Redeeming Economics (3)

In his book called Redeeming Economics, John D Mueller outlines the big developments in the history of economics.

Scholastic economics (c.1250-1776) began when Aquinas first integrated these four elements (production, exchange, distribution, and consumption) into an outline of personal, domestic, and political economy, both positive and normative, organizing Aristotle’s contributions according to Augustine’s framework.

The scholastic outline was taught at the highest university level for more than five centuries by Catholics and (after the Reformation) Protestants alike. Adam Smith himself was taught from Lutheran Samuel Pufendorf’s compendium On the Duty of Man and Citizen According to Natural Law, which as with Aquinas and the earlier scholastics, contains all four basic elements of economic theory, organized according to personal, domestic and political economy, and integrating normative with descriptive theory by the Two Great Commandments.

The fact that Pufendorf was a Lutheran who wrote a critical history of the Catholic Church and that his theories were taught at the generally Calvinist University of Glasgow, demonstrates that the scholastic outline of economic theory was broadly known and accepted by both Catholics and Protestants. Pufendorf was widely read in the American colonies and recommended for example by Alexander Hamilton, who had penned two-thirds of the Federalist papers and as first Treasury Secretary would reject Smith’s specific economic advice in the Wealth of Nations to the United States.

Classical economics (1776-1871) began when Adam Smith cut these four elements to two, trying to explain what he called “division of labor” (specialized production) by production and exchange alone. Smith was addressing the main drawback of scholastic economics, which lay not in the theory itself, but the routine assumption that the economy did not grow in the long run — which had been true on average for about two millennia. To explain growth, Smith and classical followers like David Ricardo undoubtedly advanced the two elements Smith retained. But it was on oversimplification.

Smith also dropped Augustine’s theory of utility (which is necessary to describe consumption) and replaced Augustine’s theory of personal distribution (gifts and their opposite, crimes) as well as Aristotle’s theory of domestic and political distributive justice with the mere (often false) assumption that “every individual…intends only his own gain,” as Smith put it in his famous “invisible hand” passage in the Wealth of Nations.

Neoclassical economics (1871-c.2000) began when three economists dissatisfied with the practical failure of Smith’s classical outline (William Stanley Jevons 1871 in England, Carl Menger 1871 in Austria, and Leon Walras 1874 in Switzerland) independently but almost simultaneously reinvented Augustine’s theory of utility, starting its reintegration with the theories of production and exchange. They abandoned Smith’s revised outline mostly for three related reasons: without the theory of utility classical economists were unable to answer some important questions (for example, why goods that can’t be reproduced with labor have value); made predictions about others that turned out to be spectacularly wrong (notably the “iron law of wages,” which predicted that rising population would prevent rising living standards); and directly fostered Karl Marx’s disastrously erroneous economic analysis. Though schools of neoclassical economics have since multiplied, all are derived from these three.

Thus Adam Smith’s chief significance is not what he added to, but rather subtracted from economics. As Joseph Schumpeter noted in his History of Economic Analysis, “The fact is that the Wealth of Nations does not contain a single analytic idea, principle or method that was entirely new in 1776.”

Neoscholastic economics (c.2000-). I argue that Neoscholastic economics is already and will continue to revolutionize economics in coming decades, by replacing its lost cornerstone, the theory of distribution.