Open Economics: Economics in relation to other disciplines (Routledge Studies in the History of Economics)

Open Economics

Economics has developed into one of the most specialised social sciences. Yet, at the same time, it shares its subject matter with other social sciences and humanities, and its method of analysis has developed in close correspondence with the natural and life sciences. This book offers an up-to-date assessment of economics in relation to other disciplines. An edited collection, it explores fields as diverse as mathematics, physics, biology, medicine, sociology, architecture, and literature, drawing from selected contributions to the 2005 annual conference of the European Society for the History of Economic Thought (ESHET). There is currently much discussion at the leading edge of modern economics about openness to other disciplines, such as psychology and sociology. But what we see here is that economics has drawn on (as well as contributed to) other disciplines throughout its history. In this sense, despite increasing specialisation within all disciplines, economics has always been an open discipline, and the chapters of this volume are a vivid illustration of the fact. Open Economics is a testament to the intellectual vibrance of historical research in economics. It presents the reader with a historical introduction to the disciplinary context of economics that is the first of its kind. The book will appeal to practising economists and students of the discipline alike, as well as to anybody interested in economics and its position in the scientific and social scientific landscape. Richard Arena is Professor of Economics at the University of Nice Sophia Antipolis, France. Sheila Dow is Professor of Economics at the University of Stirling, Scotland. Matthias Klaes is Professor of Commerce at Keele University, England.

Routledge Studies in the History of Economics

1 Economics as Literature Willie Henderson 2 Socialism and Marginalism in Economics, 1870–1930 Edited by Ian Steedman 3 Hayek’s Political Economy The socio-economics of order Steve Fleetwood 4 On the Origins of Classical Economics Distribution and value from William Petty to Adam Smith Tony Aspromourgos 5 The Economics of Joan Robinson Edited by Maria Cristina Marcuzzo, Luigi Pasinetti and Alesandro Roncaglia 6 The Evolutionist Economics of Léon Walras Albert Jolink 7 Keynes and the ‘Classics’ A study in language, epistemology and mistaken identities Michel Verdon

8 The History of Game Theory, Vol. I From the beginnings to 1945 Robert W. Dimand and Mary Ann Dimand 9 The Economics of W. S. Jevons Sandra Peart 10 Gandhi’s Economic Thought Ajit K. Dasgupta 11 Equilibrium and Economic Theory Edited by Giovanni Caravale 12 Austrian Economics in Debate Edited by Willem Keizer, Bert Tieben and Rudy van Zijp 13 Ancient Economic Thought Edited by B. B. Price 14 The Political Economy of Social Credit and Guild Socialism Frances Hutchinson and Brian Burkitt 15 Economic Careers Economics and economists in Britain, 1930–70 Keith Tribe

16 Understanding ‘Classical’ Economics Studies in the long-period theory Heinz Kurz and Neri Salvadori 17 History of Environmental Economic Thought E. Kula 18 Economic Thought in Communist and post-Communist Europe Edited by Hans-Jürgen Wagener 19 Studies in the History of French Political Economy From Bodin to Walras Edited by Gilbert Faccarello 20 The Economics of John Rae Edited by O. F. Hamouda, C. Lee and D. Mair 21 Keynes and the Neoclassical Synthesis Einsteinian versus Newtonian macroeconomics Teodoro Dario Togati 22 Historical Perspectives on Macroeconomics Sixty years after the General Theory Edited by Philippe Fontaine and Albert Jolink 23 The Founding of Institutional Economics The leisure class and sovereignty Edited by Warren J. Samuels

26 The Economics of James Steuart Edited by Ramón Tortajada 27 The Development of Economics in Europe since 1945 Edited by A. W. Bob Coats 28 The Canon in the History of Economics Critical essays Edited by Michalis Psalidopoulos 29 Money and Growth Selected papers of Allyn Abbott Young Edited by Perry G. Mehrling and Roger J. Sandilands 30 The Social Economics of Jean-Baptiste Say Markets and virtue Evelyn L. Forget 31 The Foundations of Laissez-faire The economics of Pierre de Boisguilbert Gilbert Faccarello 32 John Ruskin’s Political Economy Willie Henderson 33 Contributions to the History of Economic Thought Essays in honour of R. D. C. Black Edited by Antoin E. Murphy and Renee Prendergast

24 Evolution of Austrian Economics From Menger to Lachmann Sandye Gloria

34 Towards an Unknown Marx A commentary on the manuscripts of 1861–1863 Enrique Dussel

25 Marx’s Concept of Money The god of commodities Anitra Nelson

35 Economics and Interdisciplinary Exchange Edited by Guido Erreygers

36 Economics as the Art of Thought Essays in memory of G. L. S. Shackle Edited by Stephen F. Frowen and Peter Earl 37 The Decline of Ricardian Economics Politics and economics in post-Ricardian theory Susan Pashkoff 38 Piero Sraffa His life, thought and cultural heritage Alessandro Roncaglia 39 Equilibrium and Disequilibrium in Economic Theory The Marshall–Walras divide Michel de Vroey 40 The German Historical School The historical and ethical approach to economics Edited by Yuichi Shionoya 41 Reflections on the Classical Canon in Economics Essays in honour of Samuel Hollander Edited by Sandra Peart and Evelyn Forget 42 Piero Sraffa’s Political Economy A centenary estimate Edited by Terenzio Cozzi and Roberto Marchionatti 43 The Contribution of Joseph Schumpeter to Economics Economic development and institutional change Richard Arena and Cecile Dangel 44 On the Development of Long-run Neoclassical Theory Tom Kompas

45 F. A. Hayek as a Political Economist Economic analysis and values Edited by Jack Birner, Pierre Garrouste and Thierry Aimar 46 Pareto, Economics and Society The mechanical analogy Michael McLure 47 The Cambridge Controversies in Capital Theory A study in the logic of theory development Jack Birner 48 Economics Broadly Considered Essays in honour of Warren J. Samuels Edited by Steven G. Medema, Jeff Biddle and John B. Davis 49 Physicians and Political Economy Six studies of the work of doctor-economists Edited by Peter Groenewegen 50 The Spread of Political Economy and the Professionalisation of Economists Economic societies in Europe, America and Japan in the nineteenth century Massimo Augello and Marco Guidi 51 Historians of Economics and Economic Thought The construction of disciplinary memory Steven G. Medema and Warren J. Samuels 52 Competing Economic Theories Essays in memory of Giovanni Caravale Sergio Nisticò and Domenico Tosato

53 Economic Thought and Policy in Less Developed Europe The nineteenth century Edited by Michalis Psalidopoulos and Maria-Eugenia Almeida Mata 54 Family Fictions and Family Facts Harriet Martineau, Adolphe Quetelet and the population question in England, 1798–1859 Brian Cooper 55 Eighteeth Century Economics Peter Groenewegen 56 The Rise of Political Economy in the Scottish Enlightenment Edited by Tatsuya Sakamoto and Hideo Tanaka 57 Classics and Moderns in Economics, Vol. I Essays on nineteenth and twentieth-century economic thought Peter Groenewegen 58 Classics and Moderns in Economics, Vol. II Essays on nineteenth and twentieth-century economic thought Peter Groenewegen

62 The Historical School of Economics in England and Japan Tamotsu Nishizawa 63 Classical Economics and Modern Theory Studies in long-period analysis Heinz D. Kurz and Neri Salvadori 64 A Bibliography of Female Economic Thought to 1940 Kirsten K. Madden, Janet A. Sietz and Michele Pujol 65 Economics, Economists and Expectations From microfoundations to macroeconomics Warren Young, Robert Leeson and William Darity, Jr 66 The Political Economy of Public Finance in Britain, 1767–1873 Takuo Dome 67 Essays in the History of Economics Warren J. Samuels, Willie Henderson, Kirk D. Johnson and Marianne Johnson 68 History and Political Economy Essays in honour of P. D. Groenewegen Edited by Tony Aspromourgos and John Lodewijks

59 Marshall’s Evolutionary Economics Tiziano Raffaelli

69 The Tradition of Free Trade Lars Magnusson

60 Money, Time and Rationality in Max Weber Austrian connections Stephen D. Parsons

70 Evolution of the Market Process Austrian and Swedish economics Edited by Michel Bellet, Sandye Gloria-Palermo and Abdallah Zouache

61 Classical Macroeconomics Some modern variations and distortions James C. W. Ahiakpor

71 Consumption as an Investment The fear of goods, from Hesiod to Adam Smith Cosimo Perrotta

72 Jean-Baptiste Say and the Classical Canon in Economics The British connection in French classicism Samuel Hollander 73 Knut Wicksell on Poverty No place is too exalted Knut Wicksell 74 Economists in Cambridge A study through their correspondence, 1907–1946 Edited by M. C. Marcuzzo and A. Rosselli 75 The Experiment in the History of Economics Edited by Philippe Fontaine and Robert Leonard 76 At the Origins of Mathematical Economics The economics of A. N. Isnard (1748–1803) Richard van den Berg 77 Money and Exchange Folk tales and reality Sasan Fayazmanesh 78 Economic Development and Social Change Historical roots and modern perspectives George Stathakis and Gianni Vaggi 79 Ethical Codes and Income Distribution A study of John Bates Clark and Thorstein Veblen Guglielmo Forges Davanzati 80 Evaluating Adam Smith Creating The Wealth of Nations Willie Henderson

81 Civil Happiness Economics and human flourishing in historical perspective Luigino Bruni 82 New Voices on Adam Smith Edited by Leonidas Montes and Eric Schliesser 83 Making Chicago Price Theory Milton Friedman–George Stigler correspondence, 1945–1957 Edited by J. Daniel Hammond and Claire H. Hammond 84 William Stanley Jevons and the Cutting Edge of Economics Bert Mosselmans 85 A History of Econometrics in France From nature to models Philippe Le Gall 86 Money and Markets A doctrinal approach Edited by Alberto Giacomin and Maria Cristina Marcuzzo 87 Considerations on the Fundamental Principles of Pure Political Economy Vilfredo Pareto Edited by Roberto Marchionatti and Fiorenzo Mornati) 88 The Years of High Econometrics A short history of the generation that reinvented economics Francisco Louçã 89 David Hume’s Political Economy Edited by Carl Wennerlind and Margaret Schabas 90 Interpreting Classical Economics Studies in long-period analysis Heinz D. Kurz and Neri Salvadori

91 Keynes’s Vision Why the Great Depression did not return John Philip Jones

96 Capital, Time and Transitional Dynamics Edited by Harald Hagemann and Roberto Scazzieri

92 Monetary Theory in Retrospect The selected essays of Filippo Cesarano Filippo Cesarano

97 New Essays on Pareto’s Economic Theory Edited by Luigino Bruni and Aldo Montesano

93 Keynes’s Theoretical Development From the Tract to the General Theory Toshiaki Hirai

98 Frank Knight and the Chicago School in American Economics Ross B. Emmett

94 Leading Contemporary Economists Economics at the cutting edge Edited by Steven Pressman 95 The Science of Wealth Adam Smith and the framing of political economy Tony Aspromourgos

99 A History of Economic Theory Essays in honour of Takashi Negishi Edited by Aiko Ikeo and Heinz D. Kurz 100 Open Economics Economics in relation to other disciplines Edited by Richard Arena, Sheila Dow and Matthias Klaes

Open Economics Economics in relation to other disciplines

Edited by Richard Arena, Sheila Dow and Matthias Klaes

First published 2009 by Routledge 2 Park Square, Milton Park, Abingdon, Oxon OX14 4RN Simultaneously published in the USA and Canada by Routledge 270 Madison Avenue, New York, NY 10016 Routledge is an imprint of the Taylor & Francis Group, an Informa business This edition published in the Taylor & Francis e-Library, 2009. To purchase your own copy of this or any of Taylor & Francis or Routledge’s collection of thousands of eBooks please go to www.eBookstore.tandf.co.uk.

© 2009 selection and editorial matter Richard Arena, Sheila Dow and Matthias Klaes, individual chapters the contributors All rights reserved. No part of this book may be reprinted or reproduced or utilised in any form or by any electronic, mechanical, or other means, now known or hereafter invented, including photocopying and recording, or in any information storage and retrieval system, without permission in writing from the publishers. British Library Cataloguing in Publication Data A catalogue record for this book is available from the British Library Library of Congress Cataloging in Publication Data Open economics : economics in relation to other disciplines / edited by Richard Arena, Sheila Dow and Matthias Klaes. p. cm. Includes bibliographical references and index. 1. Economics. 2. Social sciences. 3. Humanities. I. Arena, R. (Richard) II. Dow, Sheila C. III. Klaes, Matthias. HB71.O64 2009 330–dc22 2008045288 ISBN 0-203-87879-5 Master e-book ISBN

ISBN 978-0-415-46012-5 (hbk) ISBN 978-0-203-87879-8 (ebk)

Contents

List of illustrations List of contributors Economics in relation to other disciplines: an introduction

xiii xiv 1

RICHARD ARENA, SHEILA DOW AND MATTHIAS KLAES

PART I

Economics in relation to the humanities and social sciences

11

1

13

The social science of economics BRIAN J. LOASBY

2

Economics and literature

30

BRUNA INGRAO

3

Happiness: what Kahneman could have learnt from Pietro Verri

48

PIER LUIGI PORTA

PART II

Economics in relation to the life and natural sciences 4

Newtonian physics, experimental moral philosophy and the shaping of political economy

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SERGIO VOLODIA CREMASCHI

5

Evolutionary biology and economic behaviour: revisiting Veblen’s instinct of workmanship

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MARK HARRISON

6

Medicine and economics in pre-classical economics ALAIN CLÉMENT AND LUDOVIC DESMEDT

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Contents

PART III

Economics and mathematics

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Mathematics as the role model for neoclassical economics NICOLA GIOCOLI

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The role of econometric method in economic analysis: a reassessment of the Keynes–Tinbergen debate, 1938–1943

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GIOVANNA GARRONE AND ROBERTO MARCHIONATTI

PART IV

Economics and architecture

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Economics and architecture MAURICE LAGUEUX

10 Economic policies and urban development in Latin America

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MICHELE ALACEVICH AND ANDREA COSTA

PART V

Economics and geography

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11 ’Space’ in economic thought

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GIOVANNA VERTOVA

12 Economics, geography and colonialism in the writings of William Petty

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HUGH GOODACRE

PART VI

Economics and sociology

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13 Economics and sociology: Gustav Schmoller and Werner Sombart on social differentiation

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JOACHIM ZWEYNERT

14 Is Homo oeconomicus a ‘bad guy’?

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ISABELLE THIS SAINT-JEAN

References Index

281 321

Illustrations

10.1 Paul L. Wiener and José L. Sert standing in front of the map of the first project for Cidade dos Motores, Brazil, 1944–47. 10.2 Preliminary sketch of the first project of Cidade dos Motores, Brazil, 1944–47. The east–west line of high buildings that shapes the new town is clearly visible. 10.3 Preliminary sketch of the Chimbote plan, Peru, 1946–50. The project was built on a pattern of existing settlements, streets and water lines that were to be merged in a new urban frame. 10.4 Chimbote plan, aerial view of a neighbourhood unit. Sert and Wiener’s proposals make extensive use of patio houses, the most common type of house in the area. 10.5 Bogotá plan, Colombia, 1949–53, overall map. Sert and Wiener defined an urban boundary separated from rural areas. The main feature of the plan is the realisation of a hierarchical road network. 10.6 Bogotá plan, map of the central area. A new pedestrian way links the administrative centre of Plaza Bolivar to a large park and leisure area: the existing blocks are transformed into a commercial axis. 10.7 Bogotá plan, layout of a neighbourhood unit. Sert and Wiener combined compact courtyard houses and high buildings to obtain a mixed architectural landscape. 10.8 Bogotá plan, pre-cast houses under construction. 10.9 Bogotá plan, tram station under construction. This design had been usually adopted for roof-vault houses.

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201 202 203

Contributors

Michele Alacevich is a research fellow at the University of Palermo, Italy. He has published several articles on development issues and the history of central banking, and he is the author of The Political Economy of the World Bank: The Early Years (2009). His current research interests include the role of economists as international advisers and Italy’s post-war economic development in international perspective. Richard Arena is Professor of Economics at the University of Nice Sophia Antipolis, France. He is one of the founders of the European Society for Economic Thought, and a former president of the society. He has published widely in the history of economic thought, and entertains special research interests in Marshall, Hayek, Keynes, Sraffa and Schumpeter. Alain Clément is an Associate Professor in Economics at the University François Rabelais in Tours, France, and member of Triangle (ex Walras Centre). He is the author of Nourrir le peuple : entre Etat et marché, XVIe–XIXe siècle (1999). His economic research interests centre on poverty and nutrition. He has published several articles about the use of biological models in economic thought and is working on colonial systems. Andrea Costa is an architect and holds a PhD in Urban Design from IUAV, Venice. He has been teaching Urban Design in the Faculty of Territorial Planning of the Politecnico di Milano, and in the Faculty of Architecture of the Università di Parma, Italy. He has published in several architectural journals, including Parametro and d’Architettura. He was co-editor of the exhibition ‘The Rational City’ (Modena, 2003) and of the book La città razionalista: modelli e frammenti. Urbanistica e architettura a Modena 1931– 1965 (2004). Sergio Volodia Cremaschi is Associate Professor of Moral Philosophy at the Amedeo Avogadro University, Vercelli, Italy. He has published extensively on Adam Smith, Malthus and Ricardo as well as on the topics of ethics, political philosophy and epistemology. His latest book is Normativity within the Bounds of Plural Reasons: The Applied Ethics Revolution (2007).

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Ludovic Desmedt is an Associate Professor of Economics at the University of Burgundy, France, and member of the Laboratoire d’économie et de gestion (UMR 5118, CNRS). His research interests are focused on the history of economic thought and on banking practices. He has published several articles on seventeenth-century and eighteenth-century monetary analysis, and is working on British monetary arrangements during the colonial era. Sheila Dow is Professor of Economics at the University of Stirling, Scotland. She is the author of Economic Methodology: An Inquiry (2002) and other publications in methodology, history of thought, post-Keynesian economics, monetary theory and regional finance. She is Director of SCEME, an associate editor of the Journal of Economic Methodology and special adviser on monetary policy to the House of Commons Treasury Select Committee. Giovanna Garrone is a Research Fellow at the Department of Economics, University of Turin, Italy. She has a PhD in European Economic Studies from the University of Turin and an MSc in Environmental and Natural Resources Economics from University College London. Her research interests include environmental economics, the history of economic thought and econometrics. Nicola Giocoli is Associate Professor of Economics at the University of Pisa, Italy. He is a Marco Fanno scholar (1992), winner of the Joseph Dorfman award of the History of Economics Society (2002) and of the Adolphe Blanqui prize of the European Society for the History of Economic Thought (2004). Among his recent publications is Modeling Rational Agents (2003). His research interests include the history of game theory and decision theory, the history of competition economics and the economic analysis of sport. Hugh Goodacre lectures on the world economy and finance at University College London, England, and is concurrently Senior Lecturer in Economics at the University of Westminster and Affiliate Lecturer at Birkbeck College, University of London. From 1972 to 1996 he was curator of books and manuscripts in the Asia, Africa and Pacific department of the British Library. His research interests focus on the economic thought of the colonial era and on the continuing influence of colonialist ideas in the economics discipline today. Mark Harrison is an Associate Professor at Daniel Webster College, Nashua, NH. He teaches courses in business, management, economics, social science, physical science and mathematics. In his first career he spent twelve years as an engineer and consultant in offshore oil drilling and production operations, based in Manila, Philippines. Bruna Ingrao is Professor of the History of Economic Thought at the University of Rome La Sapienza, Italy. With Giorgio Israel she wrote The Invisible Hand: Economic Equilibrium in the History of Science (1990). Together with Fabio Ranchetti she published Il mercato nel pensiero economico, a

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history of economic thought focusing on leading economists of the eighteenth and nineteenth centuries. Her research interests include economics and literature, Hayek and Cambridge, and development economics. Matthias Klaes is Professor of Commerce at Keele University, England. He was the first Director of the Stirling Centre for Economic Methodology, and served as managing editor of the Journal of Economic Methodology for five years. Having published widely on the history of transaction costs, historiography and the social framing of individual choice, his research interests focus on economic narrative, the semantic ambiguity of scientific terms, and conceptual history. Maurice Lagueux is Associate Professor in the Department of Philosophy at the Université de Montréal, Canada, where he has also taught the history of economic thought in the Department of Economics. His research interests are economic methodology, philosophy of architecture and philosophy of history. On economics he has published papers in the Journal of Economic Methodology, in Economics and Philosophy and various collective volumes. On architecture he has published in the British Journal of Aesthetics and in the Philosophical Forum. Brian J. Loasby is Honorary and Emeritus Professor of Economics at the University of Stirling, Scotland. His interests centre on the relationship between knowledge and organisation, conceiving both as selective connections, and extend to human cognition, firms and inter-firm relationships, decision processes, the history of economics and economic methodology. He has written five books, co-edited another, and published over a hundred journal articles and chapters in multi-author books. Roberto Marchionatti is Professor of Economics at the University of Turin, Italy. He has been a Visiting Scholar at New York University and at the University of Cambridge. He has published extensively in the field of history of economic thought. He is the editor of Karl Marx Critical Responses (1998), Piero Sraffa’s Political Economy: A Centenary Estimate (2002), Early Mathematical Economics, 1871–1915 (2004) and Vilfredo Pareto’s Considerations of the Fundamental Principles of Pure Political Economy (2007). Pier Luigi Porta is Professor of Economics and Director of the Department of Political Economy at the University of Milan, Bicocca, Italy, and a Visiting Fellow of Wolfson College, Cambridge. He is the editor, jointly with Luigino Bruni, of Economics and Happiness: Framing the Analysis (2005) and he is working on economics and happiness. Other research interests include the British classical school and Italian economic thought. Isabelle This Saint-Jean is Professor of Economics at the University of Paris Nord XIII, France, a member of the laboratory CEPN (CNRS–University of Paris Nord XIII) and associated with PHARE (University of Paris I). She is working on economic epistemology and methodology, especially on

Contributors

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self-fulfilling and rational expectations, empirical validation in economics, rationality, personal relations and the frontiers of economics (in particular the border with sociology). Giovanna Vertova is Assistant Professor at the Department of Economics Hyman P. Minsky, University of Bergamo, Italy, where she has been teaching economic geography, regional economics, economics of innovation, and the economics of globalisation. Her research interests include the economics of globalisation, space in the international division of labour, and national systems of innovation. She is the editor of The Changing Economic Geography of Globalization (2006). Joachim Zweynert is an expert on the history of Russian economic thought and international economics. He is head of the Thuringia branch of the Hamburg Institute of International Economics as well as managing director of the Wilhelm Röpke Institute. He has published widely on questions of economic development, the economics of transition, and institutional change.

Economics in relation to other disciplines An Introduction Richard Arena, Sheila Dow and Matthias Klaes

Economics has developed into one of the most specialised social sciences. Yet it shares much of its subject matter with other social sciences and the humanities. At the same time, its methods of inquiry have been compared to those found in the natural and life sciences. In many ways thus, economics is open. Its canvas opens up beyond disciplinary boundaries, traditionally conceived. The present volume offers an up-to-date assessment of this openness of economics in relation to other academic disciplines. Our vantage point is historical, since it is only from a historical perspective that many of the salient points of contact between the disciplines become apparent. A narrow contemporary perspective might suggest that parts of the economic literature are hermetically inward-looking, driven entirely by what Kuhn (1970: 36) has so pertinently described as the challenge of the myriad of puzzles found in the mundane pursuit of normal science that allows the armies of expert puzzle solvers to prove their mettle again and again. However, historiography opens up the disciplinary black box by accounting for the trajectories through which economics, like any other field of inquiry, legitimised itself in its separateness from these ‘other’ fields. As just one aspect of this apparent and much commented-upon divide, let us consider how economics, as a social scientific discipline, is often praised as the ‘queen’ of the social sciences. When one finds this accolade applied to other fields, such as political philosophy, or sociology, it is largely based on the claim that these fields deserve special status due to being foundational or primary in a sense that comparable fields of inquiry are not (Strauss 1964: 1, cf. Jaffa 1994: 202; Straus 2001: 14). In the case of economics by contrast, eminence is more often than not claimed on grounds of formal rigour and scientific method (cf. Mäki 2002; Ioannides and Nielsen 2007). Any cursory glance through the leading scholarly journals in economics will confirm that economic research today is typically of a technical and highly specialised nature. For a discipline that traces its roots to moral and social philosophy, this is a remarkable metamorphosis. It resonates with the impression, confirmed by historical analysis, of a disciplinary trajectory characterised not only by an increasing autonomy in respect to neighbouring disciplines and alternative approaches (Cambridge 27, 2001; Yonay 1998, Hausman 1992;

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Augello and Guidi 2001), but also by an increasing autonomy from (its) history (Hodgson 2001; Blaug 2001; Weintraub 2002b). The first kind of autonomy has made possible the phenomenon of ‘economic imperialism’, the process by which those, in the words of a recent Nobel Laureate, ‘contiguous’ disciplines (Coase 1977) become reconceptualised quite literally in economic terms. Whether or not such moves in the direction of explanatory unification are to be welcomed or not on methodological grounds, their impact on contemporary social science has been significant (e.g. Fine 2001; Chuah 2006; Campbell and Klaes 2008). The second kind of autonomy, much discussed by historians of economics, is reflected in the shape of the modern economics curriculum, which has all but shed substantive reference to, let alone training in, the discipline’s past (cf. Winch 1962; Backhouse 2002; Gayer 2002). Advanced training in economics today has much to do with demonstrating skill in the latest techniques of analysis, and very little with grasping conceptual trajectories and disciplinary roots (Klamer and Colander 1990; Colander 2007). Some might argue that this is as it should be. And yet, as the essays in this volume demonstrate, shutting one’s eyes completely to the disciplinary and historical context of economics means missing not only much of its intellectual legacy, but also much of the present-day subtlety of both the relation of economics to its past, and of its position as a social science among other social sciences and the humanities, and alongside the natural and life sciences. The present volume addresses these issues in a two-step approach. In its first half, two broadly synthetic parts offer three distinct and historically informed appraisals each, one set looking at the position of economics vis-àvis the social sciences and humanities, the other doing the same for the natural and life sciences. In its second half, the volume combines four shorter parts into an eclectic survey of historiographic encounters between economics and selected fields of inquiry that range from mathematics to architecture and urban development. Turning to the first group of chapters, by Brian Loasby, Bruna Ingrao, and Pier Luigi Porta, we find strong evidence for substantive links between the study of the mind, in its psychological, social, and literary aspects, and the study of economic phenomena. Brian Loasby argues that economics should more strongly reflect a basic understanding of the cognitive limits and the cognitive potential of the human mind, in a context of pervasive uncertainty and therefore of pervasive scope for imagination. As a result for him, much of modern economics is seriously undersocialised because it fails to take account of imaginative powers of the human mind. Setting the tone for the chapters that follow, Loasby uses the historiographic idiom to great effect, drawing a masterly synthesis between Adam Smith’s system of social science, and the complementary theories of the human mind developed independently by Smith, Marshall and Hayek. Bruna Ingrao takes the theme of imagination to a terrain relatively unfamiliar both to economists engaged in reflective engagement with their discipline, and

Economics and other disciplines

3

historians of economics more generally. Offering a survey of approaches from the perspective of biography, sociology and history of ideas, her chapter engages with underlying ideological debates, the personal relationships among economists and writers, and the diffusion of ideas about economics or the role of economic activities through literary works. At the heart of her analysis, she uncovers a fundamental tension implicit in the alternative considerations of human action that we can find in literary and economistic ways of looking at the world as they evolved in contemporary culture. A variation of this tension forms the central concern of Pier Luigi Porta’s chapter. On the surface, it offers a reconstruction of Pietro Verri’s eighteenthcentury political economy, mainly on the basis of his Meditazioni sulla economia politica of 1771. But Porta extends this into a demonstration of a fundamental unity running through Verri’s work, which points us to the insight that cognitivism has been at the heart of economic inquiry since its classical beginnings, although economists appear to have lost trace of it through the decades. Porta convincingly argues that since, historically, the relationship between economics and psychology has been rather twisted, the historicoanalytic perspective becomes essential for capturing the drift and novelty of the current frontier of research in behavioural economics. This research embodies a retrieval of the tradition of classical utilitarianism, from Jeremy Bentham down to John Stuart Mill and eventually to the Milanese school of the eighteenth century. This applies in particular to the study of the economics of happiness, which is gaining momentum from different sources today, notably from cognitive economics. Part II of the present volume takes the reader from the lofty world of economic imagination, in its social psychological and literary dimensions, to the dire straits of moral Newtonianism, evolutionary biology, and the anatomy of the human body. Sergio Cremaschi reconstructs the co-existence of a range of positive theories, methodological recipes and encompassing worldviews in the Scottish Enlightenment. When what was at issue related to the interaction between natural science and theology, ‘experimental’ approaches to social phenomena suggested themselves in ways not considered before, drawing from key organising metaphors such as equilibrium, circulation, and value. Ultimately, Cremaschi’s point is a historiographic one, in that Canguilhem’s lesson – namely that scientific change is produced not only by similarity but also by opposition – may be applied also to the history of economic thought. Mark Harrison reviews Veblen’s evolutionary explanation of the origin of human instincts in the light of modern biological theory. Veblen’s evolutionary models were crude by modern standards, but recent theory in evolutionary biology provides models that quite readily explain how instincts for workmanship and sportsmanship could have evolved. The instinct of workmanship, according to Veblen, motivates the organism to act in such a way as to effectively and efficiently fulfill the desires determined by other instincts, and thereby to improve reproductive fitness. This idea of intentional behaviour is implicit in modern evolutionary models. While Veblen’s explanations of the evolutionary

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origin of altruistic workmanship and of sportsmanship seem incomplete today, his conclusions about the nature of human instincts remain plausible. The excursion into the natural, biological and life sciences is completed by Alain Clément and Ludovic Desmedt’s investigation of the co-evolution of medical and economic thought in pre-classical economics. The study of wealth and that of biology, anatomy and medicine seem worlds apart. But as the authors do not tire of explaining, many of those busy developing political economy were also physicians or professors of anatomy engaged in the investigation of physiological principles. The newly developing economic science was searching for a principle around which to order itself and took the natural sciences as its model. In most works of the period, man as a physical entity served as a model for understanding the functions of the economy. The implication was that an understanding of the workings of the human body would explain the workings of the political body. But the question naturally arises as to whether such a comparison could produce any genuine economic knowledge. Clément and Desmedt argue that, not only did the body politic/human body analogy lead to an improved understanding of economic phenomena, it triggered the conceptualisation of several mechanisms, including the circulation of money, the division of labour, and the hierarchy of economic activity. Even more strongly resonating at the time we write this are the distant echoes that the authors trace from the analysis of illnesses to the dysfunctions of the economic system. This takes us to the second half of the present volume, where the reader will find four shorter parts that together form an eclectic survey of historiographic encounters between economics and selected fields of inquiry, ranging from mathematics to architecture and urban development. Nicola Giocoli takes the lead with a chapter based on his 2005 Blanqui Lecture ‘In the Sign of the Axiomatic Method’.1 He looks into the economists’ understanding of analytical rigour, finding that their ambitions, initially guided during the nineteenth century by the scientist accolades of Newtonian mechanics, led them eventually to embrace a purely mathematical notion of axiomatic rigour. He questions the standard explanation of this shift, in terms of the discipline’s increasing awareness of its lack of good experimental and observational data, and thus of its intrinsic inability to fully abide by the guiding methodological principles of classical physics. Giocoli argues convincingly that this story fails to do justice to the transformation that the notion of rigour underwent itself during this period. He traces this transformation from the so-called formalist revolution in mathematics to post-war economists’ urge to push core organising concepts of their discipline to the impressive level of generality achieved in the pure theory of general competitive equilibrium and the various twentiethcentury incarnations of game theory. The chapter closes with a fascinating account of how this new economic rigour fared in court proceedings. Giovanna Garrone and Roberto Marchionatti pursue the notion of mathematical rigour further into the field of applied statistics as it established itself within economics under the label of ‘econometrics’. A key moment of this

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episode can be traced to Keynes’s 1939 critique of Tinbergen’s first League of Nations study. With Haavelmo and the establishment of the Cowles Commission approach, the prevailing view was that Keynes was an a priori antieconometrician. However, since the end of the 1970s, new contributions have recognised that Keynes’s criticism of Tinbergen was sound on many points. The chapter reconsiders the nature of Keynes’s arguments, finding no evidence for regarding Keynes as a critic and an opponent of econometric work per se. What he opposed were the attempts at statistical inference without any prior effort of ascertaining the suitability of the economic material for making such inferences. Methodologically, therefore, the debate turned on conflicting understandings of formal rigour, albeit implicitly so. The next couple of chapters take us from economic modernism to modernism more conventionally understood and as found most prominently in the field of architecture. Maurice Lagueux argues the case for regarding architecture as the fine art that shares the most with economics. He notes that, in contrast to other arts, architecture is practised by professionals whose business is to meet, at reasonable cost, important needs of customers who must be convinced with the help of usual marketing techniques. In this sense, their enterprise can be analysed, as any other, with the standard tools of economics. What is more remarkable is that, in their practice, architects have developed some theoretical principles that are very similar to the basic principles of economics. He points us to common features such as the role of rationality, the strategies to solve problems of maximisation under cost constraints, the challenge of obtaining more with less, the conflict between modernism and postmodernist trends and, more generally, the tension between the will to transform society and the limitations associated with technology, traditions and ecological considerations. Importantly, his chapter underscores the existence of a noticeable parallel between the respective historical developments of these two disciplines, such as between the early twentieth-century neoclassical school in economics and the modernist style in architecture. The following chapter follows this homomorphism into the applied field of urban planning. In it, Michele Alacevich and Andrea Costa examine the strong interrelations between urban planning and economic planning that developed in the early 1950s in Latin America, where arguably the multifaceted programming effort of the post-Second World War era gained its greater momentum. The plan was considered the main tool, common to economic as well as to urban policies, while equilibrium was the principal concept which framed the elaboration and the implementation of any development plan. Alacevich and Costa pay particular attention to the case of Colombia, visited by some of the most illustrious modernist architects such as Le Corbusier and José Luis Sert, who were attracted by the chance to realise urban plans at a scope that had simply not been possible in Europe. The result was a particularly close symbiosis between economic and urban planning. Proceeding from these outlooks on the interpenetration of architecture and economics, the next two chapters invite us to consider the spatiality of economic

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phenomena in more general terms. Giovanna Vertova examines how space, agglomeration and external economies have been theorised. She identifies three kinds of spatiality in economic thought. The German school of location theory, the ‘new economic geography’ and the ‘new industrial space’ can be traced back to the Walrasian tradition in economics. The Marshallian tradition embraces the literature on industrial districts, systems of innovation, and learning regions. The Marxian tradition finally can be found in the work of economic geographers, such as David Harvey, Richard Walker and Doreen Massey. Vertova’s point is that, while all three conceptualisations of economic space could be used to shed light on the phenomenon of so-called globalisation, each tradition leads to different policy implications. Hugh Goodacre traces economic spatiality further back, to the work of William Petty. He urges us to acknowledge that much of the analytical apparatus in use by economists today was first forged and set to work in the service of the bureaucratic-military officialdom and predatory colonialism of seventeenthcentury England, and not, as often assumed, in the European Enlightenment. Petty’s logic of space drew directly on his experience as surveyor of Ireland during the Cromwellian occupation of that country, and ultimately drove him to advocate the transfer of much of the population of Ireland into England. In the course of elaborating this scheme, he drew together strands of economic and geographical thought that have remained intertwined till today, from Thünen’s seminal theory of agricultural rent to the ‘new’ economic geography of Paul Krugman. In the final couple of chapters we revert to the focus of Part I on economics in its relation to the humanities and other social sciences. Whereas, there, the emphasis was on synthetic coverage, here two very specific issues are explored. Joachim Zweynert tackles the thorny question of economic historicity. Arguably Polanyi’s ‘great transformation’ caused severe tensions between premodern habits of life and thought and emerging modernity. These tensions are clearly expressed in the writings of the German historical school, epitomised by the work of Gustav Schmoller and Werner Sombart. One of their key themes is the transition from Gemeinschaft (community) to Gesellschaft (society) and more precisely the issue of how solidarity between people can be maintained in the Capitalist Age, which tends to objectify social relations. Schmoller generally advocated what modern sociologists call functional differentiation of society, but held that this process needed a counterweight in the maintenance of a minimum of paternalistic social relations. Sombart, by contrast, was opposed to the very idea of functional differentiation between economy and society. While Schmoller persisted in attempting to reconcile the two competing currents of sociological thought, Sombart broke with the tradition that had been founded by Adam Smith and which therefore lay also at the very heart of the classical–neoclassical tradition of economic thought. To him, capitalism had only one social consequence, namely to destroy the old bonds between individuals, which could only be restored by a return to some community-type social ties. Therefore the question of how capitalism could be

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overcome stood in the centre of his thought from the beginning. The connection between his basic sociological position and his anti-capitalism is obvious: If the capitalist economic system, i.e. the spontaneous actions of exchange, does not create order but even endangers the cohesion of society, then the institutional separation between the state and the economy has to be eliminated and the economic system has to be reintegrated into the political body. And yet this is precisely the position which Peter F. Drucker saw as a part of the intellectual soil in which totalitarian ideology could take root. This leads us to the final chapter of the present collection, which illustrates particularly well how a historiographic approach that turns on the openness of economic inquiry towards other fields of thought can produce illuminating economic insights that feed directly into present-day economic thought and theorising. Where the previous chapter reminded us of the spectre of human evil and how its roots may grow from the prima facie innocuous and well intentioned intellectual pursuit of the economic good, Isabelle This Saint-Jean raises the pertinent question of why it is that economists have been reluctant to address evil intention and effect in the working of the economy, not just in a morally descriptive sense, but rather in a deeply probing foundational sense. She identifies a fundamental bias in economic thought towards regarding interpersonal relations as ‘good’ for individuals. Economists typically understand interaction between otherwise isolated individuals as giving rise to opportunities for material gain for the both parties in the relation. Furthermore, individuals are usually conceptualised as benevolent, maybe altruistic. At the opposite end of this spectrum, they are at worst assumed indifferent and egoist. Yet in economic models we rarely meet agents with negative feelings towards each other. This Saint-Jean’s chapter explores the implications of the proposition of Homo oeconomicus as a ‘bad guy’, by drawing attention to the vertical dimension of social relationships, which has to do with hierarchy and power, and by revisiting the philosophical literature on man in his relation with others. This final chapter asks us to probe more deeply why it seems so difficult in economics to accept individuals not merely as seeking their selfinterest ‘with guile’, but as potentially ethically flawed characters. Perhaps, suggests This Saint-Jean, the reasons might be sought in the fact that economists, in assuming individuals who are envious, full of hatred and ill will or motivated by anger, fear taking the risk of opening the door to the formidable question of the foundation of social order that they have, if not resolved, then at least moved aside with the assumption of Homo oeconomicus and with the studied indifference this agent displays towards others. These chapters provide exemplars for exploring the history of economic thought in relation to the history of a wide range of other disciplines. There is much discussion at the leading edges of modern economics about openness to other disciplines, such as psychology and sociology. But what we see here is that economics has drawn on (as well as contributed to) other disciplines throughout its history. In this sense, in spite of the increasing specialisation within all disciplines, economics has always been an open discipline.

