would consist in cumulative growth at a constant rate, cycles could only be explained as a consequence of exogenous forces determining regular ﬂuctuations, and the burden of explanation would be shifted on to the causes of such a regular behaviour. But the moving equilibrium is unstable: if, for instance, actual consumption were not up to the mark, the ensuing additional investment would be reduced, income and therefore also consumption would increase less, the situation of disequilibrium would reproduce and aggravate itself. Not only random deviations from equilibrium are ampliﬁed by this mechanism, but there are forces at work preventing the system from settling into an equilibrium state: the growth of income, in fact, whether or not at the equilibrium rate,14 triggers changes in the propensity to consume (for Keynes’s psychological principle, a richer community saves proportionately more) and the distribution of income, thereby aﬀecting the multiplier. The accelerator is not constant either, as the decrease in the rate of interest during a slump stimulates the adoption of more roundabout methods. The moving equilibrium is therefore an unlikely state of the system: even if the economy can, for short periods, grow at a constant rate, sooner or later a cumulative deviation from equilibrium will set in. The boom is broken, and eventually reversed, by the adverse changes in the multiplier and/or the reaching of full capacity, the slump is interrupted and reversed by the necessity of

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replacements and/or the more favourable acceleration coeﬃcient. The vera causa15 of the cycle lies thus in the instability of the moving equilibrium. We have seen that Harrod’s reconstruction of the traditional static method of analysis in terms of forces aimed at making static equilibrium compatible with movement. But how precisely are static and dynamic forces linked to each other, the former aﬀecting entrepreneurial decisions and the latter the conditions of reproduction of the status of the system as a whole? The ﬁrst three static determinants depend on individual preferences, and Harrod thought that there are no reasons to think that these ﬂuctuate in tandem with the cycle. The force inducing entrepreneurs to adapt to what the dynamic determinants decree is the general price level. In conditions of advance, the general price level increases, and accordingly entrepreneurs ﬁnd it convenient, ceteris paribus, to increase their own level of output; conversely, during a slump prices decrease, inducing producers to slow down. Price ﬂuctuations, however, should not be regarded as the cause of the cycle: they are only the ‘lubricant’ of the system (Harrod, 1936a, p. 126), and represent and measure the eﬀect of the resistance of the ﬁrst three static determinants against increasing production. The next question is, what induces the price level to ﬂuctuate in such an accommodating way? The velocity of circulation of money is brought into play at this point. Harrod’s description of this mechanism is rather lengthy – and in truth not fully convincing (Harrod, 1936a, pp. 125–46). It relies on the time-lag between the receipt of income and its expenditure (Robertson’s assumption):16 when activity begins to slow down, people spend more than they should, ﬁrms cash this money but reduce their level of production. There is therefore an unwanted accumulation of cash holdings in the hands of the ﬁrms; part of this may be used to pay oﬀ the ﬁrms’ debts, but there is no reason to suppose that all the cash will be used for this purpose: money can be, and indeed is, used as a reserve of value and as a capital asset, and in this case the velocity of circulation drops. If this datum is inserted in the quantity equation of money, considering that the level of activity is jointly determined by the static and dynamic forces, and that the quantity of money is determined by the banking policy, ﬂuctuations in the price level depends on changes in the velocity of circulation. The instability principle therefore organises a double causal bound between statics and dynamics: ﬂuctuations in the velocity of circulation permit changes in the price level, which in turn allow for output ﬂuctuations; the static and dynamic forces, on the other hand, determine how production, prices and velocity of circulation should ﬂuctuate. In Harrod’s view, statics and dynamics were thus integrated; Harrod actually saw statics as the foundation of dynamics, and dynamics as a complement to, and a generalisation of, statics. Harrod was naturally aware that the ‘traditional theory’ of the

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determination of prices and quantities by means of supply and demand curves had recently been subject to criticism: Sraﬀa had questioned the independence of demand and supply curves for commodities, Keynes questioned the independence of the supply and demand curves for capital. Harrod interpreted both criticisms not as logically cogent, but as limiting the domain of validity of traditional theory, and proceeded to its generalisation. He thought – and in this, of course, he was not alone – that Sraﬀa’s problem would be solved by allowing elastic demand curves, by means of which the various degree of market imperfection could be seen as a continuum, and accordingly integrated the partial equilibrium approach by introducing the law of diminishing elasticity of demand. As to Keynes’s problem, Harrod admitted that traditional theory cannot satisfactorily deal with the increase of output caused by saving and investment, but rather than discarding the whole theory on grounds of inconsistency he limited its domain to statics, which he characterised as the absence of saving and investment. But, given these modiﬁcations, Harrod thought that the utility functions and the other forces aﬀecting individual behaviour must still provide the background for – and indeed the foundation of – dynamic analysis.17 Harrod ﬁrmly believed in the continuity with the economic tradition inherited from Marshall, and indeed urged Keynes (via Kahn) to express his ideas ‘in terms which are used in marginal analysis, so that it can be ﬁtted in to the corpus of economic theory such as it is’ (letter to Kahn, 17 November 1934 in Harrod, 2003, vol. 1, pp. 345–6). As a matter of fact, Harrod not only retained the method and the analytical tools of the partial equilibrium approach for his own rendition of statics, but these were also at the basis of his dynamics, which was also formulated in terms of independent vectorial forces.18 Harrod, however, also maintained that the limitations of traditional theory as denounced by Keynes should be overcome, and saw his own dynamics as the truly revolutionary step beyond the traditional economics:19 not because it accounted for saving and investment in a way which, Harrod thought, Keynes failed to do properly,20 but because of the introduction of the instability principle. While there is methodological and analytical continuity, the fundamental break with tradition does not regard the object of analysis, but is of an epistemic nature: Harrod’s modiﬁcation makes movement possible, and indeed necessary, while the static equilibrium reduces to a state of rest. So far I have described Harrod’s approach to dynamics (as expressed in The Trade Cycle) in terms of the implications of the instability principle. Although I believe this to be Harrod’s seminal theoretical innovation, his dynamics were naturally also characterised by other components and were subject to other inﬂuences. The idea that the trade cycle takes place against the background of steady progress, for instance, was part of the shared

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premises of the Oxford and London economists engaged in ‘missionary work’ for the New Fabian Research Bureau (the Keynesian Harrod and Meade, and the Hayekian Durbin and Gaitskell respectively). Its origin is almost surely to be found in Robertson’s Banking Policy and the Price Level, but the political element in this assumption should not be underestimated, as Harrod’s ﬁrst formulation of this idea took place in a contribution to the ongoing debate with the London Fabians on the implications of monetary policy (the title itself of Harrod’s paper is illuminating: ‘The Expansion of Credit in an Advancing Community’, 1934b). The major external inﬂuence on Harrod’s economic thought, however, came from his philosophical reﬂections on the ‘mapping’ of the possible states of the world into scientiﬁc laws and concepts, and on induction and deduction. Although these problems had occupied Harrod’s mind since at least 1935, we only see their full implication for dynamics in the ‘Essay in Dynamic Theory’ (Harrod, 1939a), where Harrod recast his 1936 model in axiomatic terms. This reﬂects the logical positivist tenet that meaningful propositions are either empirical or tautological: Harrod turned his dynamic ‘forces’ into determinants of the supply of and demand for savings, based on an inductive generalisation from empirical observations, while the equality between saving and investment is a tautology.21 The most important development deriving from Harrod’s philosophical reﬂections concerns the distinction of the diﬀerent stages in dynamics. I have already mentioned that in 1934 Harrod developed the notion that the appropriate method for the study of equilibrium states is to take a time section and examine the relationships between relevant magnitudes. From 1938 on he developed the view that the construction of economic laws should proceed in three stages, the ﬁrst being a description of the instantaneous state of the system, the second dealing with the succession of events and the third concerning policy applications. Accordingly the ‘Essay’ (or, better, its original draft: Harrod, 1996) was neatly divided in three parts: the instantaneous analysis of the moving equilibrium and the discussion of its stability, in which coeﬃcients are taken as given; the succession of the events occurring during the trade cycle, when the multiplier and acceleration coeﬃcients change following income variations; and policy issues arising from diﬀerent relative positions of the warranted (equilibrium) and natural (maximum feasible) rates of growth. It is now clear that the diﬀerent deﬁnitions of dynamics given by Harrod throughout his career all belong to the same composite notion, of which they represent diﬀerent facets. The stress on instantaneous analysis and on the mutual consistency of rates of growth reﬂect a methodological concern; the distinction between continuous and per saltum changes reﬂects the analytical properties of dynamic and static equation, as the equations deter-

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mining the level of output must take the ‘fundamental conditions’ (preferences, cost functions etc.) as given while equilibrium growth implies a continuous change of output; ﬁnally, the reference to the presence of saving and investment reﬂects an ontological property of the dynamic system, as opposed to its absence in a static system. So far as the ‘time-lag theories of the cycle’ are concerned, Harrod had the feeling that they shifted the burden of the explanation of the cycle onto the lags themselves, and therefore were subject to the same criticism as Pigou’s psychological theory, namely that they resorted to frictions, maladjustments and errors of calculation rather than identifying the ‘vera causa’ of the cycle (letter to Tinbergen, 1 July 1937, in Jolink, 1995, p. 442 and in Harrod, 2003, vol. 2, p. 706) – the instability of equilibrium. The charge is explicitly addressed to Robertson (but analogous statements can be found with respect to Hicks, Lundberg, and the econometricians): ‘What I feel about people broadly in your position is that you cling a little too tenaciously to the view that the classical analysis shows that the system must be self-adjusting in the end. You are inclined therefore to emphasize time-lags and miscalculations’ (Harrod to Robertson, 25 December 1936 in Harrod, 2003, vol. 2, p. 599). Harrod did not deny that lags play a part in the trade cycle; they are, however, only relevant in disequilibrium situations, as during growth at a constant rate they are systematically discounted by entrepreneurs and consumers alike. Lags therefore only come in in stage two of dynamics, and for this reason Harrod always considered these kinds of explanations as ‘less fundamental’ that his own theory.22 I ﬁnd Harrod’s dynamics, especially as presented in The Trade Cycle, a somewhat grandiose system of thought, as they explicitly encompass static and dynamic forces, characterise individual and systemic equilibria, and are based on a reﬂection on all diﬀerent aspects of the discipline (epistemic, methodological, analytical and ontological). Their relationships to traditional theory and to the rival explanations were clearly the subject of much thought. This, of course, is not to say that Harrod’s construction is watertight. Far from it: there are indeed some fundamental ﬂaws, most of which commentators have readily picked up. The ‘methodological break’ from which the destabilising eﬀect of the general price level is deduced, for instance, was harshly criticised by Hawtrey, who pointed out: The acceptance of the association of rising prices with increasing activity and of falling prices with declining activity as a merely empirical conclusion has the serious disadvantage that it does not show which is cause or which is eﬀect. It leaves Mr. Harrod, therefore, with a very unsatisfactory kind of determinant (Hawtrey, 1937, p. 327).

Others pointed out that turning points are not well accounted for (Hansen, 1937, pp. 525–7; Staﬀord, 1937, p. 76n.). Or again, although

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Harrod took great pains to ensure that individual preferences were compatible with the outcome of dynamic laws, the whole notion is based on a confusion between individual and systemic notions of equilibrium, as he attributed to static equilibrium not only the maximisation of proﬁts and utility but also the reproduction of its own state. Conversely, he saw the dynamic equilibrium not only as equating the aggregate demand and supply of goods and capital, but also as ensuring the satisfaction of entrepreneurs. Generally speaking, reviewers of The Trade Cycle failed to notice Harrod’s attempt to reconcile the micro- and macro-levels of analysis and to export to dynamics the method of statics, and only discussed the technicalities of the cycle model. As to the epistemic postulate, a few commentators noticed that Harrod assumed a ‘frictionless’ world in order to avoid attributing the cycle to miscalculations (Robertson, 1937, p. 124; Hansen, 1937, p. 511, 523–4), but no one went further than that23 – not even Neisser, who had been a member of the Kiel School where the epistemic principle was ﬁrst developed by Löwe, realised that Harrod’s position was exactly the opposite to that of the equilibrium approach (1937, p. 441). The immediate consequence of these reactions (about which Harrod complained in correspondence with Robertson, Keynes and Henderson) was the abandonment of the analysis of the static forces, which was never resumed in his writings after The Trade Cycle.24 But the subsequent versions of Harrod’s theory were also not free of shortcomings. For instance, in spite of the disappearance of references to static equilibrium, in Harrod’s ‘Essay’ up to six distinct and sometimes conﬂicting notions of dynamic equilibrium coexisted,25 giving rise to the criticism that maintaining the same rate of advance is only one of the possible patterns of equilibrium entrepreneurial behaviour, and thus alternative rules could be devised (Alexander, 1950, p. 728). Harrod conceded that his assumption concerning the behaviour of entrepreneurs in equilibrium is ‘rather special and may be unjustiﬁed’ (1951a, p. 71), and tried to solve the problem of the consistency between individual and systemic notions of equilibrium by resorting to the notion of representative entrepreneur, which just raised another stream of objections.26 But more important for the subsequent interpretations of Harrod’s dynamics, a crucial assumption was not speciﬁed in the ‘Essay’, contributing to the distraction of the commentators’ attention from the epistemic character of the instability principle. Bowing the knee to Keynes’s insistence, Harrod submitted what he thought was a rigorous proof of the instability of equilibrium (letter to Keynes, 22 September 1938, in Keynes CW XIV, pp. 432–43 and in Harrod, 2003, vol. 2, pp. 870–73) in which, however, a vital step was missing. The analysis of stability cannot be instantaneous, as it involves comparison between diﬀerent states of the system, for which some causal nexus should be

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given. Such a complaint was ﬁrst advanced by Marschak while reading a draft of Harrod’s article,27 and noticed again in 1948 by Baumol who was the ﬁrst to attempt a more rigorous formalisation of Harrod’s argument. A prolonged debate on the stability of the warranted growth rate ensued. Commentators ﬁlled the gap by inserting some behavioural equation (in the earlier years of the debate) or assumptions on the formation of expectations, and drew – not surprisingly – diﬀerent conclusions according to the kind of additional equations they added to Harrod’s formulation. The debate took a diﬀerent turn when neoclassical writers28 believed they could attribute the instability of the moving equilibrium to the rigidity of the capital/output coeﬃcient, which they thought instead should be ﬂexible in response to changes in the rate of interest. These writers were soon echoed by Keynesian authors,29 who attributed the instability instead to rigidity in the propensity to save. These interpretations altogether missed the role of diﬀerent stages of analysis: the acceleration and multiplying coeﬃcients were indeed taken as given, but only in the ﬁrst stage, devoted to the characterisation of equilibrium at one point in time, while in the subsequent stage, devoted to the trade cycle, the variation of coeﬃcients played a fundamental role. The second stage was ignored altogether, and Harrod’s theory was seen as describing growth as an equilibrium process.30 A further diﬃculty was technical: even if they had noted the intrinsic non-linearity of Harrod’s theory, mathematical economists did not know how to deal with variable coeﬃcients: non-linear dynamics was still in its infancy, and the pioneer’s claim that he was inspired by Harrod’s Trade Cycle remained unheard (Goodwin, 1951, p. 2n.). Nor, of course, did Harrod’s poor mathematics enable him to work out neat formulas for his non-linear problem: his division in stages actually was instrumental to his incapacity of dealing with this problem, as he found a catchy equation describing the equilibrium growth rate, but for the cycle he could do nothing better than re-calculate everything with the new set of parameters consistent with the new level of income, instant after instant. Yet some of Harrod’s ideas turned out to be quite powerful, and were eventually implicitly vindicated by the later developments taking place within the ‘time-lags theories of the cycle’ which Harrod so ﬁercely opposed. When they learned how to deal with non-linearities, trade cycle theorists working in the Frisch tradition found out that cyclical solutions of functional equations are characterised by an unstable steady point in the phase diagram surrounded by limit cycles or strange attractors. Harrod’s instability principle and his idea that changes in the major forces aﬀecting the rates of growth, both developed quite intuitively, therefore jointly found a strong conﬁrmation in rather complex mathematical models. It is even somewhat ironic that the solution to these models can

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only be found by means of Harrod’s method, namely by recalculating everything instant after instant (using computers, of course), as these equations do not normally admit an analytical solution to be worked out using paper and pencil. These results make the relationship between Harrod and his contemporaries even more paradoxical than I had thought at the beginning of my research. I noticed, as a starting point, that Harrod was trying to say something which his ‘antagonists’ – the econometricians – did not understand and even snubbed; Harrod, in turn, failed to understand what the econometricians were saying. As, however, there clearly were some relevant points in common, both in terms of premises and of results, there must have been some problem in communication. In the epilogue to The Making of Harrod’s Dynamics I reviewed the secondary literature on Harrod’s dynamics, which I read in chronological order interspersed with Harrod’s own replies and restatements of the problem. Commentators were not able to see the gist of Harrod’s dynamics and concentrated on his formula for equilibrium growth – which was, however, reinterpreted as describing a growth path rather than a rate of growth at a point of time. Harrod tried to meet speciﬁc criticisms by pointing to the corresponding feature of his dynamics – methodological, analytical, ontological – but never attempted to characterise the whole conception in its relation to the alternative notions of dynamics and, worst of all, did not stress enough the epistemic character of the instability principle, which at that point perhaps he was happy to consider a ‘result’ rather than a premise of his reasoning (after all, most of his fame among his contemporaries was linked to that proposition and to his formula). The history of Harrod’s dynamics can therefore be summarised as the story of a failure to win consent: not, of course, a failure on all fronts, as his contributions certainly left a permanent mark in the history of economics (witness the success of notions such as the ‘marginal revenue’31 and the ‘international trade multiplier’, or the ‘multiplier-accelerator model’ and the ‘growth equation’, all well codiﬁed in textbooks). Harrod failed, however, to make his contemporaries aware that he was proposing an alternative and rather complex deﬁnition of dynamics, and even less could he convince them that this was ‘more fundamental’ than the competing notions. When I realised I was writing the story of a failure I had to ask myself whether I was wasting my time: surely exploring someone’s mental laboratory, where so many widely diﬀerent things were taking place at once, was a challenge and such an extraordinarily interesting exercise; but was it also a useful exercise? I decided it was – actually, I realised that it was even more useful precisely because it was the story of a failure – so a short discussion about this may perhaps be useful.

