------------ EH.NET BOOK REVIEW --------------  
Published by EH.NET (June 2006)  
  
Alessandro Roncaglia, _The Wealth of Ideas: A History of Economic   
Thought_. New York: Cambridge University Press, 2005. xiv + 582 pp.   
$110 (cloth), ISBN: 0-521-84337-5.  
  
Reviewed for EH.NET by Ingrid H. Rima, Department of Economics,   
Temple University.  
  
  
Allesandro Roncaglia's very readable history of economic thought   
book, entitled _The Wealth of Ideas_, begins by noting that even   
before the close of the prehistoric era of political economy, two   
distinctly different (and incompatible) views about the functioning   
of economies had become articulated. On the one hand, there was the   
perspective traceable to Greek ethics and philosophy that reemerged   
in the writings of twelfth- and thirteenth-century Church scholars   
whose teachings about moral behaviors included buyer and seller   
transactions intended to serve the common good. This prescriptive   
outcome was effectively "Church directed," and is interpreted by   
Roncaglia as equating exchange values with the "need satisfying"   
(i.e., utility yielding) capabilities of scarce commodities. With the   
gradual decline of feudalism beginning in the thirteenth century, and   
the subsequent rise of the nation-state, the focus of intellectual   
inquiry shifted, which Roncaglia interprets as a "transfer of the   
economic problem from the field of ethics to that of scientific   
thinking" (p. 40). Sixteenth- and seventeenth-century thinkers became   
preoccupied with the stock of metallic money (treasure) as an index   
of national wealth, holding that management of the gold stock is, or   
should be, the primary responsibility of the state. While historians   
of economics are well acquainted with the writings of Thomas Mun and   
other English and French mercantilists, Roncaglia also sketches out   
the contributions of some early Italian thinkers, in particular   
Antonio Serra, who is credited with a more sophisticated   
understanding than others of the interdependence between financial   
and real variables in enhancing the productive capabilities of the   
kingdom of Naples vis a vis other Italian cities. Thus economic   
thought shifted from the subjective concept of utility and scarcity   
to the objective perspective of physical costs and the economy's   
ability to generate a surplus.  
  
To put the conflict between these competing perspective into context,   
_The Wealth of Ideas_ traces the history of economic thought with   
chapter titles that are identified with the names of the leading   
contributors, beginning with William Petty (chapter 3), and   
concluding with a trilogy (chapters 14-16) devoted to J. M. Keynes,   
Joseph A. Schumpeter, and Piero Sraffa, whom he regards as the   
intellectual giants of the twentieth century, along with their   
leading associates. Inclusion of in-depth chapters on Schumpeter and   
Sraffa reflects the influence of a negative assessment of the   
methodology of neoclassical theory and anti-equilibrium analysis on   
Roncaglia's thinking.  
  
The history in Chapter 2 of the nexus between precious metals, trade   
and a nation's ability to generate a surplus is thus an important   
point of departure for Roncaglia's inquiry into the foundation of the   
surplus approach of modern day Sraffians. While the Physiocrats   
identified Nature and land-based activities as the source of the   
surplus, Adam Smith's _Wealth of Nations_ attributed the origin of   
surplus to "the annual labor" of every nation as the source of its   
wealth, which grows with increasing division of labor and the   
expansion of markets. Labor effort (enhanced in its effectiveness by   
its division) and Nature are the twin sources of a nation's surplus,   
and through it the source of accretions to its wealth, and its   
division among the three great social classes of society: workers,   
landlords, and capitalists, whose utilization of profit to support   
productive labor underlies the "virtuous spiral" that is the essence   
of _The Wealth of Nations_.  
  
Smith's distinction between a commodity's value-in-use versus its   
value-in-exchange is central to his rejection of the possibility of   
explaining the exchange value of a pair of commodities in terms of   
use value. His labor-value theory encompassed both the notion of   
embodied labor and the labor a commodity can command in exchange. The   
"embedded labor" explanation of exchange value is valid only in "the   
early and rude state of society," which precedes the acquisition of   
private property and capital accumulation from which Smith infers a   
theory of "natural price," which determines the distributive shares.   
However, Roncaglia maintains it is only with Ricardo that the theory   
of value "in its modern meaning of a theory of relative prices comes   
into centre stage" (p. 139). Nevertheless the Ricardian edifice   
underwent a progressive decay, which opened the way for Alfred   
Marshall's demand and supply synthesis, even though his predecessor   
J. S. Mill rejected the elements of "scarcity and utility upon which   
the subjective approach relied" (p. 243). The emergence and mounting   
influence of subjectivism is detailed in Chapters 10 (The Marginalist   
Revolution), 11 (The Austrian School and Its Neighborhood), and   
Chapter 12 (General Economic Equilibrium). Chapter 13 (Alfred   
Marshall) credits Marshall with distancing himself from "the extreme   
methodological individualism" of the first marginalist theoreticians.   
Marshall is also briefly credited for his appreciation of the   
evolutionary process of economic development, and his effort to   
construct supply curves for individual firms and industries that are   
characterized both by increasing return to scale and decreasing   
returns. The latter construct is weak, as elaborated in Chapter 16 on   
Piero Sraffa.  
  
Joseph Schumpeter is especially credited for his dynamic theory of   
entrepreneurial bank-financed innovation, which initiates expansions   
that shift resources from traditional uses to introduce new methods   
of production and new goods or to open new markets. Entrepreneurs   
initiate changes that others swarm in to imitate with other loans   
that contribute to inflationary price increases that ultimately   
provoke credit restrictions -- i.e., "forced savings" -- that   
generate endogenous contractions. The culmination is business   
failures, unemployment, and unused capacity. But it is during this   
phase of the trade cycle that the developmental innovations of the   
expansion phase are "digested." Thus, the destruction of the   
depression phase is economically "creative." Yet it is also   
politically destabilizing, and in Schumpeter's view capitalist   
breakdown is inevitable. This is the central message of Schumpeter's   
_Business Cycles_ and _Capitalism, Socialism, and Democracy_, which   
followed _The Theory of Economic Development_.  
  