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Mathematics is the other discipline which has perhaps had the most powerful impact on economics. For Debreu (1991) it was important explicitly to abstract from subject matter, so that economics was defined by its formalist method, which could in principle be applied to other disciplines. And indeed the greatest influence on economics from other disciplines too has arguably been methodological, but generally pointing in different directions from closed mathematical systems. Openness itself, given privileged emphasis in the title to this volume, is a concept which has received increasing attention within the methodological literature. In particular there has been much discussion recently about the openness of economic knowledge (see e.g. Chick and Dow 2005). In particular the implications have been drawn, for economics as a system of knowledge, of the economy itself being understood as holistically open in a sense that stands in the way of closing off certain selected aspects of it for isolated analysis in any absolute way. Critical realists in particular, taking an ontological stance, have argued that an exclusively mathematical formalist method, like Debreu’s, which they interpret in terms of a closed system, can only refer to a subject matter which is itself a closed system, and hence only in a very limited sense to an economy characterised by holistic openness (cf. Lawson 1997). This focus on the subject matter of economics is pertinent to any consideration of economics in relation to other disciplines. At issue is how far economic relations and processes can be analysed independently from the subject matter of other disciplines, particularly in the human and social sciences. If the economy is itself holistically open, any division of the subject matter into disciplines is bound to be somewhat arbitrary, and also provisional. One of the strong implications of this way of approaching economics and its subject matter has been the appeal of a pluralist methodology. This implies that a range of methods can be brought to bear on different questions, where that range depends on the questions at issue and which other disciplines (and their methods) are most relevant. In practice, this pluralism must be structured if it is to be coherent (Dow 2004). The purpose of models, theories, and indeed disciplines, is to segment the subject matter so that we do not need to consider everything at once, or in only one way, but rather focus on particular aspects of the subject at hand. But these segmentations, to be useful in a holistic sense, need to be provisional rather than fixed. Thus, not only are models provisional closures as aids to thought, but so disciplinary boundaries are themselves provisional closures which we may want to change for the purposes of addressing particular aspects of economic reality. Theorising in practice must proceed without continual reference to the history of economic thought and its relations to other disciplines. Yet it is important that there be awareness on the one hand of the provisionality of the segmentations we employ for these practical purposes, and on the other hand of what has been kept ‘at the back of the mind’. History itself is a discipline which has tremendous potential itself to contribute to modern economics. The knowledge provided by these chapters, and the issues raised, all therefore

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have the potential to improve our understanding, not only of the historical evolution of economic thought in relation to other disciplines, but also of modern economics. When faced with the task of selecting the chapters-to-be for Open Economics from more than 200 papers presented at the ninth annual conference of the European Society for the History of Economic Thought which was hosted by the Stirling Centre for Economic Methodology at the University of Stirling between 9 and 12 June 2005, the editors of this volume were confronted with what can only be described as a most impressive array of contributions to the conference topic ‘Economics in Relation to other Disciplines’, both in terms of their breadth and their quality. We truly were spoilt for choice, and feel confident therefore at this point to invite the reader to regard the present volume as a starting point for further engagement with economics in its historically grown entanglement with the disciplinary matrix of inquiry in the social, life and natural sciences as well as the arts and humanities. Studied commentary and reflection on economic affairs can ill afford to neglect the recognition of economics as a historiographically and methodologically open field of inquiry.

Acknowledgement As editors of the present volume we would like to acknowledge the support and constructive feedback of the chairs of the themed special sessions stream of the ninth annual conference of the European Society for the History of Economic Thought (ESHET), held in Stirling from 9 to 12 June 2005, from which the volume chapters were drawn. We should also like to thank two anonymous referees whose comments helped us to refine the final product, and the ESHET executive committee for entrusting us with the task of soliciting the volume from the Stirling conference.

Notes 1 Given at the ninth annual conference of the European Society for the History of Economics Thought at Stirling, on 11 June 2005.

Part I

Economics in relation to the humanities and social sciences

1

The social science of economics Brian J. Loasby

… man, who can subsist only in society, was fitted by nature to that situation for which he was made. (Smith 1759: 85)

The argument of this chapter is that much modern economics is drastically undersocialised because it lacks an understanding of the distinctive characteristics of the evolved human mind, despite the significant insights provided by three of our most famous economists, Adam Smith, Alfred Marshall and Friedrich Hayek. This deficiency results from a failure to apply what may be considered the defining principle of economics, that of analysing the implications of scarcity. These implications challenge the adequacy of a theoretical structure based on the confrontation of preference functions and opportunity sets, even when extended to include formal interdependence, as in game theory; they require both a more modest view of human cognitive abilities and a more extensive view of human motivation and potential.

The fundamental scarcity Economists study the consequences of boundary conditions. Most of these studies deal with actions within a particular set of boundary conditions; in models of constrained optimisation analytical outcomes are determined by the constraints. Some economists have tried to analyse behaviour which is intended to change these conditions, or which has the effect of changing them. I shall argue that the characteristics of the human mind have major influences on the ways in which we attempt both to operate within boundaries and to change boundaries, that models of self-interested optimisation provide an insufficient basis for understanding either of these attempts, and that social relationships – in which I include both firms and markets – are essential. It is not my intention to discuss the social influences on individual behaviour which have been emphasised by sociologists; my aim in this chapter is to explain the basis for the social organisation of activities, and in particular the significance of this organisation for the growth and use of knowledge. As Andrew Skinner (1996) has demonstrated, Adam Smith developed his economics

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within a system of social science, and my argument draws on some of the connections supplied by Smith, linking them to the work of others. Standard economic analysis is focused on boundaries that are external to the individual agent: these, which include initial endowments and the potential actions of other agents, define the opportunity sets that individuals face. Structure–conduct–performance was once the standard label of industrial organisation, but it is actually the underlying principle of theory construction throughout economics: both individual actions and overall effects are deduced from a specification of the structures that define the boundaries of possibility. This principle is not uncommon in other sciences, both social and natural: the most prominent recent example is the attempt to explain the most significant features of human behaviour by the structure of our DNA. Nevertheless, there is a significant limitation to the application of this principle within economics: few economists consider the boundaries that are internal to the human mind. The most fundamental of all scarcities which we face is the scarcity of our cognitive powers: the possibility of constrained optimisation is itself severely constrained by the limitations of human cognition. This is what Herbert Simon meant by ‘bounded rationality’. Because Simon’s phrase is often assumed to refer to certain imperfections, such as incomplete information, which can be incorporated in an adjusted model of optimisation, I prefer the term ‘bounded cognition’ (which was, I believe, first suggested by Richard Langlois): the proposition that meaning depends on interpretations is a major theme of this chapter. We can actually perform only a small proportion of the cognitive operations that would be necessary for the universal rationality that is routinely assumed in so much economics. Typically we must either abandon optimising procedures or perform them on what is, at best, a caricature of the problem that we face; Simon has explored both possibilities. Attention is a scarce resource, so decisions must be severely rationed; ‘the decision-maker’s information about the environment is much less than an approximation to the real environment’ (Simon 1959: 272); alternatives must be sought, and their consequences imagined. ‘Rationality’, in the sense of deductive logic, is therefore not the central issue in most decision-making: Chester Barnard, an experienced and thoughtful manager whose work was a major inspiration for Simon, pointed out that most of the action takes place before there is any possibility of applying logic (Barnard 1938: 305). Logic may thereafter be useful in deducing implications from data, which is possibly false and never complete, and from conjectures, which may be inspired but are necessarily fallible; but it is not sufficient for making decisions. The connection between bounded cognition and business organisation in Simon’s work is not accidental; both the structure and the limited scope of all organisations, formal and informal, are devices to limit the demands on individual cognition by combining boundary-setting for individuals with mobilising the cognitive resources of a group. This social organisation of economic activity, guided by the fundamental principle of the efficient allocation of scarce resources, has received relatively

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little attention in economics – though as I will indicate it is not a novel interest for economists. Ronald Coase (1972: 60–61) pointed out that what was called industrial organisation was actually applied price theory; this displays the implications of various market structures but tells us nothing about industrial organisation, when that is defined as the distribution of activities between firms. Nowadays industrial organisation is applied game theory, which is no more informative about this distribution. Coase (ibid.: 8) also notes that ‘when economists … speak of market structure, it has nothing to do with the market as an institution’. I shall argue that the inability of standard economics to explain how activities are organised within an economic system is an inevitable consequence of its failure to recognise the cognitive limitations, and the distinctive cognitive potential, of the human mind. Economists who use choice-theoretic models appear willing to consider any kind of scarcity except the pervasive scarcity of the cognitive powers of every individual, which not only restricts the application of logical reasoning to perceived problems but also influences what is perceived as a problem and how it is perceived: the external boundaries to which an individual reacts are themselves images within the mind, and should not be assumed to correspond to the actual boundaries. (This warning naturally applies to economists’ theories.) How and why these images differ between people is an important topic for research, not least for explaining what is identified as a problem and what may be considered as a solution. Because of our cognitive limitations, and the logical impossibility, demonstrated by David Hume, of establishing general empirical truths, we are surrounded by uncertainties; and somehow we have to deal with them. Frank Knight (1921) defined uncertainty as a property of situations in which there are no demonstrably correct procedures for assigning probabilities to a set of possibilities. George Shackle (1972) focused on the absence of correct procedures for identifying the set of possibilities over which probabilities might be distributed; and this, I suggest, is more fundamental, for what prevents us from determining probabilities is precisely our inability to list all the possible ways in which particular events may come about, or all the possible ways in which they may be prevented. Uncertainty is a formidable threat to standard techniques of analysis; when boundaries cannot be defined then the principle of deducing outcomes from a complete specification cannot be applied. The standard response of conflating uncertainty and risk (often with the aid of subjective probability), so that these techniques can be applied to a fictitious problem – a practice to which Knight (1933: xiv) forcefully objected – is therefore understandable as an apparent means of protection from a threatening unknown; but it may lead to significant and sometimes dangerous errors. If uncertainty is banished from the model, it is merely transferred to the relationship between the model and the situation to which that model may be applied. Having conflated uncertainty and risk in the analysis that won them the Nobel Prize in Economics (Merton 1998; Scholes 1998) Merton and Scholes also conflated them in

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formulating the business strategy of their company Long Term Capital Management, and quickly brought us, in 1998, very close to a world financial crisis. It is, I believe, no accident that the standard conflation of risk and uncertainty is paralleled by the conflation of information and knowledge, because uncertainty, as Knight and Shackle so clearly saw, is a problem of knowledge, not information. The calculation of risk, especially by Bayesian analysis, utilises information; but this can only be done by presupposing certain knowledge of the possibility set to which it relates. Principal–agent and game-theoretic models can make effective use of asymmetric information, but only because every agent within these models is presumed to know precisely what this information, or its absence, signifies. Arrow (1974: 40) correctly points out that ‘[a] signal hitherto unheard is useless by itself’; but in asserting that this is because ‘it does not modify any probability distribution’ he is identifying a secondorder effect. The primary reason is that a novel signal cannot be incorporated into any existing structure of knowledge. There is, of course, no reason why a structure of knowledge should support any probability distribution. That novel signals may nevertheless be of extraordinary importance will be argued later. Knowledge is an organised system of selected connections – and there is no demonstrably correct procedure for making the selection. The information content of any signal depends on the particular set of connections by which it is interpreted, and so the information that is derived from a signal very often differs according to the knowledge systems of the receivers, and may not be at all what the originator intended to convey. This is a common cause of communication failure; but as we shall see it can also contribute to innovation. Difficulties and differences of interpretation can be a serious problem in understanding what past economists were trying to say – and that is itself a sufficient reason for introducing prospective professional economists to the history of the subject. If I may mention an example that was decisive for my own attitude to economics, the core information content of imperfect competition theory as expounded at Cambridge was conceived by the expositors to be the ubiquity and inevitability of market failure; but to me the core information content was the inadequacy of this theory as an account of decision-making in economic systems, which is what I thought – wrongly, of course – economics was about. As I eventually realised, we had developed different knowledge systems. This disjunction between choice theory and the practice of decision-making eventually became the theme of a book (Loasby 1976). Knight and Shackle both recognised that uncertainty was not simply a threat; it has a very different aspect. Without uncertainty ‘it seems likely that all organic readjustments would become mechanical, all organisms automata’, and ‘it is doubtful whether intelligence itself would exist in such a situation’ (Knight 1921: 268). A world of ubiquitous rational choice would be a world without intelligence. If the future could be definitively predicted, it

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must logically be impossible for anyone to take any action that could change it; and few of us would be happy with that. Consequently ‘a life with uncertainty eliminated or perhaps even very greatly reduced would not appeal to us’ (ibid.: 348). As Shackle (1972, 1979) emphasised, it is uncertainty that allows scope for novelty, creativity, and the growth of knowledge, both theoretical and practical, because all of these entail exploration of some region within the space of ideas where particular boundaries may be abolished or redefined. The creation of knowledge is not a deductive operation: as Hume (1739–40: 164) observed, ‘no kind of reasoning can give rise to a new idea’. For both Shackle and Smith, imagination is crucial to the growth of knowledge. Yet Shackle (1969: 224) declared that ‘the boundedness of uncertainty is essential to the possibility of decision’; the limitations of our cognitive resources compel us to choose (consciously or unconsciously) where to direct our efforts, and to accept the unknown opportunity costs of doing so. Imagination requires some bounds if it is to be productive, and these bounds are to be found both in the organisation of the human mind and in all forms of external organisation. Boundaries differ between people, and for each person they differ between situations. Acts of intelligence and imagination are themselves forms of organisation for which there are no demonstrably correct procedures. In Knight’s (1921: 206) words, ‘to live intelligently … we must use the principle that things similar in some respects will behave similarly in certain other respects even when they are very different in still other respects’. Such organisational principles of relevant similarity must be related to ‘the purpose or problem in view’ and will have a limited range of applicability, and any individual’s skill in constructing and modifying such classifications must vary between domains. Barnard (1938: 301) noted how long it took, even after thorough preparation, to adapt to a new position in the same organisation. This variation across domains poses a major allocation problem of differentiation and integration for all human communities, and provides a major role for the sociality of economics, in which, as Cattaneo (1861) argued, intelligence should be a basic principle. Intelligence cannot be reduced to deductive reasoning or information processing: ‘optimisation’ is simply not good enough. As I asked once before, ‘why should we be satisfied with the analysis of rational choice when we have the opportunity to study intelligent action?’ (Loasby 2001: 410).

Theories of the mind Knowledge is inseparable from uncertainty; but for that very reason knowledge can be improved; and this improvement can be organised. That is a theme which I believe can be fairly attributed to Adam Smith, though as with all major themes there is no single originator. The idea that improvements in human well-being depend substantially on the development of knowledge about production, and also consumption, and that such knowledge can be fostered by economic organisation, underpinned Marshall’s economic studies.

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It is a theme that has recently attracted substantial attention, including major institutional support in several universities and international associations such as DRUID and the International Schumpeter Society. The history of this theme over 250 years would provide a splendid topic for some ambitious and talented historian of economic thought. As a minimal indication of the potential I will briefly review some significant features of the theories of the mind that were constructed by Adam Smith, Alfred Marshall, and Friedrich Hayek. (For a more extensive account, which includes some evidence from neuropsychology, see Loasby 2004.) Camerer et al. (2005) present a systematic exploration of the implications of neuroscience for economics, though without making the connection to these economists – an understandable but, in my view, unfortunate instance of boundary definition. All, as it happened (and was it mere happenstance?), encountered problems of knowledge before they took up economics, and all responded by developing what we may call evolutionary theories, based on the scarcity of cognitive powers, and envisaged the development of knowledge and capabilities (in Gilbert Ryle’s 1949 terms ‘knowing that’ and ‘knowing how’) through the formation and modification of selected connections, according to Knight’s principle of domain-relevant similarity. I shall not examine the relationships between their theories, but simply use some similarities as a basis for exploiting particular complementarities between them; and in order to do so I will take them in reverse order, because the actual history got the sequence wrong. Hayek (1952) produced the most elaborate and scientific account, which is still greatly respected by neuropsychologists who are aware of it. Though revised for publication much later, the essential theoretical system was worked out as a graduate student in psychology, in response to a specific puzzle. In order to be able to give a satisfactory account of the regularities existing in the physical world the physical sciences have been forced to define the objects of which this world exists increasingly in terms of the observed relationships between these objects, and at the same time more and more to disregard the way in which these objects appear to us. (Ibid.: 2–3) The classification systems of the physical and sensory orders are often incompatible. Nevertheless, despite the presumed superiority of scientific orderings (which Hayek does not challenge) we still rely on the sensory order for much of our behaviour, particularly, and significantly, for behaviour which is not consciously controlled. So Hayek’s problem was to explain how it is possible for the human brain to develop and maintain two parallel but incommensurable classification systems, an arrangement which seems so obviously inefficient. This turns out to be a key question for psychology – and for economics. The essentials of Hayek’s solution, which is worked out with great care, are that the human brain must work with simplified classification systems (ibid.: 185), that ‘the transmission of impulses from neuron to neuron within the

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central nervous system … is … conceived as the apparatus of classification’ (ibid.: 52), and that ‘the qualities which we attribute to the experienced objects are strictly speaking not properties of that object at all, but a set of relations by which our nervous system classifies them’ (ibid.: 143). (His own experience in dissecting synapses may have contributed to this conception.) Because these patterns are not imprinted by the data but constructed within the space of representations and rely on selected elements, they will incorporate distortions and may lead to error (ibid.: 145–46). There is also no reason, in principle, why the brain cannot develop distinctive neural systems, using different bases of classification, even for what we may believe to be a single sphere of physical reality – because there are cognitive economies in decomposing this sphere into distinctive domains according to ‘the purpose or problem in view’, as I will explain shortly. I will pause to mention, but without discussing, the similarities with George Kelly’s (1963: 50) account of the mind ‘construing the replication of events’ into ‘interpretative frameworks’, each of which has a limited ‘range of convenience’ (ibid.: 68) and can be misapplied, with Herbert Simon’s conception of human knowledge as a quasi-decomposable system, in which, because filtering is an active process of selection, ‘the perceived world is fantastically different from the “real” world’ (Simon 1982, II: 306–7), with Gigerenzer and Selten’s (2001: title page) detailed explanation of ‘how actual people make decisions without utilities and probabilities’ by selecting from an ‘adaptive toolbox’, and with Ziman’s (2000: 120) insistence that ‘the human capability for pattern recognition is deeply embedded in scientific practice’. Orthodox economists sometimes attribute apparent departures from rationality to ‘framing effects’; they are right to recognise that our framework of thought may lead us astray, but should also recognise that without some framework which does not reproduce ‘reality’ no decision is possible – as Kelly, Simon, and Gigerenzer and Selten all show. They might also notice the framing effects of rational choice theorising on the interpretations of economic phenomena and on economists’ conceptions of good practice. Domain-limited framing is an economising device. Hayek (1952: 102–03) observes that the formation of neural networks might occur either through the slow processes of biological evolution or during the development of individual brains, and he is very careful to avoid any discussion of these alternatives, since that is not necessary for his well defined purpose. However, Alfred Marshall’s (1994) model of ‘Ye Machine’, the third in a series of four papers written in 1867–68, (of which Raffaelli, 2003, provides a scholarly account), can be applied to this question. As a first-order approximation Marshall’s model may be summarised as inspired by Alexander Bain’s physiological psychology, supplemented by ideas from Herbert Spencer, equipped with Charles Babbage’s mechanisms, and operating in a Darwinian environment. (The young Marshall was an avid searcher for knowledge.) The ‘brain’ of this machine communicated with the outside world only through the body, and built connections, in the space of representations, by trial and error.

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Marshall distinguished two circuits. In the first, the brain simply groups ‘ideas of sensations’, links them to ‘ideas of action’ by connections which are initially random, and modifies the linkages according to the ‘ideas of sensations’ that follows the action; it thus tends to establish patterns of behaviour, each based on domain-relevant similarities, and each of which can be maintained in a kind of partial equilibrium at low cost in mental energy. The second circuit introduces conjectures of possible action linked to specific purposes, which evoke conjectures of possible consequences, leading to preselection before external trial. Despite the inevitable fallibility of internal selection, the combined introduction of guided imagination and expectations in this circuit offers prospects of improved performance; but because it makes considerably greater cognitive demands it requires the prior establishment of the first circuit and is activated only when that cannot deliver satisfactory results. Marshall already had a good intuitive understanding of efficient resource allocation, including the value of routine as an economising device which permits the selective development of new knowledge; he takes care to point out that ‘machines’ of identical design could easily develop very different capabilities according to their situations and the sequence of their trials. The interaction of automaticity and creativity, as Raffaelli (2003) has shown, became an essential component of his evolutionary economics, in which it produced a continual self-transformation of the economy. Applied to Hayek’s theory, Marshall’s model readily explains why the sensory order comes first. Unlike the physical order it does not require any orientation to the future; it is therefore less complex and less costly to construct, and must be working effectively before any resources can be selectively directed towards developing the physical order. Its lower operating cost explains why it does not disappear. That leaves the question: why are the orders different? The answer, precisely tailored to this question, had already been provided by Adam Smith as a natural implication of his theory of the growth of knowledge. As already noted, David Hume had demonstrated the impossibility of proving the truth of any general empirical proposition, either by accumulating evidence or by deductive reasoning, and had recommended turning attention to the psychological processes by which people come to accept certain propositions as true. Smith followed this advice, and elaborated Hume’s (1875: 41) suggestion, that we are ‘excited by nature’ to believe in ‘constant conjunctions’, into a theory that was based on the interaction between human emotions and the innovative human mind. Smith (1795) began with the intrinsic motivations of unwelcome surprise when confronted by inexplicable phenomena, wonder (which we might now call bewilderment) at a continued inability to understand, and admiration of a scheme of order which can accommodate what has hitherto been baffling. (What Arrow called ‘a signal hitherto unheard’ may therefore supply a powerful stimulus to create a theory hitherto unthought.) Smith illustrated the remarkable effects that these motivations can produce by tracing the successive

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theoretical systems that were invented to restore order to the perceptions of astronomical phenomena (as Copernicus explicitly declared of his own motivation), through cognitive processes which correspond well to the classifications and the links between classifications that were later proposed by Marshall and Hayek. Smith gave particular attention to the aesthetic appeal of these invented systems and the aesthetic influences on the development of conjectures. (On Smith’s view of human nature, see Ross 2004.) The two-way relationship between ‘systems’ and ‘machines’, which is the implicit core of Marshall’s representation, is an explicit recurrent theme in Smith’s writing. Art and science appear to be twin manifestations of a powerful human drive to make patterns, especially those of apparently wide application. That is why the ‘Newtonian method’ of laying down connecting principles from which everything else is derived ‘is undoubtedly the most Philosophical, and is vastly more ingenious and for that reason more engaging’ (Smith 1983: 143–44). Smith cites the readiness of many astronomers to adopt Copernicus’s theory, which attributed complex and rapid motion to a perceptibly stationary earth, as the most powerful demonstration of ‘how easily the learned give up the evidence of their senses in order to preserve the coherence of the ideas of their imagination’ (Smith, 1983: 77). In this observation Smith incidentally provides an explanation for the puzzle which prompted Hayek’s investigation. The sensory and the physical orders serve different purposes: the former is an essential part of ‘knowing how’, which guides action, the latter is part of ‘knowing that’, which appeals to the imagination. This, I suggest, is the basis for the common disconnection, noted by Ryle (1949) – who is cited by Hayek (1952) – between the two kinds of knowledge: despite what we believe is their shared basis in physical phenomena, they belong in different cognitive domains and are therefore stored in different neural networks. The imaginative appeal of general equilibrium as a Newtonian model of the economic universe should not be underestimated; it was, I suggest, a major, if unacknowledged, influence in delaying the acceptance of game theory, which though apparently general in its application did not claim to encompass the economic system in a single model. Eventually economists were persuaded to shift their focus from allocation to incentives (see Myerson 1999). Having used his theory to explain how science emerged as an increasingly distinctive category of knowledge, Smith went on to show how this category began to subdivide as different people began to focus on more specific fields and how, as a result of this more detailed attention (which, remember, is a very scarce resource), began to encounter new occasions for surprise and wonder, and so were motivated to construct new systems of connections for these more limited domains. Thus increasing scientific knowledge encouraged greater specialisation between sciences, which in turn accelerated the growth of knowledge and so led to further specialisation; knowledge and the knowledge-generating system co-evolved. Since this was a general theory of knowledge, it could be applied to the explanation of economic development; and this Smith subsequently did,

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employing the Newtonian method, at the outset of the Wealth of Nations (Smith 1776). The division of labour, within science and the economy, leads to the identification of domain-limited problems and encourages domain-limited solutions, which contribute to human knowledge and human achievement, circumventing the scarcity of individual cognition in order to relax the limits that are imposed by natural resources and our understanding of how they may be used. Ziman’s (2000: 6) claim that ‘cognition is the vital link between the social and epistemic dimensions of science’ has a similar basis. Science and the economy are therefore necessarily social institutions – because of the characteristics of the human mind. Before developing this proposition, I will sketch the biological development that made it possible. Somewhat less than a million years ago, the precursors of Homo sapiens began to experience a remarkable increase in brain size. There was very little accompanying change in the human genome, and so it was impossible to extend detailed genetic programming throughout the enlarged brain; in addition the constraints of the birth canal required infants to be born with brains that were at a very early stage of development, so that, for the first time, a great deal of neural network-building, especially in the evolutionarily novel areas of the brain, took place while interacting with a specific environment. These differentiated interactions, linked with both unconscious and conscious purpose (and also the absence of other interactions) helped to shape these individual structures, which as we have seen are structures of knowledge. What is special about human beings is this particular combination of exceptional adaptive potential and a relatively severe restriction on the number of adaptations that can actually be developed and sustained by any one individual. This is the biological basis for Smith’s (1776: 28–29) famous proposition that the ‘difference between … a philosopher and a common street porter … seems to arise not so much from nature, as from habit, custom, and education’. The crucial social consequence is that the limitations of individual human cognition can be greatly alleviated, and the extent of human knowledge and capabilities enormously expanded, by distributing this scarce resource across a wide range of domains, in each of which people may develop locally appropriate knowledge and skills through differential adaptation. This is the allocation problem which is of prime importance for economic growth, because economic growth depends on the growth of knowledge. It becomes explicit in Marshall’s (1920) economics as soon as one ceases to interpret this as a (rather unsatisfactory) precursor of later orthodoxy. What is allocated is not a set of well defined resources but a cognitive potential the product of which can never be known in advance – though it is certainly possible to make some guesses that are intelligent (in Knight’s sense) about possible products. A crucial implication of this specification of the allocation problem is that because, as Smith emphasised, it creates a vast network of mutual interdependence it requires extensive social arrangements to cope with its unforeseen consequences. As Hayek pointed out, human knowledge is both

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incomplete and dispersed; and because of the characteristics of the human brain increasing knowledge within the human species entails increasing dispersion, not only geographically but also cognitively. The welfare of each individual depends on access to cognitive externalities, which is governed by social and economic organisation. The disjunctions between the sensory and physical orders offer a very modest indication of the incommensurabilities that are necessarily entailed in creating locally appropriate and cognitively efficient interpretative systems for more and more diverse domains. ‘Common knowledge’ is exceedingly uncommon; and a good thing too. There are three human characteristics, not yet discussed, which help in maintaining the cohesion that is necessary for such an expanding system to work. All, it should be noted, assume an emotional component in human actions; indeed, unlike economic agents, whose rationality may be impaired by emotion, human agents require emotion to drive their rationality. The first is the development of language, which was made physically possible by the displacement of the human voice box some time after the enlargement of the brain, and feasible because of the increasing importance of the social context of human activities. Language is essentially a social phenomenon, as Smith was well aware; it presupposes both communal activity and the recognition of others as individuals with identity, and it fosters both improved co-ordination and greater recognition of identity. Smith’s (1983) reinterpretation of rhetoric as the art and science of communication, using methods that differ systematically according to problem and purpose, is far from irrelevant to both the growth and transfer of knowledge and the development and maintenance of interpersonal relationships. The second helpful characteristic is the motivation, which for our present purpose may be summarised as sympathy (in Smith’s sense), which is the core principle of Smith’s Theory of Moral Sentiments. The importance of an orientation to others, which is also essential to Smith’s theory of rhetoric (Ross 2004: 48), has been emphasised by evolutionary psychologists (e.g. Cosmides and Tooby 1994; Wilson 2004), who link it with co-operation for mutual benefit and social exchange rather than the solitary calculation of Nash equilibria. What may be overlooked is Smith’s (1759: 110–12) argument that only within society can any individual acquire an adequate basis for judging his own thoughts and actions, as well as the actions of others: individual identity requires an external reference. Our interest in other people, and our (selective) attempts to understand what they do and why they do it, entail recognising them as purposeful agents whose situation is often similar enough to serve as examples of appropriate or inappropriate behaviour. This is a necessary basis for the third helpful characteristic: the human capacity for imitation, which is of a scale and range far beyond that of other species (Tomasello 1999). Our understanding of the development of knowledge through making and modifying connections may lead us to expect that what we derive in this way is often adaptation rather than imitation, and occasionally a good deal more. As suggested earlier, differences

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of interpretation during the transfer of knowledge may generate innovation; and such differences may have significant influences on the outcomes of innovative sequences. These characteristics are all included in Smith’s system of social science; and their effects are reinforced by that ‘love of system, the … regard to the beauty of order, of art and contrivance’ which both motivates the creation of grand theories and explains our readiness to accept them. It also frequently serves to recommend those institutions which tend to promote the public welfare … we sometimes seem … to be eager to promote the happiness of our fellow creatures, rather from a view to perfect and improve a certain beautiful and orderly system, than from any immediate sense or feeling of what they either suffer or enjoy. (Smith 1759: 185) It should not, however, be forgotten that Smith recognised the accompanying dangers: ‘the man of system’ could lead us astray, and Descartes, who first used the ‘Newtonian method’, thereby gained widespread acceptance for an astronomical system ‘which perhaps does not contain a word of truth’ (Smith 1983: 146).

Using cognitive resources In the final section of this chapter there is room for no more than some indications of how humans respond to the combination of wide-ranging cognitive potential and severe limitations on its application by each individual in a context of uncertainty. First, we economise, collectively, by differentiating domains of knowledge and action, thus setting bounds to our particular uncertainty while allowing an extensive coverage of uncertainties within a community through the distributed application of intelligence. We might think of this as cognitive speciation, which is both maintained and continually modified through developments at the level of the individual. There is a critical assumption here that I will not attempt to justify in this chapter, except by reference to Herbert Simon (1969): it is that the universe is a quasidecomposable system, so that almost always we can get away with focusing either on the detailed connections within a subsystem without bothering about more than a few externalities or on the interaction of aggregate systems without bothering about internal detail. As supporting evidence I will simply note the success of the principle of locally adapted speciation in all life forms; but we should not omit the caveat – to which we will return – added by George Kelly (1963: 6) to a similar assumption of quasi-decomposability: ‘time provides the ultimate bond in all relationships’ (emphasis in original). The limits within which we have successfully worked many times may suddenly prove inadequate; indeed most life forms eventually disappear, as do most examples of human organisation. Within each specialisation there is

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continual variation, which, as Marshall (1920: 355) noted – in accordance with his model of cognition – ‘is a chief cause of progress’; or, as Simon (1992: 21) put it, ‘Any direction you proceed in has a very high a priori probability of being wrong; so it is good if other people are exploring in other directions’. Multiple failures are implicit in both views; in fact failure is an essential constituent of all evolutionary processes. Second, we rely extensively on automatic programmes of action, including cue selection and information processing, which are more quickly developed through cognitive specialisation, and readily imitated as a way of reducing uncertainty and releasing cognitive resources for other tasks. ‘Civilisation advances by extending the number of important operations which we can perform without thinking about them’ (Whitehead 1948: 42). We apply the (backward-looking) ‘logic of appropriateness’, which is the basis of genetically programmed behaviour, and which must necessarily precede any capability which applies the ‘logic of consequences’. This is Schumpeter’s (1934: 80) explanation of conduct that appears to be ‘prompt and rational’ within a co-ordinated economy but is actually an automatic response, an explanation which was adopted and extended by Nelson and Winter (1982). It must be part of any usable theory of co-ordination, not least because it discourages unrealisable ambitions for theory and policy and indicates why substantial novelty, even if clearly beneficial, may cause co-ordination failure by creating new sources of uncertainty – as Schumpeter argued. Third, we develop institutions, by incorporating programmatic elements into our operations of thought. Simon has repeatedly highlighted the importance of decision premises and problem-solving procedures in organisations; these are comparable to those institutions which are often portrayed as means of managing interactions outside the organisational setting. Both kinds of institutions should be recognised as external supplements to the premises and procedures which reduce uncertainty and economise on cognition within each human mind. The cognitive processes described by Smith, Marshall and Hayek all produce ‘rules of behaviour’, including rules for problem-solving, and, as Choi (1993) pointed out, we economise further by importing such rules from others, often searching for them. Our ability to do so depends on our ‘absorptive capacity’ (Cohen and Levinthal 1989), which is domain-limited and shaped by experience; and our readiness to do so is ‘more or less important to us, exactly in proportion as we ourselves are more or less uncertain about the propriety of our sentiments, the accuracy of our own judgements’ (Smith 1759: 122–23). It is not only in leisure activities that fashion is important. This importation, powerfully assisted by sympathy and language, is an important part of the social science of economics; and if we regard other people as a major resource with which to supplement our own limited cognitive abilities, then we are less likely to be motivated by opportunism – or, if so motivated, less likely to have the time and mental energy needed to construct opportunistic schemes. Opportunism may simply be crowded out. If we are to

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enjoy a high standard of living, and to improve the level of human knowledge and skills, then indeed, as Smith wrote, ‘man can subsist only in society’, and can do so only if ‘fitted by nature’, supplemented by individual development, to do so. This is not to deny that opportunism is an important issue, which may even destroy productive systems by crowding out co-operation; but such attitudes and practices (reinforced by the aesthetic and emotional attractions of a regular and harmonious system) remarkably often prepare us to accept ready-formed institutions in the organisations that we join or the interactions in which we participate. Among these interactions, exchange is of peculiar interest to economists; and yet in standard economics there is no adequate theory which recognises exchange as an activity which incurs costs. Our standard ‘market theory’ tells us nothing about how markets work within an economic system, or why they work; equilibrium theories cannot explain the process of equilibration, because during this process the equilibrium conditions cannot be satisfied. This is an outstanding illustration of the undersocialisation of economics. In defining equilibrium as an exchange of equal values at the margin, the costs incurred in the total process of exchange are ignored, as Menger (1871: 192– 93) knew – and rejected, insisting on exchange of unequal values to cover what we would now call transaction costs. In Menger’s terms, a market is a good of a higher order, which facilitates exchange by providing ‘points of concentration of trading and price formation’ (ibid.: 250). Every such concentration encourages the development of ‘a specific institutional arrangement consisting of rules and conventions that make possible a large number of voluntary transfers of property rights on a regular basis’. This definition by Claude Ménard (1995: 170) implicitly identifies a market as a means of economising on cognition and bounding uncertainty through specialisation; it invites us to consider who is likely to have the motivation and capabilities to invest in developing such institutional arrangements and the concentrations within which they will be used – and what particular arrangements, appropriate both to the particular domain and to the investor’s interests, are likely to be developed. As bases for theorising about markets as socio-economic phenomena I suggest Marshall’s (1919) fairly extensive discussion in Industry and Trade, and Casson’s (1982, 2003) analysis of the obstacles to trade (which, having read Knight, he sets in the context of uncertainty), the ways in which they may be overcome, and the role of the entrepreneur as market-maker. Instead of seeking to explain firms from markets, both Marshall and Casson explain how firms may build markets, with product design as part of the process – as is implied by Menger’s (1871: 241–56) discussion of marketability. There may be a valuable research project in connecting these practice-oriented analyses with the fundamental human factors that were identified by Smith as the basis of exchange: the development of language and the love of persuasion (which motivates us to talk to the butcher and baker, as Smith 1776: 27 says, about their advantages rather than our own needs), though he does not go

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into detail because he judges that this ‘belongs not to our present subject’ (ibid.: 25). Smith’s observation that exchange appears to be distinctively human (though, like many other supposedly distinctive human characteristics, perhaps not absolutely true) needs, I suggest, specific attention in the social science of economics. The undersocialisation of markets in economic theory led naturally to the undersocialisation of firms. Coase’s (1937) explanation of the firm as a lowercost alternative, in some circumstances, to arranging market transactions, failed to inspire interest in firms as organisations. That is not surprising, as Coase (1991: 52–53) subsequently realised: Robbins (1932: 65) had already banished any study of productive arrangements from economics by incorporating production within equilibrium theory. In this theory firms simply obeyed market imperatives, and so their internal arrangements were irrelevant to economic arguments. In a striking recent parallel, Oliver Williamson reacted to Simon’s (1991: 28) suggestion that ‘organisational economy’ is a more accurate description than ‘market economy’ by asserting: ‘that we appear to be subject to intentional governance structures everywhere we turn is misleading: the real action is largely invisible’ (Williamson 1996: 145). Though Williamson insists that a firm operates as a hierarchy – which is not orthodox doctrine – internal organisation is a means of ensuring incentive compatability, not of developing and applying domain-limited capabilities within appropriate social and motivational structures to create and apply knowledge; productive knowledge and the identification of productive opportunities are not conceived to be problematic. In this Williamson is orthodox; firms are therefore incentive structures, but not interpretative systems, and so anyone is capable of doing anything. However, it is a necessary implication of the nature of human intelligence that it matters who does what, as Richardson (1953) argued in his very first publication, and how activities are structured: resources, technology and preferences are not natural givens but are shaped by the system. In Marshall’s (1920: 138) simple phrase ‘Organization aids knowledge’; and his model of the brain, like Smith’s and Hayek’s theories, implies that people are changed by what they do, and by their interactions with other people while doing it. That people may actually seek such changes, which may be domain-specific, in their ‘identity’ has been argued by Akerlof and Kranton (2005). A firm is a quasi-decomposable system, and the manner of its decomposition determines how uncertainty is bounded, what principles of similarity will emerge to guide its activities, and what subsystems will be linked by what means. We have already noted that ‘framing’ is essential; an organisation is a multi-layered system of frameworks. As Knight (1921: 269) explains, the creation of a firm allows a division of labour in uncertainty-bearing by which ‘the confident and venturesome … “insure” the doubtful and timid’. What is offered to employees is not only increased security of income but also ‘a social prescription of some, but not all, of the premises that enter into an individual’s choice of behaviors’ (Simon 1982,

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2: 345, emphasis in original). As Knight implies, this is often a source of comfort as well as a means of co-ordination; and the desire for such comfort often promotes co-ordination. (This is much closer to Coase’s explanation of the firm than to Williamson’s.) Co-ordination is also fostered by the communication of entrepreneurial vision (Witt 1999), by the development of experience-based trust, and by the acceptance of authority, in Barnard’s (1938: 163) sense of accepting the content of a communication as a direct influence on one’s action. As Ménard (1994) emphasises, authority is by no means identified with hierarchy: no organisation can function effectively without multidirectional flows of authoritative communications, not least from those who are nominally subordinates. This is an essential constituent of the programming that economises on cognition. Nor is this simply a characteristic of formal organisation; none of us could function without accepting the authority of many messages that we receive from many sources. For theoretical and empirical analysis of the interaction between organisation and development I recommend Penrose (1959), Chandler (1960), and, for a particularly illuminating historical treatment, the detailed study of research and development in Du Pont (Hounshell and Smith 1988.) Of course, many firms fail to develop effective organisational structures, decision premises, procedures and flows of relevant communications; and those that do often fail to adapt them to new circumstances. If it is to keep uncertainty within bounds and direct scarce cognitive resources to selected areas, no organisation can tolerate very much variety. The desire to preserve existing cognitive structures is a basic human characteristic – it is a powerful economising device – and achieving a co-ordinated change of cognitive structures across a cluster of knowledge domains is likely to be especially difficult. At the individual level, the persistence of interpretative frameworks which are no longer appropriate is Kelly’s (1963) theory of personal breakdown; and organisations, which rely on a structure of interlocking frameworks, can suffer collective breakdowns – that is why Schumpeter associated innovation with destruction. (Recall Kelly’s warning that time is the ultimate bond.) This problem is a powerful reason for having many firms in an industry, and for encouraging them to be different: the encouragement of a single national champion for each industry is the worst industrial policy yet invented. Variety was Marshall’s evolutionary argument, with the important (nonbiological) addition that firms, like people, could sometimes adapt successful ideas and institutions from others. This is not what is meant by ‘perfect competition’; but it is effective competition in the etymological sense of ‘seeking together’ – by looking in different places.