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Harrod’s original work in dynamics took place with the years of high theory in the background, when several theoretical systems competed for attention and supremacy (with their associated policy implications). He was obviously in touch with the most recent developments, either via personal acquaintance with some of the leading ﬁgures or via the literature. These developments nourished Harrod’s thought, forced him to reconsider his own positions, posed new questions and proposed new answers, gave him new analytical tools and theoretical concepts. Harrod himself contributed to these developments, and he could see some of his ideas being integrated within one or the other of the new frameworks which were taking shape while, on the other hand, he also had to acknowledge that some of his other ideas never really caught on. Such a state of aﬀairs was, of course, shared, to some extent, by the other participants in this theoretical turmoil. Debates were abundant, and only rarely (if at all) could they be resolved with an agreement. Some of these are retrospectively quite diﬃcult to understand, especially when they turned into logomachies, the dissent regarding the meaning of words and the choice of the ‘best’ deﬁnition – the notions of saving and investment, in particular, were the subject of several multilateral debates which ended nowhere near an agreement. There are (at least) two ways of interpreting such a situation. One could say that, as a matter of fact, some theories, conceptual systems or assumptions were eventually proven – in the light of subsequent development of the discipline – to be useless or plainly wrong, and were accordingly discarded. In this view, which sees the history of economic thought as a more or less linear cumulation of more and more useful and powerful analytical tools, the failure to win consent is symptomatic of confused, inadequate or fallacious thinking. On the other hand, one could see more in a theory than a set of analytical instruments: a theory also consists of points of view, which may or may not be compatible with the points of view in the background of other theoretical systems. With such a view, failure to reach an agreement is not a symptom of stubbornness and sterile fossilisation into one’s own stale ideas in spite of which the world evolves, but rather reﬂects clashes of intrinsically conﬂicting doctrines. If one accepts this standpoint, debates – whether implicit or explicit, direct or via the pages of professional journals – and the success or failure of concepts and theoretical systems become the focus of the study of ideas from their genesis to their structuring and eventual acceptance, disappearance or rediscovery in a diﬀerent form and context. Debates consist in the counterpointing of diﬀerent positions; as such, they provide in fact a favourable setting for bringing to light the elements which make conceptual systems incompatible with each other. Although Harrod may partly be blamed for not being suﬃciently consistent and clear in the exposition of his ideas, the ‘fault’ cannot be entirely

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his: in the various debates in which he was involved with Keynes, Joan Robinson, Haberler, Robertson, Kaldor and others, misunderstandings were mutual, and these people cannot all be thought to be particularly stupid. I have studied these debates with some care, some in my book and others in later writings. I have already referred to the gist of Harrod’s exchanges with Keynes on dynamics and on the traditional theory of saving and investment. I would like to mention two other debates where eﬀectual communication would have required in one of the participants a radical switch in his or her perspective on the problem under discussion.32 Harrod criticised as ambiguous Joan Robinson’s notion of ‘neutral inventions’ (which she borrowed from Hicks) as those leaving the ratio of marginal productivity of capital to that of labour unchanged when the relative amounts of the factors are unchanged (Robinson, 1937, p. 132), and suggested instead ‘to divide inventions into those which at a given rate of interest, and an inﬁnitely elastic supply of capital at that rate, increase, leave unchanged or diminish the length of the productive process’ (Harrod, 1937b, p. 329). Harrod’s review generated an extensive correspondence (of which, unfortunately, only Robinson’s side is extant), which eventually led Joan Robinson to formulate the conditions under which Harrod’s and Hicks’s classiﬁcations of technological progress coincide (Robinson, 1938). Robinson’s successive attempts at this problem are extremely interesting, as they show that she never understood that Harrod had in mind a completely diﬀerent problem and that his proposal was based on a diﬀerent conception of capital. Robinson’s problem addressed how inventions aﬀect employment in the long run, and she accordingly examined how new techniques alter the marginal eﬃciency of capital by aﬀecting the production function. Harrod was interested instead in how inventions – everything else being given, including the rate of interest – alter the eﬀect of the third dynamic determinant, namely the amount of capital used in production. His reference variable was therefore the amount of capital per unit of production, a notion which he associated with the Austrian concept of ‘roundaboutness’. Although it is rather diﬃcult to recognise this point in The Trade Cycle and in later published writings,33 Harrod discussed it in detail with Kahn and Keynes in 1935 and again with Keynes and Hawtrey in 1937. Such a conceptual shift was too much for Joan Robinson: nowhere in the correspondence are there any hints that she understood that Harrod was approaching the problem from a completely diﬀerent perspective. But Harrod, as well, failed to see Robinson’s point. This is indicated by an exchange with Kaldor about a year later: again, Kaldor argued about the rate of interest and the method of production having in mind a production function, while Harrod replied with reference to roundaboutness. Needless to say, they ended up by accusing each other of being ‘tricksters

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and knaves’,34 and failed to realise that they were talking about the same object in diﬀerent and incompatible languages. The matter could be cleared only a quarter of a century later by Hicks who, with the beneﬁt of hindsight, understood that his own 1932 problem was rather diﬀerent from Harrod’s, that their corresponding viewpoints altered accordingly, and that the tools and concepts developed for the one’s problem simply could not be used for the other’s.35 A second example of failure to communicate is even more paradoxical. In 1932, Harrod applied Kahn’s employment multiplier to foreign trade. He clearly understood the technicalities involved in the multiplier as an inﬁnite series of global repercussions of local events, which he summarised in his foreign trade multiplier formula and saw expressed in a more rigorous mathematical form by Meade, in correspondence (1932) on a draft of Harrod’s International Economics (Harrod, 1933b). At the end of 1932, Keynes, as well, commented on Harrod’s draft, and clearly failed to see Harrod’s point. This was not a temporary blank on Keynes’s part, as the situation was repeated in February 1937 when Keynes read the restatement in The Trade Cycle. The problem had to be explained to him by Robertson (who is well known never to have liked multipliers!). Meanwhile, Keynes himself transposed Kahn’s multiplier to investment. Harrod was exposed to this formulation very early, as he certainly read Keynes’s Means to Prosperity as it appeared in The Times in March 1933 (Keynes, 1972, pp. 339–45). Yet, he failed to understand Keynes’s point. This is certiﬁed by an exchange Harrod had with Kahn in 1934, in which – after a ‘tutorial’ by Kahn on the new developments taking place in Cambridge, of which Harrod admittedly knew nothing – he considers the implications of the new point of view as ‘frightening’ and ‘paradoxical’. He understood the message (but nonetheless never accepted the implications of the multiplier on the traditional theory of interest) only after having read the General Theory in proof during summer 1935. The problem in the circulation and integration of the multiplier theory does obviously not reside in its technicalities, as both Keynes and Harrod had been independently capable of solving them. What both Keynes and Harrod missed in each other’s approach was that they involved a radical conceptual shift: Keynes inverted the causal relationship between saving and investment, while Harrod inverted the nexus between variations in imports and exports; moreover, both had to change the variable responsible for bringing into equality the magnitudes they were dealing with, and both – and this adds further irony – referred to variations in the level of income. Such a conceptual shift must not have been easy: it took Keynes a long time to develop on his own the implication of Kahn’s employment multiplier, and Harrod was consistently deaf to warnings that he was disregarding in

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his multiplier the leakage due to saving;36 and is not the causal nexus between saving and investment the main point on which Keynesian and neoclassical economics still diverge today?37 These, of course, are just case studies, and one would not be justiﬁed in drawing sweeping generalisations from their implications. Nevertheless I believe these results to be of importance not only for the speciﬁc cases, but also as suggesting a possible key to understanding how new theories and concepts are born, established or discarded, with the shifts of perspectives and new viewpoints they carry with them. For this reason I would like to conclude with a plea in favour of archival research. As I mentioned earlier, my book and a good deal of my subsequent research on Harrod are based on unpublished papers and correspondence. It is in the nature of these materials that they contain more debates and controversy than published writings: quibbles sometimes regard apparently minor points, misunderstandings are settled, or the resulting articles and essays may not ﬁnd their way to journals or books for a number of reasons.38 On this ground alone, exploring archives could prove extremely fruitful: apparently trivial details can, retrospectively, reveal their importance, and contribute to explaining how some ideas came about or were abandoned.39 The importance of unpublished sources is sometimes belittled or altogether dismissed on the grounds of not representing the fully developed version of one’s thought, which is properly expressed only in published writings. Patinkin even claimed that he would not consider press articles as evidence of the dating of theoretical statements on the grounds that such would not constitute part of one’s central message to the scientiﬁc community (1982, p. 85). This view seems to me unduly restrictive, as it ignores the processes involved in the discovery of a concept of theoretical statement, including the numerous trials and errors, the exploration of diﬀerent paths (and the reasons for discarding some of them), the inﬂuences of other authors40 and of contemporary events, and so on. In other words, if such a view is accepted historians would have no means for exploring a theoretical construction in its making; but there lies all the intellectual excitement of the author, and also that of the historian. As to my own research, of which I hope I succeeded in conveying the gist, I shall never be able to stress strongly enough how much I owe to what was buried among the documents collected and preserved by Harrod and his correspondents. And I am so convinced that much more is waiting to be discovered that I have undertaken the editing of Harrod’s interwar papers and correspondence.41 The Harrod-related materials would naturally only cover a small fraction of the economists’ papers available in archives, but I hope it will stimulate scholars to engage in similar research: it is hard and

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labour-intensive work, but it is often rewarding – and it is certainly a lot of fun!

NOTES *

1. 2. 3.

4. 5.

6.

7. 8. 9.

10. 11. 12. 13. 14.

I am grateful to Nicolò De Vecchi, Geoﬀ Harcourt and Bruna Ingrao for helpful comments and criticism. Geoﬀ Harcourt also commented upon The Making of Harrod’s Dynamics, of which he was external examiner when it was originally a Ph.D. thesis; due to an unpardonable oversight his name does not appear among those whose help was acknowledged. I take the occasion to remedy this here. I am indebted to the libraries where Harrod’s and his correspondents’ writings are held for permission to examine the papers in their possession; without the kind collaboration of their librarians and archivists this research would not have been possible. The terminology is taken from G.L.S. Shackle (1965). Besomi, 1988, 1992. Of course I do not mean that Kalecki and Goodwin were orthodox economists, but only that they accepted the ‘winning’ notion of dynamics. Commentators have indeed pointed out that ‘Harrod’s eccentricities . . . extended to his exposition’ and ‘something was lacking in the communication process’ (Baumol, 2001, p. 1038), and that Harrod’s ‘own exposition of his model is almost as confusing as the interpretation that neo-classicals have put upon it’ (Robinson, 1971, p. 110). See note 41 below. Besides the collections referred to in this paper (listed in the Reference section), important correspondence by, and documents relating to, Harrod are preserved among the papers of Keynes, Joan Robinson, Robertson, Durbin, Douglas Woodruﬀ, Knight, the Fabian Society, Cannan, Lord Cherwell (F.A. Lindemann), Macmillan, H.B.W. Joseph, Haberler, Henderson, Hawtrey, Marschak, Meade, the Oxford University Archives, the Rockefeller Foundation. Other batches of Harrod’s own papers are held at Nagoya University of Commerce and Business Administration, Tokyo University, Georgetown University, and the British Library. Harrod to Haberler, 21 October 1934 (Harrod, 2003, vol. 1, p. 308). Similar remarks can be found, for instance, in a letter to Henderson of 9 April 1936 (Harrod, 2003, vol. 2, p. 545): ‘I think that there are reasons in the interests of economics against being provoked into a dog-ﬁght. I cant (sic) see that it will serve any useful purpose and merely make more stink.’ The expression ‘horror of public debates’ is due to Robertson in a letter to Harrod of 4 October 1934 (Harrod, 2003, vol. 1, p. 297), replying to a letter not found where the words were probably used by Harrod himself. Harrod, 1932, 1933a, Robinson, 1932. For a discussion see Sardoni, 1999. This exchange is further discussed below. At the time of writing The Making of Harrod’s Dynamics it did not seem likely to me that Harrod was acquainted with Löwe’s article, even indirectly (see note 11 to Ch. 1). The correspondence with Haberler, part of which I read after the book was published, suggested, however, that Harrod’s version of the principle originated from the reading and criticism of Hayek – who was indeed familiar with Löwe’s article. I elaborate on this in Besomi, 2002. Letters from Kahn of 6 and 23 March, 6 April 1935; letters from Keynes, 21 and 28 March 1935 (in Harrod, 2003, vol. 1). More on this below. The principle was outlined a decade earlier, in an essay on ‘The Trade Cycle and the Theory of Distribution’ read before the British Association in 1925, now in Harrod, 2003, vol. 3, pp. 1021–32. Harrod’s generalisation of ‘traditional theory’ is further discussed below. There is an asymmetry in The Trade Cycle, which Harrod eliminated in the later versions of his theory, as he seems to consider growth at an increasing rate and at a decreasing

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rate on diﬀerent grounds: he did not worry about the cumulative eﬀects of accelerating growth, nor did he set an exogenous ‘ceiling’ as he did with the notion of ‘natural rate of growth’ in the ‘Essay’. The causes of downturn are entirely endogenous. 15. The expression was used by Harrod in a letter to Tinbergen, 1 July 1937 (reproduced in Jolink, 1995 and in Harrod, 2003, vol. 2, p. 706). 16. Such a lag is irrelevant during steady growth, but becomes important at turning points. This is consistent with the methodological division of dynamics in stages that Harrod developed later, and on which more is said below. 17. This view is not explicitly expounded in The Trade Cycle, but is clearly stated in the correspondence with Henderson (21 February 1936 in Harrod, 2003, vol. 2, p. 512), Keynes (15 April 1937, in CW XIV, p. 176 and in Harrod, 2003, vol. 2, p. 676) and Robertson (25 December 1936 in Harrod, 2003, vol. 2, pp. 600–602). 18. Given the use of the independence assumption in his own analysis, one should not be surprised that Harrod could not see much point in Keynes’s criticism of the neoclassical theory of interest and in Sraﬀa’s remark on the lack of independence between supply and demand curves. 19. This expression was used by Harrod himself, in a letter to his publisher describing a proposed collection of articles: ‘The book would be divided into 3 main blocks of articles. One concerns method, the other the economics of growth and the third the economics of imperfect competition. They have this in common that they are all feeling out towards new developments of economic theory. I thought at ﬁrst for a title of “Towards a new economics”, but I dont (sic) quite like this because it suggests something too subversive, namely a scrapping of the old, which is not at all my intention. What do you think of “Beyond the traditional economics”?’ (Harrod to Sisam, 26 September 1938 in Harrod, 2003, vol. 2, p. 875). 20. ‘In my judgement Mr. Keynes has not aﬀected a revolution in fundamental economic theory but a re-adjustment and a shift of emphasis’ (Harrod, 1937a, p. 85). 21. Harrod’s actual use of it, besides his intentions, is rather ambiguous, as he employed this equality to reduce the degrees of freedom of his system, and, in the ex-ante interpretation of the statement, as an equilibrium condition. 22. This claim is repeatedly expounded in Harrod’s published and unpublished writings: see for instance Harrod, 1936a, p. viii, and letter to Tinbergen, 1 July 1937, in Jolink, 1995 and in Harrod, 2003, vol. 2, p. 706. For a more detailed account and several further references see Besomi, 1998a. 23. The anonymous reviewer in The New Statesman and Nation, however, rightly pointed out that the importance of Harrod’s work ‘lies in his attempt to give precision to the idea of trade ﬂuctuation as arising, under the existing economic system, inevitably out of the instability of the dynamic relationship between investment and consumption’ (1937, p. 220). 24. The empirical inquiry of the Oxford Economists’ Research Group laying stress on the full cost principle may also have contributed to Harrod’s decision to abandon his attempt to use the price mechanism to explain how the macro-dynamic factors determining the oscillations of the magnitudes relating to the economic system as a whole are transmitted to the individual’s decisions to expand or contract output. For an account of Harrod’s participation in this research see Besomi, 1998b. 25. The ‘warranted growth rate’ was conceived as ‘the rate which (1) leaves each entrepreneur satisﬁed with what he has done; (2) allows for some individual disappointments but keeps entrepreneurs as a group, on balance, satisﬁed; (3) keeps them doing the same thing; (4) equates ex ante S and I; (5) concerns only the part of investment directly linked to consumption; (6) somehow diﬀers from the “proper” warranted rate which “would obtain in conditions of full employment”’ (McCord Wright, 1949, p. 326). 26. See for instance Newman 1954–55, p. 70; Pugno, 1992, p. 105; Asimakopulos, 1989, p. 353; Robinson, 1952, p. 47. 27. ‘The reaction to the divergence GGw as postulated in the Essay (the “cumulative process”) may be written, I suggest, as dG/dt (GGw), where is some increasing function. Am I right in understanding this as an empirical assumption of the boom (and

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28. 29. 30.

31.

32. 33.

34. 35.

36. 37.

38.

39.

347

depression) rather than a conclusion following from the other equations. In fact, one could imagine the opposite case: a shortage of capital equipment being met by reduction of output rather than leading to an increase. It seems that the deﬁnition of the “unstable equilibrium” implies certain empirical postulates regarding the psychology of entrepreneurs’ reactions to current proﬁts made in capital good production. Could this be stated explicitly?’ (Marschak, ‘Remarks to R.F.H.’s “Essay in Dynamic Theory”’ in Harrod, 2003, vol. 2, pp. 844–50). Beginning from Fellner, 1951, pp. 116–22, followed by Pilvin, 1953, Yeager, 1954, and ﬁnally Solow, 1956 and Swan, 1956. In particular Kaldor, 1951 and 1957, Joan Robinson, 1970, Pasinetti, 1974. Keynes’s criticism to the ﬁrst draft of Harrod’s ‘Essay’ is to be blamed to some extent, as it induced Harrod to compress the discussion of the trade cycle into a couple of sections of his paper, which failed to attract the readers’ notice. Harrod, in turn, failed to re-expand that section in his subsequent writings. After the war, moreover, the trade cycle looked like an out-of-date problem, and people were then more interested in growth. Harrod insistently claimed priority in discovery, in spite of Yntema’s precedence in publication, as the idea was submitted to the Economic Journal in July 1928. The story – supported by the documents Harrod preserved (see Harrod, 2003, vol. 3, pp. 1063–8, in particular note 1) – was reported in an ‘egoistic footnote’ to Harrod’s Life of John Maynard Keynes (1951b, pp. 159–60), and the ‘rather boring question of piorities’ was taken up again in Harrod 1967 (p. 65n.). The episode is also referred to in Harrod, 1972 (p. 394). A full discussion is obviously not possible here: see, however, Besomi, 1999a and 2000, respectively. Another example, involving Hayek and Joan Robinson, is discussed in Ingrao, 2004 and Ranchetti, 2004. Harrod’s classiﬁcation of inventions was actually noticed by commentators, and gave rise to comments in print, as expressed in Towards a Dynamic Economics, where it was discussed at length. In The Trade Cycle there is only one sentence in a footnote (Harrod, 1936a, p. 91) indicating that he had thought about this problem; this was likely to pass unnoticed, were it not for a reference in a letter to Hawtrey of 31 January 1937. Harrod to Kaldor, 14 June 1938 in Harrod, 2003, vol. 2, p. 788. The point is acknowledged in a letter to Harrod of 30 January 1963, written while revising The Theory of Wages where the classiﬁcation of technological progress was originally proposed (Hicks, 1932, 1963). The only early commentator who grasped Harrod’s point (before the debate on the relative merits of Harrod’s and Hicks’s criteria of classiﬁcation of inventions) seems to have been Hansen (1937, p. 517). Kahn to Harrod, 24 March and 18 April 1932; Keynes to Harrod, 16 February 1933 in Harrod, 2003, vol. 1. Harrod only admitted this underevaluation in The Trade Cycle (1936a, p. 149). See on this aspect the literature cited in Dalziel and Harcourt (1997, p. 621). Sometimes Harrod was mistakenly supposed to be more acquainted with Keynes and Keynesian thought than he actually was (see e.g. Black, 1997, p. 89, and Brown, 1980, p. 26). I have the impression that – on theoretical rather than policy matters – Harrod was less close to Keynes than he thought, and closer to Hayek and the Austrians than he would have liked to think (as Hicks noted, ‘there are Hayekian inﬂuences . . . even on Harrod . . ., if one looks for them’: 1967, p. 205). Including the ‘horror of public debates’ mentioned above. This did not aﬀect only Harrod; Henderson, for instance, wrote as follows: ‘I have allowed myself to be inhibited for many years from publishing many things by a desire not to quarrel in public with Maynard. Also I have a very lively sense which is conﬁrmed by some incident or other nearly every day of the immense damage that is being done to economics as a subject, at a time when it is being presented with an unparalleled opportunity, by the logomachal controversies of recent years’ (Henderson to Harrod, 2 April 1936 in Harrod, 2003, vol. 2, p. 540). For further considerations on this point see for instance Marcuzzo, 1997 and Marcuzzo and Rosselli, 2004.

348 40. 41.

The Jérôme-Adolphe Blanqui Lecture This could lead to troubles when an author does not cite his sources – as was the case with Harrod. Since published as Harrod, 2003. The editing involved, among other things, a rearrangement of the transcriptions of the documents in chronological order, as they were written and read by Harrod. This process enabled me to understand something which was hidden by the original arrangement of the correspondence among Harrod’s papers, in thematic or author order: Harrod sometimes changed his mind in the course of a prolonged exchange of letters under the inﬂuence of his contemporary correspondence with other authors. This is clearly relevant for the genesis of one’s ideas, and cannot be fully appreciated until all the links between pieces of written papers are re-established. A particularly relevant example is the correspondence between Harrod and Haberler in 1934–35, taking place at the time Harrod was subjected to Kahn’s tutorial on saving and investment described above in the text.

REFERENCES Alexander, S.S. (1950), ‘Mr. Harrod’s dynamic model’, Economic Journal, LX, December, pp. 724–39. Anonymous (1937), ‘The Trade Cycle. By R.F. Harrod’, The New Statesman and Nation, 6 February, p. 220. Asimakopulos, A. (1989), ‘Harrod and Robinson on the equilibrium rate of growth’, Banca Nazionale del Lavoro Quarterly Review, 170, September, pp. 345–58. Baumol, W.J. (2001), ‘[Review of] The Making of Harrod’s Dynamics, by Daniele Besomi’, History of Political Economy, 33(4), pp. 1037–9. Besomi, D. (1988), ‘Michal Kalecki: la dinamica economica tra materialismo e meccanicismo’, Economia Politica, V(3), pp. 343–68. ——— (1992), ‘Alla conquista del consenso: a proposito di un articolo di dinamica formale’, Economia Politica, IX(1), pp. 13–38. ——— (1998a), ‘Harrod and the econometricians: instability, time-lags and the foundations of economic dynamics’, in G. Rampa, L. Stella and A. Thirlwall (eds), Economic Dynamics, Trade and Growth: Essays on Harrodian Themes, London: Macmillan, pp. 107–48. ——— (1998b), ‘Harrod and the Oxford economists’ research group’s inquiry on prices and interest, 1936–39’, Oxford Economic Papers, NS 50, October, pp. 534–62. ——— (1999a), ‘Harrod on the classiﬁcation of technological progress. The origin of a wild-goose chase’, Banca Nazionale del Lavoro Quarterly Review, 208, March, pp. 96–118. ——— (1999b), The Making of Harrod’s Dynamics, London: Macmillan. ——— (2000), ‘On the spread of an idea: the strange case of Mr. Harrod and the multiplier’, History of Political Economy, 32(2), Summer, pp. 347–79. ——— (2002), ‘Löwe’s and Hayek’s inﬂuence on Harrod’s trade cycle theory’, European Journal of the History of Economic Thought, 9(1), Spring, pp. 42–56. Black, R.A. (1997), ‘Cambridge circus’, in T. Cate (ed.), An Encyclopedia of Keynesian Economics, Cheltenham, UK and Lyme, USA: Edward Elgar, p. 87–90. Brown, E.H.P. (1980), ‘Sir Roy Harrod: a biographical memoir’, Economic Journal, XC, March, pp. 1–33. Dalziel, P.C. and G.C. Harcourt (1997), ‘A note on “Mr Meade’s relation” and international capital movements’, Cambridge Journal of Economics 21, pp. 621–31.

