------------ 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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