Conclusion It is because of the characteristics of the human mind that, as Marshall (1920: 138–39) realised, there are many forms of organisation which can aid knowledge; they do so by setting locally appropriate bounds to uncertainty, allowing

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programmes to evolve according to locally appropriate contexts of similarity, and so releasing cognitive resources for purposeful experimentation. The process is inevitably wasteful, but much less wasteful than biological evolution. Because the system of knowledge and the economic system are quasidecomposable, each form requires its own combination of internal and external organisation, on the principles of similarity and complementarity explained by Richardson (1972). So do our own minds. Outward-facing connections should always be relatively few; but they must be there, and be appropriate. Appropriateness changes as knowledge changes; as with science, knowledge and the knowledge-creating system co-evolve. In economics, this is the central insight of Allyn Young (1928), who supervised Knight’s research; the increasing returns that deliver economic progress result from a continual interaction between changing knowledge and changing organisation, through a continual redeployment of scarce but powerful cognitive resources. That is the social science of economics.

2

Economics and literature Bruna Ingrao

Economics and literature are apparently distant fields. As it has developed over the last two centuries, economics has been associated with mathematics and the natural sciences, mathematical physics especially, but also with biology, with a focus on evolutionary theory. Nineteenth-century economics has been pervaded by biological metaphors as much as by mechanical analogies. In the twentieth century the computer has also been proposed as the operational model of economic rationality. Advanced research based on neurology, under the label of neuronomics, made extensive use of brain imaging and other techniques of neurological studies of the brain to account for human behaviour in economic choices. The examples may be multiplied and the exchanges between economics and the natural sciences are explored in other chapters in this volume. Economists openly profess their discipline to be a ‘science’, on the same grounds as natural scientists profess their disciplines to be sciences. In search of corroboration for the scientific nature of their discipline, scholars in economics have again and again reproduced the research practices applied in disciplines whose scientific credentials are more widely recognised or developed. Experimental economics, testing rules of behaviour and cognitive capabilities in economic choices, seems to have abated the residual difficulty – the apparent fact that experiments could not be practised in economics. Over the last two centuries, the economics profession moved away from the vision of political economy as pertaining to moral philosophy, aiming at achieving for the discipline the status of one among the hard sciences. What about literature, the old kingdom, whose lands emerge from imagination and myth, whose coasts and plains are drawn by narration, whose people are fictional characters? Since a radical difference is commonly predicated, opposing knowledge based on scientific inquiry and expressed in scientific language to art, as pertaining to another sphere of the mind, what has economics to do with literature, the lyrical with hard facts, the legendary with mathematical models, the fictional with empirical laws? Yet, the two worlds, economics and literature, are not as distant as they appear. Historically, literature has been for centuries not only the source of feelings and imagination, but also the carrier of knowledge on social relations and historical events.

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This was the case even after the dividing line between myth and history, or between science on one side and tragedy or poetry on another side, had been clearly traced, as in Greek philosophy from Socrates to Aristotle. Throughout history, literature (much as the visual arts) has been perceived as an inquiry into truth, and literary narration a path to understanding human behaviour. Storytelling in religious texts (parables, midrashim), in epics, in poetry has been almost universally understood as the primary source of human wisdom. In present times, we live in a schizophrenic world. The only recognised source of knowledge is hard science, yet each of us extracts a core of emotional, relational, ethical, and even factual cognition from literary sources. Hopefully, we extensively read literary texts, notwithstanding the professed, cynical dismissal of literary expression as a legitimate source of knowledge. We extensively rely on literary texts to form our adult personalities and to nourish our souls.1 Most of us (if not all of us) extract a crucial part of our understanding and knowledge of life from literary sources or narration at large, including short stories, novels, poems, movies and television fiction, not to speak of sacred texts such as the Ramayana, the Mahabharata, the Old Testament of the Bible or the New Testament. At a more philosophical level, we may assume that the human mind works in unified patterns. The symbolic forms, through which we perceive, feel, understand or approach both external objects of cognition and our inner self are not split into separate departments, as some scientist epistemologies seem to presume. The emotions are intertwined with the cognitive process of acquiring and evaluating new knowledge. Sympathy, the resonance in our own feelings of other people’s sufferings and joys, to speak with Smithian accents, is a powerful vehicle of cognition. Imagination, the ability to build up in the mind fictional worlds, is a primary aspect of human thought at large (Steiner 2005). Natural scientists work constructing highly abstract, imaginary worlds and narrate conjectural stories of how the earth or the whole universe developed. Narrative fiction conveys doubts or truths that may be felt and perceived only through emotional resonance. People must ‘suffer’ truth to understand it, or to be able to face it. In personal experience, literature remains an essential source of knowledge. Through the information texts convey, we form mental images of other people’s lives in far away continents or circumstances of life, in past times long ago, or in future times still to come. This information may be biased, much as scientific information may be, when dealing with human affairs. Neither of the two sides of our symbolic imagination, the scientific fiction or the narrative fiction, has a right to pretend to assess truth once and for all. During the last two centuries, the period on which the following discussion will focus, the separate worlds of economics and literature did indeed get in touch on a number of occasions. Economists and literary authors conversed, in a more or less friendly manner. They shared a common culture or fought in controversies. They competed to attract the attention, and win the hearts, of their readers.

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Economics in literature and economics of literature The first perspective to be explored is economics in literature – the fictional representation of economic events and economic behaviour in literary works. It is a well known field of studies in literary criticism, less so in the history of economics, though it might be of much interest to the historian of economics to understand the intellectual atmosphere, the vulgarisation of ideas, the exchanges between literati and economists or between them and their public.2 The vision of the economy that imbues literary texts testifies to how authors and readers perceived the economic issues of their times: their idiosyncrasies, prejudices or positive attitudes towards emerging novelties in markets. An important current of ideas runs through both literary works and economic works. Shakespeare, Cervantes, Milton, Defoe, Goethe, to quote but a few masters, have been scrutinised to capture their opinion on economic issues or the picture they traced of the material world of scarcity in which we live. In literary criticism scholars approached the subject with the most varied inquiries, from antiquity to present times.3 In the last two centuries income, money and wealth have played an important role in literature.4 In novels, short stories, plays or dramas, they define the social environment or the field of action, where the characters move. They originate conflicts among the characters or trace the space within which conflicts take place. They move to action, and often to murder or to commit suicide. A good number of novels are genuine ‘economic’ fiction; their plot is framed on market and business confrontations, or it is placed within a market and financial environment that is essential to its development. In economic fiction, markets are described in detailed ways. Literary texts explicitly address transactions in stocks and speculation, financial investment, fraud and corruption in poorly regulated financial markets, competition and market structure, entrepreneurship, innovation, debt and bankruptcy. Expenditure, wages, budget constraints, saving, working hours, management, risk, and so many aspects of economic activity are examined. Characters may be severely constrained by their budgets; the way they face their budgetary limits is an interesting part of their stories. Debt and bankruptcy are a recurring trope, carrying the symbolic resonance of desires clashing with opportunities or deeper metaphors of rise and fall. In a few remarkable novels in nineteenth century literature, economic events play an essential role in the scenery. In Mertvye dushi (Dead souls), Gogol draws a pungent picture of Russian agrarian society, jointly with corruption and inefficiency in tsarist bureaucracy. Dostoevsky, though rarely addressing market environments properly, almost always has wealth and income (or lack of wealth and income) in the background of his plots. Banking, finance and financiers attracted the attention of many writers, among whom Balzac, Zola and Trollope are the most well known. Cesar Birotteau (The Rise and Fall of César Birotteu) and La Maison Nucingen (The Firm of Nucingen) by Balzac are about episodes of speculation (Ingrao 2001). The Way We Live Now by

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Trollope tells the story of a powerful financier who is a promoter of railway stocks but indeed a swindler and an adventurer. L’Argent (Money) by Zola centres on an ambitious banker, telling of the crash of his banking firm in the stock market. Balzac dealt with success or failure introducing innovation in Cesar Birotteau and Illusions perdues (Lost Illusions); the latter book explores rivalry in a duopoly market in a provincial town, in the printing business (Ingrao 2007). Zola addressed entrepreneurship, innovation and the change towards mechanisation (Noiray 1981). In Au Bonheur des dames (Paradise for Ladies) competition and innovation in commercial practice (the large store versus the small shop) were at centre of the plot; in L’Assommoir (The Dram Shop) a poor laundress manages to become a small entrepreneur opening her own laundry shop, soon to fall back into poverty. The hard fight of a young woman to earn an independent income is at the core of Charlotte Brontë’s Villette. Dickens addressed many aspects of economic life in his times, including debt, banking and finance, industrial districts, income inequalities, marginality and extreme poverty, the costs of law. Hard Times, Bleak House, Little Dorrit, Our Mutual Friend are obvious candidates for the list. The income provided by rent marks the social visibility of characters in Jane Austen’s novels. Melville spoke of the whaling business, explaining how workers and captains engaged for their larger or smaller quota of profits in each trip. In the opening years of the twentieth century, Buddenbrooks by Thomas Mann told the saga of a business family. In Howards End Forster portrayed failed efforts at social climbing and the destructive effect of unemployment. Examples multiply if we consider how money and earning an income dress up social barriers. In the latter part of the twentieth century, in line with the evolution of financial markets, financial fiction has become a popular literary genre.5 Tom Wolfe’s famous novel The Bonfire of the Vanities is set in the environment of the stock market. Both Airframe and Rising Sun by M. Crichton deal with ambitions, conflicts, illegal practices and spying in the business world of large multinational firms. In contemporary British and American literature, dozens of novels are financial or business thrillers. In Japan, business novels have captured readers since the 1950s. The characters act in financial markets (as stockbrokers, business people in finance or white-collar workers); they organise or discover complex schemes of financial fraud and corruption (pressures to artificially create financial distress in government bond markets, computer hacking to divert funds, and similar stories). Financial novels, like the popular legal thrillers, are mostly written by imaginative professionals who know financial markets from within, having worked in financial institutions for years. The ‘economics in literature’ perspective offers the opportunity to explore the economic language assimilated in literary works, that is, the terminology of economics the writers were aware of or familiar with, and their sources of knowledge. In many cases, we have a precise account of how authors looked for sources to give a realistic picture of markets or had their knowledge firsthand from real life. Balzac wrote his detailed description of market dynamics

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in the printing industry in Illusions perdues from personal experience as a printer entrepreneur, and indeed a bankrupt one. Zola read books and interviewed professionals to write L’Argent, whose plot was inspired by a historical episode of financial crash (Cararsus 1974; Pellini 1996). Charlotte Brontë invested in railway stocks, with reasonable success; she was aware from direct experience of the vagaries of stock prices and the risk associated with speculation and financial investment (Houston 2005: 55 ff.). In other cases, the literary imagination transfigures experience, transforming events from the real world into fairy tales or fantasy stories. ‘Il vint une année très fa¸cheuse, et la famine fut si grande que ces pauvres gens résolurent de se défaire de leurs enfants.’6 The fairy tale Le Petit Poucet (Tom Thumb) by Charles Perrault echoes the famines of the late seventeenth century (and those that had periodically been plaguing the European rural environment for centuries), with the practice of abandoning or killing children in years of extreme dearth. At the end of the fairy tale, the author ironically suggests that Petit Poucet did not get his good fortune by stealing the Ogre’s treasure but thanks to establishing effective postal services, taking advantage of the sevenleague boots. Young women especially appreciated the faster delivery service, which he was able to offer with his high-speed boots, to send letters to their lovers. Petit Poucet earned a lot of money selling services on the market thanks to successful innovation! Ample critical literature exists on economics and literature from this perspective.7 A remarkable number of studies focus on nineteenth-century novels, with special attention to Victorian literature (Russell 1986). Financial markets and personal debt monopolised the attention of both public opinion and authors in the past and today they attract the attention of contemporary literary critics. Houston (2005) connected the Gothic imagination in fiction with economic panic and financial crashes. Dickens is credited with having been a critic of financial capitalism (Jarvie 2005). Weiss (1986) dealt with the spectre of bankruptcy in the Victorian novel. Finn (2003) traced an historical overview on the evaluation of personal debt in English culture from 1740 to 1914, drawing also on a variety of literary sources. Zimmerman (2006) dealt with images and interpretations of financial panics in American literature at the turn of the twentieth century. Delany (1996, 2000, 2002) addressed status and class in Jane Austen’s novel Emma and, among other issues, considered the economics of imperialism in connection with Nostromo and Heart of Darkness by Conrad. The economic discourse in French literature has especially been studied in the texts of the eighteenth and nineteenth centuries (Thomasseau 1988). In the first half of the nineteenth century exchanges and interactions went in both directions (Edelman and Vatin 2007). Rousseau sketched the utopian picture of an ideal agricultural society in La Nouvelle Héloise (Pignol 2005). Stendhal is remarkable for his interest in political economy and the sociology sketched in his novels (Bornemann 1994, Dubois 2007). Ample references exist on economic life in the novels by Balzac, Zola and Flaubert. The United States offered another minefield about attitudes

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towards the economy in novels. A collection of essays on money and culture has dealt especially with money in English, French, American and Russian literature, ranging from Shakespeare to Molière, Pushkin, Flaubert, James and others well known writers (Digaetani 1994). Singing poetry and storytelling are ancient trades, among the oldest, if not the oldest, in human history. The economics of literature studies the production of literary works considered as priced goods (costs of production, copyright) and their markets. It has attracted the attention of literary criticism for relevant implications on genres, audience and the writing profession (Hack 2005, Weedon 2003). It is interesting to investigate the earnings of authors and their position in society as protégés, wage earners or independent entrepreneurs.8 Attention has been devoted, for instance, to Shakespeare and his Globe Theatre, and managing the theatre as an enterprise. How comparatively hard it is to earn a living in economics and/or literature? Walras considered in his younger days whether he could earn a living as a novelist and journalist, but he settled for a safer income as professor of economics in Lausanne. Balzac produced his heavy packages of pages through hard work, pressed by his publisher. Trollope, outspokenly, denied the myth of the writer who creates for the pure pleasure of creation, and confessed that he saw his writing as a trade, a way to earn money, and his daily work as very similar to that of a mechanical worker. There is ample space for advancing the comparative economics of producing literature versus other industries, or earning money in the literature trade versus earning it in the economics profession. Editing and printing contemporary fiction are big business, though the artist-author still works alone at his desk. This perspective, mainly explored in literary criticism, is fully relevant to the economics of culture.

Literature in economics Do economists use literary sources and if so how? An extensively used literary metaphor was Robinson Crusoe, Robinson being the solver of a basic economic problem: surviving by organising production from freely available natural resources, and making the best use of scarce time, another crucial economic resource. Ranchetti analysed the metaphorical Robinson as an illustration for different purposes, in Marx, Walras, Wicksell, Wicksteed, Keynes (Ranchetti 1993). According to Marx, Robinson had to calculate the labour time allocated to different production; Wicksteed, criticising Marx, gave new meaning to the metaphor in terms of marginal utility theory. Walras imagined Robinson landing on the desert island accompanied by a hundred mariners who started a market with the goods they had eventually saved from the shipwreck.9 The island is a mental metaphor for the condition of being in an isolated world, with positive or negative resonance. In Turgot’s essay Value and Money (1769, written probably in 1766) two savages land on the same island, each carrying a different good. On the island they meet and bargain in a condition of bilateral monopoly. Robinson and Friday were the fictional

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characters in Edgeworth’s box, and Edgeworth multiplied them to explain how bilateral monopoly turns into a competitive market. Meeting on an island turns into a metaphor for meeting in a market.10 In development economics a less constructive personality has recently taken the scene: Mr Micawber,11 the chronic debtor, merry and alcoholic, who never saves a penny, spending the little he gets as soon as he gets it. Micawber’s short-term outlook is chronic poverty, defying all efforts to escape from the debt trap, and he knows that. No feasible effort of autarchic saving could possibly free him and his family from long-term distress. The perception of future uncertainty as to income and probable financial distress is so keen as to suggest that unfruitful privation to address such an uncertain lottery should be avoided. The ‘Micawber threshold’ is ‘the critical asset threshold below which it is no longer rational or feasible to pursue the autarchic accumulation strategy’ (Carter and Barret 2006: 190). The poorest fellows in developing countries who live under the ‘Micawber threshold’ end up constrained within a poverty trap (Zimmermann and Carter 2003; Carter and Barret 2006). Morgenstern told the celebrated story of Sherlock Holmes and Moriarty to illustrate strategic interaction that could end in a cognitive impasse (Morgenstern 1928: 98, 1935: 174). Novels, stories, plays, operatic librettoes and even the Bible ‘have been subjected to game-theoretic exegesis’ (Brams 1994: 32).12 Some teachers of economics have suggested that literary characters are helpful to clarify economic concepts in college courses. Papers and a whole book have been devoted to the issue, acknowledging that literary texts bear on economic ideas and surprisingly quite appropriately13 (Watts et al. 1989; Watts ed. 2003). Financial fiction may acquire didactic purposes.14 The reference to literary passages in teaching economic concepts is, of course, most welcome as a useful didactic device; it is, however, a biased procedure, if it ignores the strata of meanings that come into play in literary works. It is impoverishing to read literary masterpieces as if they were examples in a textbook exercise to explain formulas or theorems in economic theory! The illustrations, then, appear ludicrous to anyone who loves literature. Rabelais illustrates externalities and Dickens spillover costs in pollution (Watts et al. 1989: 296). The reference to literature in economic courses should not demote literary language to a merely subservient role. Economics in literature should be read with deep respect for the emotional and ethical sphere that is essential in literary masterpieces, because it is essential in our lives. King Lear has been called into question in a debate between Hirshleifer and Becker on altruism, neither of the two outstanding scholars apparently understanding that Shakespeare’s play is a tragedy, raising radical questions about the presence of evil in the world (Becker 1977; Hirshleifer 1977). The play does not deal with rational constitutional arrangements or self-interested altruism in an evolutionary, sociobiological perspective. Both Cordelia and Kent keep their faithful love for Lear in hours of extreme disgrace. The tragedy deals with the extreme perversion of natural

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affections – the natural love of daughters for their fathers, the natural love of sisters for their sisters – the innocent dying with no hope of defence, the folly of the heart and the mind disrupting lives. It is one of the darkest pictures ever penned of the human condition, the hope of love being the unique source of salvation amidst violence, torment, blindness and madness. How to misread it as an illustration of economic parables on rational self-interested altruism inspired by sociobiology?15 In the same vein, the results obtained in reading literature through game-theoretic approaches are extremely poor, for the too obvious reason that in game-theoretic approaches the emotional resonance of strategic interactions among characters is missing. With it flies away the spiritual meaning that human interaction in literary plots conveys to readers and, as a consequence, also the interest of readers for the narration. ‘Why are these stories compelling and not just humdrum illustrations of these games?’ (Brams 1994: 51). Good question, indeed. Is King Lear a special case of Becker’s model and should the mental effort to read Becker’s paper spare us the time we devote to listening to actors who play Shakespearean characters? Why write novels, plays or stories, if they are but exemplars of mixed strategies in co-operative or non-co-operative games? The game-theoretic approach becomes grotesque when it is applied to religious feelings, demoting the mystic or metaphysical vision involved in religious faith to the same sphere as a market bargaining process. Literature uses language for expressing emotions and capturing the reader’s attention. Does the use of literary expression occur in economic discourse? Is the artful and refined use of language part of the communication strategies of economics as a discipline? How does it impact on the effectiveness of communication, the reception from readers, the intuitive understanding? Keynes gave some weight and value to persuasion as an effective device of the policy maker, implying both the art of rational arguing and that of capturing the sentiment and opinion of the audience (Marcuzzo 2007). McCloskey (1998) has distinguished the genuine from the official rhetoric of arguing in economics, opposing the implicit and naive, scientist rhetoric to be unveiled in economic texts with the learned practice of rhetorical analysis, leading to plural conversation on economic theories. Many scholars, after McCloskey’s essay, unveiled the rhetoric of scientific argument in economics with negative connotations, as a pretence at evidence and logical rigour built up by linguistic conventions dominant in the profession. Hirschman (1991) denounced the rhetoric of reaction. Indeed, the art of ‘persuasion’ in economics should be considered the art of rationally arguing, having recourse to a variety of languages and expressive means, taking into account the many facets of economic questions, which by their very nature often imply ethical or political consideration and historical context. In this wider perspective, a richer language of economic persuasion is an open opportunity, still not explored as it should be. Metaphors and mental images spread through the provinces of culture from common sources or from echoes going back and forth between various fields

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of knowledge. Words and images are deeply connected and the semantics of words are, by their very nature, plastic and expanding from one sphere to another. Metaphors and parables rooted in shared culture are some sort of archetypal imprinting in the minds of both economists and literati and the public who read their texts. Transmigrations and mutations of meanings are often traceable to currents of ideas or explicit dialogues, as happens with the language of evolution in the nineteenth century, from Malthus to Darwin and back to the social sciences (Ginzburg 2007). In other cases, the shifting meanings, or the borrowings, occur in underground passages. ‘Equilibrium’ is a word pertaining to many spheres of knowledge and emotions, resonating from mechanics to psychology to economics to common parlance, with changing echoes in the mind and plastic meanings. Economic terms, when they become usual and daily recur in conversation or in the media, create a shared atmosphere of images and rhetorical figures.16 If the ‘panics’ of financial markets transmigrated from economics to literature charged with their resonance of collapse and crises, ‘ghosts’ were evoked in economics or literature from older sources in daily language and popular imagination. Echoes go back and forth from the different sources of meaning we use in exchanging words, and cross through spheres of sense that mingle in the cognitive and emotional process of the mind. The communist spectre haunting Europe was but one among innumerable ghosts which had stalked through European minds before it. Its power of persuasion came from the resonance it had in imaginative minds that had already experienced ghosts in popular stories, in traditions going back to the Middle Ages and the ancient world. The Gothic Revival fished in the pool of remote, well rooted images of devils and demons of the past to mould newborn Frankensteins.

Economists and literati Both economists and literati are professional people, who live on the work of their minds. Did they belong to separate social groups or academies or did they live in the same social environment? Were they friends or joined in collaboration? Did they belong to the same intellectual circles and exchange ideas, or did they oppose and divide in controversies? Were they opposed factions, as Carlyle pretended? Scholars compared the explicit or hidden ideologies that economists and writers shared in some historical epoch, or those that, on the contrary, were the subject of their debates, their divergent positions in the public arena, in culture and/or politics. Controversies between economists and writers were mainly examined around the opposition centred on nature and tradition versus commercial society, or utilitarianism versus spiritualism, a emphasis on material interests versus sensibility and ethics. Scholars underlined the traditional attitude of despising money, trade and commercial society in literary academies (Delany 2002). Some historians, who studied economics in literature, shared such a distrust, looking at the subject from a Marxist perspective.17 Masterpieces

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in nineteenth-century literature then are read in the perspective of radical criticism of ‘consumerism’, ‘globalisation’ or the absolute ‘bankerisation’ of society (Bigelow 2003, Houston 2005). Whatever the merits of each specific piece of research, one should reject insupportable comments on the disasters of market societies as painted in literature.18 At the opposite pole, Peart and Levy (2005) unveiled the debate on emancipation from slavery, where Carlyle forged the expression ‘dismal science’; they have shown how the ‘literary’ side was hardhearted and blind to the human rights of black people. The utilitarian political economist J. S. Mill firmly stood on the humanitarian side, to the scorn of Carlyle, Ruskin and Dickens. Connell (2001) devoted a learned study to utilitarianism and the Romantic poets in the context of political debate in early nineteenth-century British culture and the emergence of political economy as an influential science of society. His essay explores the roots of the contrast between literary sensibility and hard-minded political economy that was to be emphasised in Victorian culture by scholars such as Carlyle. But the picture the author traces is much more nuanced than the crude binary opposition of the romantic spirit versus materialistic utilitarianism. To quote other episodes, a complex evaluation emerges from the analysis of Conrad’s view of the British Empire (Delany 1996). Careful historical examination shows that the simplified interpretation opposing market-oriented ‘dismal’ scientists to sensible artists and poets is biased. The perception of such a contrast, largely formed in the Victorian Age, only partially represents what happened both in the Victorian Age and in other periods.19 It severely misrepresents both the variety of economists’ ideologies and the variety of the literati’s views. On the side of economists, much as on the side of professional writers, opinions were split, and the positions nuanced. Distrust of the effective working of markets was widespread among economists in some epochs or environments, as Furet (1995: 180) recalls the 1930s. Rejecting utilitarianism as a vision of life has little to do with advocacy of free trade in markets; Turgot, the firm advocate of free trade, wrote against utilitarian ethics. Smith, of course, had a complex vision of human motives and the human mind. J. S. Mill rejected his father’s utilitarian ban on literature and discovered the fascination of imagination and poetry (Lepenies 1988). Cournot shared romantic nostalgia for the pre-commercial society. Walras declared himself to be a socialist and spiritualist thinker. Marshall imbued The Principles of Economics with considerations on the racial qualities of different peoples, Britons versus the Germans, or versus the parasitic Armenians or the Jews. Keynes lamented the exclusive dominance of the self-interest motive in laissez-faire ideologies and drew a gloomy picture of the irrationality and instability of stock markets dominated by speculation.20 The poet Stephan George assembled a circle of friends, some of them economists sharing his orientation (Schefold 2005). Hayek, a stern defender of free trade, saw the ultimate foundation of market relationships in ethical commandments rooted in religion, since markets stand on property, contract and the rule of law. He was

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often accused (a torto) of being a conservative scholar, since he emphasised the role of tradition. On the writers’ side, distrust of markets and diffidence towards modernity were not general attitudes among professional writers in all epochs or environments. Stendhal was a stern critic of the revival of the old aristocratic order during the Restoration; his characters fight for social advancement, breaking the hierarchies of the old society (Dubois 2007). Balzac and Zola addressed economic interests with a variety of nuances, from sordid avarice to constructive entrepreneurship and creative innovation. Dostoyevsky, the stern critic of utilitarianism, was an acute and strictly realistic painter of egotism and self-interested motives in human life. His rejection of utilitarianism was on philosophical grounds, because of the drastic rejection of the utilitarian idea of happiness, evil and guilt (Picon 2002, 2005). The question whether a hard core of contemporary economics is still rooted in a global utilitarian philosophy remains open and of the utmost relevance. Many writers devoted a large part of their efforts to account for the crude self-interest of people in monetary transactions, with a dispassionate presentation of how brutally they work in this world; but many novels illustrated and praised the Smithian virtues of active life, prudence and hard work, in a gallery of characters. Novels emphasised the emergence on the social scene of active women, who work in the market to earn an independent living; they unveiled the money motives in sentimental life (Kaufman 1995; Skinner 1999). Thus, one should not accept the stereotypical divide between ‘economics’ and ‘literature’, buying Carlyle’s opposition of the dismal science to culture and sensibility. Moreover, ideologies covertly or explicitly expressed by writers are not the centre of their literary work, unless we reduce literature to the deceptive task of ornamenting ideologies (or prejudices) with emotional resonance. As Delany observed, The Way We Live Now is a biting representation of the landed aristocracy as archaic and ineffectual, although the novel echoes nostalgia for the old order at its passing (Delany 2002).

Parables and the divergence of languages Both economics and literature (at least, modern and contemporary European and American literature) start from the Bible’s crucial event after the Creation: the serpent and the apple, and eating the fruit of the tree of knowledge. Women and men are considered after the expulsion from the Garden of Eden. In fiction, as in economic models, people are constrained by scarce resources allocated to alternative ends, and they often have to earn a living by hard struggle in a competitive environment. Overlapping generations go through prosperity and decline. Both economic models and literary texts narrate stories about fictional characters, who plan over a finite horizon, live finite lives, go through youth and old age, constrained by scarce time and facing opportunity costs when choosing how to allocate it. Yet radical elements of difference emerge in the way writers and economists narrate the post-Eden world

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of money and markets.21 Let us briefly sketch some of these, underlying the specific nature of fiction as a language of knowledge (Ingrao 2001). As a first element of remarkable difference, in literature characters are many and their plurality is at the core of the narrative enterprise. Literature explores the space of human relationships, where individual personalities get in touch with each other and experience communication and affections. The encounters, with their happy end or their tragedies, are among individuals; the story is richer in literary value when the characters are complex in their individuality. Stereotyped characters are a mark of popular literature. Individuality matures through the ages of life; it is symbolically moulded in crucial, irreversible choices that build up a life path. Plots are about these changes and events, converging to happy or unhappy ends. Literary characters are individual personalities and their personality influences their attitudes in dealing with economic activities. Cognitive qualities influence their economic success. Characters are, by the nature of the literary work, asymmetric agents. Their minds and hearts are asymmetric in cognition, in motives, in behaviour. Balzac explicitly conceived characters in La Comédie humaine as portraying social types; however, the writer informs us that in his complex picture of contemporary French society these are a few hundred (Balzac 1846). The individuality of characters is not exempt from stereotypes, which may be charged with prejudice or conveying prejudice, or express visions of life. An element of stereotyped modelling is present in all genres and the delicate balance between tradition and creative innovation is a core issue in literature. In literature as in the visual arts the genre (and thus the structural stereotypes defining it) helps both authors and public, and their fruitful dialogue. Be it portrait, still life, tragedy or short story, symphony or concert, it helps the transmission of training abilities from artist to artist, across centuries. It facilitates the appreciation of art or literary works by the educated audience, which has assimilated the genre’s schemes. The genre – with its constraints – helps to create and maintain the shared community of artists and audience. Which are the sources of the wide asymmetries of capabilities, choices, and behaviour in literary narration? They are the most diverse: age and the changing attitudes from youth to adult life or old age; gender and the female– male encounter and/or failed encounter and conflict; urban life or rural environment, and provincial life versus living in the big cities; education; travelling and acquiring experience through meeting other people; training and work experience, and the specific knowledge, or the attitudes acquired in the customary profession; the status and the wealth with the acquired habits of consumption and social frequentation they imply; the exercise of political power and the control over other human lives that derives from it; and so on and so forth. They do not imply, necessarily, a refusal on the part of the author of the inner equality of all human beings, though more or less nuanced ethnic or sexual stereotypes recur in literature, as in other spheres of culture. Characters are built through life experience, much as the porter ends up different from the philosopher, not withstanding their original similarity as

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children. Last, but not least, the personality of each outstanding character has a kernel of attitudes, which make the character unique. Could the different characters acting in economic scenarios in literature be simplified into a bunch of standard assumptions on choices and behaviour? The answer is, of course, no. On the contrary, economic models explore the strategic interaction among characters in their plots under the explicit assumption that either the agents are perfectly equal in cognitive and emotional abilities or they may be classed in a few exhaustive typologies. The structural hard core of economics stands on assuming perfectly symmetric agents in general equilibrium models, or on the stronger assumption of the representative agent (only one standard character exists). In economic models, agents are but a few types, when they are not reduced to a single stereotyped character. The many agents of competitive markets are, like Edgeworth’s Fridays and Robinsons, replicated in copies. Game theory is systematically studied in the perspective of cognitive symmetry.22 Asymmetries have been studied in many economic models: the general public versus the central bank in assessing the effects of monetary shocks; the price leader versus the followers in duopoly models; the principal versus the agent in principal–agent models; the young versus the old in overlapping generation models, to quote but a few. Although research is expanding, the range of cognitive or information asymmetries remains small. Asymmetric agents are but reproduced replicas of a small set of standard assumptions, certainly not the hundreds of which Balzac spoke. As a second element of remarkable difference, novels and stories are symbolically tracing path-dependent dynamics (not, of course, in the strictly technical meaning). The effective plot creates a compelling logic connecting events in time, including chance, through crucial episodes in individual lives and encounters between the asymmetric characters. This relates to public events as much as to the private sphere of the inner self. In Die Verwandlung (The Metamorphosis) by Kafka, when Gregor Samsa is changed into a monstrous insect, this is an irreversible, path-dependent process; the reader perceives it as such.23 When Hamlet kills Polonius or Ophelia drowns herself in madness, these are irreversible events in the tragedy, and signposts for ever of what will come. The plot, the story, the drama, the tragedy, or the happy ending depend on the way people met and related to each other in crucial exchanges in irreversible lives. Literary path-dependence is not to be confused with determinism, destiny or fatalism (that may or not inspire the vision of authors). In family, love affairs, business, social life, in the whole complexity of personal relationships, literary language underlines the core of personal responsibility. Plurality of voices and path-dependent plots have more than ornamental value. Literary fiction conveys meaning and stirs emotions, because it evokes values and choices, open or fading opportunities in human life. As a third element of difference, in literature characters are never confronted with optimising procedures. They face conflicts and trade-offs that leave ineradicable marks on the souls of those involved. In choosing, people

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suffer and change. They acquire more mature personalities, or they end up captured in emotional traps. Literature deals with alternative ends in perspectives radically different from optimising criteria, whatever they are. Masterpieces in literature portray conflicts in motives and behaviour, because of ethical conflicts, which admit of no easy solution, or because of emotional conflicts that fail to reconcile in clear-cut trade-offs. Motives form layers of meaning, one entrenched in the other, one concealed within the other. Ends have to be supported by the will, with constancy and determination. Resolution or prudence, the interests and the passions, ‘pride and prejudice’ mingle in precipitating choices towards the happy end or the drama. Cournot wrote that he needed only one assumption from which all the following theorems could be derived: the maximising axiom in market behaviour (Cournot ([1838]1980): 35). In literary masterpieces, much as in the ordinary television drama or the film noir, motives are an intricate bunch of emotions, where interest and passions mingle. Why is Raskolnikov killing the old usurer in Prestupleniye i nakazaniye (Crime and Punishment)? Is it interest, because of the money? Why is Smerdiakov killing his presumed father, old Karamazov? Is it material interest? Where does the dividing line lie between interest and other passions, such as ambition, career, the desire for social recognition, the fatal compulsion to experience extreme power over other people’s lives, or lust, love, other powerful emotions? The ordinary experience of readers of fiction, be it high fiction as Bratya Karamarazovy (The Brothers Karamazov) or ordinary detective stories, is that the fascinating element in the plot has to do with the complexity of motivation. Who would enjoy a story where the characters were so transparent that the reader could clearly guess them from the beginning? Would Pride and Prejudice have any interest if the reader could decode Lizzy and Darcy from the first pages? Would the reader go through the hundreds of pages of The Lord of the Rings if he or she could know for certain that Frodo will never be overwhelmed by the power of the ring? Could the patient reader face the tomes of Tolstoy’s Voyna i mir (War and Peace) if the dreamy Natasha were not ready to flee with a lover before turning into an affectionate mother? ‘O Hamlet, thou hast cleft my heart in twain.’24 ‘Zwei Seelen wohnen, ach! in meiner Brust.’25 Literature deals with hearts split in two or more pieces. It is no easy task to throw away the worst part of each character’s heart, and live the purer with the other half.26 The double, the split of the personality, is a specific trope in a number of literary texts, from Poe to Stevenson to Dostoevsky. Stevenson wrote in a letter, ‘My point is the identity with difficulty preserved.’27 In Dostoevsky the double portrays the absence of clear identity, deeply linked to evil and guilt, for the absence of clear moral consciousness (Picon 2002, 2005). Tragedy deals with extreme ethical conflicts. Inner conflict, the construction or collapse of identity, moral dilemmas are at the core of the literary enterprise in innumerable plays, dramas, tragedies, novels, stories, and even in lyrical poetry. The character’s self is not a solid set of axioms, given a priori, but it develops in life experience, through

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age and encounters, in facing crucial events and relating to other human beings, or even to the whole creation.28 Let us note, in passing, that mythologies, fairy tales or fantasy literature are no different from realistic novels in this respect. The three differences we have emphasised, in modelling strategies and pattern of understanding, imply a different approach to economics in literary texts and economics in economic modelling, beyond the personal ideologies and prejudices of authors or economists. Let us summarise some consequences, as they appear in the ways writers and economists narrate economic events. Since many agents act in economic sceneries in literature, market dynamics result from the interaction of their different cognitive and emotional selves, or from their access to different social networks or sources of information. As a consequence, markets are never transparent. Information flows through networks of social relationships; it is frequently monopolised, and access to it is crucial to success in business. In view of the increasing attention to information asymmetries in economics, this is an interesting aspect, even at a technical level. A number of novels present the description of unregulated stock markets, where all kind of asymmetries in information and cognitive abilities (the experienced insider versus the naive outsider) concur in violating fairness in principal–agent relationships. This has been interpreted as expressing, through literary language, the widespread mistrust in markets by literati, the stock exchange being seen as Mammon, a devouring demon. However, it is the real experience of emerging markets that failures in public regulation open the way to all kinds of abusive behaviour by insiders, as documented in many historical examples (and in well known recent cases). Since the many characters relate to each other in emotional life involving ethical responsibility, in literature money is not only power of command over goods; it is power of command over other persons’ affections. In circulating, money is an effective means of symbolic communication connecting people. It is a symbolic language in social relationships. It governs marriages, interferes with passions, confers social standing, gains respect or destroys honour. Money and wealth are powerful instruments of access to social networks, social recognition, success and visibility. They buy access to positional goods. They may be the foundation of personal or family welfare, or the source of corruption and ruin. Monetary deals are signalling devices to other persons, communicating benevolence, affection, disdain, reciprocity, social hierarchies, dependence or freedom, command or obedience, love or hatred. Money is a way to speak to other people. Not even misers like money per se; to misers money is a passion, a vice, and the substitute for missing affections. The money motive in literature is but the first layer of deeper strata in the personality. In consequence, it may take thousands of nuances. One crucial episode in Idiot (The Idiot) has to do with a large sum of money offered to buy Nastasia’s love and thrown to burn into the fireplace. In Bratya Karamazovy (The Brothers Karamazov) a relevant amount of money is offered to ask forgiveness for the misbehaviour of Misha Karamazov, but the offer is rejected.