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Fellner, W. (1951), ‘The capital–output ratio in dynamic economics’, in Money, Trade, and Economic Growth. In Honor of John Henry Williams, New York: Macmillan, pp. 105–34. Frisch, R. (1933), ‘Propagation problems and impulse problems in dynamic economics’, in Economic Essays in Honour of Gustav Cassel, pp. 171–205. ——— (1936), ‘On the notion of equilibrium and disequilibrium’, The Review of Economic Studies, 3, February, pp. 100–105. Goodwin, R.M. (1951), ‘The nonlinear accelerator and the persistence of the business cycle’, Econometrica, 19(1), January, pp. 1–17. Hansen, A.H. (1937), ‘Harrod on the trade cycle’, Quarterly Journal of Economics, 51(2), (May), pp. 509–31. Harrod, R.F. (1932), ‘Decreasing costs: an addendum’, Economic Journal, XLII, September, pp. 490–92. ——— (1933a), ‘A further note on decreasing costs’, Economic Journal, XLIII, June, pp. 337–41. ——— (1933b), International Economics, Cambridge and London: Cambridge University Press and Nisbet. ——— (1934a), ‘Doctrines of imperfect competition’, Quarterly Journal of Economics, 48, May, pp. 442–70. ——— (1934b), ‘The expansion of credit in an advancing community’, Economica, NS 1, August, 287–99. ——— (1935), ‘Rejoinder to Drs. Haberler and Bode’, Economica, NS 2, February, 82–4. ——— (1936), ‘The choice of a currency policy’, Anglodania, ﬁrst part in 8(2), February, pp. 3–8, second part in 8(3), March, pp. 1–6. Reprinted in Harrod, 2003, vol. 3, pp. 1138–54. ——— (1936a), The Trade Cycle. An Essay, Oxford: Clarendon Press. ——— (1937a), ‘Mr. Keynes and traditional theory’, Econometrica, 5(1), 74–86. ——— (1937b), ‘[Review of] Essays in the Theory of Employment, by Joan Robinson’, Economic Journal, XLVII, June, 326–30. ——— (1938), ‘Scope and method of economics’, Economic Journal, XLVIII, September, pp. 383–412. ——— (1939a), ‘An essay in dynamic theory’, Economic Journal, IL, March, pp. 14–33. ——— (1939b), ‘Vers une théorie dynamique’, in Mélange Économiques et Sociaux, oﬀerts à Émile Widmer, Paris: Librairie du Recueuil Sirey, pp. 160–67. ——— (1948), Towards a Dynamic Economics, London: Macmillan. ——— (1951a), ‘Notes on trade cycle theory’, Economic Journal, XLI, June, pp. 261–75. ——— (1951b), The Life of John Maynard Keynes, London: Macmillan. ——— (1955), ‘Les relations entre l’investissement et la population’, Revue Économique, 6(3), May, 356–67. ——— (1957), ‘[Review of] Introduction to Keynesian Dynamics, by K.K. Kurihara’, Annals of the American Academy, 313, September, pp. 192–4. ——— (1959), ‘Domar and dynamic economics’, Economic Journal, LXIX, September, pp. 451–64. ——— (1960), ‘Second essay in dynamic theory’, Economic Journal, LXX, June, pp. 277–93. ——— (1962), ‘A reply to Mr. Bilkey’, Economic Journal, LXXII, December, pp. 1009–10.

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——— (1963), ‘Themes in dynamic theory’, Economic Journal, LXXIII, September, pp. 401–21. ——— (1967), ‘Increasing returns’, in R.E. Kuenne, Monopolistic Competition Theory: Studies in Impact. Essays in Honor of Edward H. Chamberlin, New York: Wiley. ——— (1972), ‘Imperfect competition, aggregate demand and inﬂation’, Economic Journal, LXXXII, March, pp. 392–401. ——— (1973), Economic Dynamics, London: Macmillan. ——— (1996), ‘An essay in dynamic theory (1938 Draft)’, edited by D. Besomi, History of Political Economy, 28(2), pp. 253–80. ——— (2003), The Collected Interwar Papers and Correspondence of Roy Harrod (3 vols), edited by Daniel Besomi, Cheltenham: Edward Elgar. Hawtrey, R.G. (1937), Capital and Employment, London: Longman. Hayek, F.A. ([1929] 1933), Monetary Theory and the Trade Cycle, London: Cape (translation of Geldtheorie und Konjunkturtheorie, Wien, 1929). Hicks, J.R. (1932), The Theory of Wages, London: Macmillan. ——— (1950), A Contribution to the Theory of the Trade Cycle, Oxford: Clarendon Press. ——— (1963), The Theory of Wages, London: Macmillan (second edition). ——— (1967), ‘The Hayek story’, in Critical Essays in Monetary Theory, Oxford: Clarendon Press. Ingrao, B. and F. Ranchetti (2004), ‘Hayek and Cambridge: dialogue and contention’, in M.C. Marcuzzo and A. Rosselli (eds), Economists in Cambridge. A Study through their Correspondence, 1907–46, London: Routledge (Ch. 16). Jolink, A. (1995), ‘ “Anecdotal myths”: Tinbergen’s inﬂuence on Harrod’s growth theory’, European Journal of the History of Economic Thought, 2(2), Autumn, pp. 343–449. Kaldor, N. (1951), ‘Mr. Hicks on the trade cycle’, Economic Journal, LXI, December, pp. 833–47. ——— (1957), ‘A model of economic growth’, Economic Journal, LXVII, December, pp. 591–624. Keynes, J.M. (1928), ‘Introduction to the [Cambridge Economic Handbooks] Series’, London: Nisbet, and Cambridge: Cambridge University Press. ——— (1971–1982), The Collected Writings of John Maynard Keynes, 30 vols, London: Macmillan, and Cambridge: Cambridge University Press (cited as CW, followed by the volume number). Löwe, A. ([1926] 1997), ‘How is business cycle theory possible at all?’, Structural Change and Economic Dynamics, 8, pp. 245–70. Translation of ‘Wie ist Konjunkturtheorie überhaupt möglich?’, Weltwirtschaftliches Archiv, 24, 1926. Machlup, F. (1963), Essays in Economic Semantics, New York: Prentice-Hall. Marcuzzo, M.C. (1997), ‘Un passato restituito. La disponibilità su microﬁlm delle carte di R.F. Kahn, N. Kaldor e J. Robinson presso la biblioteca della Banca d’Italia’, Rivista di Storia Economica, XIII, no. 2, August, pp. 261–8. Marcuzzo, M.C. and A. Rosselli (2004), ‘Introduction’, in M.C. Marcuzzo and A. Rosselli (eds), Economists in Cambridge. A Study through their Correspondence, 1907–46, London: Routledge. McCord Wright, D. (1949), ‘Mr. Harrod and growth economics’, Review of Economics and Statistics, XXXI, 4, November, pp. 322–8. Neisser, H. (1937), ‘Investment ﬂuctuations as cause of the business cycle’, Social Research, 4(4), November, pp. 440–60. Newman, P. (1954–5), ‘A property of Mr. Harrod’s dynamic model’, Review of

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Economic Studies, XXII(1), 57, pp. 70–71. Pasinetti, L. (1974), Growth and Income Distribution. Essays in Economic Theory, Cambridge: Cambridge University Press. Patinkin, D. (1982), Anticipations of the General Theory? And Other Essays on Keynes, Chicago: University of Chicago Press (cited from the Oxford: Blackwell edition, 1982). Pilvin, H. (1953), ‘Full capacity vs. full employment growth’, Quarterly Journal of Economics, LXVII(4), November, pp. 545–53. Pugno, M. (1992), Roy F. Harrod. Dall’equilibrio dinamico all’instabilità ciclica, Bologna: Il Mulino. Robertson, D.H. (1937), ‘[Review of] The Trade Cycle, by R.F. Harrod’, The Canadian Journal of Economics and Political Science, 3, February, pp. 124–7. Robinson, J.V. (1932), ‘Imperfect competition and falling supply price’, Economic Journal, XLII, December, p. 545. ——— (1937), Essays in the Theory of Employment, London: Macmillan. ——— (1938), ‘The classiﬁcation of inventions’, The Review of Economic Studies, 5, February, pp. 139–42. ——— (1952), ‘The model of an expanding economy’, Economic Journal, LXII, March, pp. 42–53. ——— (1970), ‘Harrod after twenty-one years’, Economic Journal, LXXX, September, pp. 731–7. ——— (1971), Economic Heresies. Some Old-Fashioned Questions in Economic Theory, London: Macmillan. Sardoni, C. (1999), ‘The debate on excess capacity in the 1930s’, in Keynes, PostKeynesianism and Political Economy: Essays in Honour of Geoﬀ Harcourt, volume three, edited by Claudio Sardonio and Peter Kriesler, London: Routledge. Shackle, G.L.S. (1967), The Years of High Theory. Invention and Tradition in Economic Thought, 1926–1939, Cambridge: Cambridge University Press. Solow, R.M. (1956), ‘A contribution to the theory of economic growth’, Quarterly Journal of Economics, LXX, 1, February, pp. 65–94. Staﬀord, J. (1937), ‘The trade cycle’, The Manchester School, VIII, 1, pp. 69–84. Swan, T.W. (1956), ‘Economic growth and capital accumulation’, Economic Record, 32, November, pp. 334–61. Yeager, L.B. (1954), ‘Some questions about growth economics’, American Economic Review, XLIV, 1, March, pp. 53–63. Yntema, O. (1928), ‘The inﬂuence of dumping on monopoly price’, Journal of Political Economy, 36(6), December, pp. 686–98. Young, W. (1989), Harrod and his Trade Cycle Group. The Origins and Development of the Growth Research Programme, London: Macmillan.

PART VII

The Eﬀects of Political Events on Economic Ideas: A Round-table Discussion

MARCELLO DE CECCO The demise of the Soviet Union caused many important bifurcations. I want to make a few obversations on a bifurcation which concerns the development of economic theory and of economic analysis. I refer to the debate on ‘varieties of capitalism’, which involved many economists for a number of decades. At least two species of the beast had been identiﬁed. ‘Euro-continental capitalism’ and ‘Anglo-American Capitalism’. The ﬁrst allowed for a generous dose of public involvement in production and distribution, in the shape of the so-called ‘mixed economy’. Public involvement in production and distribution had been with us for thousands of years, and up to the 1980s it did not show any real sign of wanting to disappear. But, in the countries of continental Europe, an abundant dose of corporatism was also present, analysed by many scholars, like Andrew Shonﬁeld, Ralf Dahrendorf, Fritz Scharpf, Michel Albert. In these countries, some goods and services were produced and distributed by private agents according to unfettered free-market rules. In the majority of cases, however, production and distribution were (and still, to some extent, are) organised according to modes requiring the participation of agents like the unions, the State and other entities which do not correspond to individual private agents. This was particularly clear in sectors like banking and even a comparative study of commercial law on the Continent revealed (and still reveals) the existence of a Weltanschauung which does not see companies as exclusively composed of individuals, but gives them a distinct legal personality and a capacity to operate independently of the shareholders, following the interests of all stakeholders. Even constitutions on the Continent often reﬂect this worldview, recognising the existence of actors diﬀerent from individual citizens. A lot of brainpower, paper and ink were used to inquire whether these two varieties of capitalism were converging or diverging over time. As late as the 1980s, moreover, it was felt in many quarters, both in the US and the UK, that the so-called continental model, which was also supposed to operate in countries like Japan and South Korea, was not the way of the future even for countries where free-market capitalism prevailed. The original electoral platform on which Clinton won the Presidency, in 1992, openly recognised this need, and, indeed, the ﬁrst utterances and acts of government in the economic sphere were clearly inspired by a desire to imitate the Continental-Japanese model. An almost complete about-turn in the Administration’s economic philosophy was, however, made towards the end of the ﬁrst mandate and certainly informed the re-election platform in 1996. The same could be observed to happen in Britain to the 355

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Labour election manifesto between the ﬁrst and the second Blair mandates. When the demise of the Soviet Union came about, there began a rollback of economic theory and of economic policy whereby the EuroJapanese model was to be doomed as fatally as the Soviet Union. Convergence there was to be in the immediate future, but it was a one-way street, one at whose end was the American model. It was realised that, in the absence of the Soviet Bloc, there was no need to leave any more countries which had been allowed to pursue their corporatist ways, often so successfully as to challenge US supremacy in one ﬁeld after another, because it turned out to be helpful to the defence of the Western World. This was based on the Keynesian assumption that the important thing was for bulwarks of the West like Japan, Germany and Italy to prosper and assure full employment to their citizens, who would not, as a consequence, fall prey to the delusions of the Socialist alternative. The collapse of the Soviet Model was so traumatic that it was felt the time had ﬁnally come to promote the arrival of the pure market economy, formed by freely contracting individuals, on a world, rather than only a national, level. Rational expectations became the creed of new economic theory. Its inception predated the 1990s, but it was in that decade that it became the ‘pensée unique’ of economists the world over, and such was its impact that it was embedded in the statute of the newly founded European Central Bank. It was not declared as such, but the ECB monetary policy started clearly from the premiss of a world of rational expectations. This is not surpising, as most central bank statutes have been inspired by the monetary theories prevailing at the time of their writing. It is, however, worth noting and remembering that no attention was paid therein to neo-Keynesian monetary theory, which was being developed at the same time and came to be increasingly recognised in oﬃcial policy-making circles towards the end of the decade. When the certainties of the early unipolar world were shaken by a series of international and national ﬁnancial crises which followed the liberalisation of ﬁnancial markets in countries as diverse as Sweden and South Korea, neo-Keynesian theory appeared more akin to reality. Liberalisation, of course, had been the brainchild of the theory according to which only maximising individuals were to become actors in the economic world, and their individual welfare-maximising activities had to be in no way fettered by regulatory intervention of any kind. Even the European Union Court of Justice became a disciple of unfettered liberalism, repeating in many of its verdicts that markets had to be freed from state intervention. Only towards the end of the decade the Court revised its stance once again towards regulation and a partial return to the ‘Continental Model’.

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The acme of the new wave of ideological orthodoxy was reached when the Nobel Committee awarded its prize for economics to Robert Merton and Myron Scholes. It was one of the many ironies of history that their creation as venture capitalists, the ﬁnancial ﬁrm called Long Term Capital Management, fell into a very grave crisis in the autumn of 1998 and had to be rescued by a committee of American ﬁnanciers led by Alan Greenspan. The rescue of LTCM was a glaring example of crony capitalism. No starker negation of free market theory could have been devised by its opponents. This, however, did not deter the IMF and World Bank from dictating superfree market rules to all countries which asked for their help. The close of the millennium saw the new ‘pensée unique’ still rampant, although signs began to appear that its dominance was increasingly challenged. In the ‘real time’ world of today, even an event as important as the demise of the USSR could exert its inﬂuence on economic theorising and policy-making only for a short period, although, alas, to some of us it certainly felt too long.

WALTER ELTIS There was an explosion of interest in political economy in mid-eighteenth century France. Many were disappointed and puzzled that while Paris was the intellectual capital of Europe, and France had exercised great military power in the reign of Louis XIV, she was ﬁnding it diﬃcult to ﬁnance the elementary needs of government without debts which threatened to become unsustainable. The French state had to pay higher interest rates than the governments of Britain and Holland, and higher even than those paid by private borrowers in France itself, because of fear that escalating government debt might become unﬁnanceable. Equally critically, French towns and the countryside suﬀered from repeated scarcity despite France’s exceptional fertility. There was extraordinary distress, and the poor lived on the borderline of subsistence while the wealthy displayed ostentatious luxury. A poor state, a peasantry with many close to starvation and conspicuous consumption by an often idle nobility produced internal contradictions which many were beginning to regard as unsustainable. The paradox of a rich country and a near-bankrupt government was weakening the nation. The resolution of these diﬃculties concerned every thinking Frenchman who cared for his country. The anomaly of French economic weakness in comparison with Great Britain, France’s principal competitor for European and world inﬂuence, also attracted attention. It has been widely suggested that Britain and France fought what was in eﬀect a ‘Second Hundred Years War’ from 1688 to 1815 for European and world inﬂuence. Britain mostly enjoyed naval superiority and on land it paid large sums to continental allies who mobilised armies to contain France and its allies. At the start of the Seven Years War of 1756–63, less than half the European colonists in North America spoke English, and France and Britain also exercised comparable inﬂuence in India, but the land and sea battles of that war marginalised the French presence in both North America and India. They also ensured that British inﬂuence would predominate in what was to become the wealthiest continent in the world, with the consequence that over the next two centuries, it was English and not French which became the leading world language of commerce and international politics. There was awareness of the crucial nature of these developments in the 1750s, and those who cared about the greatness of France realised that it needed to ﬁnance armies and navies which matched those of Great Britain and its allies. These eﬀorts placed intense pressures on the ﬁnances of the French state, but many were puzzled 358

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that the French economy found such diﬃculty in ﬁnancing war on a scale comparable to its less populous Northern neighbour. Everything concerning the management of the economy and the state’s ﬁnances was questioned, and an enlightened censorship permitted an extraordinary liberalism of publication provided that its location (almost invariably Paris) was described as being outside France, in Amsterdam, London or even Peking. Interest in economic issues became so great that Voltaire commented in his dictionary article, ‘Bled ou blé’ that, ‘Towards 1750, the French nation turned its attention away from tragedies, comedies, operas, novels, romantic histories, thoughts that were still more romantic and theological disputes . . ., and set out to reason on corn. . . . Useful works were written on agriculture; everyone read them apart from the farmers’ (Voltaire, 1770–75, vol. 37, p. 112). Of Plumart de Dangeul’s Remarques sur les avantages et les désavantages de la France et de la Grande-Bretagne of 1754, the Marquis of Argenson said in April of that year that ‘the king claimed to have read it, as did the rest of the court, and in the meantime they praised it without knowing what they were saying’ (Argenson, 1859–67, vol. 8, p. 274). The number of books published on the economy doubled from 1745–49 to 1750–54, and it doubled again between 1750–54 and 1755–59 (Théré, 1998, p. 18). Four economic journals were founded in France in the 1750s and the 1760s (Hutchison, 1988, p. 189). The ﬁrst British and United States economic journals only emerged after 1880. French political economy is also notable for the social and political distinction of some of its leading contributors. As in Britain, many leading philosophers together with bankers and merchants published on political economy, but the leading French writers also included Condorcet and the elder Mirabeau who held the rank of Marquis and Turgot who was brieﬂy France’s leading minister. Thirty-seven Ministers and Intendants published on economics between 1750 and 1789 (Théré, 1998, p. 37). Some of the greatest French economists were close to the heart of government and utterly aware of immediate political developments. Seventeenth- and eighteenth-century British literature included nothing of signiﬁcance from any member of the House of Lords or any member of a cabinet. The closest that eighteenth-century British political economists came to government was Adam Smith’s appointment as Commissioner for Customs for Scotland in 1778–80, after the publication of The Wealth of Nations. John Hicks has remarked on how frequently fundamental advances in economics have occurred in times of crisis (Hicks, 1977, pp. 45–6). That is precisely why the attention of some of the greatest and most creative in France was drawn to the paradox of French economic failure when France in other respects led Europe.

