Redeeming Economics (1)

I have just finished reading a book called Redeeming Economics (Rediscovering the Missing Element) by John D Mueller.

I found it very thought provoking. He claims that Adam Smith made some serious mistakes in his Economics, which set back the development of the discipline. I have always understood this. Smith pushed the labour theory of value, which is flawed. This theory sent economics down many false trails.

Modern universities teach that economics began with Adam Smith. I have always known this is wrong. In his two-volume History of Economic Thought, Murray Rothbard shows that there was nothing new in Adam Smith’s economic thought. Rothbard describes the development of economic thought by scholastic theologians and He claims that Smith was a plagiarist who stole ideas from other economists without acknowledging them.

Mueller goes further in his criticism. He claims,

The first revolution in economics had occurred five centuries before Smith, when Thomas Aquinas (1225-74) set forth the basic elements of economic theory. Synthesizing the work of Aristotle (384-322 BC) and Augustine of Hippos (AD 354-430), Aquinas offered a comprehensive view of human economic actions. All such actions fall into four categories: humans produce, exchange, distribute, and consume goods (human and nonhuman). Thus the theory Aquinas outlined―known as “Scholastic Economics” economics―had four key elements: the theory of production, which explains which goods (and how many of them) we produce; the theory of justice in exchange, which accounts for how we are compensated through the sale of goods for our contributing to their production; the theory of final distribution, which determines who will consume our goods; and final, the theory of consumption (or utility), which explains which goods people prefer to consume (p.1).

I knew from reading Rothbard that the scholastic theologians had developed a most of the components of economics. However, I was not aware of the achievements of Aquinas. Rothbard is negative towards him because of his treatment of interest. I knew that Augustine wrote on politics, but I did not realise that he had made such important contributions to economics.

Mueller explains,

Adam Smith sparked the second economic revolution when he drastic simplified the Scholastic economics he had been taught. He dropped not one, but two elements of the four that Aquinas had outlined. He eliminated the Scholastic theories of consumption and final distribution, launching “classical economics with production and exchange alone. At the same time, he claimed that Aristotle’s theory of production could be pared to a single factor: labour. Most complications in comics result from the fact that Smith's revision was an oversimplification (p.2).

A century later, the neoclassical economists, recognised one of the shortcomings of Smiths approach. They restored one of the elements that he had dropped: Augustine’ theory of utility, which describes consumption. But they did not restore the other.