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Misha Karamazov has a dissipative attitude towards money, a peculiar mark of his impulsive and excessive personality. Along with wealth, status is an independent mark of social intercourse, as Delany (2000) analysed in Emma by Jane Austen. Status influences personal destinies in many stories.29 The ambition to change one’s social status moves hundreds of characters to action, and it may end up in cruel delusion; status may be a barrier and a quite insuperable one, as in Proust’s Recherche. Since personality plays a role in life achievement, temperament and disposition contribute to success in business, or in securing status or wealth within the horizon or reach of each diverse character. Characters are actively trying to shift out their budget constraints dynamically, often to move up their social status. Literature has told many stories of people desperately trying to achieve status through wealth, but the reverse is also true: an easier budget constraint may be reached by achieving status. Investing in human capital is a widespread strategy, but destroying human capital is also an ordinary experience in fictional stories. Debt, bankruptcy and poverty are a constant menace to characters in nineteenth-century novels. Madame Bovary, to quote but one example, is submerged by debts. A disturbing number of characters go bankrupt, dissipate their wealth or are unable to ‘better their condition’ through economic activity. Literary works have dealt extensively with marginal people, as much as with success or bankrupt entrepreneurs. Debts and bankruptcies are, of course, metaphors of deeper emotional, cognitive, behavioural disequilibria in the inner self and in social intercourse. Literature faces the dark side of the human personality, destructiveness in individual life and in human relationships. It is the missing parable in economics, among so many economic parables told in mathematical modelling. It is still the untold story, though it touches on economic events, as on so many other aspects of the human condition (Ingrao 2006).

Conclusion The subject of economics versus literature, examined under the perspectives mentioned in this chapter, offers a rich field of inquiry, especially precious to the historian of economics who is interested in the birth of ideas and their roots and connections across fields of knowledge. It offers opportunities to look into the historical context and social environment where scholars in both fields work, and to capture the intellectual or emotional currents running across the diverse spaces of culture, involving both writers and readers. In further research, the specific scholarship of the historian of economics may provide value added to literary studies proper, but only when combined with careful listening to those aspects in the literary enterprise that are foreign to the practices of economic research. Many masterpieces of literature portray a rich gallery of characters illuminating the emergence of new protagonists in markets, or the evolving nature of markets in social history. To the general economist, literary texts offer the opportunity to think about the cognitive

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asymmetries, moral dilemmas and deep emotional echoes that are always at work in human action and human choice, as opposed to the ethereal images of algorithmic procedures representing choice and action in economic theory. It is a welcome reminder against the persistent attempt within the economic discipline to erase the spiritual side and ethical responsibility, reducing again and again the human subject to stereotyped versions of the maximising agent. New reductionist ambitions are powerfully at work in economics, after the failure of the mechanist vision entrenched in the earlier projects to mathematise economic theory. They are framed as the pretence of forcing the explanation of all human behaviour in the balancing of benefits versus costs, or as the revival of crude utilitarianism spreading from economics proper to political science and psychology, or as new proposals of rough biological reductionism, choice conceived as but the slave of the brain and the reflex of its biochemical and electrical working. At a deeper level, literary works remind economists of the ancient kinship of political economy with moral philosophy, and, as Smith would have agreed, ethical judgement requires educating our moral sentiments through open-minded reading in the humanities.

Notes 1 Martha Nussbaum wrote a plea defending the contribution that novels provide to public debates on ethical, political or legal issues (Nussbaum 1995). On the controversial issue of literature versus real life, see also Dubois (2000) and Dickstein (2005). 2 In their ‘Introduction’ to a collection of essays on economics and literature, Woodmansee and Osteen provide a rich survey on how literary criticism developed an interest in economic language to read literary texts in the body of studies known as ‘economic literary criticism’, exploring analogies between linguistic and economic systems, and notably homologies between language and money (Woodmansee and Osteen 1999a, b). The authors note the risk of economism in this current trend in cultural studies. It is worth underlying that the present chapter is based on radically different methodological premises. 3 See Farnham (1931), Bruster (1992), Desan (1992), Sherman (1996), Johnson (2000) and Ingram (2006), among many other titles only partially quoted in the references. Milton was deeply engaged in the discourse on trade (Hoxby 2002). Goethe, it is well known, dealt with paper money in his drama Faust (Shell 1982). 4 Some critics maintained the opposite thesis, though there is overwhelming evidence on the large presence of the economic sphere in contemporary literature. For instance, Moretti wrote that the economic world had almost no relevance in the literary masterpieces of the nineteenth and twentieth centuries (Moretti 1987: 28). 5 A web site is devoted to The Financial Fiction Genre: Banking and Finance in Literature (www.ex.ac.uk/~RDavies/bankfiction), created by R. Davies, from which we extract information on recent literature in the genre. 6 ‘Then such a bad year came when the famine hit so hard that the poor people resolved to rid themselves of their children.’ 7 The shortlist below and the references are surely incomplete; a critical review of all contributions in the field would be beyond the purpose of this chapter. 8 For references on ‘Economies of authorship’ see the survey by Woodmansee and Osteen (1999b) quoted above. 9 For the detailed references see the essay by Ranchetti quoted above. For a survey with further references see Watts (2002).

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10 The island metaphor underwent notable development in contemporary macroeconomics. 11 Wilkins Micawber is of course a character in David Copperfield. 12 For a shortlist see Brams (1994: 36). See also Deloche and Oguer (2005). 13 ‘In a survey of such [literary] works, however, we found a surprising number that describe analytical economic concepts accurately’ (Watts et al. 1989: 291). 14 Marshall Jevons is the pen name of two professors of economics, who jointly wrote the detective story Murder at the Margin. The book – so it seems – has been used as supplementary material in teaching economics in some colleges. 15 In his reply Becker commented, ‘Let me thank Hirshleifer for such a formidable protagonist as King Lear. Can economics now be extended to literature as well?’ (Becker 1977: 507). 16 Vatin argues that in the first half of the nineteenth century economic images and conceptions pass on from political economy proper to the natural sciences (Vatin 2007). 17 In their survey Woodmansee and Osteen critically underline the narrowminded Marxist vision that imbues a number of studies in new economic criticism dealing with economics and literature (Woodmansee and Osteen 1999b). 18 ‘Bankerisation’ is ‘the specter haunting the globe’ (Houston 2005: 9, quoting Goux)! Bank money, one of the most useful inventions in history, since it abates transaction costs, is seen as the monster of financial capitalism! 19 Gallagher (2005) argued that in Victorian England economists and writers shared a common background in thinking about sensation and value. 20 The relation of Keynes to the Bloomsbury group was extensively explored, with controversial results on the connection of Keynes’s thought with modernism, or rather with postmodernism (Klaes 2006). 21 Lewis (2000) maintained the opposite thesis, that neoclassical economics is a mode of storytelling, and as such cognate to novels. He examined four novels from the perspective of neoclassical concepts (Robinson Crusoe, Frankenstein, Moby Dick, Sister Carrie). 22 A notable exception is Schelling’s approach based on heterogeneous agents that has not been followed in mainstream game-theoretic literature (Innocenti 2007). 23 The Metamorphosis was first published in 1915. 24 Shakespeare, Hamlet, III.iv.159. 25 Goethe, Faust, I.1112. 26 ‘O, throw away the worser part of it and live the purer with the other half’. (Shakespeare, Hamlet, III.iv.160–61). 27 Quoted in Houston (2005: 93). Houston’s interpretation of The Strange Case of Dr Jeckyll and Mr Hyde gives a narrowminded reading of the double trope in Stevenson’s story, and it should be rejected as an example of biased economic reductionism in interpreting literary texts. 28 The attitude towards non-human living beings is a test of compassionate feelings in so many fairy tales and stories. In Crime and Punishment the beating to death of a worn-out horse turns into an agonising symbol of violence and evil on earth. 29 This is a dominant theme, for instance, in Balzac, in Stendhal, in Flaubert.

3

Happiness What Kahneman could have learnt from Pietro Verri Pier Luigi Porta

Political economy and psychology: from Bentham to Kahneman Most psychologists today would assure us that, at the time of Bentham, psychology did not exist. At the same time as eminent a psychologist as Daniel Kahneman seems to favour a return to Bentham.1 And Bentham certainly has something to do with the Verri story told in this chapter. It is well known that Bentham himself acknowledged his own debt to the Milanese school of political economy, flourishing in the years 1760–80. The so-called Accademia dei Pugni, together with the periodical Il Caffè, was the seat of the initiatives and intellectual activity of the Milanese school. By far the best known and influential personality of the school was Cesare Beccaria. However the founder and leader of the group and the real mentor behind Beccaria was Pietro Verri. For various reasons, this is still insufficiently acknowledged to the present day. A few words on Pietro Verri and Cesare Beccaria Pietro Verri (1728–97) – the Milanese economist, philosopher, historian and consultant administrator – at an early stage in his career wrote a short treatise on commerce,2 a clear sign that he deemed political economy to be the field of study more proper to his temperament and ambitions, opening up a way to him to the fulfilment of his theoretical and practical objectives. He indeed was keen on qualifying to enter the public service in the local administration of Milan, which was part of the Hapsburg Empire at the time. In his so-called ‘sincere memories’ Verri himself described that particular period of his own life. In December 1760, at the end of a year’s stay in Vienna, he made clear how significant it was to him to be considered as a political economist: I shall be employed then. But, what for? Here I am going to open up my plan to you. In Milan there are no other luminaries but those of the judicial practice. The mint, the regulation of staples, the waters, manufactures and commerce: all is in the hands of the Doctors, who, imbibed with opinions

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going back to Bartolo, actually either do not have the slightest idea of political economy or the ideas they have are such that it would be much better they had none at all. Marquis Carpani years ago did think of the same course as a way out, but he got lost out of imprudence; nor would I be able to say whether or not he really was possessed of the principles for a reasonable reform. That is now the road I see open to myself. But it is not without reflection that I have made the decision. Without reading any one of the latter-day authors I have dared, months ago, to draft the elements of commerce. Through definitions, propositions, consequences and the like I have drawn what seem reasonable conclusions to me from my own thoughts. When the work had thus been drafted, I walked to the Imperial Library and started reading on the subject. I have read Forbonnais, Melon, Du Tot, Hume and now I find that my own elements stand up, nor do I feel ashamed of them. (Verri 1760b: 104)3 The special characters of Verri’s inclinations, as just described, did in fact produce practical fruit through the years of activity after his return to Milan. But the full potential of his own political economy has hardly been recognised, and to the present day Pietro Verri remains comparatively little known as an economist, and his continuing life, in intellectual terms, is rather that of a philosopher and historian. Peter Groenewegen, when he published (1986) the first English edition of Verri’s Meditazioni sulla economia politica, noted (p. ix) that there seems as yet to be no variorum or diplomatic edition of the Meditazioni. In fact I am happy to report here that the present chapter is produced in parallel with work – now in progress under the general editorship of Carlo Capra and due to be published by the Fondazione Raffaele Mattioli of Milan – on the preparation of the Edizione Nationale delle Opere di Pietro Verri. The Edizione Nationale is designed to offer a diplomatic edition of the texts and it includes published items together with a very considerable quantity of unpublished papers and documents, preserved in the Verri Archives at the Fondazione Mattioli.4 The Edizione Nationale is planned to extend over six volumes, two of which (namely Vol. III and Vol. V) have already appeared in print. In particular Vol. III of the Edizione Nationale, published in December 2004, contains the variorum edition of Verri’s Discorsi of 1781. It also includes the Discorso sulla economia politica, which (as we shall see presently) is the last edition of his main economic work, the Meditazioni sulla economia politica. The Discorsi of 1781, as a work of Verri’s maturity, are perhaps the best example among Pietro Verri’s works to show how political economy really was Verri’s core concern. It is a special character of Verri’s analysis that it was precisely the need to develop the economic discourse that led Verri into the philosophy and the psychology of happiness and into the study of the nature of pain and pleasure. The point can be examined by following up the

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construction of the three texts composing the Discorsi of 1781 through Pietro Verri’s thought and activity. Let us now turn briefly to Beccaria. Born in Milan in 1738, Cesare Beccaria was still in his twenties when he acquired a superior worldwide reputation, the highest in the Milanese school, soon after the appearance of his celebrated pamphlet Dei delitti e delle pene (Of crimes and punishment) in 1764. A professorship of scienze camerali, meaning political economy, was created for him at the Scuole Palatine in Milan in 1769.5 Beccaria, much like Verri, was also a consultant administrator and a member of the Supremo Consiglio di Economia from 1771. Both Beccaria and Verri contributed a number of reports, or consulte, within the Consiglio. For Beccaria, natural laws of force and attraction are at work also in the moral domain with the opposite ‘attractions of pleasure and pain’. A sort of stadial model of human development is sketched by him and this is developed further also in his Ricerche intorno alla natura dello stile of 1770 and in the opening chapters of the Elementi di economia publica. In Beccaria’s conception, the progress of nations is revealed through the discovery of the unity of all phenomena; accordingly the use of analogy becomes widespread and sophisticated. More particularly, in his view, a principle of ‘economy of action’ (minima azione) appears to be common to the physical world and the moral world.6 Beccaria develops a kind of Moral Newtonianism, particularly in an essay which opens the second volume of Il Caffè and which discusses the conception of the ‘unity of science’ as the real object of the journal and as the way of spreading useful knowledge.7 It is here that the sensationalist and materialistic side of the Galileo–Newton tradition comes to the surface through the utilitarian conception that was distilled within the Milanese school under the leadership of Pietro Verri. Both Beccaria and Verri, probably following Helvétius, effectively contributed to launch the famous dictum that laws are to be considered – as Beccaria writes in the introduction to his 1764 pamphlet by making use of the formula of Scottish origin (formulated by Francis Hutcheson in 1725) – from the standpoint of ‘the greatest happiness of the greatest number’. Jeremy Bentham would stress the importance of Beccaria along with Helvétius and Maupertuis in the development of utilitarianism.8 Beccaria, in Bentham’s opinion, pursued and completed in an important way Maupertuis’s work on moral philosophy of 1749. But behind Beccaria we have to see Pietro Verri, as we proceed to illustrate in this chapter. Psychology and economics: a long-run perspective Historically the relationship of economics and psychology has been rather twisted, and this provides a case where the historical analysis perspective becomes essential in order to capture the drift and the novelty of the current frontier of research. We shall proceed here by taking first of all a specific instance of the relationship, which will be epitomised on the basis of the case of Daniel Kahneman.

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Let us now turn our attention to the final years of the twentieth century, when the new marriage of economics and psychology sets in as a reaction to the excesses of ‘perfect’ economic rationality. Daniel Kahneman stands out today as the most relevant scientific figure in the realm of the vigorous new wave of research on the widening common ground shared by economists and psychologists. A psychologist by training, his activity in research and teaching has been developing for many years at Princeton, largely in collaboration with Amos Tversky. A Nobel Laureate for Economics in 2002, Kahneman was singled out by the Royal Swedish Academy ‘for having integrated insights from psychological research into economic science, especially concerning human judgement and decision-making under uncertainty’. The rise of the sub-discipline of cognitive economics, under full development nowadays, could hardly be conceived without his own contributions to research. Kahneman’s approach embodies the retrieval of the tradition of classical utilitarianism, from Jeremy Bentham down to John Stuart Mill, to Francis Ysidro Edgeworth, to Maffeo Pantaleoni, Henry Sidgwick, Philip Henry Wicksteed and others. New experimental instruments and a new conceptual apparatus have been designed by him in order to explore the world behind choices: the realm of preferences. In the language of economic theory, it is probably fair to say that the new cognitive discipline can be conceived of as an alternative to the behaviourist approach implicit in the axiom of revealed preferences, on which the standard economic approach to human choice has long been based. The new line of research is of comparatively recent development: recall, for example, that it has very little place (barring perhaps the substantial ‘Behavioural economics’ by Herbert Simon) in such a staple reference work on the state of economics as a discipline today as the New Palgrave Dictionary, published in 1987 by Macmillan.9 The relationship of psychology and economics goes back to the linking of pleasure and satisfaction with economic value in the philosophers of the ancient world. Relevant episodes in the relationship, closer to our own times, are connected, for example, with the famous St Petersburg paradoxes putting forward a challenge to justify the finite value of an infinite-sum game: a challenge taken up by Daniel Bernoulli in his notable memoir of 1738, Specimen theoriae novae de mensura sortis, precisely on the basis of a psychological notion of subjective value. A little later, during the latter half of the eighteenth century, as just hinted, Jeremy Bentham liked to declare himself a follower and student of Cesare Beccaria. More facts in the rich and complex developments of the relationship of the two disciplines crop up during the nineteenth and twentieth centuries. Heinrich Gossen, Stanley Jevons, Carl Menger, Maffeo Pantaleoni and Friedrich Hayek provide relevant examples on the economists’ side; a further step is represented by the Allais and Ellsberg paradoxes during the 1950s. In spite of all the above developments, however, economics has ended up being conquered by a growing emphasis on separation and autonomy with respect to psychology. We cannot fully discuss the issue in the present context

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and we simply limit ourselves to recalling here that such an emphasis reflects a line of thought which is the product of extraordinarily influential contributions, such as those of Vilfredo Pareto, John Hicks, Lionel Robbins, John von Neumann and Oskar Morgenstern. That, as an approach to the problem, is still largely part of the prevailing public image of economics as a scientific discipline. That is why the logical and rhetorical strategy of economic science has been based, at least since the second half of the nineteenth century and all through the twentieth, on the assumption that each individual is endowed with stable and coherent preferences and that he or she rationally maximises those preferences, following the well known adage De gustibus non est disputandum, later called into question by several authors. Under uncertainty, given a set of options and probabilistic beliefs, an agent is supposed to maximise the expected value of a specified utility function. The canonical form of the economic problem then takes the shape of a problem of optimisation – which is characteristic of the economic approach such as described in Lord Robbins’s (1932) classic treatment. In that perspective, economics and psychology are disciplines altogether separate and working on independent statutes. Although that approach was often thought of in normative (rather than positive) terms, it is clear that economics has come to be based on a solid rational set-up, which is what any student of economics is first taught even today. Vilfredo Pareto goes as far as theorising economics as the discipline of logical actions, i.e. actions motivated by instrumental rationality, to be kept separate from sociology, which deals with non-logical actions. The transition phase is well developed today. It is one of the main achievements of Daniel Kahneman’s scientific work to have brought back to centre stage the connection between psychology and economics, giving rise to surprising and fascinating results. In Kahneman’s view the formal consistency requirements of so-called ‘economic rationality’ are psychologically impossible: they quite simply cannot be met by the human mind. However, it would be a mistake to conceive of Kahneman’s position in terms of a radical critique of rationality. His position implies, rather, that the sole realistic notion of rationality is the notion of ‘bounded rationality’, a concept introduced by Herbert Simon.10 It is only through Daniel Kahneman’s research work, to a large extent together with Amos Tversky, that it has been possible to understand more thoroughly why and, above all, how rationality is limited and to explore the psychic mechanisms through which the actual beliefs and preferences of the agents are generated. Daniel Kahneman’s research presents a menu of important ways in which economics has traditionally misunderstood human behaviour, thus ending up endorsing, in the name of rationality, misleading arguments about human behaviour. Kaheneman’s works analyse a number of heuristics, or cognitive procedures, which are associated with particular biases.11 A whole array of behavioural and experimental applications – in the field of finance, organisation, decision theory and so on – prove the fruitfulness of the

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approach and have improved economic analysis by incorporating greater psychological realism. The research work in question has been in part developed in collaboration with other authors, notably with Amos Tversky and Richard Thaler.12 Kahneman phase 1 and phase 2 It is perhaps possible to speak of an initial phase (phase 1) of Daniel Kahneman’s scientific activity, leading to the construction of his theory on the framing of decisions. In an important work first published in 1986 with Amos Tversky, ‘Rational choice and the framing of decisions’, the authors argue (p. 67) that ‘alternative descriptions of a decision problem often give rise to different preferences, contrary to the principle of invariance that underlies the rational theory of choice’. The descriptive realism of the scheme of rational choice is called into question by the fact that it is impossible to stick to the classic ‘invariance principle’ – which maintains a sort of ‘neutrality’ of preferences with respect to the frame which provides the setting of their formation and where the process of choice has its origin. There are rules that govern the framing of decisions and it is necessary to take into account the psychophysical principles of evaluation embodied in prospect theory. Kahneman and Tversky’s prospect theory lays the emphasis on a specific asymmetry in the process of evaluation and individual judgement and leads to the conclusion that different preferences take shape, according as a given problem – with a given outcome in terms of expected utility – is formulated in terms of possible gains rather than in terms of possible losses. At the same time two different modes, though logically equivalent, of specifying a problem can lead decision makers to different choices. Since agents are empirically more sensitive to losses than they are to gains (a principle later to be called loss aversion by Kahneman and Tversky), a frame which highlights the losses associated with a choice makes that choice less attractive.13 We can understand that Kahneman’s work (phase 1) consists of series of specifications, routines, ‘maps’ of bounded rationality (following the title of his Nobel Lecture: see Kahneman 2003); specifications reflecting ‘the heuristics that people use and the biases to which they are prone in various tasks of judgment under uncertainty’, following a famous Science article (with Amos Tversky) in 1974. What emerges is a new theory – which includes, at least in part, the formation of preferences – that provides an attack on the economic modelling of behaviour in so far as it is based on the application of olympic rationality (even if the latter were conceived in normative terms) on the basis of given preferences. The use of the notion of olympic rationality contributes to building up a strong tendency to identify the economic problem with a question of a relationship between agent and commodities. Under the spell of olympic rationality it is Robinson Crusoe – the castaway on a desert island – who forms the prototype of the economic agent, the Homo oeconomicus. Kahneman and

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Tversky’s approach, on the contrary, is fully open to a conception of economics as the study of relations among (personal) agents, including the implied strategic perspectives. The idea of the so-called focusing illusion provides a basis for developments in that sense.14 Moreover, in Kahneman and Tversky’s approach, the root of the insufficiently descriptive power of ‘classical’ analysis of expected utility is also linked with an exclusive focus of the latter on final states or on the outcomes of a process of choice. Contrary to that, the logic of the new approach implies a principle of reference–dependence whereby the carriers of value are gains and losses defined relative to a reference point. The transition from wealth to variations of wealth as carriers of utility is in fact made necessary precisely by that ‘irrational’ property of preferences that has been called ‘loss aversion’, as hinted above. The approach stems from a view of perception and judgement emphasising that a general property of perceptual systems is that they are designed to enhance the accessibility of changes and differences. Both the above characteristics (emphasis on relations and emphasis on variations) lead to the outlining of a subsequent phase, phase 2, of Daniel Kahneman’s work, which is rather more directly linked with economics and happiness and adjoining fields. The conceptual apparatus of traditional neoclassical theory in economics is, in a sense, too poor to be helpful in that direction and that is a reason why studies of economics and happiness, now flourishing, exhibit a distinctively heterodox style. One of Kahneman’s main points is that prevailing economic theory only takes decision utility into account, forgetting about experienced utility. Decision utility implies a perfect continuity between preference and choice; preferences, indeed, are inferred from choices. Experienced utility brings us back to Bentham’s concept of utility as a hedonic quality of human experience which can be studied and gauged independently of the process of choice. We shall see immediately how and why Pietro Verri should be brought into the argument. It is interesting that Daniel Kahneman’s experience is singularly apt to point out a peculiar recent twist in cognitive economics (as the new discipline, born out of the hybridisation of economics and psychology, is called), a twist leading directly to the retrieval of some of the characteristic fields of the Milanese school of the eighteenth century. This applies in particular to the study of the relationship between happiness and economics, which is gaining momentum from different sources today and which is receiving fundamental impulses precisely from the more recent developments in cognitive economics. Recent works by Daniel Kahneman have increasingly given relevance to a conceptual definition and measurement of well-being and happiness. We may mention here the collection of papers published by the Russell Sage Foundation in 1999, edited by Kahneman with Ed Diener and Norbert Schwartz, Well-being: the Foundations of Hedonic Psychology and, more particularly, to Kahneman’s article ‘Objective happiness’ which opens the collection. Studies on economics and happiness were given a new lease of life by Tibor Scitovsky and Richard Easterlin in the mid-1970s and are now flourishing

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also as a result of Daniel Kahneman’s contribution.15 Kahneman himself has contributed to the suggestion that Scitosvky scarcely had an audience at the time, especially among economists, as he was trying to retrieve (in substance) Bentham’s notion of experienced utility, particularly in order to explain the dramatic distortion afflicting our economies nowadays, especially in North America by comparison with Europe (see Kahneman et al. 1997). That distortion is the consequence of an excessive focus on comfort (which involves a passive attitude on the part of the consumer) to the detriment of stimulation and happiness (which in turn imply creativity and active participation). In fact focusing phenomena play a vital role in Kahneman’s phase 2. I doubt that Scitovsky himself was a reader of Verri, although I have no grounds to rule that out either. It is perhaps more appropriate to recall that serendipity works wonderfully well in an amazing number of ways. We are talking here of macroscopic phenomena which continue to be more or less ‘invisible’ to the current measures adopted in macroeconomics.16 Daniel Kahneman today contends that a closer look at emotions, affections, sensations and in general at hedonic experiences is a necessary step if we are to offer a more solid and constructive basis for welfare and felicific calculus compared with the income and product calculations used in economics. At the present moment Kahneman’s researches on the subject of happiness aim at the practical result of finding an ‘index of national welfare’ to be substituted for income as a standard indicator. Kahneman’s researches on the concept and measurement on objective happiness are of great significance.17 As already hinted, recent developments in the work on economics and happiness have emphasised the need to distinguish the mere use of commodities on the one hand from involvement in human relations on the other. If economics is gradually transformed, from a discipline of optimisation into a discipline of interpersonal relations and interactions, this fact can be seen as an important confirmation of the need for a reconsideration of Adam Smith’s system and for emphasising the links between the Wealth of Nations (Smith 1776) and the Theory of Moral Sentiments (Smith 1759), thus leading to a much richer image of Smith compared with the traditional neoclassical rationality view of him. But it should also be remembered that the Milanese school, and Pietro Verri in particular, paved the way to the system of Adam Smith.18 A well known theoretical economist, Luigi Pasinetti, in introducing the Bicocca Conference on the Paradoxes of Happiness in Economics in 2003,19 expressed the opinion that the problems and the perspectives opened up by Kahneman’s thought can provide an opportunity for reviving the classical paradigm in political economy, and the Smithian paradigm in particular. Also in this historical-analytical perspective, the interaction between psychology and economics – as it emerges from Kahneman’s research work – questions the status of the ‘normal science’, throws new light on the significance and on the limits of economic thinking and opens the way to new possibilities and applications.

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Pietro Verri’s contribution The Discorsi of 1781 It is now high time to revert to the Verri story. Verri’s volume of Discorsi of 1781, mentioned in the above (Vol. III of the Edizione Nationale, published in 2004), includes three parts which can be briefly described as follows. The first part (pp. 1–100) is the Discorso sull’indole del piacere e del dolore, a revised version of Verri’s own former 1773 pamphlet on the nature of pleasure and pain. There follows a second part consisting of a substantial revision of Verri’s own early 1763 pamphlet on happiness, the Meditazioni sulla felicità. Finally the third part (pp. 185–394) includes, as already mentioned above, a revised version of Verri’s Meditazioni sull’economia politica. These Meditazioni had first been published in 1771 and had gone through several editions. In assessing the significance of Verri’s Discorsi, the most important point is to notice that Verri’s reflections on happiness date from a very early stage and that his thinking on happiness proceeds in parallel with his economic thought (leading to the other Meditazioni in 1771) at least from 1760. That parallel development also appears to coincide with Pietro Verri’s study of Montesquieu and of Helvétius.20 In his extensive correspondence with Alessandro, his brother, in September 1778, Pietro Verri makes it clear that the order of the three texts in the volume of Discorsi will be their inverse chronological order. We are confronted – the editor of the text in the Edizione Nationale observes (Vol. III: 163) – with a carefully thought out logical ordering, which happens to coincide with the inverse chronological order, thus going from the nature of pleasure and pain (1781) to happiness (in the edition of 1778) and ending up with the political economy of 1771, albeit modified. What the chosen order makes absolutely clear is that it is precisely happiness, Verri’s early subject for reflection, which occupies a pivotal position in the book. In this way the reader comes to be guided by Verri’s analysis – starting from an assumption on the central function of pain in human life – to conceive of ways in which, by minimising the sum of pains, man can live an existence as little painful as possible and, further, to translate those conceived ways into politico-economic principles, thus approaching the achievement of public and collective happiness. In the Italian context, through the latter half of the eighteenth century, public happiness is well known to be the really fundamental concept of economic thinking. It is possible to show that the line of thought developed by the two major politico-economic schools in Italy at the time in fact revolves around that concept. The Milanese school, in particular, works on the eudemonistic eighteenth-century issues, starting from a hedonic perspective. Thereby individual happiness is the starting point. The canons of the ‘new science’ are of course – according to the spirit of the age – woven into the political and economic discourse, which comes to be shaped precisely by making use of those canons. It is because of that intellectual drift that

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scientific and technical matters acquire prominence among the contributions to Il Caffè. The triumph of natural science in all its applications stands out as typical of the Italian Enlightenment. This is particularly true of the Milanese school, while the Neapolitan side is more distinctly philosophical. Especially with Genovesi we have an original reinterpretation of the Aristotelian and Scholastic tradition, thus leading the Neapolitan school to attempt to update that tradition and bring it into line with the new scientific method: civil economy is the main fruit of that effort.21 In the present chapter we focus on Pietro Verri’s Discorsi, which also provide a signal instance of what civil economy, or economia civile, means in eighteenth-century Europe. At the same time it is not altogether improper also to speak (in Verri’s case) of an early programme of research in psychology and economics. Pleasure and pain analysed Verri’s political economy rests on several elements. For a rational reconstruction of Verri’s contribution, it should be noted that the first is a philosophical element with a psychological content, which would find a significant expression, a few years after his major book on political economy, in his Discorso sull’indole del piacere e del dolore, first printed in 1773 as Idée sull’indole del piacere and later expanded into the Discorsi of 1781. In that work Verri discusses the nature and effects of pleasure and pain. He makes clear the influence of Maupertuis on his own reflections. Without going into the extremes touched on in La Mettrie’s Homme machine or Discours sur le bonheur, or Holbach’s Système de la nature, or even of such later works as de Sade’s Philosophie dans le boudoir, Maupertuis had indeed proceeded sufficiently along the road of materialistic and deterministic sensationalism to endorse the reduction of all forms of happiness to pleasure and to think of it as measurable. The frame of reference for Verri’s treatment on the nature of pleasure and pain is twofold. On the one hand there is a large current of thinking which may be termed moral Newtonianism; on the other hand we have the developments of sensationalism and materialism in eighteenth-century thought. These two currents of thought develop their influence all over Italy and they are a driving force in the flourishing of economic thought especially during the latter half of the eighteenth century. At the same time the political economy that spreads in Italy, within that frame of reference, is largely a development of the theme of happiness, and of public happiness more precisely, within a ‘constitutional’ framework. A locus classicus of moral Newtonianism is to be found in Adam Smith’s Essays on Philosophical Subjects (1795) and more particularly in his essay on the history of astronomy. Following Hume on the method of the new science and on the connection or association of ideas, Smith is led to emphasise the idea of connection, thus turning a treatment on the physical world into something of interest in the realm of morals and politics. He, in fact, professes

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to be dealing with philosophy: ‘Philosophy is the science of the connecting principles of nature’ (ibid.: II, para. 12). He would, in due course, go on to state the same of moral philosophy in the Wealth of Nations.22 It is really the implications of the use of analogy, together with the application of Ockham’s razor, that form the basis of Smith’s admiration of the Newtonian system ‘as the greatest discovery that ever was made by man, the discovery of an immense chain of the most important and sublime truths, all closely connected together’ (1795: IV, 76). It evidently is in that sense and in view of that use that Smith insists on such a great discovery as a product of imagination as well as an unveiling of truths.23 In their turn the developments of the materialistic branch of the Enlightenment can take either a mechanistic (homme machine) or a vitalistic (homme sensible) drift.24 The use of analogy, either mechanical or biological, signals the distinction. We take these and related offshoots to represent the French– Continental branch of Newtonianism, which links up with eighteenth-century sensationalism and materialism. A typical intellectual figure, whose significance also extends to highlighting also the influence of Newton on the moral and political sciences, is Pierre-Louis Moreau de Maupertuis (1698– 1759). Other significant authors include Condillac, d’Alembert, d’Holbach, Diderot, Helvétius, La Mettrie and Sade. In discussing Verri, some general characters of the Italian case should be borne in mind; the above ramifications of Newtonianism work their way through the Italian eighteenth-century context and spread their influence on the rise of the major schools of Political Economy: Pietro Verri emerges as the leading character of the Milanese school, while Antonio Genovesi is the outstanding figure of the Neapolitan school.25 Two characters of Pietro Verri’s analysis of pleasure and pain need to be stressed here. The first point concerns the nature of pleasure: pleasure does not exist by itself; it consists in the rapid vanishing of pain. This leads to Verri’s insistence on the primary role of pain in human life. He inclines to exploit the human capacity of making comparisons in this field and thereby achieve some kind of measurement, taking into account the two fundamental dimensions of pain and pleasure, namely intensity and duration. The reality and the dynamics of human life have their source and motive in pain, while pleasure is made of a temporary – and to some extent uninteresting and static – suspension of pain. Therefore the total sum of pleasures can never exceed the total amount of pain.26 The second relevant aspect of Verri’s treatment concerns his emphasis on the distinction between physical and moral pain and pleasure. The distinction is already extant in Maupertuis; however Verri’s discussion leads him to stress the importance of sensitivity over the mechanics of pain and pleasure and thereby the qualitative aspects of the problem. Following probably Helvétius and Adam Smith,27 Verri ends up very far from La Mettrie’s Anti-Sénèque in spirit and develops a more cautious, though extremely effective, form of scientism in the eighteenth-century context.28 Verri insists (cf. the Discorso sull’indole del piacere e del dolore, s. II)

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that physical pleasure and pain are based on actual and direct sensation, while moral pleasure and pain are rather a matter of memory and expectation. It is at a more fundamental level that Verri’s Discorso sull’indole del piacere e del dolore introduces the distinction between physical and moral feelings.29 Moral feelings or sentiments are indirect or higher-order feelings, which cannot be experienced unless a reflecting faculty is sufficiently developed, i.e. an attitude to consider a mirrored reality and to evaluate one’s feelings in relation to it. Verri makes a distinction between immediate experience and mediate (or indirect) experience, where the mediation occurs mainly through memory. A moral dimension is characteristically associated by Verri with the mediated experience. Our sensations (both pleasant and painful), Verri argues, depend on three principles: immediate bodily action, hope and fear. The first principle is the origin of physical sensations; the two others of moral ones. In this way Verri establishes a close link between the degree of development of moral sense of individuals and groups and the cultural ingredients of their relational network. This same analysis also provides the foundation of his economics: trade is the product of sophisticated moral sensations.30

On happiness and economics The ‘Accademia dei Pugni’ and the review Il Caffè are the institutions through which the Milanese school of Political Economy comes into existence during the early 1760s. Pietro Verri is the founder, the leader and an active contributor to both. Il Caffè appeared between 1764 and 1766 in successive sheets (fogli) made in two volumes. Volume one (foglio XIX) has an article by Pietro Verri (devoted to thoughts on the spirit of Italian literature) discussing Galileo–Newtonianism at the philosophical level as a force of renovation, providing a new connecting frame for scientific reasoning, in the spirit of what we have called above moral Newtonianism.31 The ‘new science’, or the Galileo–Newton tradition, does indeed provide the frame of reference to illustrate the sources and methods of enlightened thinking. In his Enquiries, Hume (1748: III, 204) mentions – as ‘Newton’s chief rule of philosophizing’ – the idea, ‘where any principle has been found to have a great force and energy in one instance, to ascribe to it a like energy in all similar instances’. This is sometimes called the principle of the ‘analogy of nature’, which postulates similar hidden forces behind parallel phenomena in different fields of experience.32 Hume, for example, singles out ‘usefulness’ as a principle of that kind as a basis for justice. The Italian thinkers, Pietro Verri among them, are ready to make large use of the principle of ‘usefulness’ in their explanations in the field of morals, political economy and political science. In the case of Verri, this line of thinking is conducive to a dynamic view of society, as a system of motions or movements which are studied in order to find their equilibrium. ‘Interest’ takes the place of ‘force’; ‘sympathy’ and ‘passions’ act in the place of ‘attraction’. In the British experience Smith made use of the analogy of gravitation in the dynamics of natural and market