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The new excitement about the economy was led initially by the circle created by Jacques Vincent de Gournay, Intendant of Commerce from 1751 to 1758. He himself published little, but the origins of the phrase ‘laissezfaire et laissez-passer’ have been widely attributed to him. He arranged for the publication of important books, including notably Richard Cantillon’s Essai sur la nature du commerce, and for the translation from the English of Hume’s essays and the work of other important British political economists. His circle included especially Turgot, Forbonnais, Herbert and Plumart de Dangeul who each wrote important and inﬂuential books (Hutchison, 1988, pp. 224–5). France’s new economics soon centred, however, on the powerful and original contributions of François Quesnay. As personal physician to the royal favourite, Madame de Pompadour, and second doctor in ordinary to the king, he lived at the heart of the court. Louis XV himself participated in the printing of his Tableau économique, and suggested the ‘pensée’ (pansy) for his coat of arms to symbolise that he was also a ‘penseur’ of distinction. He even had hopes of political inﬂuence while Madame de Pompadour was alive, which led the duc de Choiseul, the King’s ﬁrst minister, to warn Du Pont in 1764, ‘You must choose; Mr Quesnay’s friends are not mine’ (Schelle, 1907, p. 304). Quesnay was also one of France’s most distinguished scientists and a Fellow of the Royal Society of London,1 an honour he shared with some of the greatest British economists, Petty, Locke, Smith and Malthus. He had the most extensive scientiﬁc qualiﬁcations of the hundreds who published on the paradox of France’s economic weakness, and it may therefore be unsurprising that he made the outstanding technical contribution. Philippe Steiner (1998) has attributed the creation of ‘the new science of Political Economy’ to him. His economics had the same object as everyone else’s, to reestablish the greatness of France, which is evident from a remarkable statement in his ‘Questions intéressantes’ of 1758, that through the adoption of correct proagricultural policies France could achieve a degree of power where its sovereign could have no other ambition than ‘the glory of being the arbiter of its neighbours, and the peacemaker of Europe’ (p. 628). Napoleon took up that challenge only two generations later. That the post-revolutionary French economy was able to ﬁnance his armies underlines the belief of Quesnay and other French economic writers of distinction that once France succeeded in ﬁnding the formula for economic success, it would recover the potential to become Europe’s dominant power. In 1756 at the age of 61 Quesnay began to publish on the economy and his astonishingly original contributions had a considerable impact on economics over the next two centuries. Wassily Leontief said that he was fol-

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lowing Quesnay when he constructed his input–output table of the United States’ economy (Leontief, p. 9). Marx’s reproduction schemes followed Quesnay’s. Schumpeter startled a Harvard audience and especially Paul Samuelson by stating in 1935 that three of the world’s four greatest economists had been French and still more when he said that Quesnay was one of these (Samuelson, 1962, pp. 3–4). In the 1750s and the 1760s France’s new economists were agreed that the ‘police des grains’ where corn, the principal food of the people, had to be sold through the state at prices its agents determined, should be replaced by competitive markets. Farmers should be free to sell corn for the best prices they could ﬁnd, whether in France or overseas. Famine was unknown in England, where farmers were free to sell corn wherever they wished. Quesnay’s principal achievement as a scientiﬁc economist was the discovery of a coherent logical framework for the school of Gournay’s new competitive economics. In the articles ‘Fermiers’ and ‘Grains’ which Denis Diderot and Jean le Rond d’Alembert published in the Encyclopédie in 1756–57, he showed in detail how modern capital-intensive farming (la grande culture) creates a surplus of 100 per cent over current agricultural costs (avances annuelles), while less eﬃcient farming (la petite culture) yields a surplus of only about 35 per cent, and peasants scratching a bare subsistence from the soil without signiﬁcant farm capital produce no surplus at all (Eltis, 1975, pp. 169–75). The agricultural surplus, or produit net as Quesnay described it, was the crucial concept in his economics. It provided rents for landowners, tithes for the Church and taxes for the state. Adequate ﬁnance for the state required that la grande culture predominate because this yielded a produit net three times as great as that from less eﬃcient farming. In contrast to agriculture, Quesnay believed that industry and commerce generated no taxable surplus. To underline this striking distinction, he described agriculture as productive because it generated a produit net, while industry and commerce were sterile, because they generated no produit net. If agriculture created a substantial produit net because it was cultivated through la grande culture, industry and commerce, where half the income from the land was spent, would be large and prosperous. If agriculture produced only a small surplus, industry and commerce would suﬀer correspondingly, so their prosperity depended on the success of agriculture. After his articles in the Encyclopédie, Quesnay invented the Tableau économique for the scientiﬁc development of his argument, and this has been widely described as the ﬁrst economic model. Here, the agricultural surplus is paid in money to the landowners, the Church and the state, who spend it to create the bulk of the economy’s eﬀective demand through a multiplier circulation process. Money circulates in the economy like blood in a human body.

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The Tableau is complex and subtle and there is a vast and growing literature on its interpretation.2 Its creation will have given pleasure to the scientist and mathematician in Quesnay of a kind which Marmontel vividly portrays: In his entresol, Quesnay scribbled down his axioms and calculations about a rustic economy, as tranquilly indiﬀerent to the movements of the court as if it had been a hundred leagues distant. Below us they were deliberating war and peace, the choice of generals, the dismissal of ministers; while in the entresol we discussed agriculture; we calculated the net product, or sometimes we dined gaily with Diderot, D’Alembert, Duclos, Helvétius, Turgot and Buﬀon; and Madame de Pompadour, unable to persuade this troupe of philosophers to descend to her salon, came up herself to see them at table and chat with them (Marmontel, 1972, I, p. 139).

The Tableau Quesnay consequently created, with its celebrated zigzags to describe inter-sectoral income ﬂows, had a technical complexity which few could understand outside the circle of les Économistes as his disciples soon came to be described. He was a brilliant dialectician and he took his followers through each detail of the argument in a regular weekly salon, hosted by his principal collaborator, the Marquis of Mirabeau, where: he did not hasten dogmatically to establish his own opinion; but through a series of well-prepared and carefully composed questions led you to propose as a consequence, what he had originally wished to establish as a principle (Weulersse, 1910, p. 57).

Adam Smith attended some of the Tuesday discussion-dinners during 1765–66, when he was visiting Paris in a prolonged European tour as escort and tutor to the Duke of Buccleuch. He absorbed the new French economics, and in The Wealth of Nations he described Quesnay’s system as ‘the nearest approximation to the truth that has yet been published on the subject of political economy’ ([1776] 1976, p. 667). Quesnay and his disciples established a new approach to economics. Physiocrats were invited to advise monarchs in Germany and Russia. Quesnay had ﬁrmly established the economy’s disposable surplus as the key to economic growth or decline. The new French economics also emphasised the advantages of competitive markets. Food prices were not to be forced up artiﬁcially. The creation of free markets for food would raise the prices farmers received to the level the prosperity of France required. Smith’s understanding of the importance of competition and the potential gains from free trade were fully formed before his visit to Paris. These are to be found in the lectures he gave in 1762–63 as a professor in Glasgow. But Smith’s lectures lack any account of the creation of an economic surplus and its signiﬁcance for whether the wealth of nations will grow or

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decline. This became the heart of Book II of The Wealth of Nations and it is evident that Smith discovered it in Paris.3 But he also transformed and greatly simpliﬁed the argument, so that Quesnay’s powerful new insights which were conﬁned within a narrow French élite, were developed into an element of the conventional wisdom which came to be accepted for more than a century by virtually all who studied political economy. Notes 1. See Hecht for this biographical material. 2. The classical interpretations especially include those by Meek (1962, pp. 265–96) and Spengler (1945). More recent interpretations include Herlitz (1996), Pressman (1994), Vaggi (1987) and Eltis (1975). 3. See Skinner (1997) and (1999) for accounts of Quesnay’s inﬂuence on Smith in Paris in 1765–66. Skinner ﬁnds Turgot superior to Quesnay, and his inﬂuence therefore more signiﬁcant. Turgot does not receive any acknowledgement in The Wealth of Nations, and the French account of capital accumulation and surplus-creation and their impact on economic growth, which Smith absorbed into his own political economy after his visit to Paris, is far more fully developed by Quesnay.

References Argenson, Marquis d’ (1859–67), Journal et mémoires, (ed.) E.J.B. Rathery, 9 vols, Paris. Dangeul, Plumart de (1754), Remarques sur les avantages et les désavantages de la France et de la Grande-Bretagne (supposedly translated from the English of John Nickolls), Paris. Eltis, Walter (1975), ‘François Quesnay: a reinterpretation. 1: The Tableau Économique; 2: The theory of economic growth’, Oxford Economic Papers, vol. 27(2) and 27(3), July and November, pp. 167–200 and 327–51. Developed as Chapters 1 and 2 of The Classical Theory of Economic Growth, Macmillan 1984, 2nd edition, Palgrave 2000. Hecht, Jacqueline (1958), ‘La vie de François Quesnay’, in François Quesnay et la physiocratie, 2 vols, Paris: Institut National d’Études Démographiques, 1958 [subsequently INED], pp. 211–94. Herbert, Claude-Jacques (1755), Essai sur la police générale des grains: sur leur prix & sur les eﬀets de l’agriculture, Paris. Herlitz, Lars (1996), ‘From spending and reproduction to circuit ﬂow and equilibrium: the two conceptions of Tableau Économique’, European Journal of the History of Economic Thought, vol. 3, I Spring, pp. 1–20. Hicks, John (1977), Economic Perspectives: Further Essays on Money and growth, Oxford: Clarendon Press. Hutchison, Terence (1988), Before Adam Smith: the Emergence of Political Economy 1662–76, Oxford: Basil Blackwell. Leontief, Wassily (1941), The Structure of the American Economy, 1919–39, New York: Oxford University Press. Marmontel, J.-F. (1972), Mémoires, Paris: Clermont-Ferrand. Meek, Ronald L. (1962), The Economics of Physiocracy, London: Allen & Unwin. Pressman, Stephen (1994), Quesnay’s Tableau Économique, Fairﬁeld, NJ: Kelley.

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Quesnay, François (1756), ‘Fermiers’, INED, pp. 427–58. Quesnay, François (1757), ‘Grains’, INED, pp. 459–510. Quesnay, François (1758), ‘Questions intéressantes sur la population, l’agriculture et le commerce’, added to L’Ami des hommes in 1758, and reprinted in INED, pp. 619–66. Quesnay, François (1758–9), Tableau Économique. Republished in 1972, Marguerite Kuczynski and Ronald L. Meek (eds), as Quesnay’s Tableau Économique, London: Macmillan. Samuelson, Paul (1962), ‘Economists and the history of ideas’, American Economic Review, vol. 52, March. Schelle, G. (1907), Le Docteur Quesnay, Paris. Skinner, Andrew (1997), A System of Social Science: Papers Relating to Adam Smith, 2nd edn, Oxford: University Press. Skinner, Andrew (1999), ‘Adam Smith and physiocracy’, in Roger E. Backhouse and John Creedy (eds), From Classical Economics to the Theory of the Firm: Essays in Honour of D.P. O’Brien, Cheltenham, UK and Northampton, MA: Edward Elgar. Smith, Adam (1776), An Inquiry into the Nature and Causes of the Wealth of Nations, 2 vols (London). Republished, edited by R.H. Campbell, A.S. Skinner and W.B. Todd, 2 vols, Oxford: University Press. Spengler, J.J. (1945), ‘The physiocrats and Say’s Law of Markets’, Journal of Political Economy, vol. 53, September and December. Steiner, Philippe (1998), La ‘Science Nouvelle’ de l’économie politique, Paris: PUF. Théré, Christine (1998), ‘Economic publishing and authors, 1566–1789’, in Gilbert Faccarello (ed.), Studies in the History of French Political Economy: from Bodin to Walras, London: Routledge, pp. 1–56. Vaggi, Gianni (1987), The Economics of François Quesnay, London: Macmillan. Voltaire, F.-M. Arouet, M. de (1770–75), ‘Bled ou blé’, in ‘Questions sur l’encyclopédie distribuées en forme de dictionnaire par des amateurs’, in Collection complète des Oeuvres de Mr. de Voltaire: dernière édition, 49 vols, Paris, vol. XXXVII, pp. 103–18. Weulersse, Georges (1910), Le Mouvement physiocratique en France (de 1756 à 1770), 2 vols, Paris.

DAVID LAIDLER . . . the ideas of economists and political philosophers, both when they are right and when they are wrong, are more powerful than is commonly understood. Indeed the world is ruled by little else. Practical men, who believe themselves to be quite exempt from any intellectual inﬂuences, are usually the slaves of some defunct economist. Madmen in authority, who hear voices in the air, are distilling their frenzy from some academic scribbler of a few years back.

Thus did John Maynard Keynes (1936, p. 383) begin his paean of praise to thinkers in general, and to economic thinkers in particular. No wonder economists of all persuasions are familiar with this passage. It expresses one of the most agreeably comforting thoughts that any of us is likely to encounter in a working lifetime. George Stigler’s (1982) message about the political role of intellectuals is less soothing, and less widely discussed as well, probably for that reason. He conjectured that ‘their support is . . . available to the highest bidder, just as other resources in our society are allocated’ (1982, p 32). And, perhaps with Keynes’s contrary view at the back of his mind, though he did not say so, Stigler elaborated as follows: That intellectuals should believe that intellectuals are important in determining the course of history is not diﬃcult to understand. The position is less easy for even an intellectual economist to understand, since it sets one class of laborers aside and attributes special motives to them. On the traditional economic theory of occupational choice, intellectuals distribute themselves among occupations and among artistic, ethical, cultural, and political positions in such numbers as to maximize their incomes, where incomes include amenities such as prestige and apparent inﬂuence (1982, p. 34).

Neither Keynes nor Stigler seems to have thought that there is enough inﬂuence running from politics to economics to be worth discussing. Economic ideas had political consequences according to the former, and political uses according to the latter, but both of them believed that economic ideas have an internal dynamic of their own, and that they develop independently of political inﬂuences. Keynes attributed too much importance to his own ideas in driving that dynamic onwards – ‘detached scholarship’ is not the phrase that leaps to mind when one thinks of the judgements he passed on his predecessors and contemporaries – but he was just as much a devotee of the idea of economics as an intellectually independent scientiﬁc enterprise as the more erudite and reliable Stigler. The broad thrust of Stigler’s argument is irresistible. For example, the classical economists argued the virtues of free trade long before it was 365

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adopted by Britain, and their successors continued to do so long after it was abandoned too. In each case, it is an extremely plausible hypothesis that developments within the economy, and changes in political inﬂuence among the interest groups that they created, drove policy changes, not developments in economic thought. And if the case for protectionism got more attention in the German Empire from its very outset, that had more to do with the economic and political ambitions of its rulers than with the pure persuasiveness of Friedrich List and his disciples. It would be easy to ﬁll the rest of this note with other examples, but two more will suﬃce, namely those ﬁrst-year classroom favourites, rent controls and minimum wage laws: it is inconceivable that examples of these not-always-minor stupidities would still exist had Keynes been right about the political importance of economic ideas. Stigler was surely right to deny that aberrations in economic policy can be understood simply as mistakes that will be righted the moment those responsible for them learn a little more economics. Every academic economist knows that this profession of ours can usefully be analysed with the basic tools of labour economics and industrial organisation, and must concede Stigler’s point that intellectual work is not an activity apart from all others whose practitioners are uniquely altruistic and disinterested in their endeavours. But is his rather depressing assessment all there is to it? Are economists simply people who do socially-detached science for a living, but supplement their incomes, material and psychic, as hired intellectual guns in political conﬂicts whose lines have already been determined by the self-interest of the participants? If I may strike a personal note, I still recall my alarm when, as a rather starry-eyed former student of Karl Popper, I became aware of the scarcity of empirical economists actively seeking to refute their own hypotheses. Then I began to notice how eager we all seemed to be refute each other’s ideas in order to make room for our own, and I ﬁnally grasped the signiﬁcance of the parable about how, in competitive conditions, the pursuit of proﬁt not only eliminates that ethically suspect quarry, but unintentionally promotes general welfare too. Where there is intellectual competition and diversity, scientiﬁc knowledge, including economic knowledge, does perhaps develop ‘as if’ it were the creation of a mythical individual who follows simple Popperian precepts, but it does so as the collective outcome of rivalries among actual individuals, none of whom does in fact behave according to these precepts. The invisible hand guides the intellectual marketplace as it does any other. The most obvious potential buyers for any new economic idea are other economists, usually of a younger generation who have not yet selected the product to whose development they will devote their own eﬀorts. Beyond

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them, however, are other, more important consumers: maximising individuals generally, including members of those political groups to whom Stigler’s self-interested intellectuals cater. Here, modern macroeconomics has something to teach historians of economic thought about the role of economic ideas in economic and political life. It gives us a crucial hint about how economic ideas ﬁt into economic and political behaviour when it tells us that maximising individuals, interest groups and policy makers must use economic ideas to work out what actions are in their own self interest. Modern macroeconomics is wrong to insist that the ideas in question must always involve the ‘true’ model of the economy being studied, because, as we all know, there is no such thing: economic ideas are always contentious, always prove to be wrong and change continuously over time. This last fact is crucial, for it implies that the behaviour of maximising agents who are pursuing the same old goals will evolve with economic ideas. If politics is the art of the possible, economics is an essential input into deciding just what that possible consists of. As economics changes, then, so will politics. To return to an earlier example, free trade emerged in Britain because those who relied on a rapidly developing industrial sector for their incomes and inﬂuence understood that it was in their interests that it should do so. But they were surely led to this understanding by classical economic theory, which helped them to see where their interests lay. And if Keynes’s General Theory came very late in the development of a political climate favouring policy activism, its role in contributing what seemed to be a sound scientiﬁc basis for such activism surely gave that development a considerable boost. So Keynes’s claims on behalf of the power of ideas were not quite vacuous after all, and not totally inconsistent with Stigler’s views either, but they don’t tell the whole story, for causation here runs from economics to politics, but also in the opposite direction.That is because the internal dynamic of economics is not just a matter of continuously delving more deeply into the deductive structure of theories, but also of responding to the interaction between those theories’ predictions about events with the events themselves. These events are, moreover, the outcome of the prior application of economic ideas to maximising decisions, and when these do not produce the expected consequences, prevailing beliefs among economists about which economic theories are useful begin to change. Sometimes their response is to conjecture something new, but often they take another look at what had earlier been discarded. In either case, an alternative model (or models) begins to be applied to decision-making, political outcomes change, new evidence is generated and the process repeats itself. Recursive interaction between politics and economic ideas is thus an integral part of the economic life that our self-referential discipline tries to

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understand. Those who study the history of economics are probably aware of this already, not least the organisers who chose the theme of this conference. Outside of the history of thought, though, most of our colleagues seem blissfully unaware of this fundamental fact, or perhaps it is not in their interests to acknowledge it. Either way, our task as historians of thought is to persuade them to take notice of it, which just happens to coincide with our own self-interest in the survival of our branch of the discipline. References Keynes, J.M. (1936), The General Theory of Employment, Interest and Money, London: Macmillan. Stigler G.J. (1982), The Economist as Preacher and Other Essays, Chicago: University of Chicago Press.