Chapter 16, simply entitled Piero Sraffa, begins by articulating   
Sraffa's ambitious goal of "shunting the car of economic science" in   
a direction opposite to the marginalist approach introduced by   
Jevons, and refined by the Austrians, Walras, Marshall, and Pigou to   
ultimately emerge as the present day paradigm of the economics   
profession. Sraffa began his academic career at the University of   
Perugia in 1923, and by 1925 (one year after the death of Alfred   
Marshall and the publication in 1924 of the eighth edition of his   
_Principles_), he published a lengthy article in Italian criticizing   
Marshall's attempt to reconcile the phenomenon of increasing returns   
at the level of the firm with the existence of purely competitive   
markets. Joining a debate initiated by John H. Clapham (1922) in the   
_Economic Journal_, Sraffa criticized Marshall's attribution of   
long-run increasing returns to "external economies" equally available   
to all firms. Marshall's error, Sraffa argued, was that the external   
economies concept violates the assumptions that underlie his partial   
equilibrium analysis. Firms experiencing increasing returns will   
expand in order to increase returns still further, which is   
incompatible with the competitive assumption of large numbers of   
small firms. Recognizing the predisposition of decreasing long-run   
cost to monopoly, Marshall conceived of economies of production that   
are external to individual firms, while being internal to the   
industry. But, Sraffa argued, it is precisely the incompatibility of   
economies that are external to the firm while being internal to the   
industry, which render Marshall's theory of the firm's supply curve   
untenable. Economies external to the firm but internal to an industry   
are incompatible with Marshall's partial equilibrium approach.   
Sraffa's 1925 critique of Marshall's increasing returns analysis of   
the firm is thus tantamount to an anticipation of imperfect   
competition. Thus, Sraffa's 1925 paper (republished in 1926) "paved   
the way" for the modern non-neoclassical theory of non-competitive   
market firms, for which Joan Robinson (1933) and Edward Chamberlin   
(1933) are typically credited.  
  
Because of Italy's political instability and the congenial   
intellectual environment offered Sraffa at Cambridge following the   
publication in the _Economic Journal_ of his 1925 paper, he moved to   
the U.K. As the Secretary of the Royal Economics Society, J. M.   
Keynes was in a position to negotiate on Sraffa's behalf the   
assignment of editing the work of David Ricardo, which ultimately   
resulted between 1951 and 1955 (with the assistance of Maurice Dobb)   
in eleven volumes of _The Works and Correspondence of David Ricardo_   
(the last being an index). The Swedish Academy of Sciences awarded   
Sraffa a gold medal for his achievements in 1961, anticipating the   
Nobel Prize in economics, which has only been awarded since 1969. The   
highlight of Sraffa's interpretation of Ricardo's contribution to   
economic thought was that he reconceptualized the economic system as   
a circular flow of production enhanced by increasing division of   
labor, which generates a surplus that promotes consumption and   
growth. Sraffa maintained that this is an interpretation of the   
classical tradition that reflects a "striking contrast" (1960, p. 93)   
to contemporary neoclassical theory, which conceives of the economy   
as a one-way avenue leading from "factors of production" to   
"consumption goods," and whose values in exchange are established by   
the interaction of demand and supply forces. For Sraffa the term   
"value" does not mean value in exchange, because the price of one   
commodity cannot be conceived independently of any other. Commodity   
prices are established simultaneously with wages and profits, which   
is a theme that is further elaborated in his _Production of   
Commodities by Means of Commodities_ (1960). Sraffa's concern,   
therefore, is not to explain the determination of static equilibrium   
prices on the assumption of constant returns to scale. Rather, it is   
to study the conditions of reproduction in capitalistic economies on   
the assumption that industries tend to earn a uniform rate of profit,   
from which Sraffa inferred that the key to the movement of a relative   
price is a change in the wage cost.  
  
Roncaglia's chapter on Sraffa provides a logical segue to his final   
two chapters "The Age of Fragmentation" and "Where Are We Going?" The   
age of fragmentation is characterized by the presence of   
substantially autonomous groups of economists located internationally   
who ignore, or do not take into account, research areas other than   
their own. "Pluralism" is, in no sense, near at hand. The theory of   
value constitutes the "heart" of economic science (p. 514). Yet, for   
Roncaglia, the basic caveat is that the evolutionary approach of   
Sraffian/Schumpeterian/post-Keynesian/neo-Marxian/ Institutionalism   
is incompatible with the static view, which reflects the struggle   
between utility and scarcity that emerges from the demand and supply   
equilibriums. Thus, in no sense is Roncaglia able to see any evidence   
"of a clear and continuous ascent of economic science towards an ever   
fuller understanding of reality" (p. 505). Present day fragmentation   
of economic thinking therefore strengthens the case for studying the   
history of both the classical and marginalist approaches, between   
which there exists a "no man's land," which both Keynes and   
Schumpeter may have inhabited. Roncaglia himself, while clearly   
writing to reflect the legacy of Schumpeter and Sraffa, provides a   
very knowledgeable and readable account of the history of economic   
thought. His book is a contribution, not only to every historian of   
economic thought, but also to contemporary heterodox thinkers who now   
will have a valuable resource for understanding the historical   
origins of many (perhaps most) heterodox issues.  
  
  
The seventh edition of Ingrid H. Rima's _Development of Economic   
Analysis_ is in progress.  
  
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