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prices. Hume’s Treatise (1739–40: I.1.4) aimed at extending the notion of attraction from the natural to the moral universe. Among the Milanese, Verri develops his own philosophy from the premise that searching for pleasure and shunning pain are the great engines of human action, as he writes in introducing the Discorso sull’indole del piacere e del dolore, discussed in the preceding section.33 The mechanical analogy seems prima facie dominant; but the biological analogy is also pervasive, particularly as political systems are compared to bodies which can experience corruption and decline but also healing and recovery. It is in that connection that the sensationalistic and materialistic components of eighteenth-century thought acquire their significance. Before examining Verri’s works on happiness on the one hand and political economy on the other (both of which contribute to providing the building blocks for the construction of his own system of political economy), it is worth mentioning that a number of contributions published in the volumes of Il Caffè touch on one or other of the two strands, as described in the above, of the Galileo–Newton tradition, namely the application of the ‘analogy of nature’ on one side and the ‘sensationalistic views’ on the other. In particular Cesare Beccaria, Pietro Verri, Alessandro Verri and Paolo Frisi are among the main authors. Other related figures should be added, among them Gian Rinaldo Carli and Alfonso Longo. As an example Paolo Frisi’s ‘Saggio sul Galileo’, which was published in 1765 in foglio III of the second volume of the journal,34 takes its place in the context of the scientific inspiration of the journal, which includes contributions entirely devoted to problems of applied mathematics, physics and astronomy.35 At the same time Frisi’s essay on Galileo should be considered in conjunction with similar essays in which the author approached d’Alembert, Cavalieri and, above all, Newton. The case of Cesare Beccaria, the best known worldwide, certainly deserves a special treatment in the reconstruction of the formative years of Political Economy in Milan at the time of the Accademia dei Pugni. But it is certainly the works of Pietro Verri which afford the best opportunity to examine the sources and fundamental ideas of the Milanese school, including the influence of the ‘new science’ or the Galileo–Newtonian tradition on Political Economy. Particularly Pietro Verri’s works on Happiness and on Political Economy – the second and third of the Discorsi of 1781 – develop his views on value and money, and on market equilibrium, together with his conception of the dynamics of the system. They provide probably the most interesting analysis of the working of the economy within the Milanese school. We shall here summarise Verri’s view of economy, bringing to light (1) his view on the working of the forces of attraction and repulsion, (2) the basis and development of his hedonistic philosophy, and (3) his constant preoccupation to speak of measurable phenomena. As we have already mentioned, for a full understanding of Verri’s views on commercial society, we have to turn to his formative years. As early as 1763, in his Meditazioni sulla felicità, Verri spells out the foundational pieces of his

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approach to civil life. He argues, in particular, that the excess of desires over and above possibilities or ‘power’ is a measure of unhappiness.36 The search for happiness in the form of the removal of unhappiness is a core issue in Pietro Verri’s political philosophy. He appears from the start as one of the leading representatives of eighteenth-century eudemonistic views. The great object of happiness – Verri argues – can be pursued in two ways. Happiness, in fact, consists in the reduction of the difference between the two elements of desires and power; achieving that reduction can be effected by acting upon either one or the other of the two elements. It can be said therefore that, the object of happiness being reduced to a difference, it can be conquered either by ‘addition’ or by ‘subtraction’: addition of power or subtraction of desires. In typical utilitarian vein, Verri declares addition to be superior. An addition in the form of the enlargement of power provides the main route to happiness as compared with a check on desires. Verri, however, lays special emphasis upon creativity rather than mere enjoyment of what is already in our possession as a condition for happiness. Anyone who has achieved the possession of a moderate fortune – Verri argues even from the opening sentences of the Meditazioni of 1763 – will tend either through lack of prudence to prefer present whims to future needs, or through ill considered distribution to postpone present needs to future whims; either way, the mistaken calculation of the profligate on the one hand, as well as that of the miser on the other, consist in pre-ordaining chimerical to real needs. When the fortunes of an individual or a family exceed the limits of subsistence, a lust for more is generated and the sum of desires is multiplied.37 The appropriate concept to be used in order to clarify Verri’s point of view in this context is ambition, to which s. 3 of the text of 1781 is devoted. Ambition is described as an ambivalent passion, liable to turn equally into the most ruinous and the most deserving of passions. Verri’s own moral approach leads him to attribute an algebraic sign to the content of passions. Ambition can bear both signs: there exists a positive ambition, which coincides with creativity and the continuous search and desire of a person to better his or her condition;38 however, much as we owe any great achievement to it, at the same time – Verri argues – we derive from ambition that peculiar desire for rank and distinction that easily turns into extravagance and prodigality, a delusive drift into ruin not infrequently exciting sneers and contempt in the hearts of the multitude.39 Therefore, sheer enjoyment is to be distinguished from creative enjoyment or the pleasure to make and create. Virtue – in Verri’s own words – is every useful act. Verri’s definition of utility is that of a disposition to perform good acts: ‘“utilità” è “attitudine a far del bene”’.40 Utility to Verri has an active meaning which provides the basis for his view of society in its formative steps as an industrious gathering of co-operating forces, founded upon a compact, the end of which is the participants’ well-being or public happiness. What is meant by that is, of course, the greatest possible happiness distributed with the greatest possible equality.41 Verri invites a reflection on how ‘la beneficenza puramente umana sia una emanazione dell’amore del piacere’ (purely human beneficence

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is a by-product of our love of pleasure). Love of pleasure, in turn, operates through the ‘secret connection’ – la secreta connessione – between our own pain and the pain of others. To Verri,42 good arises from evil, sterility produces abundance, poverty generates wealth, burning needs spur ingenuity, blatant injustice arouses courage. ‘In una parola il dolore è il principio motore di tutto l’uman genere’ (pain is the moving principle of the whole mankind); without it man would turn into ‘un animale inerte e stupido’. Pain excites labour, leads to the perfection of trades, teaches us to think and reflect: it creates sciences, induces us to imagine arts and refine them. Let us finally turn briefly to Pietro Verri’s main book on political economy proper. Verri’s work on political economy owes much to the influence of Henry Lloyd, whom he had met in his early years and with whom he would remain in contact through the years. Lloyd (see Sraffa 1931; Theocharis 1983) is sometimes revisited as a pioneer of mathematical economics and for his 1771 book on the theory of money. Through the forty sections of the Meditazioni sulla economia politica, a work of his maturity published anonymously in 1771, Pietro Verri lays great stress on creativity as the source and origin of the formation of wealth and the real object of the science of political economy. An important example of Verri’s emphasis on creativity occurs in s. XIII of his political economy.43 In a country made rich through industry machines and tools are perfected to such a degree that the workman in a single day will produce an article which in a less industrious nation would take several days to make; such are the resources available to a country which has grown rich through its industry, resources that are lacking in a country whose riches have come spontaneously from the land. (Verri 1986: 44)44 Of course (ibid.: s. I, p. 4) ‘[n]eed or, in other words, the sensation of pain is the goad used by nature to arouse man from the indolent state of stagnation in which he would otherwise languish. … Need [he continues] sometimes leads men to plunder, sometimes to trade. For trade to exist there must be both want and plenty.’ Concerning plenty – Verri explains (ibid.: s. III, p. 9), outspokenly contentious with the ‘sect of the economists’ – ‘[r]eproduction applies as much to manufacture as it does to work in the fields’, so that we should speak of ‘this highly fruitful sterile class’, on the product of which entire cities and states survive. Such and similar concepts crop up time and again throughout Verri’s writings. Particularly noticeable, as we have anticipated, is the unity of three works, all of them drafted or redrafted by him during the 1770s and collected by the author himself under the heading of Discorsi in 1781: his work on happiness, on the nature of pleasure and pain, and on political economy.45 In any treatment of Verri’s political economy we should include at least three related elements giving life to his economic philosophy. The first is the

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‘philosophical’ element, which finds significant expression in Verri’s Discorso sull’indole del piacere e del dolore. In that work Verri acknowledges, as mentioned above, the influence of Maupertuis on his own reflections. Maupertuis is mentioned in that Discorso (s. VI) on account of his attempts to calculate pleasures and pains. Although we do not possess an instrument of measurement in that case, Verri observes (s. XIV), still, in the practice of our actions we continually tacitly make precisely that kind of comparison of good and evil and of pleasure and pain. The second element has to do with Verri’s attitude as a civil servant. Political economy to him consists in intellectual challenges for the solution to practical problems. The third element finds expression in his bent for ‘political arithmetic’, both in terms of the use of mathematical logic and in terms of measurement and statistical inquiry. Since the very start of his own activity as a writer, particularly through his compilation and discussion of the balance sheets of foreign trade for the State of Milan, it is clear that political economy, to him, is an empirical science. Verri is thus well representative of a school which, along with the Neapolitans at the Italian level, best illustrates the fruits of the new scientific attitude in moral philosophy. Public happiness, in Verri’s system, must be the object of policy. Verri’s system is based on free trade and on competitive markets: however, without an appropriate context, determined by the institutional setting, there is little presumption that the effects will be progressive. Verri is perhaps the best representative of a generation which had been acutely aware of the dangers of decline in a civilised country; his own reading of Lombard history (in his historical works) provides a signal illustration of this attitude. It is easy therefore to understand the duplicity he constantly stresses in most of the concepts he analyses. At the same time his insistent elaboration on the significance of intermediate bodies and on the rule of law does not contradict his lifelong struggle against those particular bodies and institutions which had come into existence and were in power in the State of Milan as a result of Spanish rule. The roots of Verri’s thinking on the ‘progress’ of civilisation and society are to be found in his Discorso sull’indole del piacere e del dolore and more particularly in his introduction of the distinction between physical and moral feelings.46 As we have recalled above, moral feelings or sentiments are indirect or higher-order feelings, which cannot be experienced unless a reflecting faculty is sufficiently developed, i.e. an attitude to consider a mirrored reality and to evaluate one’s feelings in relation to it. Although there is, in Verri’s conception, a direct association between the degree of development of the ‘moral sense’ of individuals or social groups and the cultural complexity of their relational setting, the historical evolution of the ‘moral sense’ is far from being of a monotonic type. Wealth, happiness and incivilimento are unfortunately not bound to go together. Verri’s study of the ‘connecting principles of nature’, applied to the polity, is designed to show that the achievement of public happiness is a complex process, which cannot be the effect of the work of simple mechanical devices.

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Conclusion Revisiting Pietro Verri means revisiting a number of issues linked with the rise of utilitarianism through the seventeenth century. In particular two are significant to economists today. In the first place it means revisiting the roots of hedonic philosophy and psychology and how that line of thinking happened to be interwoven historically with the rise of Political Economy. Verri’s analysis of the nature of pleasure and pain, of the role of empirical and experimental science, of quantitative measurement and on mathematical formulations, are part of a utilitarian research programme designed to provide the foundations of the new science of political economy. All that, in turn, is not merely of historical interest, as is made clear by the growth of happiness studies today. Happiness studies are part of a renewed emphasis on the links between Economics and Psychology. Public happiness is the core issue of Verri’s Political Economy. In recent years surveys and contributions have become increasingly widespread in behavioural economics. Behavioural economics is today the phrase which is more commonly employed to cover these and similar developments, even if the expression ‘cognitive economics’ would seem more appropriate, especially as those new developments are certainly keen on empirical analysis, but are not restricted to the behaviouristic perspective. An issue of HOPE (2004) included a survey of behavioural economics with the subtitle ‘How Psychology made its (limited) way back into Economics’ by Ester-Mirjam Sent. It is a useful survey which takes the occasion to make a point on ‘how historical analysis may contribute to a possible revival of abandoned research directions’. The author argues that behavioural economics has been splitting into ‘old’ and ‘new’, the transition implying a sort of re-absorption into the mainstream or, at best, the establishment of a general situation of ‘moderate pluralism’ in economics today, a view on which the reader is referred to a paper by Sheila Dow (1997). This is an interesting discussion. However, it should be mentioned that the new developments on happiness and economics are still neglected in E.-M. Sent’s treatment, which may prove to be a serious omission. More generally it seems fair to say that the dynamic impact of the new encounter between Economics and Psychology is still under way and producing new results – take as an instance the development of behavioural finance and of neuroeconomics – so that it appears hazardous to advance early predictions or to try and classify a subject matter in full evolution too rigidly.47 Concerning Kahneman’s analysis and its relation with Verri, two points can be made on the basis of the issues presented and discussed in this chapter. 1 As we have seen above, Verri introduces an asymmetry between pain and pleasure which is akin to the principle of loss aversion (see above) in Kahneman and Tversky’s theory, or the so-called endowment effect identified by

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Richard Thaler. This kind of asymmetry does not belong to Bentham, who instead actually criticised the idea, especially against Locke and Maupertuis. I venture to suggest that a thorough canvass of the intellectual history of the period might even persuade Kahneman to invoke a ‘back to Verri’ rather than a ‘back to Bentham’ approach.48 2 Kahneman distinguishes between (a) experienced utility, (b) remembered utility, and (c) decision utility.49 The distinction between (a) and (c) is used by him to argue that (a) is utility in Bentham’s sense (which provides the main ground for his ‘back to Bentham’ approach), while (c) is utility inferred from choices: (c) is currently adopted in economics and it makes preferences dependent on choices. Kahneman’s normative analysis involves (1) pleading for a return to (a) (‘back to Bentham’) and (2) showing that error and confusion systematically arise from mixing (a) with (b). So (a) and (b) must be kept distinct and, in principle, the individual should be made conscious of this discrepancy and encouraged to correct evaluations biased by memory and stick closer to actual experience.50 In this perspective all experiences of any kind are in principle comparable in terms of experienced utility. At the same time, in Kahneman’s theory there is another mechanism leading the individual to draw wrong and biased evaluations, without sticking close enough to actual experience: there is in fact a possible source producing phenomena of focalism, and can foster focusing illusion. Errors in predicted utility are produced by a systematic overweighting – when a change of state occurs – of the distinctive aspects of the new state, an effect that has in fact been labelled focusing illusion (see e.g. Kahneman 1999: 16). For example, the widespread presumption that the rich are happy stems from an illusion of this kind (see Kahneman et al. 2006). It is here that Verri’s analysis of memory offers an interesting parallel on how to keep illusion at bay. The parallel involves social interaction, which implies a qualitative distinction of hedonic experiences. It is a possible corollary of Kahneman’s analysis that social interaction may happen to be sacrificed in personal choices due to the overwhelming influence of focusing illusion. In Verri, on the other hand, too close a concentration on physical sensation hobbles the course of interpersonal relationships and stifles the flourishing of commerce and industry. Again in this case a reference to Verri sheds light on new utilitarian elements with respect to Bentham. In both ways (Kahneman’s and Verri’s) it appears that some kind of qualitative differentiation within actual experience, possibly linked with the flourishing of social interaction, introduces a new element in the evaluation of predicted utility, an element which is not extant in Bentham’s analysis, where qualitative differences of hedonic experience have little or no space. There seems to be a parallel between Scitovsky’s analysis (where ‘cultural’ goods are less subject to the hedonic treadmill compared with ‘comfort’ goods) and Kahneman’s analysis, where it looks plausible that ‘relational’ goods are less prone to focussing

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illusion (or what he calls the ‘satisfaction treadmill’, e.g. in Kahneman 1999: 14) compared with ordinary commodities.51 This, as a perspective, introduces a de facto heterogeneity of the commodities involved. Developing the consumption of ‘relational goods’, which leads (in Verri’s view) to commerce and civilisation, fosters a more correct evaluation of the utility involved in actual experience. To Kahneman, however, a qualitative difference in experienced utility is not, in general, a chosen perspective. At the same time, however, it is possible to argue that, when the different heuristics and biases affect different kinds of goods or hedonic experiences, this is tantamount to acknowledging some heterogeneity of the goods or of the experiences themselves. Utilitarianism has given rise historically to a whole host of debates, especially on (1) rule versus act utilitarianism and (2) measuring utility. The cognitive approach today points in a different direction. It leads to a revival of some of the original debates, which actually preceded the rise of ‘philosophical radicalism’ or Benthamite utilitarianism. Thus we are led to turn to the old questions of the symmetry or asymmetry of pain and pleasure and of the existence of qualitative differences of hedonic experiences.52 On both issues, historically, Bentham’s ideas happened to take the lead; but, once we go back to the full debate, there is probably much to be learnt from those who, later, came to be described as mere precursors paving the way to Bentham. That is also perhaps an illusion from which we may be wish to be saved. In this chapter it is Verri’s turn to come to the rescue.

Acknowledgements I am grateful to Dr Maurizio Mattioli, President of the Mattioli Foundation in Milan, for his unfailing support in the pursuit of the study of Pietro Verri’s economics. The present work would not have been possible without a constant interaction with my colleagues Giuseppe Bognetti, Angelo Moioli and Giovanna Tonelli, with whom I have been working for years to edit Verri’s economic writings for the Edizione Nazionale of Pietro Verri’s works under the direction of Carlo Capra. A number of ideas in this chapter have been developed in collaboration with Roberto Scazzieri and, more recently, with Luigino Bruni. Thanks are due also to Peter D. Groenewegen for useful comments. It is only fair to add that I am solely responsible for any remaining errors or shortcomings.

Notes 1 See Kahneman et al. (1997). 2 Meditazioni mie sul commercio (Verri 1760a). The first draft was produced by Pietro Verri during his stay in Vienna in 1760. The work was then published in 1763 in Il Caffè, the famous periodical founded in Milan by Verri himself. As hinted above, Il Caffè became a product of the intellectual group established by Verri under the name of Accademia dei Pugni.

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3 Verri (1760, my translation). This pseudo-letter, as it is called, contains inaccuracies, probably designed to make the story more attractive, as Verri’s biographer Carlo Capra has shown (Capra 2002: 157). This fact, however, does not change much of the true nature of Verri’s original vocation as a political economist as it emerges from this document. 4 Verri’s archives provide an outstanding example worldwide among economists. They are fully described in Panizza and Costa (2000). See also the ASE-SIE: Archivio Storico degli Economisti, accessible through the Web site of the Società Italiana Economisti. 5 Milan was not yet the seat of a university in the proper sense at the time, but it was the policy of Maria Theresia to foster the development of the Scuole Palatine as a kind of institute of advanced studies. 6 See Beccaria’ s ‘Frammento sullo stile’, Il Caffè (1764–66: 277–84). 7 Beccaria’ s ‘De’ fogli periodici’, Il Caffè (1764–66: 411–19). 8 Beccaria’s quotes are reported by Venturi in his 1965 edition of Beccaria’s work (see Beccaria 1965: 562–63). 9 The New Palgrave purports to pay heed to historical-analytical backgrounds in general, which however happens to a limited extent in this case. Among recent contributions, Bruni and Sugden (2007) offer an original and insightful analysis of the relationship of Economics to Psychology. However their exclusive emphasis on behavioural analysis seems lopsided. In fact the main focus of a number of developments is on cognitivism. 10 Simon – an immensely creative economist and certainly a non-mainstream figure in the profession, sometimes perhaps rather reductively mentioned as the father of artificial intelligence, and himself a Nobel Laureate of Economics in 1978 – would speak of the model of ‘olympic’ rationality for the standard case in the economic science (cf. his Reason in Human Affairs), a notion he contrasts with bounded rationality; the latter leads to substitute satisficing for optimisation. With Simon’s work the idea began to gain currency that what had constantly appeared to be the more robust, elegant and general scheme of analysis (i.e. the ‘olympic’ one) had in fact to be set aside as insufficiently specified and unable to bear the burden of providing a benchmark rule of economic theorising. ‘Bounded rationality’ has since gradually become familiar to a wide area of research spanning Economics, Psychology and the social sciences, and has become pivotal to a whole wave of new studies of psychological processes underpinning individual rationality and decisions. The contribution of Sidney Winter should also be singled out as important. 11 See Kahenman (2003, esp. ss. V, VI). Also Kahneman (1999, esp. pp. 21–22). 12 Amos Tversky, a younger colleague of Kahneman’s and a Stanford psychologist, died prematurely in 1996. Kahneman had collaborated with him especially since the late 1960s. An autobiographical piece by Kahneman has a lively recollection of their relationship: ‘We were a team, and we remained in that mode for well over a decade. The Nobel prize was awarded for work that we produced during that period of intense collaboration.’ Richard Thaler, of the University of Chicago, is among the best experts in behavioural finance today. 13 On the framing effect, the Asiatic disease example remains classic. In the example, a programme which is certain to save a limited number of lives is preferred (owing to risk aversion) to an alternative programme which has a limited probability of saving all the lives but which will save none of the lives under attack. Were the same choice to be reformulated in terms of possible losses, the preference would be reversed and, rather than accepting the certain loss of a given number of lives, it would be preferable to run the risk of an uncertain programme having some probability of saving all the lives. On loss aversion, see Tversky and Kahneman’s ‘Loss aversion in riskless choice. a reference-dependent model’ in Kahneman and Tversky (2000: 143–58).

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14 See, for example, Kahneman et al. (2006). 15 See Scitovsky (1976), now Easterlin (2005). As Easterlin notes (p. 53), ‘Scitovsky has argued that cultural goods … are less subject to hedonic adaptation than “comfort” goods.’ The distinction is significant and relevant to latter-day theories on the issue. Scitovsky himself had drawn inspiration from Daniel Berlyne’s studies of arousal and stimulation, as he makes clear especially in his chapter ‘The pursuit of novelty’ (Scitovsky 1976: ch. 3). 16 See Merton and Barber (2004). 17 See also the Bicocca Conference on ‘Capabilities and Happiness’, 16–18 June 2005, in http://dipeco.unimib.it/. 18 The relevance of Pietro Verri can be fully gauged after the appearance of the Edizione Nazionale delle Opere di Pietro Verri. 19 See now Pasinetti’s paper in Bruni and Porta eds (2005). 20 The point is highlighted by Gianni Francioni in his introduction to the Discorso sulla felicità (Discourse on Happiness), in the Edizione Nazionale, Vol. III, pp. 155–94. 21 For a comparison of the Milanese and the Neapolitan schools, see Bruni and Zamagni (2007). It is perhaps the special character of the Italian tradition, generally speaking, that the study of the polity in the light of the principles of the ‘new science’ is not conducive to any mechanical view of the economy and society. It rather leads to a civic conception, implying a rather sophisticated blend of institutional interactions which is aptly described by Antonio Genovesi’s term economia civile; it is a conception the spell of which can be traced through the Italian tradition well into the nineteenth century, and which can provide a clue to the study of the Italian tradition in political economy also in a more general sense. 22 ‘The beauty of a systematic arrangement of different observations connected by a few common principles was first seen in the rude essays of those ancient times towards a system of natural philosophy. Something of the same kind was afterwards attempted in morals. The maxims of common life were arranged in some methodical order, and connected together by a few common principles, in the same manner as they had attempted to arrange and connect the phenomena of nature. The science which pretends to investigate and explain those connecting principles is what is properly called moral philosophy’ (Smith 1776: V.i.f.25). 23 This is what Cohen (1980, esp. ch. 3) calls ‘Newtonian style’. See also Cremaschi (1984). 24 See Giannetti da Fonseca (1991). 25 See Bruni and Porta (2003). Schumpeter, in his treatment of eighteenth-century Italian economic thought, is basically correct to say that ‘only two “schools”, in the strict sense of the term, can be identified: the Neapolitan and the Milanese’ (1954: ch. 3, s. 4d, p. 177). 26 The idea that the only real thing is pain – while happiness is, in fact, negative pain – was debated through the eighteenth century; it appears to embody a neoStoic view of self-control. The contrary view of two principles, pleasure and pain (comparable in algebraic terms) bears a more neo-Epicurean imprint. Differently from Verri, Bentham would side with the latter view. Verri’s line of descent came from Locke’s analysis of ‘uneasiness’ and was shared by Genovesi and other authors. The issue is discussed by Guidi (2007); cf. also the ‘Introduction’ by S. Contarini to Pietro Verri’s Discorso sull’indole del piacere e del dolore, in the Edizione Nazionale (2003–, Vol. III: 25–61). It is in the same context that Verri (s. VIII: 112) insists – contrary to the common saying that the silly are happy – that it is (as he writes) the happy who are silly, for they lack the goad of pain to overcome inertia. ‘Healthy’ happiness, as it were, cannot be a permanent state, but requires some source of continuous arousal. In Verri’s analysis there is also the novel remark that, in measuring pleasure and pain, of the two fundamental dimensions of intensity and duration it is intensity that matters more to the subject, compared

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with duration (see Verri’s Discorso, s. X, in Edizione Nazionale, 2003–, Vol. III: 123–25), which appears to correspond closely to the phenomenon of ‘duration neglect’ discussed by Kahneman in various places (see, e.g., 2003: 1465). Verri read the Theory of Moral Sentiments in the French translation by MarcAntoine Eidous of 1764 under the title of Méthaphysique de l’a¸me. The point is stressed by Silvia Contarini in her introduction to this text in the Edizione Nazionale, Vol. III, pp. 25–61. For more on the issue, see Porta and Scazzieri (2002: 95 ff.). The opening sentence of the Discorso sulla economia politica declares that ‘[h]uman societies which know no other needs than the physical have, of necessity, little or no reciprocal trade’ (cf. Groenewegen 1986: 4–5). Verri, P. ‘Pensieri sullo spirito della letteratura d’Italia’, in Il Caffè, edited by Torino Francioni-Romagnoli, 1993, pp. 211–22. Unless otherwise stated, quotations from Italian texts in this chapter are translated by the author. On Verri, see also Porta and Scazzieri (2002). Cremaschi (1984: esp. chs 1 and 2) discusses the influence of Newtonianism beyond physics and astronomy. Verri praises M. de Maupertuis (particularly his Essai de philosophie morale of 1749) for giving a rigorous mathematical theory and a practical measure of pleasure and pain. Frisi, P. ‘Saggio sul Galileo’, Il Caffè, 1993, pp. 431–42. Examples are R. Boscovich’s ‘Estratto del Trattato astronomico del sig. de La Lande’ (Il Caffè, pp. 344–49), Frisi’s ‘Degl’influssi lunari’ (pp. 291–95) and Beccaria’s ‘Tentativo analitico su i contrabbandi’ (pp. 173–75), famous as an early example of mathematical political economy. Cf. also Theocharis (1983). ‘L’eccesso de’ desiderj sopra il potere è la misura della infelicità’, in the Introduzione to the Discorso sulla felicità, Edizione Nazionale, Vol. III, p. 198. Verri’s theory explicitly moves from Maupertuis, who proposed to measure pleasure and pain and argued that the total amount of pain exceeds the total amount of pleasure, as we have seen in the previous section. ‘Le ricchezze “portano seco la sete di accrescerle,” – moltiplicano la somma de’ nostri desiderj.’ Cf. also Verri’s treatment of wealth as it is developed in the Discorso sulla felicità, s. 2, Edizione Nazionale, Vol. III, pp. 201–8. We purposely echo here a Smithian expression, significantly close to the wording used by Verri himself. Cf. also, e.g., the passage on ambition in Il Caffè, Vol. I, p. 200. ‘Sulla spensieratezza nella privata economia’, Il Caffè, Vol. I, p. 323. Much as ambition is an ambiguous force, so are riches, as Verri argues in s. 2 of his Discorso sulla felicità: greater riches do not necessarily mean greater happiness. Verri’s argument here appears to contain the principle of focusing illusion (e.g. Kahneman et al. 2006), for – he writes (s. II, Edizione Nazionale, Vol. III, p. 202) – the art of knowing how to enjoy riches is much rarer than the art of materially winning them. P. Verri, ‘Gli studi utili’, Il Caffè, Vol. I, sheet xxviii; ibid., pp. 311–18 (see p. 315). Concerning utility, we shall see presently that Verri’s thinking can be encompassed within what has been called ‘an accomplished rendering of the Italian utility-cumscarcity version of the natural-law theory’ (Hutchison 1988: 304) within limits only. In particular the active meaning of the term ‘utility’ should never be forgotten. That undoubtedly makes of Verri a rather more interesting animal than a mere precursor of the marginal utility theory. Society, in fact, is analysed, ever since the Meditazioni of 1763, as ‘industriosa riunione di molte forze cospiranti’ based on a patto, the end of which is ‘il ben essere di ciascuno, il che si risolve nella felicità pubblica o sia la maggiore felicità possibile divisa colla maggiore uguaglianza possibile’.

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42 Discorso sull’indole del piacere e del dolore, in Verri (1781), s. XI (‘Il dolore precede ogni piacere ed è il principio motore dell’uomo’); cf. Edizione Nazionale, Vol. III, pp. 131 and 134–35. 43 Section XIII is often quoted by commentators. Under the title ‘Of the value of money and its influence on industry’, the section basically focuses on the power of industry in increasing what the author calls ‘annual reproduction’. This provides the essential premise on which his argument rests on the value of money. It is, however, quite common to focus merely on the argument’s implicit criticism of Hume on money in that section (see below): this is unfortunate, as the criticism cannot in fact be understood without the premise. 44 We quote here from the Groenewegen English edition of Verri’s Economia politica. The corresponding passage is to be found in the Edizione Nazionale, Vol. III, p. 341. 45 Verri (1781), now in the Edizione Nazionale, Vol. III. Cf. also Verri’s treatment of the Leggi vincolanti in 1796. The present argument has its natural sequence in Verri’s theory of price, on which the reader is referred to Porta and Scazzieri (2002), where Verri’s Political Economy of ‘Effective Supply’ is discussed. 46 For more on the issue, see Porta and Scazzieri (2002: 95 ff.). 47 An important treatment of the issue is presented in Bruni and Sugden (2007). 48 On Bentham’s own criticism of the asymmetry of pain and pleasure, see Marco Guidi’s contribution in Bruni and Porta (2007: esp. pp. 68–90). To appreciate the significance of the point made above, the reader should also take into account that the asymmetry in question bears an important weight on the framing of Verri’s Political Economy. As we have seen, Locke and Maupertuis are Verri’s sources on the asymmetry: Verri’s original contribution lies in building the bridge to Political Economy in the form of his political economy of ‘effective supply’, as it has been called by Porta and Scazzieri (2002, esp. pp. 85–93). 49 See in particular Kahneman (1999). See also ‘New challenges to the rationality assumption’, in Kahneman and Tversky (2000: 758–74). 50 The distinction parallels the one between experiencing self and remembering and evaluating self, used by Kahneman elsewhere. 51 Kahneman values ‘relational goods’ highly. I refer here to the discussion of the issue of social interaction as a source of happiness in Sugden (2005). On relational goods, see Gui and Sugden (2005). 52 As Martha Nussbaum (2005: 173) writes, for Bentham ‘pleasure is a single homogeneous sensation, containing no qualitative differences’.

Part II

Economics in relation to the life and natural sciences

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Newtonian physics, experimental moral philosophy and the shaping of political economy Sergio Volodia Cremaschi

Introduction: analogy and metaphor in the history of science The relationship between physics and economics is still under the cloud of a diehard myth. It is the idea that physics, the hardest science among the natural sciences, had a rather obvious influence on economics, the hardest science among the social sciences, and this happened because both disciplines treat quantity, not quality, and quantity is what can be treated mathematically. There is a grain of truth in the myth – indeed, only those embodying at least a grain of truth survive – but also this one, like every grain, can yield fruit only if it dies. The story needs just to be turned upside down, that is, economics established first a privileged relationship with physics in the Age of Newton, as a result of a shift in the ‘primary theme’ of a long established analogy, the natural–moral analogy, which had been alive since the times of Plato as iatro-political analogy and became instead a mechanico-political analogy as a side effect of the echo of Newton’s work, of its theological and political implications, and of the confrontation between Cartesians and Newtonians. Strangely enough, the main source of inspiration for such transfers from the body to the mind and from the universe to the polity was a movement of ideas apparently far away from the inspiration of modern science, namely Renaissance philosophy of nature. This was dominated by Neoplatonic themes, and analogy was believed by Renaissance Neoplatonists to be the ruling principle in the universe. Correspondence between the micro and the macro levels, symbolic relationship, and anthropomorphism were the basic features of such theorising on nature. And yet this climate of ideas did not yield only magic, astrology, and alchemy, since, combined with the Platonic belief in a mathematical nature of the universe, it encouraged application of mathematics in both science and pseudo-science. The iatro-political analogy had been ruling from the time of Plato to the Renaissance, reaching perhaps the Physiocrats and Adam Smith, when he introduces the ‘animal principle’ that restores health to the political body notwithstanding mistaken policies (Smith 1776: iv.ix.14). A paradigm shift from this analogy to a new one was the source of the new physico-social analogy that became the ruling framework. The reasons for this shift are still to be

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explored, but the success of the new Galilean approach in a number of fields within natural philosophy was one reason of interest in the new physics. But also within the new paradigm there were alternative blueprints for further developments, roughly marked by the alternative between Cartesianism and Newtonianism. The former, with its basic analogy that equated the universe to a machine such as a clock, suggested paths of inquiry in the field of social and political theory that encouraged artificialism, authoritarian views of political power, ready-made rules for the correct functioning of society. Newtonianism seemed immediately to suggest blueprints for a non-absolutist view of government, and a view of society where the individual and the public interest could be reconciled by other means than direct intervention from political authority. The clock and the scales became analogies embodying two alternative cognitive strategies in facing society. The choice of either of these primary themes reveals the political approach adopted, absolutist or proto-liberal, but also the view of societal laws, an artificialist one or one based on spontaneous order (Mayr 1986).

Newtonianism and the physico-moral analogy Newton, who was once believed to have been the first ‘empirical’ scientist, is now the cross and delight of historians of science for his twofold character. He was both a mathematician and an adept of Neoplatonic doctrines, and it was precisely because of his refusal of Cartesian rationalism that he was prepared to admit of such a ‘semi-magic’ notion as action at a distance. Besides, he believed that a new natural philosophy should lay the basis of a renewed moral philosophy, assuming the two fields to be parallel. He wrote in Query 31 of Opticks: ‘And if Natural Philosophy in all its parts, by pursuing this method, shall at length be perfected; the bounds of Moral Philosophy will be also enlarged’ (Newton 1704: iii, 264). The way of enlarging such bounds was inquiring into ‘our duty’ towards the First Cause, starting with the knowledge provided by Natural Philosophy concerning the ‘power he has over us’ (ibid.), and the ‘benefits we receive from Him’ (ibid.). Newton’s followers developed his programme in several diverging directions. The first was the foundation of natural law on a priori evidence by the authors of the ‘Boyle Lectures’, yearly lecture courses where the ideas of antiCalvinist Cambridge divines such as Ralph Cudworth (1731) and Samuel Clarke (1706) were presented, including moral and political doctrines where a few Newtonian items were inserted into a Platonic framework. The main claim was that social life was possible on the basis of ‘nature’, that is, before intervention by ‘super-nature’. The Newtonian elements helped in establishing an analogy between (physical) Nature and Man, suggesting that society is somehow analogous to a Newtonian (not a Cartesian) cosmos in that it is self-regulating, and accordingly neither needs a theocratic regime nor a secular absolute sovereign, since good and evil may be recognised by a healthy human reason, and accordingly the social condition precedes the political

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condition, or man is by nature sociable. Laws of nature are presented as analogous to mathematical relations, and their validity is ‘as self-evident as the existence of proportions and lack of proportions in geometry and arithmetic’ (ibid.: 47), since it would be as difficult for an intelligent person ‘to deny any natural difference between good and evil’ as for a geometer to establish ‘as a first principle that a bent line is as straight as a right line’ (ibid.: 51). Pope in An Essay on Man illustrated the physico-moral analogy by which, as the planets turn on their own axis while turning in a circle around the sun, so ‘two consistent motions act the soul’, Self-love and Social Love, which turn out to ‘be the same’ (Pope 1734, iii, vv. 314–23). Note that the analogy is the basis of the implication of a possible coexistence of different ‘movements’ which is transferred from physical nature to the mind and society. This points to a sensitive issue in post-Reformation discussion, since the Augustinian tradition stressed a dichotomy between Nature and Grace, due to the Fall of Nature after the original sin, and claimed the impossibility of ‘natural’ morality. Yet Pope’s claim sounded, in 1734, less as a rejoinder to hard-line Protestants than to Mandeville’s Fable of the Bees, the latest sceptical reductio ad absurdum of Augustinianism by proving ‘vice’ to be useful and ‘virtue’ obnoxious (Mandeville 1714). Locke travelled a path as divergent as possible from that of the Cambridge Platonists, namely towards an empirical science of man, in so far as he intended to build a ‘history’, or a genealogy of ideas, but he was guided too by one central item of the Newtonian methodology, caution against hypotheses (Locke 1690: iv.xvii.13), which implied leaving aside any inquiry into ultimate causes.