BERTRAM SCHEFOLD Both world wars had a deep eﬀect on intellectual developments, possibly deeper in Germany than in the victor countries, but these eﬀects were very diﬀerent in each case.1 It is often said now, after its end, that the First World War was the great calamity of the twentieth century, the Second World War only being a catastrophic sequel. It was the truly tragic event because good and evil, right and wrong, were not as easily discernible in 1914 as in 1939. The founding of the Federal Republic of Germany required a completely new beginning, while the changeover from the constitutional monarchy to the parliamentary democracy after the German Revolution allowed us to preserve many academic traditions. In fact, the 1920s was one of the most glorious periods of German research and university life, not only in the sciences (e.g. quantum mechanics), but also in the humanities where, in philology, history of art, psychology and related disciplines, many young people started their careers who would later, as emigrants, become famous the world over. This was true also of economics (Scherer, 2000), although this discipline suﬀered perhaps most during the transition and its achievments are comparatively little known. The predominance of the Historical School ended, but researches along historicist, institutional and evolutionary lines continued. The ideas of Austrian, Marshallian and Walrasian economics spread; there was much interest in the nascent theory of imperfect competition. The German pre-Keynesians helped to advance international research in business cycles, but their best results were hardly noticed abroad. The heritage of the Historical School permitted the rise of sociology, but only specialists today are aware of these origins (Neumark, 1989). Classical and Marxist economists contributed to the origin of input–output analysis, but they too remained largely unknown. Advance and regression, progressive and conservative traits in German economics immediately prior to the advent of National Socialism make for a highly ambivalent picture, and recent research, in particular on the formation and the later fate of emigrants, only gradually allows us to form a judgement on what the potential of the German universities in that period really was with regard to economics. The war and the German defeat presented a number of economic problems of a new kind. Some were traced by Keynes in his criticism of the Peace of Versailles where the suggestion was made that industrial Germany and agrarian Russia collaborate to lessen the social and political tensions present in each country. His clear subsequent analysis of the great inﬂation 369

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in Germany envisaged the ‘dethronement of gold’, as Salin (1924) was to put it. The comparison of economic systems began to move from abstract confrontations of centralised and decentralised forms of allocation in general equilibrium models to concrete assessments of wartime planning and so-called organised capitalism. The possibilities of modifying the market system now seemed manifold and cultural inﬂuences on economic behaviour and organisation important. There was Max Weber’s hypothesis of increasing rationalisation and the spreading of bureaucracy, but there were also Schumpeterian ideas as to how the formation of new elites of entrepreneurs would provide a new dynamic for capitalism. Indeed, the most diverse political, intellectual and spiritual movements now hoped to foster their aims by means of all sorts of economic reforms. This went so far as to disquiet the great Austrian poet Hugo von Hofmannsthal and led him to mention the dismal science in 1926: ‘We live in a critical moment of world history. Wars of nations and conﬂicts of classes have been transformed into new religious wars, spiritual wars which are all the more murderous since they are fought in the dark. Sect is ﬁghting with sect and nobody wants to see the frightening spectacle of how invisible hands exchange the terrible weights on the scales in the physical and spiritual struggle of the masses for survival: now economics is dressed up as faith (Geist) and then faith is dressed up as economics’ (Nörr, Schefold and Tenbruck, 1994, 218). A small group of economists attempted to pursue their own path by linking economics and cultural history. They rejected both materialist determinism and the liberal idea of essentially unchanging motivations. They diﬀered from the Historical School in that they doubted the existence of general and universal progress and the link between the growth of wealth and moral advances. Eucken thought that this belief in progress had spread after the decline of German idealism and romanticism in the 1840s and that it culminated with German uniﬁcation in 1871. Scepticism in this regard had set in prior to the First World War (and the arguments for a value-free social science advanced by the brothers Weber and Sombart were in part motivated by that scepticism) but the experience of the First World War and of the defeat helped to reinforce that scepticism and made it spread among the intellectuals of the Weimar Republic. Edgar Salin (1927) gave a voice to these feelings in a long review of Sombart’s work on modern capitalism whom he credited with the achievement of what his generation had been challenged to contribute: a ‘German economics’ which would combine history and theory by creating a new ‘intuitive’ variant of theory, based on the understanding of the changing motivations in history which linked cultural and economic developments. Humans act not only with a view to their individual advan-

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tage, but also intentionally, attaching a social meaning to their acts and creations, and economic institutions are thus not only the unintended result of a multiplicity of actions but, in many cases, at least up to a point, also the result of a conscious creation by groups, classes or nations on the basis of tradition, moral principles and social conceptions. Previously, economic stages had been distinguished to take account of the economic consequences of technical progress (e.g. stone age, iron age etc.), new forms of communications (e.g. barter, monetary economy, credit economy) or political forms (city economy, national economy, world economy). Systems had been distinguished according to the form of allocation (market versus planning). Now the move was made to speak of economic styles in order to emphasise a parallel evolution (co-evolution in a more recent terminology) of economic institutions, cultural forms and mentalities. The most inﬂuential single work in this domain still is Max Weber’s ‘Protestant Ethic and the Spirit of Capitalism’, published before the First World War, but most inﬂuential afterwards. Schumpeter was groping towards his own version of socio-economics, which can, following Shionoya (2001), mainly be inferred from his appreciation of the work of others – he once predicted that the future would lead to a combination of the works of Schmoller and Edgeworth! The recent revival of institutionalist and evolutionary economics has led to a new interest in the debates of the youngest Historical School in the 1920s (Pearson, 1997). It deserves to be emphasised here that the retreat from the previously leading idea of progress was largely motivated by the bitterness, the suﬀering and the delusion the war had caused. The Second World War led to a totally diﬀerent constellation. Most of the best economists had left the country, and only a few of them were inclined to return. Those who had stayed behind and had survived had to work in very diﬃcult material conditions; they had been largely cut oﬀ from international research since 1933, they were insecure as to which intellectual traditions should be revived, and they were confronted with students eager to learn about new developments in economics, in particular Keynesianism, which the Professors themselves now ﬁrst had to study. When peace was established, economists looked for new orientations. The liberal conception of Ordnungspolitik was formulated and had considerable success in the phase of reconstruction, but German economists primarily felt that they lacked theory. Thus, not much room was left for the concerns of the Historical School. Its heritage, nevertheless, played some role in the debates. On the one hand, Ordnungspolitik was based on what one knew about diﬀerences of economic systems in the past and the factors which had led to their adoption. Eucken’s fundamental work was directed

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both against Schmoller’s atheoretical approach and the acceptance of corporatist forms of government based on cartelisation which had been advocated by some members of the Historical School. But the idea that the liberal order did not simply emerge but had to be chosen and that the institutions necessary to its maintenance had to be created was formulated in opposition to eighteenth century liberalism and represented a transformation of the institutionalism inherent in the Historical School. On the other hand, there remained some who did not believe that nearly perfect competition could be restored. Edgar Salin argued that European uniﬁcation now required economic concentration, and he saw advantages in managerial capitalism. There was also much discussion on economic methodology, but the late followers of the Historical School proved not very innovative, compared to the so-called youngest Historical School after the First World War. In particular, the chance was missed to complement Keynesianism with historical elements. Keynes’s empty phrase of the ‘animal spirits’ of entrepreneurs might have been replaced by a historical sociology of the role of entrepreneurs, but the theorists and the historians were not really able to communicate. Similarly, not much was added to the consideration of the relationship between economy and culture, compared to the earlier work of Max and Alfred Weber, Sombart and others. However, the Historical School – or what had remained of it – correctly foresaw the later diﬃculties of Keynesianism to control the cycle, and they added to the conception of the Social Market Economy by emphasising that the freedom of the individual should be realised in creative work, without excessive deterioration of the environment, in a policy which was to facilitate self-help. The Historical School had prepared the ground for the discussion of the theory of economic systems. The rivalry between the capitalist and the communist world led to stress more abstract comparisons of eﬃciency; looking back, we can see that it was a mistake to neglect the point of view of the Historical School with its emphasis on institutions and motivations, for the present diﬃculties of the countries in transition still have much to do with institutional problems. The Social Market Economy itself was deﬁned as a compromise between the principle of eﬃciency and the necessity of redistribution in favour of the weak, within a stable legal framework, and based on a traditional consensus as to how a compromise was to be established. Müller-Armack, the originator of the concept, interpreted it as an ‘economic style’, kept alive by this spirit of compromise. He therefore used a deﬁnition which was based on the thought of the Historical School, but, in reaction to mounting pressure for redistribution, the concept soon began to change its

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meaning. To defend its liberal content, many now simply say that a market economy is social because it is eﬃcient. The Historical School traditionally had attempted to preserve a unity of economics, sociology and social and political philosophy, maintaining close links with law. These disciplines soon moved farther and farther apart. Around 1960, the ﬁeld of economics in Germany came to be dominated by the modern combination of theory and econometrics. While nobody would want to ban theory nowadays – a negative attitude which has, to some extent, erroneously been ascribed to the Historical School – it is diﬃcult to overlook the fact that interesting perspectives, especially historical ones, have sunk into oblivion which once had helped to form the judgement of economists. On the whole, knowledge accumulates, but there may also be losses. Note 1. The eﬀects were analysed in a series of conferences which I helped to organise, ﬁrst with Knut Wolfgang Nörr and the late Friedrich Tenbruck, then with Karl Acham and Knut Wolfgang Nörr. The proceedings were published in two books (Nörr, Schefold and Tenbruck, 1994; Acham, Nörr and Schefold, 1998). These volumes assemble the papers of historians of economics, sociology, politics and law. They demonstrate the impact of the wars on each of these disciplines. The papers in each discipline were commented upon by specialists of the other disciplines, so as to ensure an interdisciplinary discussion and to analyse the similarities and diﬀerences in the reactions to the changes in the political conditions. My remarks are based on my contributions to these books; they contain ample references omitted here.

References Acham, K., K.W. Nörr and B. Schefold (eds) (1998), Erkenntnisgewinne, Erkenntnisverluste. Kontinuitäten und Diskontinuitäten in den Wirtschafts-, Rechts- und Sozialwissenschaften zwischen den 20er und 50er Jahren, Stuttgart: Franz Steiner Verlag. Nörr, K.W., B. Schefold and F. Tenbruck (eds) (1994), Geisteswissenschaften zwischen Kaiserreich und Republik. Zur Entwicklung von Nationalökonomie, Rechtswissenschaft und Sozialwissenschaft im 20. Jahrhundert, Stuttgart: Franz Steiner Verlag. Pearson, H. (1997), Origins of Law and Economics. The Economists’ New Science of Law, 1830–1930, Cambridge: University Press. Salin, E. (1924), ‘Die Entthronung des Goldes’, Schmollers Jahrbuch, vol. 48, pp. 95ﬀ.; shorter version in Salin (1963), pp. 251–66. Salin, E. (1927), ‘Hochkapitalismus. Eine Studie über Werner Sombart, die deutsche Volkswirtschaftslehre und das Wirtschaftssystem der Gegenwart’, Weltwirtschaftliches Archiv, 25(1), 314–44; extended version in Salin (1963), pp. 182–212. Salin, E. (1963), Lynkeus. Gestalten und Probleme aus Wirtschaft und Politik, Tübingen: J.C.B. Mohr (Paul Siebeck).

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Scherer, F.M. (2000), ‘The emigration of German-speaking economists after 1933’, JEL, 28(3), pp. 614–26. Shionoya, Y. (ed.) (2001), The German Historical School: The Historical and Ethical Approach to Economics, London and New York: Routledge.

CHRISTIAN SCHMIDT Wars are indisputably political events. The term ‘World War’ applied to the last two major conﬂicts is suﬃcient for considering World War I and World War II as turning points in the history of wars. Their economic dimension is evident. Indeed, their impact on public expenditures, international transfers, demographic trends and economic growth has been scrutinized at length. They gave rise to well-known debates among economists (see, for instance, Keynes, Rueﬀ and Ohlin on reparations and German transfers for World War I). Alternative interpretations have also been proposed in retrospect from the available data (see Kuznets and Bairoch). Besides its economic consequences, warfare itself gives rise to new economic ideas. A link between wars and economic thought has not seriously been investigated. Such a connection is well demonstrated by World War I and World War II at their diﬀerent stages, namely preparations, military engagements, negotiation processes. We propose to sketch out brieﬂy some features of this puzzling relationship. Schematically, warfare and economic thought are related in two diﬀerent ways. On the one hand, war situations as extreme cases reveal several properties of the economies which are more or less ignored by the analysts, even in their traditional domain (exchange, production, markets and organizations . . .). In analysing such properties, new economic ideas emerged. Furthermore, the management of war requires new conceptual frameworks from which some analytical tools have been used for economic understanding. Thus, they enlarge the classical corpus of economic concepts as, for example, strategies, deterrence and tacit cooperation. On the other hand, wars take place in multifaceted contexts, including economic features. These intricate phenomena stimulate alternative approaches for modelling economic evolution in a broader historical prospect. Therefore, war also oﬀers a starting point to renew several ﬁelds of economic analysis, such as cycles and long waves. Applied Economics and Policy-making World War I was a tremendously large-scale laboratory for the belligerents’ economies and the investment of almost all the activity sectors towards an economic purpose, the military victory, gave a precise meaning to the label ‘economy of war’ which was promptly used. A lot of everyday innovations in resource allocation, and human forces’ mobilization emerged from this very speciﬁc period. But one of the most signiﬁcant economic innovations 375

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due to this war is undoubtedly the introduction of a general income tax system in France. Such a ﬁscal revolution was thought up by the French politician Caillaux during the war as a national contribution to the collective eﬀort, and was implemented as from 1919. Therefore it can be legitimately considered as a by-product of World War I. Whereas the exceptional level of economic activities directly or indirectly devoted to warfare was the dominant characteristic of World War I, the economic speciﬁcation of World War II was more qualitative. Indeed, several systems of rationing distribution already experimented with during World War I reappeared in more sophisticated ways but the novelty was elsewhere. During World War II, a new framework to coordinate market economic activities was explored, especially in the United States and just after the war in Europe through a planned control. One of the best examples is provided by Jean Monnet in the matter. When World War II began, Jean Monnet was a young French manager who had arrived in the US to promote the product of his ﬁrm. He rapidly became one of the pioneers of an original organizational system to coordinate various industrial sectors involved in the preparation of the war. Immediately after the war, Jean Monnet came back to France, where he became the father of the ﬁrst ‘French Plan’. The goal of this very ﬂexible institution was to give consistency to the diﬀerent middle-run programmes of industrial sectors in order to determine the priorities of French economic recovery. In 1944, Boulding published The Economics of Peace. Its main topic was to analyse the problems of economic reconstruction after what Boulding labelled in a suggestive metaphor ‘the bath eviction eﬀect of the war’. Boulding’s point of view was mainly macroeconomic and he reached concrete propositions such as an ‘adjustable ﬁscal plan’ which would be dependent on the variations of the monetary revenue. At the same time, but on another level, the idea of a ‘controlled economy’ through feedback mechanisms in a cybernetic prospect was beginning to be explored. The organizational experiments of war and the reconstruction problem were their major raison d’être. Theoretical Contributions to Economic Analysis Whereas new economic concepts were driven by the pressure of the military staﬀs during World War I and even after; very few theoretical inventions emerged from World War I. This was not the case for World War II because it was managed, especially in the United States, in a quite diﬀerent way than World War I. From the American point of view, World War II was primarily a scientiﬁc war which required the application of new techniques for computing and optimizing military operations. The best illustration of this new American

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perception of warfare is to be found in the impulse given at this time to linear programming methods. Such an approach was utilized for planning air raids and battleﬁelds. Thus, air command became a major source of innovations for mathematical economics. Indeed, Dantzig discovered his algorithm solution in 1947, but the general lines of his method were known before and actively developed during the war. Thanks to Koopmans and several economists of the Cowles Foundation, a bridge was quickly built between Dantzig’s research for military purposes and the economic theory of optimal allocation (Koopmans, 1951). From this period on, Koopmans, and after him, Samuelson, have understood that linear programming and activities’ analysis revolutionized the foundations of this domain of economic theory.1 Many things have been said about the role of the Rand Corporation, the major think-tank for military planning and the evolution of economic thought in the United States during the war period (Mirowski, 2001; Morgan, 2001). At ﬁrst sight the link seems very strong. Game theory coupled with linear programming was at the top of its agenda. Some of the most brilliant researchers of this very new ﬁeld2 were supported by this institution as, for example, Dresher, Mashler and Shapley, who were also interested in economic questions. But further reﬂection tends to give a diﬀerent picture, and the ﬁnal impact of the Rand Corporation on economic theory appears overestimated or, at least, misevaluated. The case of game theory is illustrative. Let us ﬁrst observe that game models of attack, attritions and warfare pursuits were elaborated by the Rand just after the end of World War II when the Cold War had begun, which is not a complete coincidence. Rather more important for our topic is the mathematical structure of the majority of those models. They extensively used the resources of diﬀerential calculus through dynamic systems which justiﬁed the name of ‘diﬀerential games’ (Dresher, 1961; Isaacs, 1965). In spite of formal references to Theory of Games and Economic Behavior, such games of war were analytically diﬀerent from the strategic games explored by Von Neumann and Morgenstern in 1944, and Nash from 1950. Those games were intrinsically dynamic and the problems they solved do not correspond to optimal solutions in the classical acceptance, but rather to achieve threshold values according to military targets. The relationship between Von Neumann and Morgenstern’s initial coalitional construction was not obvious. Thus, their direct impact on the dominant views on game theory shared by the economists of this time remained relatively weak. The discovery of evolutionary games by the economists during the 1980s provides indirect proof of such a lack of ﬁliation. They did not ﬁnd their inspiration in the literature of the diﬀerential games elaborated by the Rand researchers in the middle of the 1950s, but they started with the animal

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contests described in the game theoretical mode by biologists, such as Maynard Smith. Indeed, the games studied by the Rand for military purposes do not model evolutionary systems. However, evolutionary games, as well as diﬀerential games, use the same mathematical approaches for explaining dynamic phenomena in terms of a game. During the Rand Corporation’s heyday, economists who were attracted by game theory did not really perceive the relation between such kind of models and the economic phenomena they pictured as games (market functioning, trade bargaining, etc). The Cold War opened a new room for economic theory. Schelling’s pure coordination games and the related concept of ‘focal points’ exemplify this unexpected impact of the Cold War. At the end of the 1950s, the starting point for Schelling’s works was to identify a tacit bargaining process between two opposite nuclear powers, namely the United States and the Soviet Union. His purpose was to specify the potential risk of such a new situation and to explore the viability of a possible negotiation on disarmament between the two countries. In the end, Schelling discovered a new class of non-cooperative game, the issue of which cannot be simply deduced from the individual rationality of each player. Accordingly, and among other innovative ideas, he was the ﬁrst to capture the intuitive notion of ‘common knowledge’ (Schelling, 1960, p. 202) a long time before its ﬁrst formalization by Aumann (1976). Schelling’s seminal contributions to the coordination problem became, twenty years later, a major reference for the new economic institutionalism (Shotter, 1981). The Long-wave Perspective A quite diﬀerent relation between wars and economic ideas was also developed by taking into account war as a signiﬁcant factor for the understanding of long-run economic ﬂuctuations. Such an approach is clearly dependant on the long-wave perspectives of economic dynamics. It appears for the ﬁrst time in Kondratieﬀ’s works published in the very brief period between 1924 and 1928. In his 1928 seminal paper on ‘Long waves in economic life’, Kondratieﬀ had already pointed out the fact that the number of major international and internal conﬂicts were much more numerous during the rising waves of his supposed long cycle than during the descending waves. In spite of this evidence, Kondratieﬀ recognized that he was unable to give a causal interpretation of this observed connection between the two phenomena and remained sceptical about the possibility of using it for explaining the long-run dynamic processes of the capitalist economies (Kondratieﬀ, 1928). Anyway, Kondratieﬀ’s empirical observations on this topic opened a ﬁeld for research which was only explored twenty years later.

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Once again, its starting point coincided with World War II. Thus, the Swedish economist, Ackerman, published the results of his reﬂection on dynamics and structural changes just after the war. In this essay, Ackerman implicitly went back to Kondratieﬀ’s notes on the statistical distribution of the wars along the long-run economic waves. He went beyond them in comparing the proportion of population mobilized by the wars through Sorokin’s3 measurement with prices and revenue distribution indices available during the period studied. Ackerman’s diagnosis was at variance with Kondratieﬀ’s conjecture on this point. For him, wars provided the actual impulse of the historical movements which drive long-run economic ﬂuctuations (Ackerman, 1944). At ﬁrst glance, Ackerman’s conclusion seems simply to be derived from the statistical data measuring the impact of wars on fundamental economic aggregates, a question which has been studied for many years by an impressive series of economists, long before Ackerman’s contribution. But Ackerman’s real novelty is elsewhere, in the method as well as in the content. He brought out his statistical observations on a secular period à la Braudel. More fundamentally, he tried to treat wars and major political events as endogenous variables in his analyses of long cycles. Indeed, wars are not the only driving forces listed by Ackerman. Among them, technical innovations in the broad sense of Schumpeter are also determinant. But, contrary to Schumpeter’s views, Ackerman did not consider innovations and wars as external factors generating the turning point of the long-run economic movements but rather as integrated factors in a much more comprehensive dynamic schema. Thanks to more elaborated statistical material, long waves have been recently reﬁned. The new interest in this kind of analysis was mainly due to several Dutch economists during the 1980s (Reijnders, Kleinknecht, Van Duijn, Van Ewijk). Some of them used new statistical procedures in order to identify the ‘turning points’ of the long waves (Van Duijn, 1979). Others, like Van Ewijk, tried to test Kondratieﬀ’s periodization by means of spectral analysis (Van Ewijk, 1982). But none elaborated any more than Ackerman the hypothetical ‘war pulse eﬀect’. According to their statistical investigations, wartime and the periods of war preparation generate huge distortions in the classical economic relation between public expenditure and ﬁxed capital formation. Therefore, eradicating this war period by statistical manipulations seems to leave intact the normal proﬁle of Kondratieﬀ’s long wave cycles (Van Ewijk, 1981). However, the long wave approach also gives rise to alternative currents of thought which put wars at the core of economic long-run dynamics. Thus, an isolated French economist, Imbert, was probably the ﬁrst to work in that direction. Starting from a sample of three seculars, Imbert, in the

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middle of the 1950s, already defended the idea that, according to his collected data, wars were the key factors for explaining the long waves schema through temporal alternations of rising phases of expansion (Imbert, 1956). In spite of statistical and theoretical weaknesses he did some real pioneering work, which was rediscovered more than twenty years later by a few American political economists, when they reopened the question of the actual role of war in the long-wave processes initially raised by Kondratieﬀ’s empirical observations. Goldstein is the main ﬁgure of this group. The solution he proposed is based on two extensions of Kondratieﬀ’s original framework. Following Modelski’s suggestion about a possible cycle of wars in a very long period of observations (Modelski, 1978), Goldstein transformed the nature of the question. So far the problem to be solved has become how to explain the relation between economic long waves and the long cycle of wars. Thus, in order to link together economic growth, price movements and wars, Goldstein utilized real wages as an adjustment variable (Goldstein, 1988) in an ambitious dynamic system with many ‘feedback loops’. As observed wars are positively correlated with several price indexes and negatively with wages, the real wage is supposed to be the relevant intermediary between the wars and the long waves’ ﬂuctuations on production. Goldstein’s conclusion remains disputable. This sophisticated construction is still open to many criticisms at various levels (Conybear, 1990; Schmidt, 1993). But unquestionably, Goldstein’s baroque construction has oﬀered up to now a stimulating research programme of interest to economists, historians and political scientists. Concluding Remarks There is no evident connection between Boulding’s, Schelling’s and Ackerman’s thoughts which have been mentioned here. Further reﬂection shows, however, a common strand going through their ideas. Each of them can be considered in a sense as heterodox vis-à-vis the main economic stream. This is not really surprising when we bear in mind that wars themselves always reveal some unusual facets of economic life. Notes 1. A synthesis of this revolution was proposed by R. Dorfman, P.A. Samuelson and R.M. Solon in their well-known book Linear Programming and Economic Analysis (1958). 2. Let us recall that the ﬁrst edition of Theory of Games and Economic Behavior was printed in 1944. 3. Incidentally, the Russian sociologist Sorokin, who promptly emigrated to the United States, was a friend of Kondratieﬀ. Kondratieﬀ met him for the last time during his visit to the United States in 1924.