The Scottish tradition of scientific Newtonianism During the first half of the eighteenth century Newton’s work became the emblem of the ‘new philosophy’ all over Europe. Aristotelianism, with its occult qualities and substantial forms mocked by seventeenth-century philosophers, was no longer perceived as a real danger, and the villain became instead Descartes, the author of an ‘illusive philosophy’ or of ‘one of the most entertaining romances’ that have ever been written. In Scotland a tradition of scientific Newtonianism, that had its strongholds at Marischal College, Aberdeen, and then at St Andrews and Edinburgh, was established before Newtonianism was firmly established in England. This tradition – as a result of the Calvinist connection that linked Scotland and the Netherlands – owed something to the Dutch Newtonian school, whose main exponent had been Willem Jacob van ‘s Gravesande and which yielded an ‘experimentalist’ interpretation of Newton’s work, stressing the difference between pure and applied mathematics: since mathematical principles are ‘within us’, while the physical are ‘outside’, pure mathematics is a kind of certain knowledge whose objects are created by ourselves, while physics is a kind of uncertain knowledge, taking the action of unknown external substances into account. The principles of

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mathematical physics, being unable to mirror true physical principles at work behind the phenomena, are mere tools for explanation (see Sheperd 1982; Barfoot 1990; Wood 2002; Kerszberg 2006). The leading figure of the Scottish tradition was Colin MacLaurin, the author of An Account of Sir Isaac Newton’s Philosophical Discoveries (1748) that presents the contents of Newton’s Principia, with an extended discussion of Newtonian methodology. MacLaurin’s Newton has two enemies: on the one hand, dogmatic theologians and Aristotelians, on the other, Cartesians. MacLaurin claims that the ‘interests’ of true religion are not ‘advanced by feigning philosophical systems purposely to favour it’ (MacLaurin 1748: 66), but instead an ‘entire liberty must be allowed in our enquiries’ (ibid.), even if we ‘ought not to abuse this liberty by supposing instead of inquiring, and by imagining systems instead of learning from observation and experience the true constitution of things’ (ibid.: 7, emphasis in original). It is true that in the Middle Ages the ‘disputes among the sects … produced a talkative sort of philosophy’ (ibid.), but it is also true that such disputes have proved less dangerous than ‘that pride and ambition’ which has led philosophers to produce hastily ‘a complete and finished system of nature’ and, in order to round up such a system, to invent ‘certain principles and hypotheses’ on whose basis they pretend to explain all the mysteries of nature. In more detail, the methodological claims are the following. First, while defending Newton against the charge of having denied the conjectural character of science, MacLaurin downplays Newton’s emphasis on the exclusion of hypotheses, arguing that he meant to rule out only groundless hypotheses (ibid.: 29 ff.). He insists that abuse of ‘hypotheses’ had been the source of ‘variety of opinions and perpetual disputes’ that have discredited philosophy as such, in so far as, instead of searching into nature, men retired to contemplate their own thoughts … gave their imaginations full play … Hypotheses were invented, not for reducing facts or observations of a complicated nature to rules and order, (for which purpose they may be of service) but as principles of science. (Ibid.: 94) Second, in his interpretation of the analytico-synthetic method, he qualifies Newton’s claim of being able to ‘deduce’ theories from observation, explaining that ‘in natural philosophy, truth is to be discovered by experiment and observation, with the aid of geometry, only’ (ibid.: 90–91), and we are accordingly ‘to proceed by the method of analysis, before we presume to deliver any system synthetically’ (ibid.: 91). Third, he argues the legitimacy of analogy as well as its limits claiming that Newton was less rigid than Descartes vis-à-vis analogy, and ‘when he was not able to demonstrate the causes of the phenomena described in the second [the Opticks] more evidently, he endeavours to judge of them, by analogy, from what he had found in the greater motions of the system’ (ibid.: 21, emphasis in original). There are indeed cases of ‘abuse of analogy’, such as those of the Pythagoreans and of

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Kepler, who, by pursuing ‘analogies and harmonies’ (ibid.: 30) have been led astray. Fourth, he claims that there are limits to be set also on the application of ‘geometry’, since the latter is of no use ‘till data are collected to build on’ (ibid.: 30). Fifth, he stresses Newton’s vindication of final causes, which were ruled out by the Cartesians. He recalls ‘how essential the greatest and best philosophers have thought the consideration of final causes to be to true philosophy’ (ibid.: 29), and adds that ‘it gave a particular pleasure to Sir Isaac Newton to see that his philosophy had contributed to promote an attention to them … after Descartes and others had endeavoured to banish them’ (ibid.). Sixth, he recalls Newton’s belief that natural philosophy is of use in laying ‘a sure foundation for natural religion and moral philosophy’ and he explains how this can be done: ‘we are to endeavour to rise, from the effects thro’ the intermediate causes, to the supreme cause. We are, from his work, to seek to know God, and not to pretend to mark out the scheme of his conduct, in nature, from the very deficient ideas we are able to form of that great mysterious Being’ (ibid.: 90). The seventh and most important point is abuse of hypotheses. The reason for lack of the same gradual progress in natural philosophy as was available in geometry was that ‘Hypotheses were invented, nor for reducing facts or observations of a complicated nature to rules and order (for which purpose they may be of service) but as principles of science’ (ibid.: 94); in other words, we ought not to abuse our intellectual liberty ‘by supposing instead of enquiring, and by imagining systems, instead of learning from observation and experience the true constitution of things’ (ibid.: 6, emphasis in original). This is a sort of paraphrase of the fourth rule, added in the Principia’s third edition, and omitted in the first popularisations, such as Pemberton’s. It is indeed Newton’s most anti-Cartesian statement, prescribing that: in experimental philosophy we are to look upon propositions inferred by general induction from phenomena as accurately or very nearly true, notwithstanding any contrary hypotheses that may be imagined, till such time as other phenomena occur, by which they may either be made more accurate, or liable to exceptions. (Newton 1726: ii, 555) MacLaurin’s work was completed by 1728 and, albeit published only in 1748, circulated in manuscript for twenty years.1 This may help in accounting for a tortuous story of ideas circulating among Scottish authors between the 1730s and 1770s, a story whose main character was the fourth rule, with its anticonjectural and anti-systematic implications as well as its stress on empirical constraints (Force 1987: 180 ff.).

Scottish Moral Newtonianism The importance of such transfers was magnified when, at the origins of the Scottish Enlightenment, it was located within a wider strategy where Newton

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was paradigmatic not only for natural philosophy but also for methodology. The ‘Newtonian philosophy’ became the ‘third way’ between the opposed shoals of untutored empiricism and arrogant rationalism, or between Bacon and Descartes (see Brown 2006: 1084–93; Cremaschi 2000). Francis Hutcheson, Professor of Philosophy at Glasgow and Adam Smith’s teacher, introduced a physico-moral analogy whose primary themes are inertia and gravitation and the secondary ones self-love and benevolence. He declares, ‘Self-love is really as necessary to the good of the whole as benevolence; as that attraction which causes the cohesion of the part, is as necessary to the regular state of the whole as gravitation’ (Hutcheson 1725: 263). The generation after Hutcheson developed his isolated analogy into a sustained allegory, trying to give flesh and bones to Newton’s wish that the boundaries of moral philosophy be enlarged as a result of progress in natural philosophy. The first to undertake such a development was George Turnbull, known in his quality of Thomas Reid’s teacher at Marischal College.2 He presented as a graduation thesis at Aberdeen in 1723, two years before Hutcheson’s use of the gravitation–benevolence analogy, a dissertation, ‘De scientiae naturalis cum philosophia morali conjunctione’, and in 1740 published his Principles of Moral and Christian Philosophy (Turnbull 1740a) where a remarkable methodological preface was prefixed to a rather traditional discussion of normative ethics and of the rational basis of the Christian religion. The first of the two volumes appeared the same year as the third book of Hume’s Treatise, but its contents were the basis of Turnbull’s teaching at Aberdeen in the 1720s and 1730s and, a certain circulation of manuscript lecture notes being more the rule than an exception, the possibility of Turnbull’s direct influence on Hume should not be dismissed, even if the shared background, i.e. Newton, MacLaurin, and Hutcheson, may account for almost identical phrasings. The general plan of the work aims at a refutation of moral scepticism from empirical premises, along the line inaugurated by Shaftesbury and followed by Hutcheson and later on by Thomas Reid. The first book proves the existence of justified moral standards by combining an a priori way, centred on the moral sense, and an a posteriori way, centred on the good consequences of right actions. The second book tries to prove the existence of a world order and a solution to the problem of theodicy. The work labours under the inner tensions of an attempt at combining Shaftesbury’s Platonic line of inquiry with Cumberland’s empiricist one. The real novelty is in the methodological preface. The striking point in this preface is that the refutation of moral scepticism on an empirical basis does no more start with naive ‘observation’, like Shaftesbury, but with a would-be ‘experimental’ approach, qualified by its own peculiar dowry of methodological tools, a dowry that Turnbull declares to be Newton’s legacy (ibid.: 6 and 8), including the idea that in order to bring moral philosophy … upon the same footing with natural philosophy … we must enquire into moral phenomena, in the same manner as

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we do into the physical ones: that is, we must endeavour to find out by experience the good general laws to which they are reducible. (Ibid.: 56) Accordingly, both fields ‘must set out from the same first principles, and be carried out in the same method of investigation, induction, and reasoning’ (ibid.: 47). Other methodological ideas are that the study of human nature is a study of ‘questions of fact or natural history’ (ibid.: 8), the assumption that the world we experience is ruled by general, uniform and constant laws, and that these may pertain both to moral and to natural philosophy in so far as they are considered under different aspects (ibid.: 8, 48–49, 54 and 56); besides, the recommendation that ‘hypotheses assumed at random, and by caprice, or not sufficiently confirmed by experience, are never built upon’ (ibid.: 8; cf. 65) and that they are not ‘to be any further admitted, than as questions, about the truth or reality of which, it is worth while to enquire’ (ibid.: 64). One difference from Hume is a more marked confidence in the possibility of building a moral philosophy not as a ‘beautiful, elegant romance’ (ibid.: 62) or a mere ‘collection of facts discovered by experience’ (ibid.), but as ‘a mixed science of observations, and reasonings from principles known by experience to take place in, or belong to human nature’ (ibid.: 63). Accordingly, as in natural philosophy, we have a ‘mixed mathematics’. So an account of human nature such as the one proposed may be called ‘mixed moral philosophy’ (ibid.) as far as it is built on the basis of principles taken from observation and of others introduced as hypotheses proved to be ‘real solution of appearances’ or ‘found really to take place in nature, either by immediate experiment, or by necessary reasonings from effects’ (ibid.: 65). Turnbull’s theodicy, from which his justification of moral laws in turn depends, is an item strikingly absent from Hume’s work. Turnbull’s reasoning is as follows. First, the general laws of the corporeal world are ‘good laws’, since they ‘produce its good, beauty, and perfection in the whole’ (ibid.: 50). Second, ‘tho’ natural philosophy be commonly distinguished from moral; all the conclusions in natural philosophy concerning the order, beauty, and perfection of the material world, belong properly to moral philosophy’ (ibid.: 52). Third, the problem of evil is ‘settled’ by reducing it to ‘partial evil’, subservient to general good, for ‘no particular effect, which flow from good general laws, can be evil absolutely considered, that is, with regard to the whole’ (ibid.: 51). Fourth, also in moral philosophy, unless the moral world be unintelligible, there must be general laws (ibid.: 55) and the criterion of moral goodness depends on the discovery of the ‘final cause, or moral fitness of any constitution’ (ibid.), which is established on the basis of the discovery of the ‘good principles’ of the moral domain, those that ‘are conducive by their steady and uniform operation and prevalency to the greater good, beauty, and perfection of that whole in the sum of things’ (ibid.). This implies that those laws are established which are conducive to general good effects, albeit at the price of partial evil, and a passage from is to ought is available

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once we are willing to accept partial evil for the sake of general good. Fifth, the motive for acting morally is provided by enlightened self-interest, as Malebranche had first suggested and the Anglican divines John Gay, Thomas Brown, and William Paley repeated. Turnbull writes that reason is a ‘power of making a just estimate of human life, and its principal end, by connecting things past and to come with what is present; and thus of computing our true interest’ (ibid.: 142) and that, accordingly, our sense of right and wrong and our sense of happiness ‘do not contradict one another’ (ibid.: 145), what is ‘beautiful’ is also ‘useful’ (ibid.: 175), our interest is doing what is right both in view of the other-worldly prize and because virtue is ‘our truest interest … whether we are to subsist after this life or not’ (ibid.: 201). Also relevant is A Discourse upon the Nature and Origin of Moral and Civil Laws, published as an appendix to Turnbull’s translation of George Gottlob Heinecke’s Elementa juris naturae et gentium. Here he claims that Heinecke’s work provides an example of the ‘experimental way of reasoning’ in morals in so far as he tried to deduce the duties of man from the mind’s principles and inner dispositions, thus practising the same ‘experimental’ approach as Cicero, Grotius, and Pufendorf, whose results cannot be refuted unless by proving that the analysis of the human mind it yields is not ‘fact’ (Turnbull 1740b: 201). David Hume’s fame until recently contributed to obscuring the importance of his background and to causing forgetfulness of the elements he shared with other Scots. At last, after a long story of misplaced discussions about Hume the sceptic or Hume the forerunner of analytic philosophy, his ‘Newtonianism’ has been acknowledged. Hume’s project of an all-encompassing ‘science of human nature’, meant to provide a basis for epistemology and accordingly for every branch of both moral and natural philosophy, founded on the analytic– synthetic method, and built following the blueprint of an analogy between the moral and the (Newtonian) physical world, has been recovered by a rich literature with the effect, among others, of stressing similarities between Hume and other Scots.3 Let us see how the issue of Hume’s Newtonianism may be construed after recent scholarship has tried to do what Forbes asked, namely establishing ‘what precisely Newtonianism meant for Hume’ (Forbes 1975: 3). A first point to be kept in mind is the circumstance that the young Hume’s education was less exclusively literary than Hume scholars used to believe (Barfoot 1990; Sheperd 1982; Gilardi 1990: 213–30) and that he was exposed to some serious mathematical and physical teaching. A second point is that Hume’s references to Newton’s work as a whole are enough to refute any claim to his lack of interest in it. In particular, the passage in the History of England on Newton and the ‘mechanical philosophy’, ‘a theory which, by discovering some of the secrets of nature, and allowing us to imagine the rest, is so agreeable to the natural vanity and curiosity of men’ (Hume 1754–62: vi, 542), whose conclusion is that, while Newton ‘seemed to draw off the veil from some of the mysteries of nature, he showed at the same time the imperfections of the mechanical philosophy; and thereby restored her ultimate

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secrets to that obscurity in which they ever did and ever will remain’ (ibid., emphasis in original), expresses clearly enough the point of view of somebody who did not believe Newton’s to be the last word, and was more doubtful than Newton himself of the human mind’s ability ever to reach ultimate causes, but also of somebody who did believe his theory to be superior to previous ones. A third point is that the eighteenth-century literary and scientific cultures were not such separate domains as they have later become, and the comparison of Cicero and Newton, found in Turnbull and then in Reid, was by no means a strange one, since the former had professed the kind of moderate scepticism that the Scots tended to believe was a viable alternative to intemperate Cartesian rationalism; in a word, ‘Hume is an eighteenth-century man of letters attempting to understand the limits of knowledge and, in so far as the problem of science is the problem of what one can know about unobservable mechanisms, his interest is riveted upon Newton, whom he sees as a great ally in the cause of a moderate scepticism’ (Force 1987: 178). A fourth point is the availability and quality of secondary sources through which Hume could have access to Newton’s doctrines. Hume may have read not only entries in Chambers’s Cyclopaedia (see Chambers 1728), but also Keill’s (1718) and Pemberton’s (1728) introductions, MacLaurin’s manuscript lecture notes and, last of all, the methodological parts of Newton’s Principia (Force 1987: 178–87). It is worth recalling in this connection that MacLaurin moved from Marischal College to Edinburgh in 1725, at about the time of, or one year before, Hume’s graduation, and accordingly we cannot rule out the possibility that he attended MacLaurin’s course in 1725–26. It is worth noting also that Hume makes clear reference to the fourth rule, unavoidably ignored by Keill (writing before the third edition of the Principia) and overlooked by Pemberton. Let us discuss now the meaning of Hume’s project of an ‘experimental’ moral philosophy. There is no point in discussing either whether he had given origin to sciences like psychology and the social sciences, since the agenda was still different, namely reforming moral philosophy, nor whether the term ‘experimental’ alluded to some vague Baconian attitude or to ‘true’ Newtonian method, since what is to be understood as ‘Newtonian’ in this connection has to be established on the basis of the eighteenth-century comprehension of what Newtonianism was. ‘Experimental’ is indeed a semi-technical term of eighteenth-century jargon and it conveys a reference to Bacon, Galileo, Boyle, and Newton, as well as an opposition to the ‘conjectural’ or ‘hypothetical’. One more misplaced question would be whether Hume has actually been true to Newton’s methodological standards; the answer would surely be negative, since Hume never reached certain targets such as mathematical treatment of empirical data or real experiments on human behaviour under controlled conditions, but the question is ill framed, since Hume never aimed at reaching such targets. A sensible question on the contrary is whether there are significant novelties in Hume’s approach compared with his predecessors’ and whether they may have been inspired by his ‘experimental’ programme. Broadie

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gives a balanced answer, noting that the term ‘moral’ was ‘used in a wider sense by Hume than we should think appropriate today’ (Broadie 1990: 101), and adds that for Hume ‘experimental reasoning’ does not mean reasoning based upon ‘experiments’, concluding that Hume’s target was instead drawing ‘a map of human nature, not on the basis of an analysis of concepts, or by working from a certain theological position regarding God’s nature and purpose’ (ibid.: 102), but on the basis of ‘experience’. In more detail, Hume’s overall project is older than Newton’s, being Mersenne’s, Descartes’s, Hobbes’s and Spinoza’s project of a reformed moral philosophy on a methodological basis derived from the new science of nature, and accordingly – after Newton – ‘experimental’. The methodological staple out of which this image of experimental philosophy is made includes the distinction between ‘principles’ (or ‘philosophical hypotheses’) and ‘original qualities’, the analytic–synthetic procedure, the postulate of simplicity of nature, a role for analogy, refusal of ‘conjectures’, and finally refusal of hypotheses on first causes. A related point on which Hume insists is the limited scope of our knowledge implied by the ‘experimental’ approach, and in fact he believes that the fourth rule is some kind of overarching rule (see Force 1987: 178–87), to the point of keeping his distance from Newton himself by refuting the Argument from Design on the basis of the impossibility of extending the scope of analogical reasoning from individual cases to the world as a whole. Besides – and here the dispute about Hume’s Newtonianism may turn out to be pure logomachy – Hume believed that Newton’s example could support an older tradition of moral studies characterised by its refusal both of a priori truths (such as those of Clarke) and artificial conjectures (such as those of Locke). In this tradition Cicero and Grotius may be included since they drew their own principles from history and observation, while a self-styled Newtonian such as Locke has to be excluded because of his ‘Cartesian’ recourse to conjectures in his political doctrine. If this is Hume’s understanding of ‘experimental philosophy’ he was clearly a ‘Newtonian’ and his own was no lip service to Newton, even if it was different from what others believed Newtonianism to imply. What is pointless is asking Hume and Adam Smith to pass some examination in differential calculus or expecting them to be competent in nineteenth-century ‘Newtonian’ physics.4 ‘Experimental philosophy in the moral subjects’ is for Hume tantamount to a ‘science of human nature’. Talk of human nature does not imply abandoning the Newtonian inspiration, as claimed by Noxon (1973: 157) nor does it imply a programme of a ‘modern’ empirical psychology, as claimed by Jessop (1976). Instead, it is tantamount to the whole of the moral subjects or, in a stricter sense, to the core of those general ‘principles’ such as association of ideas which play a role in all the moral subjects. The reason is that the relationship between the core and the peripheral areas of moral subjects is not a deductive one, but instead an inclusive one (see Lecaldano 1991: 29 ff.), since principles are reached through analysis on the basis of observation, and analysis may stop at a higher or lower level of generality, and in several cases,

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mainly in the Essays, Hume presents the principles as ‘maxims’, comforted by history and experience, without inquiring into underlying mechanisms. This does not mean a methodological turn but just a choice of stopping at a more or less deep level of explanation. The methodological claims in Hume’s work may be described as follows. First, ‘hypotheses’, or ‘philosophical hypotheses’, or ‘principles’ (Hume 1739– 40: Intro. xxi and ii.1.5), used as equivalent terms following the Principia’s first edition, where the word ‘hypothesis’ was still used, are law-like expressions of regularities that he may just express in the shape of a maxim or further analyse into deeper mechanisms. Second, the analytic–synthetic procedure consists in ‘deducing’ general maxims from a comparison of a number of particular cases in order to make ‘all our principles as far as possible universal, raising our experiments to the utmost degree of generality and accounting for effects by few and very simple causes’ (ibid.: Intro. xxi). Third, analogy is a basic procedure in Hume’s actual way of proceeding (Monteiro 1978; Gilardi 1988) and makes it so that his theories can be built in a way different from inductive generalisation plus deduction, as one would expect by an adept of the analytic–synthetic procedure; in detail, it justifies the very inference from past cases to a novel one (Hume 1748: iv.2), as well as attempts at unifying different principles and the introduction of physical analogues for moral phenomena; the ‘philosophical hypothesis’ of association of ideas (Hume 1739–40: ii.1.5) is introduced precisely by such a controlled use of analogy between the physical and the moral. Fourth, ‘experiment’ is the basis for ‘philosophical hypotheses’ or for ‘maxims’, and the test for ferreting out wild conjectures (Hume 1748: iv.2), for example of aprioristic doctrines such as the social contract. ‘Experiment’ is reliable with different degrees of certainty (ibid.: x.1), and in moral subjects it presents us with peculiar difficulties deriving from the impossibility of obtaining uniform conditions and from the uncertainty of introspection, since there are phenomena that it is hard to reduce to ‘original qualities’ (Hume 1739–40: i.1.5) and it is impossible to explain ‘ultimate principles’ (ibid.: Intro.10). The most reliable observational basis he seems to be able to point to is history and observation of current human behaviour; what kind of warrant the ‘maxims’ he builds on such a basis may claim is unclear, and in particular the distinction between those maxims that aim at formulating genuine empirical generalisations and those that are simply formulations of generally accepted conventions is even less clear (see Brown 1984: 107–08). Hume’s positive doctrines with a Newtonian pedigree are the following: first, association of ideas as an observed general phenomenon; the basis of association is a mechanism, like a ‘gentle force’ that brings two ideas together as if ‘nature has bestowed a kind of attraction on certain impressions and ideas’ (Hume 1739–40: ii.1.5); second, an analogue of vis inertiae as the basis of ‘habit’ and ‘custom’ (Hume 1748: v.1); it is important to note that inertia is an element of a dynamical physical model such as Newton’s and it was absent from Cartesian physics, that was purely cinematic, as well as from Hobbes’s

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social theory that was modelled on the former; third, ‘belief ’ (ibid.: v.2) and the ‘fellow feeling’ or ‘sympathy’ (Hume 1751: v.2), both assumed to be generally observable ways of behaving of our ideas expressible in maxims and possibly analysable into a more basic mechanism, association of ideas; fourth, feedback mechanisms such as those of the monetary flow (see Hume 1742: 315), the balance of trade (ibid.: 311–12), the tendency of manufactures to move elsewhere after they have led a country to opulence (ibid.: 333); the two latter mechanisms are self-regulating, or are analogous to the scales, singled out by Mayr as the emerging model in eighteenth-century political studies (see Mayr 1986; cf. Brown 1984: 85 ff.). Adam Ferguson, the author of An Essay on the History of civil society (1767), claimed in his Institutes of Moral Philosophy that moral philosophy, ‘the knowledge of what ought to be’, presupposes a knowledge of ‘the history of man’s nature, his dispositions, his specific enjoyments and sufferings, his conditions and future prospects’ (Ferguson 1769: 10). Such knowledge in turn may be built by establishing ‘principles’, that is, general rules ‘applied to explain or regulate particulars’ (ibid.: 3), and theory is ‘explanation from principles’ through the analytic and the synthetic method; theory establishes laws of nature, that is, general rules ‘collected from facts’ (ibid.); facts may be either physical or moral, the latter being ‘any general expression of what is good’ (ibid.: 5). Note that a moral law is reached through analysis, starting with ‘the sentiments and actions of intelligent natures’ (ibid.: 6). The usual negative example of pseudo-explanation, Descartes’s theory of vortexes, is invoked in order to assess that ‘all theory must rest on ultimate facts. To require proof a priore [sic] for every fact, were to suppose, that human knowledge requires an infinite series of facts and explanations; which is impossible’ (ibid.: 9). There are at least two ‘laws of human nature’: the law of self-preservation and the law of society that makes men desire the welfare of their fellow creatures. The latter law does exist, even if it has been disputed, since ‘it acts constantly, even if the actions of men are regulated, not by this law only, but by this combined with every other law of their nature’ (ibid.: 92). Accordingly, the general tendency of the law of gravitation is, to cause bodies to approach each other; as the tendency of the law of society is to cause men to produce public good, or to abstain from public harm. But the external result is opposite in opposite circumstances. Heavy bodies are not always falling, nor social natures always are acting for the public good … And thus the operation of the law of society, like that of gravitation itself, is always real, though the external result is not always the same. (Ibid.: 92–93) Thomas Reid, a disciple of Turnbull and a critic of Hume, partly developed the former’s programme and partly recycled much of the latter’s ideas while attacking him. He outlined the programme of a philosophy of mind with a

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scope more restricted than Hume’s science of human nature and yet more neatly qualified as an empirical science and outlined a ‘Newtonian’ way to knowledge, the ‘way of observation and experiment’, avoiding ‘conjectures’ and sticking to ‘just induction from facts’ (Reid 1764: i.1), a way practised every day in common life by ‘common sense’ that unwittingly follows Newton’s rules, and then proposed his own foundation of morals (Reid 1785: 637– 39). Reid’s main heir was Dugald Stewart, who in his Elements of the Philosophy of the Human Mind (Stewart 1792, 1813, 1826) grafted ideas from Ferguson, Smith, and Hume himself on to the trunk of Reid’s anti-sceptical commonsense epistemology, yielding the nineteenth-century Scottish philosophy, namely a synthesis of ontological realism and epistemological antirationalism. As a conclusion, it would never be stressed enough that the idea of ‘experimental philosophy’ as the third way between Bacon and Descartes and the only adequate response to the challenge of neo-scepticism is the key to a meaningful intellectual-historical account of what the Scots were doing. This implies taking this programme on the very terms in which its proponents formulated it (see Wood 2002: 107). Besides, it implies recognising the continuity existing between all the Scottish Enlighteners, and realising that even when Reid was attacking the ‘sceptical’ Hume he was just playing tactical manoeuvres in order to introduce ‘Humean’ ideas into the Presbyterian establishment, parading as the true enemy of the ‘atheist’ Hume.5 Besides, the legacy of previous generations should be considered as essential to the following, unless one fall into Laudan’s blunder (Laudan 1970) of discovering Reid’s philosophy as the turning point toward Newtonian methodology. Last of all, it is true that different writers tended to bend the same programme in different directions, and the refusal of the Design Argument and theodicy are the watershed. It is true that Hume is at one pole of a spectrum whose opposite pole is Turnbull and that Smith differed from Hume in the principle that belief can be corrected on the basis of ‘practical’ constraints posed by our relationships with the world. But nonetheless, no Scottish Enlightenment scholar can fall, as Schliesser (2005: 727) does, into the trap of the myth of ‘Humean despair’ just because Kant and Hegel and Quine (none of whom was a Scottish Enlightenment scholar) had bought such a myth from Reid, who had his own reasons for spreading it. It needs be kept in mind that it was between the 1750s and the 1770s, after Turnbull and Hume had launched their experimental-philosophy manifestoes, and while Ferguson and Reid were working at their own developments, that Adam Smith wrote pieces of his philosophical history of the arts and sciences, the first version of The Theory of Moral Sentiments, dictated the Lectures on Jurisprudence, and then wrote The Wealth of Nations. Once the pieces of the context are brought before our eyes, the idea that the whole of Smith’s work fitted in this programme becomes plausible enough, and various attempts at finding sources of inspiration for Smith outside of such a context (Foley’s 1976 Democritean philosophy, Lindgren’s 1974 Kuhnian epistemology, Schliesser’s 2005 ‘realism’) turn out to be even less plausible.

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Adam Smith’s moral Newtonianism The history of the interpretations of Smith’s work in general, and of The Wealth of Nations in particular, is a curious one. Smith’s works having been almost universally neglected by historians of philosophy, The Wealth of Nations was left to historians of economic thought to be read out of context. After the marginalist revolution it was seen as an example of pre-scientific, aprioristic, ‘metaphysical’ theorising. When the most historically minded writers perceived the existence of some Newtonian influence on Smith, they tended to homologate it to the Boyle Lectures philosophy, that is, precisely to the dogmatic theological and political theorising that was required in order to reassure post-marginalist economists about the unbridgeable gap subsisting between post-1870 science and pre-scientific dogmas. In the twentieth century The Wealth of Nations was rescued and a new reading offered proving that after 1759 Smith had dropped theology, thus becoming an ‘empirical’ scientist, with the ‘virtual disappearance from the Wealth of Nations of the doctrine of an order of nature designed and guided by a benevolent God’ (Viner 1927: 222), a doctrine allegedly central to the Theory of Moral Sentiments (ibid.: 221). Due to lack of competence in the history of science and philosophy, Viner and his contemporaries tended to read Smith’s ‘empirical’ attitude in terms of the twentieth-century empiricist vulgata. This line of interpretation came to its reductio ad absurdum when it was suggested that Smith had already become an empirical scientist in 1759, since his first work was a contribution more to social psychology than to ethics (Bittermann 1940; Campbell 1971). In the meantime Smith’s Essays on Philosophical Subjects had been rescued, first by a path-breaking, and universally ignored, French contribution (Moscovici 1956)6 and later by a few British and American contributions, the most notable being Lindgren (1974: 1–19). Unfortunately the latter were hardly ‘real’ intellectual history, in so far as they were trying to bring Smith’s methodology into comparison with twentieth-century philosophy of science. To my taste, Schliesser (2005) too, who provides a good piece of historical work, in the end falls into the camp of ahistorical reconstructions, since ‘modest realism’ as a label for Smith’s epistemology is too vague to add anything to our understanding of Smith’s contribution. Berry (2006) simply tries to dissolve interpretative problems by asserting that Smith’s Newtonianism ‘is better understood as a general orientation rather than a specific agenda’ (Berry 2006: 126).7 In contrast, an articulated Smithian methodology can be reconstructed. There is clear acknowledgment in Smith of the superiority of Newton’s positive contribution, and of the Newtonian analytic–synthetic method vis-à-vis Cartesian physics and Cartesian methodological attitudes. This needs to be stressed, since the claim of Smith’s adherence to Cartesianism has circulated (Foley 1976; Mirowski 1989), even if adherence to Cartesianism could hardly have been conceivable in eighteenth-century Scotland and its ascription to Smith is incompatible with textual evidence such as the following from the

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Lectures on Rhetoric: ‘the Newtonian method is undoubtedly the most philosophical and in every science, whether of Morals or Natural Philosophy, etc., vastly more ingenious, and for that reason more engaging, than the other [i.e. the Aristotelian]’ (Smith 1982: ii.134–35). The notoriously ‘sceptical’ considerations by which The History of Astronomy ends, according to which, while Smith has been ‘endeavouring to represent all philosophical systems as mere inventions of the imagination’, he has ‘insensibly been drawn in, to make use of language expressing the connecting principles of this one [Newton’s], as if they were the real chains which Nature makes use of to bind together her several operations’ (Smith 1795: iv.76) have been used to prove alternatively that Smith was a Cartesian or an outright sceptic. When matched with the quote from the Lectures on Rhetoric they allow instead for the conclusion that Smith believed in the superiority of both Newtonian method and Newtonian theory, that he did not believe Newton’s theory to be the ‘final’ discovery of first causes, but also that this did not amount to asserting instead that ‘everything goes’, since a better theory is such in so far as it accounts for both new and familiar phenomena in a more satisfactory way, to be assessed on the basis of unchanging laws of the mind. We may conclude that Smith’s understanding of the Newtonian method derives from the tradition of ‘experimentalist’ Newtonianism and that it gives pride of place to the distinction between ‘original qualities’ in external reality and ‘principles’ in the mind, which is not the basis for a sceptical argument but, on the contrary, is made compatible with a less sceptical stance than Hume’s by dropping the latter’s claim of the impossibility to reform ‘belief’ thanks to an item that Smith might have learned from Condillac, namely the idea that there are constraints to beliefs posed by practice (both in the knowledge of nature and in morality) such that eventually neither a priori systems, on one hand, nor custom and habit, on the other, can resist good arguments based on practice. So the conclusion of The History of Astronomy is neither an expression of outright scepticism nor an irrelevant gloss, being instead the attempt to clarify a theoretical tension in Smith’s epistemology between the merely ‘internal’ character of our criteria for theory choice and a need to postulate some correspondence of theory and world order. Also an explicit programme for a ‘Newtonian’ moral philosophy may be easily found in Smith. It recommends development of peripheral areas such as ethics, jurisprudence, and political economy, instead of the centre, the ‘abstract science of human nature’; it prescribes accordingly that speculations about the original qualities of human nature be left aside, even if the ‘principles’ of the mind are more directly accessible to us than those of physical reality (Smith 1759: vii.ii.4.14), and we may assume that there are ‘unchanging principles of human nature’ (ibid.: iii.2.30) albeit yielding opposite phenomena in different situations (See Smith 1776: i.ii.1). The reason is that we never meet human-nature-in-a-void – something Hume perhaps still longed for in 1739 – and also the unchanging ‘principles’ we formulate are introduced – like in natural philosophy – by generalisation and analogy, starting with

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phenomena or ‘manifestations of human nature’ (Smith 1759: vii.ii.3.4; cf. Cremaschi 1984: 96–99, 138–42, 148–51). Thomas Pownall (1722–1805), governor of Massachusetts, member of Parliament, and writer on several subjects, wrote a letter to Smith where he proposed an interpretation of the structure of The Wealth of Nations in terms of analytic–synthetic procedure (Pownall 1776: 337). Smith (1980: 224) acknowledged Pownall’s comments, kept them in mind while preparing the second edition of the work, but was aware that Pownall would not have been satisfied with the changes introduced (ibid.: 250). Even if Berry (2006: 126) explains away Pownall’s reference to Newton as a mere ‘compliment’, due to ‘the very prestige of Newton’, the work may be read instead precisely as Pownall suggests, that is, as consisting of the sum of an analysis and a synthesis, both meant to carry out the function assigned to them in Newton’s work. The former should consist of a collection of observations on human behaviour at different times and places, on which a few general maxims concerning human conduct in economic affairs could be based. Analysis brings in new theoretical entities, such as equilibrium, circulation, labour value, by elaborating on the physico-moral analogy that allows for the creation of new entities, invisible chains, imaginary machines, invisible hands, following the Newtonian idea of ‘analogy of nature’.8 Exclusion of hypotheses on original qualities was the strategic factor in allowing for an experimental moral science and it is made even more explicit in The Wealth of Nations. In the Lectures on Jurisprudence hypotheses were formulated on deeper ‘mechanisms’ behind the principle invoked in the explanation of exchange, for example the propensity to truck and barter (Smith 1978 [B]: vi.56); in the latter work exploration of ‘deeper’ qualities is dismissed as not pertaining ‘to the current inquiry’ (Smith 1776: i.ii.2). It may be noted that this resembles Hume’s change of mood noted by Noxon (1973: 3–8) after the Treatise, when he abandons his inquiry about the centre of the science of man in favour of exploration of its peripheral areas such as government, morality, and commerce.

Adam Smith’s moral Newtonianism and the shaping of political economy After discussing the Newtonian methodological legacy, I illustrate now how several positive items were transferred from Newtonian physics to political economy. Mechanisms. In seventeenth and eighteenth-century literature on commerce, a number of isolated mechanisms had been ‘detected’ behind individual market and monetary phenomena (Brown 1984: 25–48). Those discoveries had been made possible by the use of an analogy with familiar physical mechanisms such as wheels, scales, flow of fluids. The Wealth of Nations goes one step forward by linking phenomena with ‘principles’ in a systematic way. As a side effect it creates an overall view of society as a sum of mechanisms.

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One of them is equilibrium or gravitation. Society is viewed, statically, as a universe of exchange values attracting each other and consisting of labour embodied in marketable material goods. Equilibrium establishes itself within that system, in so far as different goods tend to gravitate around a ‘natural rate’ which is their average or ordinary value (Smith 1776: i.vii.9–15; cf. Cremaschi 1984: 135–36). The latter, and more complex, mechanism is that of value circulation, providing – unlike the former – a dynamical view of society. This mechanism is apparently derived from the Physiocrats’ idea of a circulation of goods (and in fact it cannot be traced in the Lectures on Jurisprudence, that precede Smith’s acquaintance with the économistes), but with a decisive shift in its meaning. Smith’s ‘great wheel of circulation’ carries around value, not physical goods (like in Quesnay’s Tableau), and such circulating value also acts as a magnet attracting fresh potential value, hidden in remote corners of society, so that society’s total amount of value grows bigger with each phase of such circulation process (Smith 1776: ii.ii.11–160; ii.ii.230; iv.vii.c.43; cf. Cremaschi 1984: 137–38 and 189–93). Concepts of force. Newton’s idea of universal attraction had become a magic word, and every kind of counterpart in the moral world had been introduced, ranging from Locke’s principle of the association of ideas to Hutcheson’s sympathy and Helvétius’s interest. Smith recalls on one occasion Hutcheson’s metaphor of benevolence as a ‘moral attraction’ by which the different members of society are ‘drawn to one common centre of mutual good offices’ (Smith 1759: ii.ii.3.1). In The Wealth of Nations an explicit analogon of physical gravitation is introduced, and it is something much less universal, but at the same time more precisely defined, than other moral equivalents of attraction. The gravitation of prices is an observed behaviour of commodities that may be interpreted as if the latter were attracted by a ‘centre of gravitation’, which is not something existing in the real world but only an ideal point. The observed phenomena, which may be described in terms of action of a vis attractiva, may be ‘resolved’ into the action of a vis a tergo; the latter is identical with one of the ‘principles’ of the theory, namely ‘desire of bettering our condition’. The sum of actions by these forces yields a final order, equivalent to the order that could have been previously established according to some Design. The expression ‘invisible hand’ airs such an equivalence of vis a tergo and vis attractiva; this use of the expression can be found indeed in Roger Cotes with reference to a physical experiment (Newton 1959–77: v, 392; cf. Cremaschi 2002a: 101–2). Final and efficient causes. One closely related subject is the role of teleology. Nineteenth-century interpreters used to read into Smith a HarmonienLehre, a dogmatic assertion of harmony between individual and collective interest, via a quasi-animistic action of the invisible hand. Twentieth-century reactions detected in The Wealth of Nations only law-like statements of regularities, only ‘ordinary’ or ‘average’ behaviour (even if described occasionally by the old-fashioned adjective ‘natural’). Truth lies not in between but somewhere else; indeed, teleology does play a role in Smith’s system, but as limited as the

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one it played in Newton, namely in a social (weakened) equivalent of the Design argument, which shows how an overall order results from the sum of numberless instances of efficient causality. The equivalence of the ‘desire of bettering our condition’ and the ‘invisible hand’ indicates precisely the possibility of a quasi-teleological reading of the theory. But Smith believed neither in the Design argument nor in any social theodicy, and for him order, both in the moral and in the natural world, is postulated as objective but inaccessible in any detail, while an ‘imaginary’ order – provided by those imaginary machines in which theories consist – may help in seeing and connecting a number of causal connections. A few such individual connections are known to be real, not ‘imaginary’ – what is imaginary is what is added by imagination in order to fill the gaps between phenomena, thus yielding ‘imaginary machines’ or ‘invisible chains’ – but, on the whole, theories in natural philosophy (and the same holds for moral philosophy) are bound to remain for ever imperfect approximations to an opaque world order. I should add that Smith is, to say the least, more prudent than Newton had been in presenting his own theoretical achievements as a basis for theological speculation. While Newton says in the famous Query xxi that the discovery of an order in the universe had made a foundation available for natural theology (Newton 1704: 261–64), Smith, both in the first edition of The Theory of Moral Sentiments and in the sixth, mentioned the Design argument as bearing also on society, understood as a ‘part of nature’ (Smith 1759: ii.iii.3.2 and vi.iii.30), but admitting such argument only as a legitimate subject for speculation, not as an established starting point for any deduction. Societal laws. The status of societal laws is a central issue in Smith interpretation. The nineteenth-century literature used to stress Smith’s indebtedness to the natural law tradition; as a reaction, twentieth-century literature, say Viner and Bittermann, vindicated the ‘empirical’ character of Smith’s theory, with mention of Smith’s Newtonianism made incidentally by Bittermann just as a proof of his ‘empiricism’ and his negation of any role for ‘natural law’. Things are in fact more complex, since the natural law tradition did have an impact on the origins of the social sciences, but not as an alternative to some tradition of ‘empirical’ theorising inspired by the model of the natural science. The point is rather that during the eighteenth century there was at first a coexistence, and subsequently a fusion, of two distinct traditions of social theorising, namely the systematic tradition of natural law and the tradition of piecemeal social theorising of cameralist and ‘mercantilist’ literature (Brown 1984: 70). The Wealth of Nations is precisely a result of a fusion between both, and Smith’s moral Newtonianism was the catalyst that made it possible (Cremaschi 1981, 1984: 204–7). Theoretical confusion prevailing until recently on the point was connected with lack of historical awareness about natural law. The latter used to be associated with ‘Deism’, theology, and metaphysics, all assumed to be roughly equivalent. On the contrary, it is worth stressing that, as shown in an important but neglected article by Francis Oakley (1961), in which Zilsel’s (1942) famous theses on the origins of modern

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science are criticised (cf. Cremaschi 2002b), the Scholastic legacy in natural law doctrines was twofold, in so far as, besides the Thomist notions of lex aeterna from which the law of nature derives, directly reminiscent of the Stoics’ immanent rational law of nature, there was an opposite notion, the idea of a law ‘imposed’ by God on the world. The latter was typical of the via moderna, the approach of William of Ockham and his followers, who were the most direct forerunners of Galilean physical science (Ghisalberti 1990: 147–62). It is from this tradition that the Newtonian image of the clock and the watchmaker derives, and it is within this tradition that, before Galileo and Newton, a mechanistic pre-comprehension of the physical world was created according to which the world is composed of parts endowed with certain ‘essential qualities’ but devoid of any immanent telos, and it is on the sum of those parts that a system of laws is superimposed. I would like to add that the former view was a hindrance to social theorising, as shown by the Physiocrats’ example, where the order discovered by the theory is immediately identified with the moral order. Smith, on the contrary, was encouraged in framing his own view of societal laws by his association with the latter tradition. It is worth recalling that in The Theory of Moral Sentiments a kind of a ‘Stoic’ ideal world order, one in which what is and what ought to be ideally converge, is described as an ideal both unknowable and impracticable. What is relevant to an ethical theory is the acknowledgement of some ‘weaker’ order, which is produced in human affairs by readjustments of sympathetic reactions facing both reciprocal mirroring in social life and changing external circumstances. Smith notes that, if all general rules are commonly denominated laws, including the ‘laws’ of motion, which bodies observe in their mutual interaction, yet those general rules which our moral faculties observe in approving or condemning whatever sentiment or action is subjected to their examination, may much more justly be denominated such. They have a much greater resemblance to what are properly called laws, those general rules which the sovereign lays down to direct the conduct of his subjects. (Smith 1759: iii.5.7) In The Wealth of Nations, Smith avoids the term ‘law’ to indicate scientific social laws, even if that usage had already been introduced by Locke,9 and talks instead of ‘principles’, a term belonging to Newtonian terminology. Two important traits of the Smithian principles are their relationship to phenomena and their non-ultimate character. The Wealth of Nations starts with what would be called, in Newton’s words, a ‘phenomenon’, similar in its status to the phenomena listed at the beginning of Book III of the Principia (see Smith 1776: i.1; Newton 1726: iii, 3–10), which is division of labour. From the phenomenon a principle, namely the propensity to truck and barter, is ‘deduced’; it is subsequently shown to agree, not only with the phenomenon taken as its basis, but also with other observed phenomena (Hetherington

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1983; Brown 2006). This procedure clearly follows a scheme according to which explanation is composed of an analysis and a synthesis.10 The principle introduced during the construction of the theory (and supposedly ‘deduced’ from the phenomena) is assumed to be non-ultimate in its character and its resolution into more basic qualities of human nature is declared to go beyond the scope of the inquiry undertaken. Note that, by this statement, one more element of Newtonian methodology, namely anti-essentialism, expressed by the hypotheses non fingo clause, is embodied in Smith’s economic theory. By way of conclusion, I would suggest the fruitfulness of the lex imposita view in favouring the ‘discovery’ of societal laws, and the barrenness of the ‘immanent’ natural law view. This conclusion may be compared with Canguilhem’s remark concerning the ineffectiveness of mechanicism in preparing the discovery of the reflex mechanism (Canguilhem 1955: 169) due to the circumstance that vitalists were more prepared to ‘see’ individual mechanisms in biological phenomena precisely because they believed that mechanical connections were exceptions, not the rule. Smith, unlike the ancient Stoics and the seventeenth-century Platonists, was not a believer in cosmic harmony. For him, the idea of a world order was a kind of ‘regulative’ idea, unusable for evaluating real-life cases. And yet precisely Smith’s post-scepticism proved to be an excellent basis for innovative use of metaphor, that is, precisely because Smith believed all theories to be creations of our imagination, he felt free in adopting several analogies as sources of cognitive strategies while treating the phenomena of society, politics, and commerce, and the familiar physicomoral analogy in Smith’s hands ceased to be a rhetorical device for preachers and started being used as a tool for highlighting previously undetected causal connections. But this happened because for him no overall world harmony held, and beneficial unintended results carried by such causal connections were an exception, not the rule. Mirowski’s historical epistemology, inspired by recent developments in philosophy of science, has granted metaphor a role much more basic than McCloskey’s once famous economic rhetoric that ‘discovered’ just that also economists make persuasive use of discourse; this amounts to discovering the ‘perlocutive’ dimension of economic discourse, while Mirowski’s ‘discovery’ has looked beyond surface metaphorical expressions, and indeed beyond discourse, looking at language as the mould by which economic thinking is given its shape, and identifying ‘deep’ metaphors, such as the physico-moral parallel which underlies the modern world view and also moulded economic science (Mirowski 1989). His contribution overlaps fairly well with what has been argued by Cremaschi (1984: 182–93, 1989, 2002a) in taking developments in post-empiricist philosophy of science seriously, but his programme of studying the interaction between physics and marginalist economics might be expanded to include classical political economy. It is enough to realise that Adam Smith was not the Cartesian materialist depicted by Foley (1976) and that accordingly there is room for exploring analogies between Smith’s economic

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theory and Newton’s (not Descartes’s) physics, and that the kind of reciprocal interaction between nineteenth-century economics and physics detected by Mirowski may be recognised also between eighteenth-century political economy and natural philosophy. Indeed, all that the present chapter intends to deny is the content of one of Mirowski’s footnotes where he argues that the existing literature that attempts to claim that Newtonian physics had some influence on Smith ‘is of necessity misguided because Newton was not the conduit through which Smith imbibed his scientific influences’ (Mirowski 1989: 407–08) and adds that the first to point this out was Foley’s ‘superb work’.11

Conclusion Mirowski’s attempt at applying two ideas from contemporary philosophy of science to the reading of economic texts is quite fruitful, even if slightly less novel than he believes; yet these ideas, namely (1) a constant interaction between theories and observations, (2) a metaphorical character of the redescription of phenomena by theories, may yield results partially different from his own; in more detail, the history of the relationship of physics and economics did not start in 1870 and it was an intricate one: there were borrowings of substantive items before the methodological justification for the borrowing, and there were methodological programmes that seem to open the way to ‘scientific’ economics and then turn ‘back’ toward Cicero; yet this is not so bad, since Cicero was not so obscurantist as to represent an outright alternative to ‘science’. The fact that the story was complex does not imply that it was a messy one and that Newtonianism was just a confused catch-all label; the problem is instead that it makes little sense discussing whether Smith was more like Kuhn or like Putnam, while it does make sense asking whether he was closer to Descartes or Newton or to a voluntarist or intellectualist view of natural law. The important fact is that for the Scots the ‘Newtonian philosophy’ was a third way beyond Rationalism and Scepticism that promised a way out of the knot of theological voluntarism and political authoritarianism that had apparently locked up post-Reformation northern Europe into a deadlock; thus, far from being a sixteenth-century sceptic or a twentieth-century epistemological relativist, Smith – pace those who believe that the Newtonian inspiration gave him ‘a general orientation rather than a specific agenda’ (Berry 2006: 125–26) – was at his best a ‘Newtonian’ precisely while writing The Wealth of Nations.

Acknowledgements This chapter has benefited from Bernard Schefold’s discussion at the ESHET meeting, Stirling, 9–12 June 2005. The second and third sections draw on Cremaschi (1992) and (1998).

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Notes 1 See Murdoch (1748: vi); see also Gilardi (1990: 241 ff.); Laudan (1970: x–xiii). 2 See Norton (1975, 1982: ch. 4); Brown (1984: ch. 3); Forbes (1975: ch. 1); Broadie (2005). 3 See Noxon (1973: 27–123); Capaldi (1975: 49–70; Lecaldano (1991); Gilardi (1990). 4 These are the requests posed by both Schwartz (1989) and Mirowski (1989). 5 Berry takes the deep divergences between Turnbull’s and Hume’s conclusions (on the proof of God’s existence, the Design argument and theodicy) as a proof that the Newtonian inspiration was something very loose; what he misses is that the programme may have been the same even if some positive doctrine may have been different. 6 The paper is not included in the International Library of Critical Essays in the History of Philosophy (Haakonssen 1988) apparently because the criterion for inclusion in an international library is being originally published in English! Berry (2006: 119) does quote the paper but in relation to a rather marginal point, apparently missing the main claim, which is precisely the opposite of Berry’s claims. 7 See Schliesser (2005), Berry (2006), see also Montes (2004). 8 See Gilardi (1988); Monteiro (1978); Cremaschi (1984: 146–48); Cremaschi (2002a). Freudenthal (1981, 1983: 253–56) has raised the doubt whether analysis, as actually carried out by Smith, really consists of such an inductive generalisation or instead at crucial points mistakes definitions of theoretical entities with assertions of original qualities of human nature. 9 On Locke’s use of the expression ‘law of value’, see Brown (1984: 63–66). 10 As claimed by Pownall, pace Berry’s dismissal of his claim (Berry 2006: 125) 11 That any eighteenth-century Scot might have been a Cartesian is a rather curious idea, and that Foley’s work be ‘superb’ is an even more curious one, since his book is famous among Smith scholars for its mistakes. See Vivenza (2002: 126–29, 207–08).

5

Evolutionary biology and economic behaviour Revisiting Veblen’s instinct of workmanship Mark Harrison

In recent decades, social scientists have discovered that evolutionary biology provides fresh, exciting insights into human behaviour. Psychologists now actively pursue Evolutionary Psychology, anthropologists study models of geneculture co-evolution, and neoclassical economists formulate mathematical models of the evolution of human preferences (see Robson 2001). But the recent interest in the biological underpinnings of human social behaviour is not new – it is actually the rediscovery of an approach that was quite popular in the early twentieth century. The first wave of evolutionary theorising in the social sciences proceeded directly from Darwin’s publication of The Origin of Species (1859). Darwin himself applied the theory of natural selection to human behaviour in The Descent of Man (1871), in which he proposed that instincts – innate biological drives – help to explain human behaviour. By 1890, William James had produced his landmark Principles of Psychology, which elaborated on the role of instincts in human behaviour. In 1899 Thorstein Veblen published The Theory of the Leisure Class, which used an early version of the concept of gene-culture co-evolution to explain human socioeconomic behaviour. James, Veblen, and many others were part of a broad movement in the social sciences towards evolutionary theorising (Degler 1991; Richards 1987). The influence of evolutionary theory on the social sciences peaked shortly before the Second World War and then began to decline. After the war, James’s programme of Evolutionary Psychology was supplanted by behaviourist psychology, and Veblen’s Evolutionary Economics was displaced by neoclassical economics. By the later twentieth century, evolutionary thinking in the social sciences had been marginalised. Ironically, the waning of interest in the evolutionary approach to human behaviour occurred just as evolutionary biologists were forging a new, rigorous, and powerful theory of evolution. Today we think of biological evolution as a process of genetic change. But neither Darwin nor his early followers possessed the concept of a gene, nor the knowledge that an organism’s genotype remains largely unaffected by the life experiences of the organism. Mendel had not yet been rediscovered, and Weissmann’s famous experiment, in which many generations of mice lost their tails in order to prove that biological

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inheritance is not Lamarckian, was not fully appreciated. Today’s theory of biological evolution, known as ‘the modern synthesis’, emerged shortly before the Second World War. It combined Darwin’s concept of natural selection with Mendel’s concept of the gene as a quantum unit of inheritance. It incorporated the observation that the germ line was separate from the soma. The synthesis of these ideas allowed biologists to develop mathematical models of evolution by natural selection, creating the field of population genetics (Bowler 1989). The modern synthesis theory of biological evolution posits three fundamental processes, variation, selection, and retention of characters. Variation of characters is random, so the course of evolution is inherently path-dependent and non-teleological – ‘chance caught on the wing’. Selection occurs as a result of differential rates of reproduction (i.e., by reproduction of the fit-enough rather than by ‘survival of the fittest’, the latter being Herbert Spencer’s misleading phrase). Retention is accomplished by genes, which faithfully replicate themselves in each generation. The modern conception of evolution by natural selection thus features random variation caused by genetic mutations, selection of genes via differences in rates of reproduction, and transmission (retention) of genes by the self-replication of DNA. A few technical details of the modern synthesis will be important in the discussion that follows. First, evolution is something that happens to a population, not to an individual. A species is a population of interbreeding individuals, not a ‘thing’. Second, since no species lives in isolation, it is more accurate to speak of the simultaneous co-evolution of multiple species. Each species is part of the environment of the others. And third, although the gene is the vehicle of heredity, selective forces may affect groups of genes. Selection may operate at the level of the individual gene, at the level of the chromosome, at the level of the genotype of an individual organism, or at the level of the collective genes of a group of organisms in a social group (Wilson 1977; Michod 2000; Field 2004). Selection at the level of the social group, though once controversial, is now the accepted explanation of the evolution of some seemingly ‘fitness-reducing’ behaviours such as altruism. A Darwinian approach to human behaviour must also address the effects of learned behaviour and culture, which is done with models of gene-culture co-evolution (see especially Boyd and Richerson 1985). Culture is endogenised in an evolutionary model of human behaviour by assuming that ‘cultural transmission of behaviours is analogous to genetic transmission’ (Dawkins 1976). The cultural analogue to a gene is a ‘meme’, a unit of behaviour that is replicated when it is imitated by another person. Genes and memes co-evolve in parallel, interacting with each other. Memetic evolution parallels genetic evolution, but there are three important disanalogies. First, though transmission of genes is strictly parent-to-child, the transmission of memes through a population of carriers can go in any direction; it more nearly resembles the spread of an infectious virus. Second, acquired characters do not change the biological genotype and are not transmitted, while acquired memes can of course be transmitted to others in a quasi-Lamarckian

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fashion. And third, cultural evolution is many orders of magnitude faster than genetic evolution. Most theorists therefore assume that genetic evolution lags behind cultural evolution – that modern humans possess a genotype evolved for life in small bands of Paleolithic hunter-gatherers, overlain by a culturally acquired memotype of more modern origin, a ‘veneer of civilisation’. The behaviour ultimately expressed by a human is the product of a complex interplay between genes and memes (Ridley 2003). For example, a genetically predisposed taste for sweet foods might be culturally influenced to result in a preference for rice pudding over bread pudding. Or, taking an extreme example, consider the celibacy of Roman Catholic priests. Celibacy is genetically disastrous, but the memotype is so culturally robust that it survives by the constant recruitment of new priests. In models of gene-culture co-evolution, genes predispose but culture disposes. Thorstein Veblen produced the world’s first working model of gene-culture co-evolution in 1899 (see the splendid history in Hodgson 2004; see also Hodgson 2001: 297; Jensen 1987). Veblen argued that humans have innate instincts, or drives, analogous to what are now called genetic predispositions, and ‘habits of thought’, analogous to memes. Veblen defines an institution as a ‘common habit of thought’, analogous to a species of meme, and includes an ‘instinct of idle curiosity’, which produces cultural innovations analogous to mutations in a genetic model. Thus ‘Social evolution is a process of selective adaptation of temperament and habits of thought under the stress and circumstances of associated life’ (Veblen 1899: 145). Veblen’s analysis of human economic behaviour rests upon his concept of the ‘instinct of workmanship’. The instinct of workmanship is essentially a drive to be productive, to create, to work efficiently and effectively. Curiously, Veblen posits that this drive to be productive motivates service to the social group rather than self-interest. Veblen does recognise interpersonal rivalry, but the rivalry in his scheme is not the result of simple egoistic self-seeking. Instead, it is competition for social esteem – the desire to be judged a ‘top man’ in the eyes of others in the social group – that motivates individuals to produce and amass individual possessions. Veblen, to his credit, and unlike most of his contemporaries, explains how the instinct of workmanship might have been favoured by natural selection in the environment of early humans. He argues that group selection in the primordial social group of early man produced the altruistic bias of the instinct of workmanship as well as a human desire for social esteem. The purpose of this chapter is to review and assess Veblen’s explanation of the origin via natural selection of the instinct of workmanship. We will survey Veblen’s antecedents, analyse and evaluate Veblen’s use of theory from evolutionary biology, and then attempt to draw lessons for modern economists.

Veblen’s antecedents The meaning of the word ‘evolution’ has itself evolved over time (Bowler 1988). In the nineteenth century, ‘evolution’ often referred to ‘ontogenetic evolution’

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(Hodgson 1993), that is, change according a predetermined pattern, in stages, much as an infant matures into an adult. Lewis H. Morgan’s (1907) theory of social evolution, with ‘savagery’ leading to ‘barbarism’, and ‘barbarism’ to ‘civilisation’, is one example of an ontogenetic theory of cultural evolution. Herbert Spencer’s theory of social evolution, which preceded Darwin’s and was more widely read at the time (Richards 1987), is another. Both Morgan and Spencer had great impact on Veblen. But Veblen rejected their ontogenetic approach to evolution in favour of ‘selectionist’ (Murphey 2002) or ‘phylogenetic’ (Hodgson 1993) models of evolution, for both cultural and biological change. Selectionist models, first proposed by Charles Darwin, view evolution as a statistical process in which order emerges from disorder via natural selection, with no pre-ordained pattern or plan. Veblen, following Darwin, held that evolution was not ‘teleological’ but was in fact a product of ‘cumulative causation’, path-dependent but unplanned, and subject to the influence of chance events. Veblen’s application of selectionist thinking to cultural evolution also draws from Darwin. Darwin proposed, in The Origin of Species, that cultural evolution could proceed in a fashion analogous to natural selection (Hodgson 2003: 86). Sir Charles Lyell soon applied Darwin’s idea of selectionist cultural evolution to the evolution of language: What are the laws which govern the selection of some of these words or idioms, giving them currency in preference to others? … in the general struggle for existence, some terms and dialects gain the victory over others. … from considerations of brevity … euphony … fashion … (Lyell 1863: 463) The concept of selectionist cultural evolution seems then to have lain fallow until C. Lloyd Morgan advanced ‘the idea of an emergent level of socio-economic evolution that was not explicable exclusively in terms of the biological characteristics of the individuals involved’ (Hodgson 2001: 142, 297; see also Richards 1987: 397). Hodgson suggests that Veblen heard Lloyd Morgan speak in Chicago in 1896, and in this manner acquired the idea that institutions evolve by a process analogous to natural selection. Meanwhile, as the idea of cultural evolution was gestating, other thinkers were developing a Darwinian ‘instinct and habit’ theory of individual human psychology. Darwin himself (1859: ch. VIII) first drew the vital distinction between instincts, which are innate, and habits, which are acquired. Darwin later, in The Descent of Man, discussed human instincts, including human social instincts: It has, I think, now been shewn that man and the higher animals, especially the Primates, have some few instincts in common. All have the same senses, intuitions, and sensations, similar passions, affections, and emotions, even the more complex ones such as jealousy, suspicion, emulation, gratitude, and magnanimity. … . they feel wonder and curiosity; they possess the

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same faculties of imitation, deliberation, choice, memory, imagination, the association of ideas, and reason, though in very different degrees. (Darwin 1871: 456) Darwin’s ideas were extended by William James (1890), who produced a long list of instincts. James hypothesised human instincts for vocalisation, imitation, emulation, pugnacity, sympathy, hunting, appropriation, acquisitiveness, sociability, shyness, secretiveness, modesty, jealousy, cleanliness, constructiveness, play, curiosity, plus a catalogue of instinctive fears. In James’s theory of the mind, instinctive drives act in partnership with learned habits of thought and conscious reasoning to determine the behaviour exhibited by a human (Twomey 1998). Two of James’s posited instincts, emulation and constructiveness, clearly influenced Veblen’s thinking on the instinct of workmanship: Emulation or rivalry, a very intense instinct, especially rife with young children, or at least especially undisguised. Everyone knows it. Nine-tenths of the work of the world is done by it. We know that if we do not do the task someone else will do it and get the credit for it, so we do it. It has very little connection with sympathy, but rather more with pugnacity … (James 1890: 409) Constructiveness is as genuine and irresistible an impulse an instinct in man as in the bee or the beaver. Whatever things are plastic to his hands, those things he must remodel into shapes of his own, and the result of the remodeling, however useless it may be, gives him more pleasure than the original thing. (Ibid.: 426) Veblen also cites William McDougall (1924), a widely read psychologist of the day with a list of instincts similar to James’s. Regrettably, neither James nor McDougall explained how the instincts they proposed might have arisen via natural selection. Veblen combined James’s instinct-and-habit theory of psychology with the Darwin–Lyell–Lloyd Morgan idea of selectionist cultural evolution. Since James’s instincts are biologically inherited, rather than learned, this gives Veblen the distinction of creating an early model of ‘gene-culture co-evolution’ – speaking loosely, of course, as he did not have the modern concept of a gene and was forced to rely upon a vague theory of ‘races’ as the vehicles of biological heredity. Veblen’s co-evolutionary model placed the greater part of the burden of explaining human behaviour upon culture. This allowed him to shorten and simplify James’s list of instincts, resulting in a more parsimonious theory. Though he alluded to other instincts, Veblen actually discussed only three instincts (Rutherford 1984): the instinct of workmanship, the parental bent, and the instinct of idle curiosity. By far the most important of these is the

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instinct of workmanship, which is essentially an elaboration of James’s aforementioned instinct of constructiveness, or perhaps of Popper-Lynkeus’s similar ‘engineering impulse’ (Rasmussen and Tilman 1992). The instinct of workmanship is the only instinct whose origin Veblen explains.

Veblen’s explanation of the origin of the instinct of workmanship Veblen first explained how the instinct of workmanship could arise via natural selection in an article entitled ‘The instinct of workmanship and the irksomeness of labor,’ published in 1898. The explanation is repeated with little change in his subsequent Theory of the Leisure Class (1899) and Instinct of Workmanship (1914). We will examine this explanation in some detail. Veblen (1898) begins with an argument that man has evolved to be an intentional being. ‘By selective necessity he is endowed with a proclivity for purposeful action … he is an agent seeking in every act the accomplishment of some concrete, objective, impersonal end’ (Veblen 1898: 80). Though simpler creatures might prosper with only reflexes and instincts, man needs to be goal-oriented and goal-driven in order to use his mental capacity to full advantage. The proclivity for purposeful action, ‘in its positive expression is an impulse or instinct of workmanship; negatively it expresses itself in a deprecation of waste’ (ibid.: 81). The instinct of workmanship impels to man to work efficiently towards the goals set by other instincts: ‘ … its functional content is serviceability for the ends of life, whatever these ends may be; whereas these ends to be subserved are, at least in the main, appointed and made worthwhile by the various other instinctive dispositions’ (Veblen 1914: 31). In other words, the instinct of workmanship is at root a drive to be efficient in the use of resources while pursuing other goals. Veblen’s idea that natural selection favors efficiency in the use of reproductive resources is uncontroversial; such an assumption is implicit in most evolutionary theory. Surprisingly, to a reader of modern evolutionary biology, Veblen next invokes group selection to argue that the instinct of workmanship evolved to serve the welfare of the social group, rather than the welfare of the individual. … [A]rchaic man was necessarily a member of a group … and no group could have survived except on the basis of a sense of solidarity strong enough to throw self-interest into the background … self-interest, as an accepted guide of action, is possible only as the concomitant of a predatory life. (Veblen 1898: 87) Therefore, he says, humans did not evolve egoistic selfishness, because: … the necessary dominance of a sense of group solidarity would preclude that. The selective process must eliminate lines of descent unduly gifted with a self-regarding bias. (Ibid.: 88–89)

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Veblen concedes that some ‘proclivity to emulation must have been present … chiefly sexual emulation … ’ but then says that, ‘neither this nor the rivalry for subsistence could have been the dominant note of life’ (ibid.: 89). He repeats this surprising assertion in 1914, saying again that early humans, living in groups in the primordial environment, would evolve egoless altruism: This savage mode of life, which, was, and is, native to man, would be characterized by a considerable group solidarity within a relatively small group, living very near the soil, and unremittingly dependent for their daily life on the workmanlike efficiency of all the members of the group. The prime requisite for survival under these conditions would be a propensity unselfishly and impersonally to make the most of the material means at hand and a penchant for turning all resources of knowledge and material to account to sustain the life of the group. (Veblen 1914: 36) In effect, Veblen has incorporated prosocial altruism into his instinct of workmanship. How odd. Most theorists in biology, as in economics, assume that individuals are self-interested. Why not treat altruism as a separate instinct, along the lines of William James’s ‘sympathy’? Veblen’s argument for human altruism may simply be a rhetorical stratagem, because he quickly introduces an element of interpersonal rivalry, discussed below, by arguing that humans compete for esteem within the social group. Thus Veblen’s denial of human egoism is not essential to his theory of human behaviour, but serves instead to emphasise that interpersonal competition in society is motivated more by interpersonal comparisons than by simple materialistic greed. Is Veblen’s argument that humans evolved a drive for altruism biologically plausible? First, in Veblen’s support, let us note that he makes this argument on good authority. Darwin had earlier advanced the idea that group selection explains prosocial behaviour in social insects. Darwin also believed that social species, including man, may have instincts for ‘sympathy’: … any animal whatever, endowed with well-marked social instincts, the parental and filial affections being here included, would inevitably acquire a moral sense or conscience, as soon as its intellectual powers had become as well, or nearly as well developed, as in man. For, firstly, the social instincts lead an animal to take pleasure in the society of its fellows, to feel a certain amount of sympathy with them, and to perform various services for them … (Darwin 1871: 471) Although man, as he now exists, has few special instincts, having lost any which his early progenitors may have possessed, this is no reason why he should not have retained some degree of instinctive love and sympathy for his fellows … (Ibid.: 480)

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Modern evolutionary biologists, after several decades of controversy, now generally accept that altruism can evolve via group selection in social species (Field 2004). And there is broad agreement that humans are indeed a social species. Veblen’s contention that humans are genetically predisposed towards altruism is thus consistent, in principle, with modern evolutionary biology. There is, however, a question as to the degree of altruism present in humans. The highest degree of altruism is known in biology as eusociality. In a few species, individual members of a social group forgo all reproduction – in effect, committing genetic suicide – in order to advance the welfare of the group. This phenomenon is known as eusociality, and the social group exhibiting eusociality is sometimes called a ‘superorganism’ (Wilson 1978). The self-sacrificial altruism of worker ants or honey bees is the standard example, but eusociality is also known to occur in mammals (e.g., the much studied naked mole rats described in Dugatkin 1997). Eusociality, however, is rare, particularly so among mammals. In the overwhelming majority of species, individuals within the social group do compete for resources. Modern biologists view eusociality as the exception, not the rule. Veblen has claimed, in effect, that early humans were virtually eusocial, selflessly seeking the welfare of the social group and ignoring their own individual reproductive success. He denies self-interest any role in human behaviour. Like Kropotkin (1902), he ignores the fact that organisms within a social group may co-operate, and even exhibit altruism, while simultaneously competing within the group for reproductive resources. Veblen’s line of reasoning would apply equally well to any social species, and would imply that all social species are altruistic to the point of eusociality. This is simply not true. Veblen thus has failed to support his claim that humans are innately predisposed towards ‘a penchant for turning all resources of knowledge and material to account to sustain the life of the group’ (Veblen 1914: 36).

Veblen’s explanation of the origin of interpersonal rivalry To explain how natural selection can produce a drive for interpersonal rivalry, Veblen (1898: 90) first claims that ‘Sensitiveness to rebuke or approval is a matter of selective necessity under the circumstances of associated life.’ Because man craves esteem, ‘it becomes the proximate end of effort to put forth evidence of power’. Social esteem is awarded based on a ‘comparison of the abilities of different agents’, specifically, upon each individual’s ability to be workmanlike and productive. This creates a drive for relative status: … men are compared with one another and with the expected ideals of efficiency, and are rated and graded by the common sense of their fellows … The visible achievement of one man is, therefore, compared with that of another and the award of esteem comes habitually to rest on an invidious comparison of persons … (Ibid.: 90)

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In effect, Veblen has now implicitly added an instinctive drive for social esteem, introducing a second instinct without naming it such. Esteem, he further assumes, is meted out based on interpersonal ‘comparison of abilities’. Esteem is therefore a positional good and interpersonal rivalry is the logical consequence. In this way, what Veblen might easily have called an ‘instinct of emulation’, following James, is incorporated into his instinct of workmanship. He thus restores an element of interpersonal competition to his model of human behaviour. Is this instinctive drive for social esteem biologically plausible? Once again, Veblen has an idea on good authority. The idea that humans crave esteem had earlier been advanced by Darwin: … the common opinion how each member ought to act for the public good, would naturally become in a paramount degree the guide to action. But it should be borne in mind that, however great weight we may attribute to public opinion, our regard for the approbation and disapprobation depends on sympathy, which, as we shall see, forms an essential part of the social instinct, and is indeed its foundation stone. (Darwin 1871: 471) Instinctive sympathy would also cause him [man] to value highly the approbation of his fellows; for, as Mr Bain has clearly shewn, the love of praise and the strong feeling of glory, and the still stronger horror of scorn and infamy, ‘are due to the workings of sympathy’. Consequently man would be influenced in the highest degree by the wishes, approbation, and blame of his fellow men as expressed by their gestures and language. (Ibid.: 481) Darwin here refers to Alexander Bain (1868), who had argued that a craving for esteem derives from sympathy. Sympathy, for Bain, has the same meaning as it did for Adam Smith (1759): ‘in Sympathy, the essential point is to become possessed of the pains and pleasures of another being’ (Bain 1868: 254). Sympathy leads – it is never clear quite how – to a ‘love of approbation’ (ibid.: 254). Bain later alluded to competition for esteem: Self-complacency and the love of admiration are motives to personal excellence and public spirit. Egoistic in their roots, the tendency of these feelings may be highly social. Indeed, so much of social good conduct is plainly stimulated by the rewards and punishments of public opinion, that some ethical speculators have been unable to discern any purely disinterested impulse in the conduct of man. The unsocial side of these emotions is manifested in the intense competition for a luxury of limited amount. The disposable admiration of mankind is too little for the claims upon it. (Bain 1884: 256)

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Bain here clearly foreshadows Veblen’s later (1899) thinking on invidious comparison (much as John Rae (1834) foreshadows Veblen’s later thinking on conspicuous consumption). Unfortunately, neither Bain, nor Darwin, nor Veblen ever satisfactorily explained how man’s capacity for sympathy evolved, or how sympathy produces a love of approbation. All failed to offer a clear explanation of the evolutionary origin of a craving for esteem. It is odd, to a modern reader, that Veblen forsakes an alternative argument, based on the concept of relative fitness, which would support his claim that humans have an instinctive drive for relative wealth. The principle of relative fitness holds that the gene which ultimately prevails in the gene pool is not the gene with the highest absolute rate of reproduction, but rather is the gene with the highest relative rate of reproduction – relative, that is, to its competitors. In populations that are structured into groups, a gene can increase its representation in the next generation by motivating acts that reduce the reproduction of competing individuals within the social group. Biologists (Hamilton 1970; Vickrey 2003) have used models with relative fitness and group selection to explain the evolution of spite. Economists (Harrison 1998, 2003; Burnham 2001; Eaton and Eswaran 2003) have used similar models to show how humans might have evolved preferences for relative income or relative wealth. The principle of relative fitness offers a straightforward approach to explaining a drive for relative wealth, and thus for what Veblen called ‘invidious comparison’ or ‘sportsmanship’ (though relative fitness would not be capable of explaining a craving for esteem, or the phenomenon of conspicuous consumption). But Veblen addresses the concept of relative fitness only to reject it: Until recently there has been something of a consensus among those who have written on early culture that man, as he first emerged upon the properly human plane, was of a contentious disposition, inclined to isolate his own interests and purposes from those of his fellows, and with a penchant for feuds and brawls. Accordingly, even when the view is met with that men are by native proclivity inclined to action, there is still evidently a presumption that this native proclivity to action is a proclivity to action of a destructive kind. It is held that men are inclined to fight, not to work – that the end of action in the normal case is damage rather than repair. This view would make the proclivity to purposeful action an impulse to sportsmanship rather than to workmanship … There is much to be said for this view. … Yet there is a considerable body of evidence, both from cultural history and from the present-day phenomena of human life, which traverses this conventionally accepted view that makes man generically a sportsman … the discipline of work has acted to develop a workmanlike attitude. It will not do to say that the work accomplished is entirely due to compulsion under a predatory regime … (Veblen1898: 82)

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This passage fails to make clear Veblen’s reasons for rejecting relative fitness as an explanation of interpersonal competition and interdependent preferences, but the rejection is clear. Having rejected both egoistic greed and a drive for relative wealth as sources of interpersonal competition, Veblen’s theory of human behaviour must rely upon the drive for relative social esteem discussed earlier. But, as we have seen, Veblen offered no clear explanation of the origin of this drive. Is it biologically plausible to argue that such a drive evolved in early man? A modern theory known as the Zahavi Handicap Principle suggests that it is. Zahavi (1975) asked how burdensome, dangerous characteristics, such as the gaudy tail of a peacock, might have evolved. He theorised that a seemingly ‘fitness-reducing’ characteristic could have reproductive value as a signal of quality. Suppose that mating is a game between peacocks and peahens, each attempting to maximise reproductive advantage via their joint parental investment in offspring. The peacock’s tail is a costly, and therefore credible, signal of good health, and of good genes. This signal attracts peahens and improves the peacock’s mating opportunities. The improved mating opportunities offset the cost and risk of the peacock’s elaborate tail, yielding a net reproductive benefit. According to the Handicap Principle, only costly signals are credible, so handicaps to fitness can evolve to serve as reliable signals of quality. The Zahavi Handicap Principle can also be used to explain a drive for relative social esteem. If members of a social group join together and invest resources into mutually beneficial ventures, then it may be that costly demonstrations of productivity will attract partners to these ventures. Thus a costly signal of productivity or quality could improve the gains from cooperative endeavours and a produce net gain in reproductive resources. Early man could in this manner evolve a desire to earn the ‘imputation of efficiency by one’s fellows’ and thence a desire to ‘put forth evidence of power’ (Veblen 1898: 91). The conspicuous consumption of a human appears thus as a signalling device analogous to the ostentatious tail of a peacock. And so we find that modern evolutionary biology, using ideas unavailable to Veblen, can in principle explain a craving for relative social esteem, a desire to be a ‘top man’ in the social group. Even though Veblen’s biological explanations fall short, his claims about human nature remain perfectly plausible.

Discussion Let us recapitulate. Veblen first argues that humans are instinctively altruistic to the point of being virtually eusocial, and then argues that interpersonal rivalry arises via a second, implicit, instinctive drive for relative social esteem. His explanations of the evolutionary origin of these drives, when examined critically in the light of modern evolutionary biology, do not bear up. Nevertheless, modern evolutionary biology supplies alternative arguments that support his claim that early humans evolved drives for altruism and relative social esteem. Further, although Veblen denies a role for egoistic materialism

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in human motivation, adding such a drive to his model of human behaviour would not invalidate any of his other claims – it would simply be one additional instinct among many. In short, we can conclude that all Veblen’s claims about human nature are perfectly compatible with modern theory in evolutionary biology. Veblen’s instinct-and-habit model of human behaviour, and his proposed instinctive drive for workmanship, incorporating as it does drives for altruism and relative social esteem, form the foundation of the devastating social critique he delivers in the Theory of the Leisure Class (1899) and later works. Because individual humans compete for relative social esteem, a positional good, Homo veblenicus has negatively interdependent preferences. Because of these interdependent preferences, free markets fail to maximise social welfare (see Collard 1978; Archibald 1992). Furthermore, the ‘Social Darwinist’ (actually, Spencerian) argument that unfettered competition, though sometimes brutal, aids the evolution and vigour of the ‘social organism’ also fails because the drive for relative social esteem produces conspicuous consumption and thus wastes the society’s collective resources. Veblen’s model of human psychology, focusing as it does on the interdependences of men in society, raises normative issues that still concern us today (see Mayberry 1969). To study these issues we need a deeper understanding of human desires – in neoclassical language, a better understanding of preferences. For the last century, neoclassical economists, lacking a theory of preferences, have relied upon ad hoc assumptions about human preferences. But the growth of experimental economics has made it clear that many of the traditional ad hoc assumptions about human preferences do not stand up to scrutiny. For example, the traditional assumption that human preferences are egoistic rather than interdependent is simply untrue (see Bolton 1991; Harrison 1998). This raises a second question: what is the form and structure of these interdependencies? To answer questions like this, neoclassical economists need a ‘theory of preferences’. Veblen first showed economists that evolutionary biology can provide such a theory of preferences. As Veblen put it: It is a distinctive mark of mankind that the working-out of the instinctive proclivities of the race is guided by intelligence to a degree not approached by the other animals. But the dependence of the race on its endowment of instincts is no less absolute for this intervention of intelligence; since it is only by the prompting of instinct that reflection and deliberation come to be so employed … Men take thought, but … the racial endowment of instinctive proclivities decides what they shall take thought of, and how and to what effect. (Veblen 1914: 6) Neoclassical economists, following, perhaps unknowingly, in Veblen’s footsteps, have now begun to use evolutionary biology to provide a theory of

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preferences. The modern synthesis in evolutionary biology has led to mathematical models of population dynamics, which economists can use to produce formal models of the origin of human preferences (Robson 2001; see also Ursprung 1988; Witt 1991). What can a modern neoclassical economist studying the evolutionary basis of human preferences learn from Thorstein Veblen’s earlier efforts? In my view, the primary lesson to take from Veblen is that models of human preferences need to provide testable hypotheses. Veblen’s theory lacks testable hypotheses – he is too quick to point out that every instinct is ‘contaminated’ by others and modified by acquired habits of thought. At times he actually seems to go out of his way to render his predictions unfalsifiable. Thorstein Veblen, like William James, was trained as a philosopher; he produced arguments and theoretical systems rather than hypotheses and predictions. His model of human economic psychology thus led to no programme of empirical research or Kuhnian normal science. The second lesson from Veblen is that the rational choice model is only one of many possible models of human economic psychology (see Twomey 1998). Though rational choice may remain the grand dame of economic theory, other approaches to human economic behaviour can yield rich, complementary insights.