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References Ackerman, J. (1944), Ekonomisk teori, Lund. Aumann, R.J. (1976), ‘Agreeing to disagree’, Annals of Statistics, 4, pp. 1236–9. Boulding, K. (1944), Economics of Peace, Iowa: Iowa University Press. Conybeare, J.A.C. (1990), ‘A random walk down the road to war: war cycles, prices and causality’, Defence Economics, 1(4), pp. 329–38. Dantzig, G.B. (1951), ‘Maximisation of a linear function of variables subject to variable inequalities’, in T.C. Koopmans (ed.) Activity Analysis of Production and Allocation, New York: J. Willey. Dresher, M. (1961), Games of Strategy, New York: Prentice Hall. Goldstein, J.S. (1988), Long Cycles: Prosperity and War in the Modern Age, Yale: Yale University Press. Isaacs, R. (1965), Diﬀerential Games, New York: J. Wiley. Imbert, G. (1959), Des mouvements de longue durée, Aix: La pensée universitaire. Kondratieﬀ, N. ([1928] 1984), The Long Wave Cycle, New York: Richardson and Snyder. Koopmans, T. (ed.) (1951), Activity Analysis of Production and Allocation, New York: J. Wiley. Modelski, G. (1978), ‘The long cycle of global politics and the nation-state’, Studies and History, 20(2), pp. 214–38. Schelling, T. (1960), The Strategy of Conﬂict, Cambridge, MA: Harvard University Press. Schmidt, C. (1993), ‘Cycles longs en économie et cycles de guerres. Généalogie d’un programme de recherche et débat de méthode’, Economie et Société, XVII(7/8), pp. 319–44. Van Duijn, J.J. (1983), The Long Wave in Economic Life, London: Allen and Unwin. Van Ewijk, G. (1981), ‘A spectral analysis of the Kondratieﬀ cycle’, Kyklos, 35(3), pp. 468–99.

ERICH W. STREISSLER The Field to Survey As Jules Verne tells us, Phileas Fogg was not only willing but able to travel around the world within 80 days. Not a mean feat in 1873, the year of the greatest ﬁnancial crash of the nineteenth century. I have been assigned the altogether more daunting task of presenting an historical perspective of ﬁnancial institutions as well as technological progress. And I can only hope that in the near future a worldwide ﬁnancial crash of the dimensions of that which started in Vienna on May 8th and 9th 1873, the other side to the story of Phileas Fogg, will be avoided. In order to make my task a little more tractable I shall only speak of international ﬁnancial markets and their institutions. I hope this will be in conformity with our general topic, the single ﬁnancial market. Is the development of international ﬁnancial markets mainly technological? And is this development progress? These would actually have to be our ﬁrst questions. The doubts expressed in these questions I shall leave unanswered, and merely, after a short prelude, approach my topic in four ways. First, I shall argue that within (roughly), the last three centuries there were only two or three great innovations which shaped international ﬁnancial markets. The ﬁrst was institutional, in fact, and only the latter one or two innovations were technical in the narrower sense. Second, I shall show that there actually was destabilizing institutional retrogression during the twentieth century, now happily past. Third, I shall examine the eﬀects of the undoubted growth in size of international ﬁnancial markets and what that means institutionally. Finally, I shall deal very brieﬂy with the speed of ﬁnancial innovation and the eﬀect which this has on ﬁnancial markets. Prelude The Nobel Memorial Prize winner in economic sciences of the year 1999, the Canadian (living in Europe) Robert A. Mundell, has published ‘A Reconsideration of the Twentieth Century’ from a mainly ﬁnancial perspective.1 Its key sentence, appropriately making the case for international ﬁnancial institutions, runs: ‘Forget the 75 years between 1914 and 1989!’ As far as international ﬁnancial markets are concerned, most of the twentieth century was that rarest of phenomena in the modern world, a period of mere retrogression. Towards the end of the 1930s we retrogressed to the lowest level of international exchange for centuries and to nearly no ﬁnan382

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cial transactions on the international level. Not only was Keynes’s General Theory conceptually one of a closed economy, we had actually degenerated into a world system of nearly closed economies. ‘The clue to the twentieth century lies in the links between its ﬁrst and last decades’, Robert Mundell adds somewhat optimistically. True, only the (long) ﬁrst and the last decade of the twentieth century had full international capital mobility. In that respect only these ‘book ends of the century’,2 as Mundell calls them, came up to the European standard since about 1700. But we have not yet regained the single monetary anchor, which the period from 1717 to 1914 had found in gold. Thus we are still far behind the ﬁnancial integration of the nineteenth century. We have no single reliable monetary standard and thus no common expectational basis. Otherwise, how could it have been possible that the world’s greatest debtor nation, an economy with a continuous current account deﬁcit since 1982, and, to boot, at record levels in both 1999 and 2000, could convince the world, by a concerted propaganda eﬀort, that because of its unproven ‘new economy’ its currency relative to the Euro is now worth more by 30 or 40 per cent as compared to three years and some 60 per cent as compared to six years ago? Or how could laggard Germany convince itself and – unfortunately – many others that the accession of Italy to the Euro is a burden on that currency when Italy, in contrast to Germany, was running a substantial international current account surplus up to 1999, with only very small deﬁcits thereafter, thus strengthening and not weakening the Euro? We have not yet re-established clear international ﬁnancial measuring rods, nor the clear standards or the clear theories which we had up to 1914. In a ﬁeld so rife with unproven speculation we have not yet regained the certitudes of the unjustly despised nineteenth century. Technological Progress? After these sceptical remarks let us turn to Progress (with the capital P of the optimistic nineteenth century), to be exact: to technical economic progress, once more a nineteenth-century idea, much propagated by Karl Marx. For international ﬁnancial markets there were only two or three technical advances in the wider sense. As P.G.M. Dickson convincingly showed, there was a ‘ﬁnancial revolution in England’ around 1700–1710, a revolution substantially preceding the so-called Industrial Revolution.3 The Dutch already before that and then England in the early eighteenth century established a truly international ﬁnancial market, and not only for governments but for private individuals, though, one might say, the two were largely complementary, government securities being bought by private individuals: Sarah Jennings, the widowed duchess of Marlborough, invested in

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such paper securities, unthinkable only half a century before. In fact, securities, even of governments, for the ﬁrst time became just that – securities. The Swiss canton of Berne invested in English, in French and in Dutch securities, i.e. widely internationally. For the ﬁrst time in modern European history there was a genuinely international market in stocks and bonds. At the same time it became a market based on an international monetary standard, on gold. To a certain degree this came about, curiously enough, through a miscalculation by one of the greatest mathematicians of all times, the then Master of the British Mint, Sir Isaac Newton. In 1717 Isaac Newton miscalculated the correct silver price to be set for the British gold coin, the guinea. He miscalculated it at 21 shillings. Or, in a slightly kinder interpretation of his advice, the British parliament chose the wrong option among his several suggestions. The silver price of the British gold coin was set too low so that, quite inadvertently, Britain stumbled into monometalism, into the gold standard. Add to that the fact that, of all the nations of Europe, Britain alone had made coinage a completely costless public good, so that the slightly cheaper gold coinage rapidly replaced silver (in the sense of new full-weight silver coins). Thus it was more or less by accident that the leading ﬁnancial nation of the eighteenth century, Great Britain, created a truly international, we may even say a world ﬁnancial market based on its newly created gold standard. This was the ﬁrst great ‘technical’ innovation in ﬁnancial markets to be considered here, certainly ‘progress’, though ‘technical’ in the narrower sense only by courtesy. With the gold standard international ﬁnance had become – for the ﬁrst time since antiquity – a more or less private commercial business. As an example, the last two Habsburg emperors, Joseph I and Charles VI, could raise four great foreign loans, denominated in British pounds sterling: in 1706, 1710, 1735 and 1737, altogether totalling nearly one million pounds (more precisely 910000 pounds) on the London capital market. These international loans to the Habsburgs amounted in sum to some 2 per cent of one yearly British GDP, thus proving quite substantial even from a modern perspective. They were much larger than what could be raised in Germany, where Charles VI ﬂoated only a loan of a one million Reichsthaler in 1730, worth about 180000 pounds, considerably smaller than the British loans of 1706, 1735 and 1737. That both the German loan of 1730 and the British loan of 1735 were secured on the revenues of Silesia proved not the wisest of decisions after 1741, when Frederick of Prussia alienated that rich part of the Habsburg Empire. Let us leave the ﬁrst half of the eighteenth century which, with the gold standard and the London market, had established an international ﬁnancial system in a sense much more advanced than our own. For, be it remem-

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bered, within the last two years or a little more we have witnessed a depreciation of the yen against the dollar by about 70 per cent and of the Euro by about 40 per cent, calculating in each case from the lowest point to the highest. Such rapid changes in monetary standards would have appeared quite unimaginable to any eighteenth-century ﬁnancier. One problem that he had, however, was that it took many days for him to ﬁnd out what happened simultaneously in other ﬁnancial markets; that it took at least ﬁve weeks to know what happened in North America; and months to know what was the case in India. In the early nineteenth century Nathaniel Rothschild could still make money by being informed by his own private packet boat about a day earlier than other market participants of the outcome of the battle of Waterloo. All this was changed in the last third of the nineteenth century by the introduction of the international telegraph and soon after, by the 1890s, by the introduction of the telephone. From now on, news of what happened in distant ﬁnancial markets spread within minutes by telephone. Financial markets all over the world were now informatively linked and the ﬁnancial decision period shrank to about ﬁve minutes. From the 1890s onwards ﬁnancial markets became simultaneously acting markets, a great technical advance indeed. About one hundred years later ﬁnancial markets are now linked by internet. The diﬀerence of this further technical advance relative to the telephone is that decisions have now to be taken within only half a minute and not within ﬁve minutes; and that many more people can see the same bits of news simultaneously on their internet screens. Still, I am not sure whether I should speak of two phases of technical progress, the telephone and a century later the internet, or basically only of one. From ﬁve days to ﬁve minutes the time dimension of reliable up-to-date international information is reduced by a factor of about 300 to 1. From ﬁve minutes to one half of a minute it is further reduced by a factor of only ten. And it is not clear whether processing complex information in only one half a minute is not beyond the capacity of most human brains. One gets the impression that the ﬁrst panic reaction after one half of a minute tends to be soon reversed. Therefore I think that it was the telephone which more than a century ago brought the decisive technological advance and that the mass use of the internet has to be considered as basically only a minor additional frill to the great advance brought about by the telephone. This question is, in fact, part of the ongoing debate about the extent of ‘newness’ in the new economy. To my mind the multitude of technical innovations just before 1900 and then again around 1950 is far more important than the sole advance of computer and of internet technology during the last decade of the twentieth century.

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Unity and Stability Lost Thus the last great innovation with respect to international ﬁnancial markets, the introduction of the telephone, took place more than a century ago. And the twentieth century presents itself ﬁnancially not as one of great technological progress, nor one of stagnation, but actually as one of retrogression. Let us remind ourselves ﬁrst that – for countries not on the brink of rapid decline – the inﬂationary experience of the twentieth century is historically unique. From about 1630 to 1750 the British price level hardly changed at all and from then on only modestly up to 1790. Then, again, from 1820 to 1913 there was no price level change, though this time with somewhat larger swings in between. Only the quarter century of war around 1800, ﬁrst with revolutionary, then with Napoleonic France, brought inﬂation, but that was very modest compared to the inﬂation shown even by the respective victor nations in the great wars of the twentieth century. The real inﬂationary problem of the twentieth century is to what an extent it shifted relative values of the major currencies against each other within only a few decades. This, basically, was disquietingly new. Robert Mundell has documented the astonishing fact that the United States of America suﬀered the greatest inﬂation by far in its entire history in the 1970s: during the eleven years form 1971 to 1982 the US price level rose by a full 157 per cent while during World War I, from 1913 to 1920, it had only risen by 121 per cent; during the Civil War it had risen by 118 per cent, between 1861 and 1864; and during the commonly considered highly inﬂationary World War II, to be exact from 1939 to 1945, the US price level had risen least of all, by only 108 per cent.4 The German Deutsche Mark, on the other hand, during its whole history, in the ﬁfty years from 1948 to 1998, showed the lowest rate of inﬂation of all world currencies, at 23⁄4 per cent inﬂation on average, marginally lower even than the Swiss franc in the same period of time. During the ﬁnancially uneasy 1970s gold had showed an astonishing boom, rising in its dollar price from 35 dollars the troy ounce in 1970 to 850 dollars in early 1980, an average dollar price increase of 37.5 per cent a year! Today it is down, measured in US dollars, to less than a third of the price of 1980. After 1980 the ‘phoenix ﬂight’ of gold was replaced by the ‘phoenix ﬂight’ of US common stocks: the conservatively calculated Dow Jones index of stock prices increased from 1982 to 1999 more than ﬁfteenfold or, in real terms, i.e. after subtracting inﬂation, by an average of 13.5 per cent a year, less than gold in the 1970s, but still at a quite unsupportable rate. Even if you correct for the fact that many US companies have bought back around two per cent of their common stock each year in order

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to fulﬁl stock options of their top management and if you correct for the fact that the Dow Jones weighs its composite stocks in such a way that particularly successful stocks constantly get a higher weight and that it periodically takes out unsuccessful stocks altogether, the corrected real increase in average US stock prices has to be around nine or ten per cent a year. Add to that the average dividend yield and you get more than double the real return on capital, which cannot exceed ﬁve or at the very most six per cent per annum for long, even in the USA. Thus from the 1970s onwards, since the introduction of ﬂexible exchange rates, we have been living through a period of vast ﬁnancial instability, an instability which, apart from world wars, we had not witnessed since the early eighteenth century. Add to that the historically unique experience that the leading ﬁnancial nation of the world, the United States of America, now does not save at all any more; in fact it shows a negative personal saving rate, a circumstance certainly partly due to the astonishing stock market price rise which makes Americans feel much richer than they can be in the long run. This means that most US real investment is at present ﬁnanced by Japan and certain European nations. We are thus faced with a frighteningly unstable scenario for the long run. Since the 1980s not even inﬂation rates have been a reliable guide any more because inﬂation no longer diﬀers very much between the leading nations. Since the creation of the Euro we now have three great world currencies, the US dollar, the Euro and the yen. Their values need not be bound to any real fact whatsoever. They can represent just commonly held fantasies for the future discounted to the present. Or, as Lord Keynes so aptly wrote, they can merely be ‘what average opinion expects the average opinion to be’.5 So at present exchange rates are anchorless. To give a more precise statement, from 1973 the movement of the exchange rates of the leading industrial nations (without substantial inﬂation) – and that includes nations behind the US dollar, the yen and, on average, also the nations behind the Euro – cannot be shown to have diverged substantially from a random walk without drift. And it is an important feature of such a random walk in prices that starting from any given price this price and each and every other price will again be reached with certitude, but on average one has to wait an inﬁnitely long time till any given price is reached. This is an uncomfortable thought for mortal human beings who will, I conﬁdently believe, live inﬁnitely long, though no longer in a state where they care about prices. To put it in a nutshell; twentiethcentury ﬁnancial markets have severed their ﬁrm moorings, secured by an anchor of gold, and have substituted for them an unpredictable random walk.

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Growth in Market Size and its Consequence However, after the lull of the mid-twentieth century, an unprecedented number of boats are now birthed in the storm-threatened harbour of international ﬁnancial markets. In reading the newspapers one gets the impression that the admirals of this ﬂeet of ﬁnancial investors are the great international speculators. But that is largely misleading. The owners of the numerous boats are actually the vast crowd of old-age pensioners and those who invest in future old-age pensions. On average we live much longer than our forebears a century ago; and, furthermore, most of us live long and then die in the same age bracket. The really great change in modern international ﬁnancial markets is its domination by funds basically geared to investor demand of future old-age pensioners and to those who have already reached that happy state. US ﬁnancial investment theory has counselled that in order to even out the ﬁnancial risks of the late twentieth century one should hold about one half of one’s investments outside the country; but then the unprecedented long-term boom during the 1980s and 1990s of the US stock market came along. Thus US citizens on average did not exactly follow the advice of international diversiﬁcation, though Japanese and also European investors did. And in Europe as from 1 July 1990 everyone has been allowed to do so, which is once again proof that, in the twentieth century, the period up to 1914 and that from 1990 onwards are twin eras of free ﬁnancial investment. ‘Forget the 75 years between 1914 and 1989!’. It is the size of old-age pension investment that dominates the markets today, and with the increase in average wealth old-age pensioners investing commercially have vastly increased in number. It is exactly old-age pensioner sentiment which also explains why in most of the developed world we are no longer faced with substantial inﬂation. For inﬂation makes investment for retirement a nightmare. There is, however, a downside to that great and still rapidly increasing depth of the international ﬁnancial investment market dominated by oldage pensioners and those planning to become so: by now, the foreign exchange market deals only to the tune of one per cent with current account transactions and is employed for a full 99 per cent for capital transactions. If the forex market were mainly for export and import ﬁnance, for current account transactions, price swings would tend to be self-correcting. Those actual or aspiring old-age pensioners, however, who dominate the capital account, show low risk aversion. They mainly invest for a return in ten or twenty years’ time or further in the future. By then everything – the entire situation – may be quite diﬀerent and will most likely be so if the exchange rate movement basically follows a random walk. Furthermore, if they

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suﬀer a drop in value of their investment there is no way for them to overcome such a loss; and if they gain, why should they switch horses? This implies that the increase in volume of transactions in international ﬁnancial markets has made the markets almost insensitive to price ﬂuctuations, to exchange rate changes. And the fall in the average risk aversion of the dominant investors tends to make exchange rate changes all the larger. After the loss of the unique exchange rate anchor of the eighteenth and the nineteenth centuries the very thickness of modern international ﬁnancial markets has made these markets almost insensitive to large price ﬂuctuations. This is in stark contrast to what used to be, where a thin market showed sharp price ﬂuctuations because it is diﬃcult to ﬁnd suﬃcient buyers when large sellers come along and vice versa. Today international ﬁnancial markets, though thick markets, have become highly risky and it is dangerous to deal in them. Does Financial Innovation Count? Does ﬁnancial innovation in international ﬁnancial markets count for much? Actually, thus far for surprisingly little. Remember, according to the Nobel Laureate Robert Mundell, we should ‘forget the 75 years between 1914 and 1989!’, and thus forget all the mainly short-term innovations, eﬀected mainly for national ﬁnancial purposes. Not much has happened to the instruments of international ﬁnance since 1914. One important ﬁnancial innovation of the twentieth century was the rise in regulatory importance of the central banks. By the 1990s when freely moving international ﬁnancial markets were once more established, the funds of the central banks had, however, become so small, relatively speaking, that they were unable to dominate these markets and even less able to dictate to them. One not very large international investor, Mr. Soros, could break the pound sterling within hours, willingly aided, however, by the British commercial banks. After the half-hearted and not very successful attempts of the European Central Bank to shore up the Euro last year we can more or less forget central bank inﬂuence, as long as international ﬁnancial markets are not very uncertain as to the probable future price movement. But there was one sign of warning of the possible dangers presented by ﬁnancial innovations. That was the crisis of Long-Term Capital Management in September 1998.6 First, we learned to our surprise that hedge funds, being investment funds open only to very large investors, ‘as such . . . are left mostly unregulated’.7 Second, we found out that according to US law derivative contracts, if they failed, were not subject to normal bankruptcy protection from all creditors, but that each and every counter-party could ‘liquidate any of the defaulting counter-parties’ assets . . . in their control for any reason’, thus pos-

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sibly causing ﬁnancial chaos.8 Third, the size of the engagement of LongTerm Capital Management, and the low level of their security was eyeopening: with an apparently huge paid-up capital of slightly less than ﬁve billion dollars Long-Term Capital Management secured more than 125 billion dollars of bank credit from sixteen of the largest banks of the world. Thus its capital was only 4 per cent relative to its debts. With this dangerously ‘small’ ﬁnancial basis – if one can ever call ﬁve billion dollars small – it secured contracts of more than one billion dollars, or, as some say, of over 1350 billion dollars. Thus its paid-up capital was not much more than one half of one per cent or even only one-third of a per cent of its contracts. Its contracts were about ﬁve or more than six times the then annual Austrian GDP. Does ﬁnancial innovation count in international ﬁnancial markets? With these huge and unguarded sums it very well might, and in a highly destabilizing way. Had there been a crash of Long-Term Capital Management, the long-lasting US boom would most likely have ended then and there, after a normal eight-year period from 1990, while it is now in a very unusual eleventh year. It was one of the greatest achievements of William McDonough and of the Governor of the Fed, Alan Greenspan, to have handled that dangerous crisis so adroitly. Even so the Japanese yen, most likely as a consequence of Long-Term Capital Management, appreciated within days of the crisis by some 25 per cent altogether, and 15 per cent within a few hours on one early October morning. Therefore we may conclude it is quite likely that ﬁnancial innovation will indeed count on international ﬁnancial markets, though it has not really done so yet; and it is quite possible that innovation might bring added dangers. This may seem to be a rather gloomy conclusion, but I am an optimist. In a further half-century I am sure we shall be faced once more with substantial technological progress in international ﬁnancial markets. Historical experience teaches us that progress brings its ups and downs. The twentieth century was more a period of retrogression than of advance for international ﬁnancial institutions, a period more of downs than ups. A single international monetary standard may be hoped for in the future. Notes 1. Robert A. Mundell (2000), ‘A reconsideration of the twentieth century’, American Economic Review, XC, June, 327–40. 2. Both quotations, ibid., p. 327. 3. P.G.M. Dickson (1967), The Financial Revolution in England – A Study in the Development of Public Credit 1688–1756, London. 4. Mundell, loc. cit., 335. 5. John M. Keynes (1936), The General Theory of Employment Interest and Money, London, p. 156.

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6. See Franklin R. Edwards (1999), ‘Hedge funds and the collapse of long-term capital management’, Journal of Economic Perspectives, 13(2), Spring, 189–210. 7. Edwards, loc. cit., 190. 8. Edwards, loc. cit, 201.

Index Abalkin, L. 4, 284 absolutism 276–7 acceleration principle 331–2 Ackerman, J. 379, 380 Addison, P. 307, 320 Adler 257 Afghanistan 283 Aftalion, A. 71, 78–85, 89, 90 Agiatis 190, 194 Agis 187, 190, 192, 194 Agis IV 189, 194 Akerman, J. 254 Albert, M. 355 Alexander II, Tsar 278, 279, 283 Alexander, S.S. 338 Algarotti, F. 245 Algeria, Bank of 76 Allen, R. 257 Allen, W.R. 296 Allende government 15 Allied Control Council 97 Amonn, A. 256 ancien régime 59–60, 62, 63 Anderson, B. 25, 26 Anglo-American capitalism 6, 355 anglomania 240 ‘annona’ system 226 anthropocentrism 270–71 applied economics 375–80 Aratus 187, 189, 190, 191, 194, 196, 197, 199 Areus 190 Argenson, Marquis d’ 359 Aristodemus 189 Aristomachus 189 Aristotle 64 Armstrong, P. 320 Arouet, M. de 359 Arrow–Debreu 208, 209, 218 Artis, M.J. 46 Asia 2, 173, 175, 265

Association for Education in Citizenship 315 Attlee, C. 320 Augustin, Saint 66 Aumann, R.J. 378 ‘Ausgleichsforderungen’ 101 Austria 26, 79, 181, 292, 294, 369, 390 Economic Society 258 Austrian Zeitschrift für Nationalökonomie 247–59 Austrian School 248, 250, 252, 253, 257, 258–9 costs, production and market forms 255 economic crisis 256–7 methodological problems 254 volume of 1930 253–4 volume of 1931 254–5 volume of 1932 255 volume of 1933 255–6 volume of 1934 256–7 volume of 1935 257 volume of 1936 257–8 volume of 1937 258 volume of 1939 258–9 volumes I to VIII 250 volumes V to VIII 250 avances 157, 159 Avtonomov, V. 3–4, 275–86 Babbage 241 Baden 181 Bairoch 375 Balogh 318 Baloglou, C.P. 3 Bandini, S.A. 227, 228–9 Bank Charter Act 13 bank deutscher Länder 98–9, 105 Bank of England 313 Banking Principles 19 Banking School 12, 13, 15, 20, 28, 29–31

393

394

Index

Banque de France 2, 71, 72, 73, 74, 75, 76, 83–4, 85, 87 Regency Board 77 Barber, W.J. 289, 296, 299 Barna, T. 124 Bauer, O. 257 Baumol, W.J. 339 Berdyaev, N. 266 Bernanke, B. 289 Besomi, D. 327–48 Beveridge, W.H. 307, 308, 317–19 bimetallism 16–22 Binswanger, H.C. 179 Blair, T. 356 Blanc, J. 294 Blum, L. 75 Bode, K. 258 Böhm-Bawerk 247, 249, 251, 253 Boisguilbert, P. le P. de 150, 151, 161, 227 Bortkiewicz 134 Boulding, K. 376, 380 Bouniatian, M. 256 Bourde, A.J. 181 bourgeoisie 58–61 Braudel, F. 168 Bray, F. 180, 181 Bretton Woods 314, 319 Brezhnev, L. 283 Briant, A. 71, 74, 75, 85, 87 Browne, S. 251 Bryan, W.J. 21, 22 Buccleuch, Duke of 362 Buﬀon 151, 241, 362 Bukharin, N. 280, 281 Bulgakov, S.N. 268, 269, 273 Bundesverfassungsgericht 67 Burger, J. 234 Cagan, P. 11, 15 Caillaux, J. 70, 74, 75, 86, 87, 376 Cambodia 176, 178 Cambridge School 63 Cameron, Count 231 Cantillon, R. 80, 134, 360 capitalism 6, 355 Carey, H.C. 3, 238–45 Cargill, T.F. 293 Carli, Count G.R. 228, 245 Carnap 258

Cartelier, J. 2, 124–6, 127, 130–49, 206–23 Cary, M. 197 Cassel, G. 82 Catchings, W. 24, 253 Cattaneo, C. 234 Central Committee 282 Central and Eastern Europe 285 centrally planned economy 270–71 Cercidas 187–203 Chamberlin, E. 255 Champa 176 Chaptal 240 Charles Albert, King 234 Charles, L. 110, 111, 130, 146, 162, 164 Charles VI 384 Chastellux 223 Chicago School 29, 65 ‘Chicago Tradition’ 28 Chicago University 28 Chile 15 China 3, 16, 173–6, 178, 179–80, 181, 182, 284, 359 Choiseul, duc de 360 Choudri, E.U. 298 Chuprov, A.I. 268 Churchill, W. 2, 39, 70, 89 Civil War 386 Clark, C. 307 Classical economists 369 Cleomenes III’s reforms in Sparta 3, 187–203 economic conditions in Greece 188–90 equal distribution of wealth 196–9 philosophers, role of 194–6 socio-economic reforms 190–94 Clinton, B. 355 Cobden, R. 234, 235 Cochinchina 176, 178 Cohrssen, H. 295 Colbert 130, 151, 231 Cold War 6, 97, 103, 377 Cole, G.D.H. 318, 319 Colm, G. 97 Colm–Dodge–Goldsmith Plan 97–8, 99 Colson 867 Committee of Experts 71, 73–5, 76, 77, 85, 86

Index Committee on the Workings of the Monetary System 12 Commonwealth of Nations 39 Communist Party Programme 282 commutative justice 57–8 Condorcet 359 Confucius 179 Congress of Vienna 233 Continental Model 356 Continental–Japanese model 355 Conybeare, J.A.C. 380 Corden, W.M. 44 corn 158–61 Corn Laws 206 corn price 137–41 corn trade 161–6 costs 255 Coudenhove–Kalergi 39 Cournot 247 Courtauld, S. 307–8, 318 Cowles Commission 297 Cowles Foundation 377 Cownie, J. 238 Coyer 146 Craver, E. 248 Crombie, A.C. 238 ‘crude’ harmony doctrine 243 Currie, L.C. 25, 26–7 Cynics 195–6, 197–8 Czechoslovakia 282 Dahrendorf, R. 355 D’Alembert, J.le R. 153, 361, 362 Dalton, H. 319 Dangel-Hagnauer, C. 2, 70–91 Dangeul, P. de 359, 360 Daniels, C. 176 Dante 66 Dantzig, G.B. 377 De Cecco, M. 1, 6, 55–69, 355–7 de Gournay, J.V. 360, 361 De Marco 65 De Sully, M. 150, 151, 152, 160 de Tracy 241 De Viti 65 debt–deflation theory 292, 299 Democratic Party 21–2 Deutsche Bundesbank 99 di Cavour, Camillo Count B. 234–5 Di Fabio 51

395

Dickson, P.G.M. 383 Diderot, D. 153, 168, 361, 362 Dietz, R. 270 Dimand, R.W. 289, 297 Diodorus Siculus 187 discipline 193, 195 Distelrath, G. 181 distributive justice 57–8, 62–3 Dmitriev 134 Dodge, J.M. 97 Doisy 151 Dolan, E.G. 248 Dresher, M. 377 Du Bourg 241 Du Halde, J.-B. 179, 180 Du Pont de Nemours, P. S. 179, 209, 241, 360 structural change and social transformation in physiocracy 150, 159, 160, 162–3, 164, 166, 167, 168, 169 Duclos 362 Dudley, D.R. 198 Dunoyer 240 Dupré de Saint-Mauri 151 Durbin, E. 307, 319, 336 dynamics in the making 327–48 acceleration principle 331–2 employment multiplier 343–4 imperfect competition 331 instability principle 331, 332–4, 335, 338, 339–40 partial equilibrium approach 332, 335, 338 price level 334 roundaboutness 342 statics 334, 335, 338 supply and demand 335 time-lag theories 337, 339 trade cycle theory 331, 332, 335–6, 337–8, 339, 342–3 East Asia 173 Eccles, M. 26 economic analysis, theoretical contributions to 376–8 economic integration 41–2 Economic and Monetary Union in Europe 37–53 economic integration 41–2

396

Index

integration from historical perspective 38–40 monetary union 42–3 optimum currency area theory 43–8 political priorities 48–51 Edgeworth 371 education 193, 195, 219 Egypt 188 Eichengreen, B. 289, 298 Eidelman, N. 278 Einaudi, L. 65, 234 Elliott, J.E. 238 Ellis, H. 257 Eltis, W. 2, 5, 109–28, 130, 162, 164, 214, 358–63 employment multiplier 343–4 Enlightenment 174, 232, 235, 240 see also French Enlightenment ‘ephorate’, abolition of 191–2 Epictetus 195 Epitadeus 189 equal distribution of wealth 196–9 Erhard, L. 97, 102, 105 Eucken, W. 3, 104, 258, 272, 370, 371–2 Euhemerus 196 Eukleidas 192 EURATOM 39 Euro area 46–7 Euro–Continental capitalism 6, 355 Euro–Japanese model 356 Europe 1–2, 3, 59, 62, 109, 254, 265 applied economics and policymaking 376 bimetallism, monetarism and quantity theory 14, 23, 24 and France 358, 359, 360 French Enlightenment 207 Great Depression 291, 292 and Italy 232, 233–4, 235 market size 388 perfect competition 372 Ponthiamas: physiocratic model state 173–4, 175, 180, 181 structural change and social transformation in physiocracy 154 and United States real investment 387 see also Economic and Monetary Union

European Central Bank 45, 67, 68, 356, 389 Governing Council 42 European Coal and Steel Community 39 European Court of Justice 356 European Economic Community 39, 41 European economic crisis 233–4 European Monetary System 41 European Monetary Union 106 European Union 41, 49–50 Evans, A.A. 314 exchange rate 81–5 mechanism 41 expenditures 156–8 ‘Explications, Les’ 113–14, 121, 122, 123, 124 exports 158–61 Fabian Society 308, 314, 319 Far East 180 Fascism 309, 310 Faucci, R. 243 Federal Reserve 24, 26, 28, 293, 296, 298 Act (1913) 25, 69 Banks 98 Board 25, 26 Policy 26 system 15, 68 Federation of British Industries 307, 308, 309, 310 Fedotov, G.P. 265 Feldman, G. 4, 282 Felix, D. 14 Ferrara, F. 3, 238–45 Fiat money 61 Filangieri, G. 245 financial innovation 389–90 Finland 86 First World War 61 Fisher, I. 4, 10, 11, 22, 23, 24, 28, 30, 289–302 ‘five hundred days’ 284 five year plans 282 Fleming, J.M. 45 Föhl 252 Forbonnais 139, 211, 218, 360 Fossombroni 234

Index Foster, W.T. 24, 253 Fox-Genovese, E. 180 France 2, 5, 17, 39, 56, 344, 358–63, 376, 386 freedom and governmental interference 240, 241 German monetary reform 95, 98 and Italy 228–9, 230, 233 ‘Law of Year Eleven’ 16 National Assembly 39 physiocracy 179–80 Ponthiamas: physiocratic model state 174, 181 structural change and social transformation in physiocracy 150–52, 158–61 Treasury 71 see also monetary reform in France; Tableau économique and France Francis I 231, 232 Franco-Prussian War 16 Frankel, H. 58 Frankel, J. 47 Franklin, B. 241 Frederick of Prussia 384 free trade 166–8 Free Trade principle 20 freedom, advocacy of and governmental interference 238–45 Carey, H.C. and Ferrar, F. 240–42 individual interests and social needs 242–4 Freiburg school 104 French Enlightenment 3, 173, 175, 206–23 composition of interests 216 education 219 instrumentalisation 211 Monarchy 213–14 natural law 212, 217, 220 natural order 209–10, 212, 213, 215, 216–20 net product theory 213, 214, 221 subsistence 213, 215, 221 Tableau économique 211–12, 213–15, 218, 220, 222 Traité de la monarchie 211–12, 213–15 ‘French Plan’ 376

397

‘Freshman brains trust’ 26 Freud, S. 257 Friedman, M. 44, 65 bimetallism, monetarism and quantity theory 10, 11, 13, 14, 15, 16, 25, 28, 29 Frisch, R. 327, 328, 339 Frisi, P. 245 Gaidar, Y. 4, 284, 285 Gaitskell 336 Galiani, F. 56, 57, 168, 227, 230, 245 Gaspardone, E. 176, 178, 179 Genovesi, A. 227, 228, 231–2, 245 Germany 2, 5, 16–17, 39, 55, 174, 356, 383 and Austrian Zeitschrift 249, 251 Constitutional Court 68 freedom and governmental interference 241, 245 Great Depression 292, 294 Grundgesetz 67 inflation 370 monetary reform in France 72, 73, 79, 81–2, 88–9 Parliament 67, 68 and patristic legacies in Russia 263, 270, 271–2 physiocracy 362 protectionism 366 Reich 58 technological progress 384 theory and econometrics 373 unity and stability 386 World Wars 369, 375 see also monetary reform in Germany Gertler, M. 289 Gertsen, A. 267, 269 Gesell, S. 294, 295 Gide, C. 70, 71, 79, 85–7, 89, 90 Giﬀen, R. 19, 20 Giobertis, V. 235 Gioja, M. 233, 234 ‘glasnost’ 283 global rate of return 139–41 Glyn, A. 320 gold standard 384 Goldsborough Bill 296 Goldsmith, R.W. 97

398

Index

Goldstein, J.S. 380 Gömmel, R. 181 Goodwin, R.M. 327, 339 Gorbachev, M. 4, 283, 284 Goricheva, L. 263 Gossen 247 governmental interference see freedom, advocacy of and governmental interference grande culture 131–3, 139, 142–3, 145, 147–8, 153–5, 163–4 Graziani, A. 293 ‘Great Contraction’ 25 Great Depression 4, 15, 24, 25, 26, 61, 289–302, 319 New Deal 295–9 ‘stamped money’ plan 293–5 Stock Market crash 290–93 Great Reforms of 1860s 278 Greece 188–9 Greenspan, A. 357 Gregory of Nazianz 199 Grenfell, H.R. 18 Gresham’s Law 18 Groys, B. 265 Gurley, J. 13 Guyana 175

Henrich, F.K. 240 Henry IV 151, 160 Heracles 192, 195–6 Herbert, C.-J. 161, 360 Herlitz, L. 124, 214 Herriot, E. 75, 87 heterodoxy 380 Hicks, J.R. 65, 247, 248, 255–6, 257, 359 dynamics 327, 328, 337, 342, 343 Historical School 5, 369, 370, 371, 372, 373 history 168–70 Hitler, A. 94, 104 Hobbes, T. 207, 217 Hofmannsthal, H. von 370 holism 270–71 Holland 358, 359, 383 Homburger Plan 97–8, 99 Hoover Administration 298 Horace 199 Howson, S. 319 Hsü Kuang-Chhi (Paul Hsü) 182 Hucks-Gibbs, H. 18 Hugo, V. 38 Hume, D. 152, 167, 227, 360 Hutchison, T. 258, 359, 360

Haberler, G. 80, 330, 331, 332, 342 Austrian Zeitschrift 248, 249, 251, 252, 257, 258 Hacksthausen, A. 279 Hahn, F. 64 Hansen, A.H. 80, 337, 338 Harberger, A.C. 14 Harris, J. 318 Harrison, J. 320 Harrod, R.F. 248, 258, 327–48 Harvey, W.H. 20, 21 Häuser, K. 2, 94–106 Hawtrey, R.G. 10, 11, 23, 24, 25, 337, 342 Hayek, F.A. von 1, 23, 50, 63, 65, 269, 272, 306, 331 Austrian Zeitschrift 248, 249, 252, 253–4, 256 Hect, J. 152 Helots, liberation of 193 Helvétius 362 Henderson 258, 338

Imbert, G. 379–80 imperfect competition 331 income distribution 168–70 India 16, 109, 175, 358, 385 individual interests 242–4 Indochina see Ponthiamas kingdom Industrial Revolution 383 instability principle 331, 332–4, 335, 338, 339–40 instrumentalisation 211 integration from historical perspective 38–40 International Monetary Fund 357 interwar years 22–9 IS–LM model 11, 30 Isaacs, R. 377 Issing, O. 1, 37–53 Italy 3, 226–36, 251, 356, 383 earlier developments 226–7 economic thinking and economic life 227–32 European economic crisis 233–4

Index freedom and governmental interference 240, 241, 242, 245 Napoleon’s economic policies 232–3 Risorgimento 234–5 Izhboldin, B. 269 Jambulus 196 Japan 181, 329, 355, 356, 387 Jay, D. 319 Jeanneney, J.-M. 79 Jeﬀerson, T. 241 Jennings, S. 383–4 Jevons 18, 247 Jèze, G. 73, 74, 75 Jichuang, H. 180, 182 Johnson, H.G. 13, 15 Joseph I 384 Joseph, M. 315, 316 Jouhaux, L. 89 jus civile 57 jus gentium 57, 58 Kahn, R. 12, 248, 306, 330, 335, 342, 343 Kaldor, N. 4, 14, 15, 253, 306–21, 342 Kalecki, M. 252, 318, 320, 327 Kallimedon 198 Kamenev 281 Kantorovich, L. 4, 282 Kaufmann, F. 254 Kenen, P.B. 45 Keynes, J.M. 1, 2, 6, 104, 276, 356, 365–7, 387 Austrian Zeitschrift 248, 252, 253, 256, 257 bimetallism, monetarism and quantity theory 23, 25, 27, 28, 30 distributive justice 62–3 dynamics 327, 329, 330, 333, 335, 338, 339, 342, 343, 344 full employment 356 General Theory 383 and Germany 369–70, 371, 372, 375 Great Depression 289, 294, 295, 297 monetary reform in France 70, 83, 85, 86, 89 political element in monetary theory 55, 56, 57, 62–3, 66 socialist reconstruction of Britain 306, 315, 318, 319

399

Khomyakov 266 Khrushtchev, N. 282 King, J.E. 4, 306–21 King, M. 289 Kireyevskii, I.V. 266 Kleinknecht 379 Klump, R. 2–3, 173–82 Knapp, G.F. 55, 56, 57 Knight, F. 254, 257, 327 Knox, A.D. 198 Ko 179 Kochin, L.A. 298 Kondratieﬀ, N. 233–4, 281, 378, 379, 380 Koopmans, T. 377 Koshalyov, A. 266–7 Kossygin, A. 282 Kreis 257 Krugman 47 Kuybyshev, V. 282 Kuzcynski, M. 111, 150, 153, 157, 158 Kuznets 375 Labour Party 356 Reconstruction Committee 319 Labrousse, E. 168 Lachmann, L.M. 258 Laidler, D. 1, 6, 9–33, 366 Lamartine Yates, P. 314 Land Central Banks (LZB) 98 land distribution 193–4 landlords’ expenditures 137–41 Lange, O. 256 Larin, Y. 280 Larrère, C. 221 Latin America 14, 15, 284 Latin Monetary Union 17 Lauderdale 241 Laughlin, J.L. 19, 20, 21, 25, 26, 27 Lausanne School 256 Laverdy 123 Law, J. 151 Lazard 73 Leijonhufvud, A. 23 Leitsätzegesetz 102 Lenin, V.I. 4, 281 Leonidas 190, 194 Leonidas II 190 Leontief, V. 282 Leontief, W. 4, 156, 257, 360–61

400

Index

Leopold II 227, 231–2 Lerner, E. 11 Lhomme, J. 80 Li Tana 179 Li Zhi 180 Liberman, E. 282 List, F. 4, 56, 280 Locke, J. 207, 208, 217, 227, 360 Long-Term Capital Management 357, 389–90 long-wave perspective 378–80 Louis XIV 117, 150, 358 Louis XV 111, 360 Lovasy, G. 257 Löwe, A. 331, 338 Lucas 66 Lucilus 199 Luhmann, N. 270 Lundberg 337 Lycurgus 195 Lydiadas 199 Maastricht Treaty 41, 42, 45, 48, 67, 68, 69 Mac Cuu (Mo Jiu) 178 Mac Thien Tu (Mo Tiaxi or Kiang-tse) 178–9 McCann, C.R. Jr 264 McDonough, W. 390 Machiavelli, N. 66 Machlup, F. 249, 252, 327 McKinley 21 McLuhan 211 Mahr, A. 254, 258 Malaysia 176 Malleret, L. 174, 181 Malthus, T. 230, 241, 360 Mannheim, K. 310 market forms 255 reforms 283 size 388–9 Marmontel, J.-F. 362 Marschak 339 Marshall, A. 19, 23, 247, 249, 256, 335, 369 Martin, K. 307 Marx, K. 124, 126, 135, 137, 156, 209, 320, 361, 383 Marxism 280, 281

Marxists 104, 268–9, 369 Masci, G. 258 Mashler 377 Mau, V.A. 276, 281, 285 Mauritius 175, 182 Maverick, L.A. 179 Mayer, H. 249, 251, 258 Maynard Smith 379 Mazzini, G. 234–5 Meade, J. 258, 319, 331, 332, 336, 343 Meek, R. 131, 145, 147–8, 150, 153, 157, 158 France and Tableau économique 110, 111, 113, 124 Megistonus 192 Meiselman, D. 11 Mencius 179 Menger, C. 252 Menger, K. 247, 249, 250, 251, 252, 254, 256, 258 Mengotti, F. 227, 231 Merton, R. 357 metallism 58–61 Metternich, F. von 233, 234, 235 Michell, H. 196, 198 Middlemas, K. 320 Mikhailovskii, N.K. 267–8, 269 Miliband, R. 320 Mill, J.S. 241, 279 Ming dynasty 173, 178, 180, 181 Mirabeau, V. de R., marquis de 179, 210, 211, 214, 359, 362 France and Tableau économique 110, 111–14, 117, 119, 121, 122 structural change and social transformation in physiocracy 152–5, 157, 162, 163, 166, 167, 168, 169 Mirowski 377 Mises, L. von 1, 63, 64, 65, 248, 251, 252, 257 Mississippi Company 151 Modelski, G. 380 Monarchy 213–14 monetary controversy 11–16 monetary instability (1919–26) 71–3 monetary orthodoxy 63–5 monetary reform in France 70–91 Aftalion 80–83 Aftalion and Rist on exchange rate

Index and price level behaviour (1927–8) 83–5 Committee of Experts and Poincaré Cabinet 73–5 de facto stabilization and de jure stabilization 75–8 Gide 85–7 monetary instability (1919–26) 71–3 Nogaro 87–8 Rist: Deflation in Practice 79–80 Rueﬀ 88–9 monetary reform in Germany 94–106 decision-making and alternatives 96–9 economic order, political implications and economic thought 101–5 reform 99–101 monetary theory 55–69 commutative justice 57–8 distributive justice 57–8, 62–3 First World War and Fiat money 61 metallism and bourgeoisie 58–61 monetary orthodoxy 63–5 money, legal origins of 56 political element 65–7 theoretical underpinnings 67–9 Monnet, J. 376 monopoly planning 309, 310 Montesquieu, Baron de 152, 175, 208, 216, 226, 230 Montet, H. 87, 88 Moreau, E. 71–8, 87, 88, 89 Morgan, K.O. 73, 320, 377 Morgenstern, O. 248, 250, 251, 252, 254, 255, 257–8, 377 Mosca, G. 66, 67 Moschus 37 Müller-Armack, A. 3, 272, 372 Mun, T. 227 Mundell, R. 43–4, 382–3, 386, 389 Munro, T. 24 Muratori, L.A. 245 Musonius Rufus 195 Mussolini, B. 55 Myrdal, G. 230, 256 Napoleon 232–3, 235, 360 Nash, J. 377

401

National Defence bills 72, 74, 77, 79–80 National Investment Bureau 320 National Peace Council 317 Peace Aims Conference 314 national reform strategy 272–3 National Socialism 369 natural law 212, 217, 220, 239 natural order 142–3, 209–10, 212–13, 215, 216–20 Needham, J. 176, 180, 181 Negishi, T. 114 Neisser, H. 338 Nemchinov, V. 282 neoclassical counterrevolution 276 neo-Keynesian theory 356 net product theory 213, 214, 221 Neumann, Von 377 Neumark 369 New Deal 25, 26, 295–9, 309, 310 new economic policy 280–81, 311 New Zealand 67 Newton, Sir I. 384 Nicholson, J.S. 18 Nogaro, B. 70, 71, 85, 87–8 Nörr, K.W. 370 North America 109, 228, 240, 241, 242, 245, 358, 385 Novozhilov, V. 282 Nozick 210 Nuﬃeld Reconstruction Survey 318 numéraire 139–40, 144–5 October Revolution (1917) 280 Ohlin 255, 375 ‘one hundred percent money’ project 297, 299 Opie, R. 257 optimum currency area theory 38, 43–8 assessment 44–6 Euro area 46–7 limitations 47–8 Ordungspolitik 371 Ortes, G. 227, 230, 245 Orthodox Church 3, 264–5, 276 Osterhammel, J. 174 Ottaway, A.K.C. 317 ‘Outlines’ 99 over-indebtedness 291, 292, 299

402

Index

Pan-European Movement 39 Pareto, V. 65, 66, 67, 208, 218, 222, 255 Parisi, D. 3, 238–45 partial equilibrium approach 332, 335, 338 Pashkov, A.I. 279 Patinkin, D. 344 patristic legacies in Russia 263–73 and Federal Republic of Germany 271–2 holism, anthropocentrism and tselostnyi world of centrally planned economy 270–71 national reform strategy 272–3 Orthodox Church 264–5 ‘Russian economic idea’ 263 socio-philosophical traditions and economic thought 264 tradition of economic thought 265–70 ‘patronomoi’ 192 Pattullo, H. 110, 121, 159, 160, 162, 166, 169 Pavanelli, G. 4, 289–302 Pax Romana 38 Peace of Aix-la-Chapelle 235 Pearson, F.A. 296 Pearson, H. 371 Peasants Liberation Act 279 Pecchio, G. 227, 230 Peel, Sir R. 12–13, 234 Pénin, M. 85–6, 87 Pennsylvania, School of 244 perestroyka 283, 284 Perlman, M. 264 Persaios 195 Peru 153 Peter the Great 277 petite culture 117, 119, 121, 131–2, 145, 147–8, 153–4, 163 Petty, W. 134, 153, 227, 241, 360 Phelps Brown, H. 258, 306 Philippe, S. 130, 146 Philippines 176 Philippovich, E. von 249 Phillips, A. 124 Phillips curve 12 Philopoemen 199 philosophers, role of 194–6 Phylarcus 187, 190, 196–7

physiocracy 179–80 see also structural change and social transformation in physiocracy Pigou, A.C. 10, 257, 331, 337 Pinochet government 15 Pinot, V. 180 Plutarch 187, 189, 190, 191, 192, 193, 194 Poincaré, R. 70, 71–8, 85, 86, 87, 88, 89 Poivre, P. 2–3, 173–6, 177, 178–9, 181, 182 Poland 95, 284 Polanyi, K. 58 Policy-making 375–80 ‘politeia’ 195 political priorities 48–51 Polybius 187, 190, 192, 194, 199 Pompadour, Madame de 168, 360, 362 Pompeius Trogus 187 Ponthiamas kingdom 173–82 Chinese roots of French physiocracy 179–80 Poivre: Voyages d’un Philosophe 174–6 Popper, K. 366 Portugal 79 Possoshkov, I. 277 Potsdam Agreement 95, 96 Preobrazhensky, E. 280 Pressman, S. 124 Pribram, K. 3, 264, 270–71 price/prices 81–2, 158–61 level 83–5, 334 of production 135–7 reduction 291 special classical system 132–5 system 135–7 production 255 productive activity 145–7 produit net 119, 131, 133–5, 137–9, 142, 144–6, 148, 154 property 195 Pruns, H. 3, 226–36 Przeworski, A. 319 Ptolemy 189 Pyrrhus 187 quantity theory 9–33 bimetallism 16–22 definition 9–11

Index interwar years 22–9 monetary controversy 11–16 Quesnay, F. 2, 5, 109–28, 130–49, 227, 360, 361, 362, 363 French Enlightenment 206, 207–8, 209, 210–11, 212–16, 217–22 monetary reform in France 76, 78, 88 Ponthiamas (Indochina) 173, 179, 180, 181 structural change and social transformation in physiocracy 150, 151, 152, 153, 154–5, 156, 157, 158–9, 160–61, 162, 168, 169 Quing (Mandschu) dynasty 173, 178, 180, 181 Radcliﬀe Committee/Report 12, 13, 15, 20, 28 Radical party 73, 75, 76, 85, 87 Rae, J. 244 Rand Corporation 377–8 Rawls, J. 210 Raybaut, A. 2, 70–91 Re, F. 233 Reagan, R. 9 ‘Real Bills’ Doctrine 13, 25–6 Reichsbank 98 Reichsmark 94, 96, 100–101 Reichwein, A. 180 Reid, A. 178 Reijinders 379 Reisch, R. 250, 258 reproduction 156–8 revenu 157 Ricardo, D. 19, 61, 126, 206, 208, 241, 244–5 power and wealth and Tableau économique 134, 135–7 Ricci 257 Richecourt, Count 231 Rieter, H. 180 Risorgimento 234–5 Rist, C. 70, 71–8, 79–80, 83–5, 87, 88, 89 Robbins 248 Robertson, D.H. 27–8, 328, 330, 334, 336, 337, 338, 342, 343 Robinson, J. 4, 252, 255, 257, 306–21, 330, 342

403

Robson, W. 307 Roll 258 Romania 79 Roosevelt, F.D. 25, 26, 256, 295, 296, 298, 299, 315 Röpke, W. 256 Rose, A.K. 47 Rosenstein-Rodan, P. 250, 252, 254, 257 Rothschild, K.W. 3, 247–59 Rothschild, N. 385 Rougier, L. 179 Round Table discussions 5, 6 roundaboutness 342 Rousseau, J.-J. 210–11, 215–22 Rueﬀ, J. 70, 71, 76, 78, 85, 86, 88–9, 90, 375 Ruggles, R. 14 Russell 258 Russia 3–5, 181, 275–86, 309, 335, 356, 357, 362, 369, 378 Communist Russia 280–82 general tendencies 275–6 and German monetary reform 95, 96, 97, 98, 101 New Economic Policy 311 Post-Communist Russia 283–6 specific features 276–8 Tsarist Russia 278–80 see also patristic legacies in Russia Rykov 281 Ryzhkov 283 Saint Simon 240 Saint-Pierre, Abbé de 38 Salin, E. 370, 372 Samuels, W.J. 239 Samuelson, P. 361, 377 Say 240, 241, 242 Scharpf, F. 355 Schefold, B. 5, 369–73 Schelle, G. 360 Schelling, T. 266, 378, 380 Scherer, F.M. 369 Schlesinger, K. 252 Schmidt, C. 5, 375–81 Schmoller 249, 254, 371, 372 Schneider, E. 104, 255 Scholes, M. 357 Schüller, R. 250, 252–3, 257, 258

404

Index

Schultz 257 Schumacher, E.F. 314, 318 Schumann, J. 265 Schumpeter, J. 3, 64, 275, 361, 370, 371, 379 Austrian Zeitschrift 248, 249, 251 monetary reform in France 83, 87 Schwartz, A.J. 11, 15, 25 Second Hundred Years War 109 Sédillot 72 Selevcus 189 serfdom 276–7, 279 abolition of 278 Sergent, C. 73, 77 Seven Years War 358 Shackle 252 Shapley 377 Shaw, E.S. 13 Shaw, G.B. 307 Shionoya, Y. 371 Shonfield, A. 355 Shotter 378 Shove, G. 307 Shpet, G. 267 Siam 178 Simmel, G. 58, 268 Simons, H. 28, 29 Single European Act (1986) 41 Single Internal Market Directive (1992) 41 Single Market 42, 49 Slavophiles 3, 266, 267, 273, 278 Smith, A. 18, 126, 152, 220, 359, 360, 362–3 freedom and governmental interference 240, 241 Italy 227, 231 power and wealth and Tableau économique 134, 147 Smith, T. 310 Smoot–Hawley tariﬀ 291 Social Market Economy 372 social needs 242–4 Social Security League 317 social transformation see structural change and social transformation in physiocracy socialism 73, 75–6, 309, 311, 317, 356, 369 Socialist Enterprise, Law on 283

socialist reconstruction of Britain 306–21 Kaldor on postwar reconstruction 315–17 Kaldor, Robinson and Beveridge 317–19 Robinson on planning and reconstruction 307–14 Society of Nations 87 Socio-philosophical traditions 264 Socrates 195 Sokolnikov 281 Solon 197 Sombart 370, 372 Sorokin 379 Soros 389 South Africa 23, 61 South Asia 173 South Korea 355, 356 Southeast Asia 173 Spain 229 Spanish Succession, War of 151 Sparta see Cleomenes III’s reforms in Sparta special classical system of prices 132–5 Specie Resumption Act 17 Spencer, H. 267 Spengler, J.J. 124 Sphairos 193, 195, 198 Spheerus 190 Sraﬀa, P. 55, 125, 127, 255, 306, 335 power and wealth and Tableau économique 133, 134, 135, 136 stability 386–7 Stability and Growth Pact 45–6, 49 stabilization, de facto and de jure 75–8 Stackelberg, H. von 104, 255, 258 Staﬀord 337 Stalin, J. 4, 281, 282, 283, 319 ‘stamped money’ plan 293–5 Starodubrovskaya, I.V. 276, 281, 285 statics 334, 335, 338 Steindl, F.G. 289, 293 Steindl, J. 248, 252 Steiner, P. 109, 127, 360 Stephanus 198 Stewart 241 Stigler, G.J. 365–7 Stock Market crash 290–93 Stockholm School 23

Index Stoics 195, 198 Stone, R. 306 Storch, H. von 265 Streeten, P. 243 Streissler, E.H. 5, 382–91 Strigl 254 Strong, B. 293 structural change and social transformation in physiocracy 159–71 export of French corn and impact on prices 158–61 France 150–52 free corn trade 161–6 free trade 166–8 history and income distribution 168–70 Tableau économique: expenditures and reproduction 156–8 wealth, new principle of 152–5 Strumilin, S. 281 Struve, P.B. 268–9, 270 Stryker, R.R. 24 subsistence 213, 215, 221 Sully, M. de 110, 121 supply and demand 335 Sweden 316, 356 Switzerland 386 Tableau économique 130–49, 156–8, 211–12, 213–15, 218, 220, 222 grande culture and petite culture 147–8 landlords’ expenditures, corn price and global rate of return 139–41 landlords’ expenditures, corn price and produit net 137–9 natural order and grande culture 142–3 price system and prices of production 135–7 productive activity and wealth, increase in 145–7 produit net and numeraire 144–5 as special classical system of prices 132–5 Tableau économique and France 109–28 development after Quesnay 124–7 discovery 111–22 later editions 122–4

405

Tarn, W.W. 197, 198 Tchernyshevsky, N. 279 technological progress 383–5 Teles of Megara 196 Temin, P. 289 Tenbruck, F. 370 Tenenbaum, E. 100 Terray 168 Thatcher, M. 9 Thére, C. 359 Thirlwall, A.P. 306, 317, 319, 320 Thirty Years War 226 Thomas, Sir M. 319 Thompson, E.P. 320 Thompson, N. 319 Thünen, J.H. von 247, 270 Time-lag theories 337, 339 Timoshina, T.M. 280 Tinbergen, J. 255, 257, 328, 337 Tintner 248 Tiratsoo, N. 320 Tobin, J. 13–14, 16 Tomlinson, J. 320 Tomsky 281 Tooke, T. 28, 80, 83 trade cycle theory 331, 332, 335–6, 337–8, 339, 342–3 Traité de la monarchie 211–12, 213–15 Treasury 72, 75, 79, 84, 296, 313 Treaty on the Establishment of the European Defence Community 39 Treaty on European Union see Maastricht Treaty Treaty of Rome 39 Triﬃn, R. 14 Trotsky 281 Tugan-Baranovskii, M.I. 269 Tugwell, R. 24 Turgot, A.-R.J. 179, 227, 241, 359, 360, 362 United Kingdom 2, 4, 39, 63, 366, 367, 383, 384, 386 and Austrian Zeitschrift 247–8, 249, 251, 255, 355, 358, 359 bimetallism, monetarism and quantity theory 15, 16, 17–18, 19, 21, 28 France and Tableau économique 109, 123

406

Index

freedom and governmental interference 241, 242 and French Enlightenment 206, 207 and German monetary reform 95, 98 Great Depression 292 and Italy 227–8, 230, 233 and monetary reform in France 70, 72, 73, 74, 76, 85, 86, 88–9 power and wealth and Tableau économique 130, 143 structural change and social transformation in physiocracy 150, 152, 153, 158–9, 160–61 see also socialist reconstruction of Britain United States 376, 377, 378, 386, 387, 388, 389, 390 American model 356 and Austrian Zeitschrift 248, 254 bimetallism, monetarism and quantity theory 13–16, 19, 20–21, 22, 24, 25, 26, 28 California 61 Congress 17, 58, 68 Continental model 355 economic journals 359 Economic and Monetary Union in Europe 44–5, 46, 48 freedom and governmental interference 243, 244 and German monetary reform 95, 97, 98, 99 Great Depression 289–91, 292, 293, 294 input–output table 361 loan agreement 319 monetary reform in France 72, 73, 74 political element in monetary theory 60, 62, 63 and Russia 276, 283, 285 unity 386–7 Uri, P. 14 Utzschneider, J. Von 231 Vaggi, G. 2, 124, 127, 130, 150–71 Van Duijn, J.J. 379 Van Ewijk, G. 379 Vargas, Y. 219 Vauban 151

Vaughn, K.I. 248 Veblen, T. 24 Vernadsky, I. 279 Verne, J. 382 Verri, P. 245 Versailles versions 111–12 Victor Emmanuel II 235 Viesseux 245 Vietnam 174–5, 176, 178 see also Ponthiamas Viner, J. 26, 255 Vo Vuong, Emperor 175 Voltaire, F.-M. 175, 359 Wald, A. 248, 252 Walicki, A. 268 Walker, F.A. 17, 19, 20, 22 Walras, L. 206, 247, 369 Warren, G.F. 296 Washington consensus 284 wealth, increase in 145–8 wealth, new principle of 152–5 Weber, A. 372 Weber, M. 370, 371, 372 Weulersse, G. 168, 362 Wharton School of Finance and Economy 243 Whately 241 Wicksell, K. 11, 23–4, 27, 28 Wiener 257 Wieser, F. von 80–81, 82, 83, 247, 249, 251 Willis, H.P. 25 Wilson, H. 318 Witte, Count S. 4, 279–80 Wittgenstein 257, 258 Wolfson, M.A. 289 Woolf, L. 307 Wootton, B. 318 Workers’ Educational Association 312 World Bank 357 World War I 1, 5, 22, 70, 370, 375, 376, 386 World War II 2, 5, 11, 15, 369, 371, 375, 376, 379, 386 Wright, A.W. 319 X Party Congress 281 Xenares 190

Index Yakoviev 283 Yang 179 Yavlinsky, G. 284 Yeltsin, B. 4, 263, 283 Young, A. 24 Yugoslavia 283 Yurovsky, L. 281

Zassenaus 257 Zen’Kovskii, V.V. 265, 266 Zeno of Borysthenes 195 Zhang, W. 46 Zinoviev 281 Zweynert, J. 3, 263–73

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