Acknowledgement I wish to thank Malcolm Rutherford and Matthias Klaes for extremely helpful comments. Any errors that remain are my own.

6

Medicine and economics in pre-classical economics Alain Clément and Ludovic Desmedt

Until the early seventeenth century, economic problems, and especially those relating to food supplies, were conceived of in accordance with simple and unquestioned principles: wares were to be supplied in proper quantities to the market at proper prices, gold and silver were to be accumulated, there was to be cheap bread and help for the poor. Abundance and low prices were the primary aims. The perception of the nation’s economy was simplistic and in that it was much like the medicine of the time. Until the Renaissance, the human body was viewed as something of a black box: nobody quite knew what was inside it. Medicine, based on the works of Aristotle and the previously uncontested legacy of Galen, was more of an art than a science. But why the parallel between the two disciplines? The study of wealth and that of biology, anatomy and medicine seem worlds apart. But many of those busy developing political economy were also physicians or professors of anatomy engaged in the investigation of physiological principles. Caffentzis evokes the ‘conceptual commerce between medicine and economic thought’ (Caffentzis 2003: 204) and argues that the two branches of knowledge were very closely allied. The newly developing economic science was searching for a principle around which to order itself and took the natural sciences as its model (Buck 1977). Economists’ systematic recourse to analogies and metaphors contributed extensively to this development. And the medical model was readily employed because a good number of economists, including Petty, Locke, Barbon and Mandeville, had studied anatomy and practised medicine (Groenewegen ed. 2001). But a few physicians-cum-economists are hardly sufficient grounds to explain the connection between the two disciplines. And other economists, too, whether merchants (Malynes, Mun), government advisers (Montchrestien, Davenant, Defoe) or holders of high office (Boisguilbert) also made reference to medicine. In most works of the period, man as a physical entity served as a model for understanding the functions of the economy. Pre-classical authors did not focus their analysis on production, as the classical authors later would, but were preoccupied by exchange. Hence the circulation of wealth constituted a problem of ‘public health’. The organic paradigm still dominated reflection about society: physiological or psychological metaphors were used when dealing with social and economic phenomena.

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The implication was that an understanding of the workings of the human body would explain the workings of the political body. But the question naturally arises as to whether such a comparison could produce any genuine economic knowledge? It is widely accepted that classical and neoclassical economics had been greatly inspired by Newton’s mechanical model of the universe (Ménard 1981; Mirowski 1989; Zouboulakis 1993; Schabas 1990; Hodgson 1993). Might not the biological model, too,1 and specifically its anatomical and medical components, yield economic knowledge? Although analogy and structural comparison in the natural sciences nurtured new knowledge, any transposition from the living world to economics, from the human world to the world of wealth, is a far from obvious step. In France, Montchrestien published the first treatise in French dealing with the economy in 1615. The references to the medical thought of the time and to physiological knowledge are numerous and constant throughout his work. Even if he was not a physician himself, he was well informed on medical practices and was as interested in the circulation of goods as the physicians were interested in the circulation of blood, in the physiological development of the body and in the transmission of illness. In England, two well known political and economical advisers went beyond the common anatomical metaphors of their day to occupy the psychological ground. At the very beginning of the eighteenth century, both Charles Davenant and Daniel Defoe were fascinated by the circulation of credit: according to them, the growth of financial markets challenged the traditional pattern, and human societies could be threatened by disorder. Hence new types of illnesses could appear. The influence of primitive neurology exposed in the work of Dr Thomas Willis (who described the animal spirits), for example, was taken further by Defoe or George Cheyne. Medicine and economics set about trying to understand the figure of the Homo creditor (Pocock 1975), who first appeared with the financial revolution. In fact, though, the body politic/human body analogy led to an improved understanding and even the invention of several mechanisms, including the circulation of money, the division of labour (or its confirmation), and the hierarchy of economic activity (first section below). The analysis of illnesses into their symptoms and causes (second section) found an echo in certain dysfunctions confronting economists of the time, namely the supply of food (third section) and financial crises (fourth section). This is apparent in Montchrestien’s attempts to understand and provide solutions to the severity of the economic situation described in his treatise, or in the efforts of Davenant and Boisguilbert to overcome food shortages in the late seventeenth and early eighteenth centuries, or again in the endeavours of Davenant and Defoe to understand and explain the financial problems England was experiencing at the time. The objective of this chapter is to show, on the basis of a number of representative economic writings of the period, to what extent medical practice and

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matters of public health actually inspired economic thought, and how they may have been useful in clarifying a number of economic ideas.

From human anatomy and physiology to the structural representation of economic processes Pre-classical writers of the seventeenth and early eighteenth centuries commonly approached the analysis of economic issues by using analogies, metaphors and identities.2 In particular they frequently established an identity between the human/animal body and the political body and the State. The human body and the political body This parallel is a variation on the Renaissance theme of deux corps du roi, one the natural body and the other the political, the members being the king’s subjects, and the king in charge (Vigarello 2005: 387 ff.). As in Montchrestien’s Traité de l’Economie Politique ‘There is a great relationship and narrow suitability, between the bodies of the well composed States, and the bodies of animals’ (1615: 68), because ‘Animals have three powers, a vegetative power which feeds the body as the ploughmen work and feed the State, a sensory power and source of heat to which are likened the craftsmen, finally an intellectual power which gives the movement to the body and which the traders exercise in our society’ (ibid.: 70). Natural and artificial states Mun (1664: 70) wrote in metaphors of the prince (the sovereign), who is like ‘the stomach in the body’. Davenant in 1698 replaced the prince by the people, who in turn were ‘the stomach of the State’s body’. Borrowings were also in the same vein for pre-classical economists. For Boisguilbert ‘The body of the State is as the human body, among which all the parts and all the members have to contribute to the common preservation’ (Boisguilbert 1707: 943). Mandeville, the physician, put it succinctly: ‘Laws and Government are to the Political Bodies of Civil Societies what the Vital Spirits and life itself are to the Natural Bodies of Animated Creatures’ (Mandeville 1714, I : 3). William Petty entitled his book (written c. 1671) The Political Anatomy of Ireland. In the preface he explicitly claimed to be following Francis Bacon, highlighting the experimental method and the idea that analytical methods can be transposed from one discipline to another. He thus drew a parallel between the natural body and the body politic. Petty worked with Thomas Hobbes, who drew a distinction between the ‘natural body’ as a ‘work of nature’ and commonwealths, which were the product of human will.3 The Leviathan began by contrasting man in his natural and artificial states. Behind this analogy between the human body and the social and political body was a basic metaphor likening the economy to a living organism

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(Klamer and Leonard 1994). This transition from the workings of the living world to the functioning of societies was common in the seventeenth century in Hobbes and Nicole and then in Boisguilbert (Faccarello 1986). Its sources lay in Renaissance writings, although it was no longer a simple illustrative metaphor in the way sixteenth-century poets commonly used metaphor to discourse on nature as their inspiration. All these analogies and metaphors were designed to describe the nation as a whole, with each of its members contributing to its proper working. The political body became the linkage between the universe and the individual, and in turn the replica of the human body. To study the functioning of the human body was to study the functioning of the universe, and vice versa, as stated by the physician Paracelsus in 1520 and attested to by several economists. Another feature of this analogy was that it generated a new economic representation, which was no longer ‘punctual’, but extended (the body representing a spatial range) even though the separation between the two dimensions was not even made until the early seventeenth century (Dockès 1969). Money, ‘blood of the commonwealth’ Advances in anatomy were revolutionising ideas about the circulation of blood. ‘These physiological developments led to the observation that the body politic had money as its circulating medium; consequently, there were inevitable metaphors associating monetary phenomena with the body’s and persons’ fluids, material and mental’ (Caffentzis 2003: 206). William Harvey’s De motu cordis (On the circulation of the blood) was published in 1628. Blood, he claimed, flowed through the heart and body in a continuous circulation (Harvey 1628). Galenic medicine held that blood was generated by food (the liver manufacturing blood) and then disappeared. Harvey argued that blood was conserved and moved in a closed circuit. Its motion was circular, like that of water and rain. The body was nourished by ingesting foodstuffs, the energy-giving constituents of which were transported by the blood. The heart acted like a pump. These new views were spread throughout Europe at varying rates from one country to another (Hill 1964: 60). It was a widely held belief that money guaranteed the nation’s health; conversely its poor state of health could lead to the wasting away of the body politic. Since the early seventeenth century, forms of money had regularly been likened to vital functions. For Malynes, for example, precious metals were the body and blood of the king; money allowed the monarch to come into contact with his subjects.4 Without money, on the other hand, trade dwindled. The analogy between the circulation of blood in the body and the distribution of wealth in the country was widely used. However, the mechanisms in operation were specified and fresh advances made. Hobbes was deeply influenced by Harvey’s new ideas. His interpretation of human societies was fashioned by the natural sciences, and the significance of motion in his view of the

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body politic can be ascribed to Harvey (Cohen 1994: 196). In the Leviathan it is said that the ‘Nutriment of the Commonwealth’ is made up of ‘Animals, Vegetals, and Minerals’ (Hobbes 1651: 128) and that then ‘all commodities … passeth from Man to Man … Nourishing (as it passeth) every part thereof … as it were the sanguification of the Common-wealth’ (ibid.: 131). The image of the circuit became central and the nutritive virtues of the blood were underscored. Petty claimed, ‘Money is but the Fat of the Body-politick, … as Fat lubricates the motion of the Muscles, feeds in want of Victuals, fills up uneven Cavities, and beautifies the Body, so doth Money in the State quicken its Action’ (Petty 1665: 113). For most of these writers, the idea that bodily functions complemented each other and maintained an internal equilibrium, however precarious, perfectly illustrated what could be observed in the heart of society. This connection provided suitable didactic support not only on which to develop an economic discourse but also with which to justify and legitimise the necessary division of labour (between the rich and the poor in particular) and the quest for a certain economic order. The virtues of comparative anatomy and physiology Progressively, the organic metaphor took its place as a way for thinkers and rulers to view the world. A correspondence or symmetry was perceived between phenomena on macro and micro scales. From organ complementarities to activity complementarities The analogy between the various organs (and their functions) that made up the human body and the various activities that contributed to the creation of wealth showed the need to take into account all the economic sectors of activity. For Montchrestien, trade was the goad of wealth and ranked before industry and agriculture. But, even if he established a hierarchy among these three activities, he claimed like other writers that each activity was indispensable to the other economic sectors. One economic activity could not be neglected in favour of another, or one professional category in favour of another. In evidence, Montchrestien referred to what he called a natural economy: Let us see the nature (that the great Politician has only to imitate) that distributes to all the members of our body, by proportion and measure, the food which they need. And that, if somebody does not receive his necessity, the spirits stop little by little coming there; he atrophies and reduces, and thus begins the dissolution of all our assembly. This serious consideration has to lead Your majesties to diligently look after your State. (Montchrestien 1615: 52)

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Farmers, craftsmen and merchants were the three categories whose joint economic activity was mutually indispensable and essential to maintaining the power of the State. Agriculture, although apparently ranked last, was an essential organ. Montchrestien compared it to the activity of the liver: ‘We can say that the ploughmen are the feet of the State, because they support it and carry all the burden of the body … It is by them that your nobility live, and that your cities are fed. And thus, we can say conveniently that they are to the State what the liver is to the body’ (ibid.: 80). At the time, people still believed that the liver was the centre of the venous system, and Realdo Colombo (1559), the successor of Vesalius, even held one of the liver’s functions to be the development of nourishing blood. This did not mean that all activities were equally important. Montchrestien wrote of proportion and equal necessity. Although some organs of the human body were more important than others, all were necessary for the survival of the individual, and similarly for the State. This argument emerged in Montchrestien’s writings with the concept of autarky (cf. infra). The concept of harmony Throughout the seventeenth century, anatomical discoveries allowed the body to be depicted in the most minute detail. Vesalius5 unquestionably furthered this knowledge by analysing the skeleton and the movement of the muscles under the skin and so discovering their harmony. These discoveries enthralled people. As with the most precise anatomical observations, careful scrutiny of all the components of the economic system and the connections between these various components brought about a better understanding of the economy and suggested solutions to economic problems. Thus Charles Davenant could write: It shall not be here argued, whether the skill of physic be now brought to perfection, or whether it is yet capable of further improvements; but this may be safely pronounced, that the knowledge of the sinews, muscles, arteries and veins, with the late discovery of the circulation of the blood and all the parts of anatomy, conduce very much to render this dark science more plain and certain; in the same manner, such as would understand the body politic, its true constitution, its state of health, its growth or decay, its strength of weakness, and how to apply remedies to the various distempers to which it is incident must study and look narrowly into all distinct parts of the commonwealth, its trade, the current money, the arts, labour and manufactures, and the number of its people, with many other things which altogether are the member of which the great body is composed. (Davenant [1699] 1771, II: 169) Montchrestien sought the same harmony in the way society functioned as the anatomist found in the human body, a sort of natural equilibrium, such as Boisguilbert described later. While Montchrestien denied there was such a

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thing as economic equilibrium, order, proportion and harmony were very much present in his thinking. For Montchrestien, what characterised the human body in good physical condition was its anatomy and its coherence with its different parts. The body had always been able to sustain itself. But good physical condition and bodily strength were dependent above all on the united and complete functioning of all parts of the body.6 Then came the necessary equilibrium of the four body fluids that helped sustain the body throughout life. For Montchrestien, it was essential to ‘imitate the nature’ (ibid.: 127). It was through the use of all its abilities that the State could enhance its economic power: ‘The good political administration is a universal health of all the body of the State, and, consequently, a whole arrangement of every particular member’ (ibid.: 52). This economic order, for Montchrestien, ensued from the need for the state to be self-sufficient. France could achieve this because ‘France is a world’ (ibid.: 292). As for the working condition of the human body, the economic order supposed ‘a just and moderated balance between excess and deficit’ (ibid.: 127). In nature a certain order was inherent but the frequent imbalances necessitated outside intervention (bloodletting, purging, etc.). In the economic world, this order needed to be organised and supervised. Such was also the function of the prince, according to Montchrestien. The only way to solve the problem between the rich and poor was ‘that the nation provides the nation’ (ibid.: 127). Montchrestien went on to suggest that foreign trade should be controlled and imports of manufactured goods and exports of raw materials limited. Davenant argued in similar terms, using the same astonishing approach to the anatomical structure of the human body. They also share the same degree of complexity: ‘it is hard to trace all the circuits of trade, to find its hidden recesses, to discover its original springs and motions, and to shew what mutual dependence all traffics have one upon the other’ (1698, I: 388). Beyond its complexity and the fragility that might ensue from it, Davenant emphasised that the human body, at that time, might encounter mortal danger at every turn and that the economic system appeared to be functioning well, somehow or other, despite the numerous economic problems besetting it. Davenant might well have had the intuition of a self-regulating system: He who looks into anatomy, will wonder how life can be at all carried on, when, there are so many pipes and conduits, of which any stoppage is immediate death, and the reflection makes him melancholy. A dissection of the body politic is much of the same nature, and not at all more cheerful work, and such as search into matters of government, will admire how a state subsists and thrives, when, in appearance, there are so many things to hurt, and so few to do it good. (Ibid.: 389) Nevertheless, the analogy contained a number of limits which Davenant himself pointed out. While a person had a limited life expectancy, the political body

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had a potentially infinite lifetime. ‘Life, though it is shortened by irregularities, is not to be extended by any care beyond such a period. But it is not so with the body politic, by wisdom and conduct that is to be made long-lived, if not immortal’ (1699, II: 294). This longevity of the political body, setting it apart from the human body, suggested that, while the organs of the human body could not be improved upon, there was scope for improving the institutions of the political body: ‘the disorders we labour under are capable of a remedy’ (ibid.: 294). Davenant provided a good illustration, to a certain extent, of the analogy as analysed by Ménard: first ‘globalised’ and providing an overview that could then allow the bringing forward of a new type of knowledge (Ménard 1981: 144–46). Money circulation and vital activity Two of Harvey’s important new ideas were imported into economics: the idea of circuit (the nation for political arithmeticians) and that of continuous motion. The central concept became money, which circulated among members of society. This was why Petty contrasted the tradesman and the landowner. The former was involved in a dynamic activity: ‘Merchants … yielding of themselves no fruit at all, otherwise then as veins and arteries, to distribute forth and back the blood and nutritive juyces of the Body Politick, namely, the product of Husbandry and Manufacture’ (Petty 1662: 28). And so the essential feature of trade was motion, which was why money and trade grew in parallel. Money had a very special place in explaining the workings of the economy; it was a necessary instrument for the circulation of wares and wealth. For many seventeenth-century authors, blood, as a nourishmentdistributing agent, was analogous to the conception of money as the ‘vital spirit’ of trade. ‘William Harvey’s theory of blood circulation encouraged the belief in the necessity of money to circulate through the economy’ (Coleman 2000: 716).7 Blood had life-giving powers and distributed vitality around the body. ‘The origin of vital activity in animal organisms was now attributed to the circulation of the blood, which nutrifies the various parts of the body as it flows from the heart and back again’ (Christensen 1989: 704). Davenant linked trade and the circulation of money: ‘Trade, as it is now become the strength of the kingdom, by the supply it breeds of seamen, so it is the living fountain from whence we draw all our nourishment; it disperses that blood and spirits through all the members, by which the body politick subsists’ (Davenant 1695b: 16). As Davenant put it, ‘Trade and Money are like Blood and Serum, which tho’ Different Juices, yet runn throught the veins mingled together’ (Davenant 1942 [1695a]: 8). This image was particularly suited to credit, based as it was on circulating assets and as it established strings of mutual claims and liabilities. After the Glorious Revolution and the outbreak of the War of the League of Augsburg, attitudes to credit in particular signalled a major break with the past (Desmedt 2005). At the same time as the Bank of England was being

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founded, diverging conceptions of wealth were arising: this confrontation between land values and market values engendered tension (Pocock 1975). By basing the issue of paper, and so trade in goods, on credit, banking projects were consistent with a number of anatomical principles: the banks could be likened to pumps drawing wealth from society which was then redistributed to the body politic. Wealth could be listed under assets and the paper issued under liabilities in much the same way as there was an inflow and outflow of blood. The analysis of the circulation of the blood was applied to banking: the assets–liabilities rationale was likened more or less to the mechanism of the heart (the two ventricles, systole and diastole). Relative progress in anatomy contributed to an improved representation of the economy through recourse to analogies with the human body. These analogies were extended to the analysis of national economic disorders.

From bodily illnesses to national economic illnesses The vocabulary used directly reflected the repeated use of medical metaphors: commentators spoke of economic illnesses, of the suffering of the State, the state of decline, the ailment that ate away at economies, indigestion, etc. A parallel could also be drawn between caring for the human body and caring for the political body, between the role of doctor and that of the State. For example, Montchrestien, confronted with the illness France was suffering from, proposed vigorous solutions borrowed, metaphorically, from medicine. The king, acting as a doctor called to the patient’s bedside, had the power to relieve France from its suffering at the hands of foreign merchants. But what treatment should be followed in all of these cases? The initial diagnosis: idleness of the people For the author of the Traité, France was threatened by sickness. The main problem nations encountered, Montchrestien claimed, was high unemployment: idleness was ‘the biggest plague of towns’ (ibid.: 242) because ‘man was born to live in continual exercise and activity’ (ibid.: 56), with the result that ‘people reduced to do nothing are led to behave badly’ (ibid.: 96). Moreover, in the same way that the body loses vitality when its parts remain idle, the State declines if its people do not work. Now, for Montchrestien, this situation of idleness is the result of competition from foreign merchants. Foreign countries that are able to produce low-cost goods inundate our country with their products, with their low prices due to unfair manufacturing procedures and low salaries. This price disparity in manufactured goods between France and its neighbours explains why national manufacturers are not able to sell their product either in France or abroad. On one hand, those who buy raw materials and agricultural products in France deprive France of manufacturing and employ a large number of people. Large unemployment follows. Beyond the inactivity that ensues the consequences of unfair and prejudicial

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trade between France and foreign countries, another result of this type of activity is a diminution of gold and silver because the merchants of manufactured products ‘amass it and take it to Seville, Lisbon, London, Amsterdam or Middleburg’ (ibid.: 303). An illustrative metaphor Montchrestien used the medical analogy between physical illness and the illness from which France suffered to denounce a situation he judged serious and dangerous. France’s illness was of the same nature as those the human body suffers, illnesses that Paracelsus, in restoring life to the ontological concept of illness (Grmek 1997: 162), perceived as being endowed with a proper structure interfering with human organism. In the Treatise these foreign beings of the social body were foreign merchants. They engaged in a business that benefited neither France nor the French, because they indulged in predatory acts. These foreign beings disrupted the nation’s smooth working. They ranked with ‘leeches who become attached to this big body, pull its best blood and stuff themselves with it, then leave the skin. It is starving louses who suck the juice and feed on it till the subject had died’ (Montchrestien 1615: 303). The image went even further: ‘As the vultures fly over the carrion’ (ibid.: 314). At first glance these were illustrative metaphors intended to improve understanding, but they ended up setting the imagination on fire (Maasen et al. 1994; Cohen 1993). Montchrestien ranked leeches and lice as harmful beings, as parasites whose food source depended on human beings, abandoning the body when it could no longer supply them with what they needed. A heuristic metaphor Montchrestien did not draw on animal and medical imagery alone to support his arguments. He also borrowed the more direct medical discourse on contagious disease. Human bodies, he wrote, ‘are in several manners susceptible to contagion. The plague enters it by several ways’ (1615: 292). Montchrestien referred to a contagious illness that was very much present and dangerous in his time, a killer disease that hit both cities and the countryside, leaving impressive death tolls in its wake: 25 per cent of the population of Venice from 1575 to 1577, 50 per cent in Lyons in 1628 (Mollaret 1996: 254). The measures taken to contain this dreadful disease (regular quarantine through isolation of the infected, cordoning off of towns, etc.) were indicative of just how contagious it was. Montchrestien extended this notion of contagion to the economic body, which suffered because of the unfavourable influence of foreign merchants with regard to the people of France. In effect, these were commercial influences and very widespread. The country’s ports were the principal means of penetration and by analogy the main points of entry for the plague. To combat the foreign plague that was gradually gaining the entire country, Montchrestien suggested forming a true political autarky.

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Montchrestien called for the king to act like a good doctor: ‘dispense the remedy, by using lenitifs, épithems, potions or otherwise’ (1999: 293). In reality he was not advocating applying Paracelsus’s medicines, which involved chemical treatment of the illness, or using products based on mercury, lead, arsenic, antimony or other substances. Montchrestien suggested, rather, imposing a sort of quarantine, much like what was put in place during the great plague epidemics of the time. Transposed to economics, this treatment entailed autarkic withdrawal and export taxes on goods. Prohibiting imports of foreign goods would counter idleness, unemployment, and ultimately the impoverishment of the country. We will see in the fourth section that, for some writers, mental illnesses could also be harmful.

From illnesses to remedies: the fluid mechanism In his interpretation of economic dysfunctioning, Davenant adopted Montchrestien’s view to the extent that he considered idleness the essential cause of the economic difficulties in his country. However, he diverged on the origin of the illness. Idleness, foreign trade and humoral equilibrium For Montchrestien, idleness was an evil caused by the environment outside the social body. Davenant, by contrast, held that, even if idleness had external causes – it was, for example, the sudden influx of gold and silver to their home country that made the Spanish lazy – it was part of the natural order: ‘Nature in her contrivances has made every part of a living creature either for ornament or use, the same should be in a politic institution rightly governed’ (Davenant 1699, II: 205). Although idleness appeared to be essentially a natural phenomenon it still had to be combated. Davenant imagined elsewhere a plan to put the very poor to work. Moreover, he was persuaded that foreign trade would prove an efficient economic solution, because responding to foreign demand would stimulate the national economy and employment. Unlike Montchrestien, Davenant did not draw on the same solutions to answer the problems raised by the nation’s dysfunctional economy. In a general sense Davenant was in favour of free trade among nations. He saw international trade as a sort of fluid: It is the radical moisture of the commonwealth, and if it be quite drawn away the body politic becomes consumptive, hectical, and dies at last (being subject to diseases and death itself, like human frames); and as human bodies are not to be kept alive but by receiving in of nourishment, to repair the hourly decays which time produces, so nations cannot subsist long unless they receive from time to time reliefs and refreshments from abroad.

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Davenant was making a direct reference to humoral medicine. Humoral medicine was concerned with the balance of fluids within the body, such as the blood, bile, phlegm and black bile (melancholy) and of other fluids making up the picture. Good health was ensured by the balanced coexistence of all these fluids. Sickness ensued if too much or too little of these bodily fluids was produced. Foreign trade was thus compared to one of these ‘fluides subtils’ for which a balance must be struck between ‘excess’ and ‘deficit’. Such a balance was indispensable to the vitality of the State, because it promoted the circulation of wealth, but it should not be over-practised. Davenant gave an indirect and summary indication of the importance that it should assume: ‘The true sign that foreign traffic has conveyed spirits and nourishment into each vein of the body politic, is, when trading nations are able to fit out and maintain a great naval strength, for their defence and security’ (ibid., I: 356). Abundance or dearth of food and the theory of humours Davenant drew on knowledge of the humours to solve the food crisis too. Dietary principles were used in a lengthened parallel between the requirements of the human and social bodies. The starting point was the principle of healthy foodstuffs and diet, subscribing to the preoccupations of the time, which implied neither excess nor shortage of food, in accordance with nature and humours, while respecting the principle of contradictions as well as the digestibility of food (Flandrin 1996: 683–703). Davenant wrote: It is not the taking in a great deal of food, but it is good digestion and distribution that nourishes the body and keeps it healthy. The same thing holds in the body politic; so that gold and silver are often a sustaining diet for a nation; and there may be as well too much as too little of this kind of treasure, if it be not turned to proper uses. (Davenant 1698, I: 382) To facilitate the efficient distribution of food resources, he proposed ‘To settle a fund for erecting in every county granaries capable of containing such a quantity of corn as may nourish the people a certain time, upon any emergent occasion’ (Davenant 1699, II: 226), the management of which should be assumed by individuals and not by the State. The digestive metaphor provided justification within nations for a public or private reserve function, widely put into practice since ancient times, and which had its equivalent, on a purely physiological level, in the form of a stock of nourishing reserves like fat. However, borrowings from the theory of humours were imperfect because the theory rejected situations of accumulation. This was one of the limits of this parallel between economics and medicine. The one-sided and biased recourse to medicine is beginning to justify a pre-existential economic knowledge. In any case, one cannot speak of the wholesale transfer of medical theory to working knowledge. Borrowings were fractional and the role of the analogies

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and metaphors was to illustrate and serve a polemic function even if they also conformed to existing institutions and new ideas.

From physiology to psychology: the case of credit and financial activities Influenced by the theory of humours, the famous Dr Thomas Willis8 conducted research at the end of the seventeenth century into ailments of the animal soul and its seat, that was the brain. He brought to light what he named ‘animal spirits’, which possessed explosive properties: [The animal spirits] being distributed by the brain, as from a fountain, along the nerves over the whole body, imbue, irradiate, and fill all parts, inducing in each a certain tenseness. So that the ducts of the nervous structures, like cords lightly strung, are extended from the brain and its appendages in every direction to all peripheral parts. (Willis 1672: 275) These ideas influenced a number of his contemporaries just when the surge in non-specie-based monetary instruments was changing people’s behaviour and sometimes causing illnesses of the imagination. The new forms of circulation – stock certificates, bills of exchange, IOUs9 – might appear to be fictions, or at least constructions of the mind. This transition from the physiological to the psychological overturned traditional conceptions, as evidenced by the writings of Charles Davenant and Daniel Defoe. The passionate ‘Lady Credit’ Credit involved volatile mechanisms, as Davenant stated: Of all beings that have existence only in ye minds of men, nothing is more Fantasticall, and Nice than Credit. ‘Tis never to be forced; it hangs upon opinion. It depends upon our passions of hope and fear. It comes many times unsought for, and often goes away without reason, and when once lost, is hardly to be recovered. (Davenant 1696a: 75) Credit was perfectly well able to make up for any shortfall in cash. ‘ … the Credit which the Exchequer and the Bank had obtain’d was grown in the Body Politick a prevailing part in Its habitt and Constitution’ (Davenant 1696b: 206). However, ‘fictitious’ wealth (tallies, banknotes, lottery tickets, goldsmiths’ notes, etc.) supplemented metallic money. This paper credit became vital to trade. ‘Credit … is the principal mover in all business, and if there should be a total stagnation of this nerval juice, a dead palsy would forthwith seize the body-politic’ (Davenant 1698: 162). Davenant was the

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first major commentator to emphasise the fundamentally unstable character of credit. That tireless polymath Daniel Defoe proposed The Anatomy of Exchange Alley in 1719 to provide an up-to-date view of mechanisms governing stock jobbers and other investors. In fact this anatomical work, begun several years earlier, revealed the existence of ‘the lightest and most volatile Body in the World’ (The Review, 14 June 1709, cited by McVeagh 2000: 14), that is, credit. Defoe set out the characteristics of this new financial society by studying the behaviour of ‘Lady CREDIT’ (The Review, 10 January 1706, Defoe 1706: 273). ‘Money has a younger Sister … but if she be never so little disappointed, she grows sullen, sick, and ill natur’d, and will be gone for a great while together: Her Name in our Language is call’d CREDIT, in some Countries Honour, and in others, I know not what’ (ibid.). As might be expected, this young woman might be overcome by nervous excess, whether hysteria or hypochondria. The former ailment involved convulsions; the second, melancholy. By escaping from the material realm of coins and metal, the tangle of financial commitments might lead to movements that were hard to control (‘the present Diliriums that seize upon Peoples Heads, and which cause them to run on such fatal Extremes’, The Director, 21 October 1720, Defoe 1720: 223). These financial convulsions were not simply metaphors: for English society of the time, the bursting of the South Sea Bubble was quite dramatic. Some new pathologies For Defoe ‘the South Sea Company [was] to be dissected, shown as a Skeleton’ (The Director, 14 November 1720, Defoe 1720: 245). A Journal of the Plague Year came out just after the South Sea Bubble had burst (Defoe 1721, see Desmedt 2007). It read like a particularly successful metaphor of the financial fevers that gripped Londoners (and similarly Defoe wrote The Chimera about the Law affair (1720). The South Sea Company was formed in 1711. Investors expected astronomical returns from trade with remote lands (Murphy 1997: 43). Until 1719 the company was quite sensibly run. Then in 1720, as a result of corrupt practices, the Commons and Lords accepted to convert the public debt into shares of stock. The company became the subject of massive speculation: there was talk of a ‘bubble’ (the term designating any deception and by extension unsound or speculative undertakings). Numerous companies were formed, riding the wave of euphoria that swept London. Funds were to be raised for companies for trading in hair, manufacturing hats and caps, extracting silver from lead, etc. (Carswell 1961: 156). In the face of such competition, and of rumours of corruption, the South Sea share price, after having increased tenfold, crashed. The bursting of the bubble meant big losses for many English merchants. As in the epidemic, amid all the speculation, contagion took hold of the city. ‘In A Journal of the Plague Year, the plague is a figuration of credit: ramifying, unavoidable, preying on imagination. Both

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are versions of comprehensive uncertainty’ (Sherman 1996: 145). The posting of bills or mortality or share prices on the walls of the capital quantified the scale of the trouble. Defoe was not the only commentator to come up with metaphors of the episode: In a sick Body, when the Mass of Blood is corrupted, when the Constitution of the Body is subverted, and the Motion of the Spirit stop’d and stagnated, the Patient finds no Benefit by Medicine; he must be left to the Secret Operations of Nature, either for Life or Death. The Body of the South Sea People seem to be in just such a Crisis at this Time. (Applebee, 17 December 1720, cited by Rogers 1985: 156) And the crisis brought disruption in its wake: We are assured, that the Number of Distemper’d Heads is so strangely encreas’d for some Months past, by the sudden rising and sudden falling of Men’s Fortunes and Families, under the operation of South Sea Vomits, and other Bubble Physick; that there is not room to be had among the private BEDLAMS, or Mad-Houses as they are call’d, throughout the Town. (Applebee, 28 January 1721, in Rogers 1985: 160) Defoe’s writings both as a journalist and a novelist were particularly perceptive when it came to financial troubles. Rumours about the financial markets were a plague which could lead to the worst forms of delirium: if people entertained fantastical visions, the ‘body politic’ was heading for chaos. The infection might contaminate all the members of the business community. The works of Davenant and Defoe feature a combination of two levels of economic discourse. When discussing merchandise, the metaphor of the circulation of the blood prevailed. Certain anatomical laws ensued: if circulation came to a halt, the outcome might prove fatal for the community. What had to be avoided, then, was any break in trade which would lead to stasis.10 Analysis of financial transactions took a different approach, as the opposite danger was prevalent, that of overheating. These commentators went beyond the common anatomical metaphors of their day to occupy the psychological ground. They were fascinated by the circulation of credit.11 In the throes of financial revolution,12 London society was immersed in a world of highly volatile reciprocal commitments. The excessive fluidity of animal spirits could cause psychological aberrations such as delirium, melancholy or insanity. It was no longer immobility that was to be feared but feverishness. Such feverishness was contagious, since securities were not objective but subjective. ‘Credit became a symbol of revised power relations in emergent capitalist society, where opinion, passion, fantasy – embodied in the market for stocks – eroded traditional, stable values embodied in land’ (Sherman 1996: 27). These pages prefigure the analysis of stock exchange cycles causing wavering between melancholy and hysteria.

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Conclusion In pre-classical writings the idea of movement and of circulation was a particularly important one: generally, ‘nourishment’ was extracted from the land or from labour and then had to be distributed to the different members of the social body. ‘In the absence of an economic theory of production and distribution, money, capital, labour, or gifts of nature were all categorical equivalents for the stimulation of this process of circulation, and it was only through a consideration of this process that such elements could take their place’ (Tribe 1978: 89). The seventeenth century and the first half of the eighteenth were the period of representation, just as the sixteenth century had been that of interpretation. People saw in phenomena only the parts of a machine, and in the machine itself something that was devoid of intention and purpose. In particular, the human body became a machine, whose workings and functions were being progressively discovered by medicine. The representation of economic issues was no exception to the rule. In a discipline that was largely undeveloped, whose methodology was still to be invented and which was usually in the hands of doctors and professors of anatomy, it seems natural enough that knowledge of the human body and its ailments should have become the main source of inspiration in the early stages for reasons of simple proximity. Even the founders of political arithmetic, looking to take up the challenge, were unable to forgo reasoning by analogy (particularly that of the circulation of blood). And yet this approach was not wholly unambiguous. Borrowings from medicine were both fractional and often approximate, appealing to the imagination more than being point-by-point comparisons between the workings of the human body and the workings of the economy. However, the economy gained a great deal from such comparisons, if only in terms of how to address the matter of national food supply when taking space into consideration, or in justifying and determining the role of various economic actors (the State in particular). The shift in viewpoint brought about by Defoe expressed in its own way what some years later George Cheyne was to call The British Malady.13 The fever to buy, which was particularly apparent on the financial market, challenged traditional markers. The social body might be threatened by new forms of behaviour: wealth, with luxury, were harmful germs. Human societies which make progress also meet madness, disorder and chaos on the way.14 ‘This flourishing economic order blessed, or cursed, with multiplying wealth, and addicted to the pleasures of property and ‘passive enjoyments’ proved, in many respects, damaging to equilibrium, both physical and mental’ (Porter 1992: 62). The seventeenth-century economists thus opened up an avenue of research into the parallel between the working of the economy and the working of the human body which was taken up in the eighteenth century by Quesnay, and then in the nineteenth in particular by Spencer, and in the twentieth century by Walter Canon, as part of a more assertive analogical and homological approach.

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Notes 1 See Clément (2002, 2003); Desmedt (2005). 2 Analogies provide us with a first type of interaction between the social and natural sciences; these interactions result from the recognition of an idea, a concept, a law, that seems to have an element that will function in both fields. Analogies are therefore seen as tools that can be employed to solve problems in both domains, see Cohen (1993). 3 ‘Drawing directly on Harvey’s comparison of the heart to a pump and of the circulatory system to a hydraulic network of pipes or conduits, Hobbes set forth – on the very first page of the introduction to Leviathan – the analogy between a machine and an animal or human body’ (Cohen 1994: 196–97). 4 ‘To be short, Bullion is the very Body and Bloud of Kings, Money is but the Medium betweene Subjects and their Kings, Exchange the heavenly Mistery that joynes them both together’ (Malynes 1623: 139). 5 Andreas Vesalius had been appointed a professor at Padua’s famous university at a very early age. In this college, corpses were dissected. Vesalius corrected the errors of the Greek anatomists and questioned, without ever condemning him, the anatomical work of Galileo, which had been uncontested until then (Tubiana 1995). 6 The idea that good health depended on all parts of the body being in proper working order was well known among doctors of the time. 7 ‘The dynamic, demand-inducing role of money was expressed in the early seventeenth century in variants of the metaphor of money as the blood, or “Vital Spirit” of trade, embodying the concepts of nourishment, stimulus, and the dangers of plethora or deprivation inherent in the function of the blood in Galenic physiology’ (Kelly 1991: 69). 8 See Foucault (1972). 9 In the eighteenth century ‘even the humblest of men found themselves enmeshed in the web of credit’ (Brewer 1982: 207). Ashton summarised the situation: ‘coins for retail trade and the payment of wages; notes for deadlines in real estate; and bills for commercial transactions’ (Ashton 1959: 106). 10 Defoe observed of the tradesman facing financial hardship, ‘his credit, the life and blood of his trade, is stagnated’, in The Compleat English Tradesman, I, 69, cited by Sherman (1996: 103). See also in Robinson Crusoe: ‘the surprise may not drive the animal spirits from the heart, and overwhelm him: for sudden joys, like griefs, confound at first’ (Defoe 1719b: 38). 11 ‘By this Invisible, Je ne scay Quoi, this Non-natural, this Emblem of something, tho’ in it self nothing, all our War and all our Trade is supported’ (Defoe, The Review, 14 June 1709, cited by McVeagh 2000: 15). 12 See Dickson (1967); ‘this was a brave new world of finance capitalism, a world in which the values of the market place penetrated social and political circles as never before’ (Finkelstein 2000: 222). 13 ‘What C. B. MacPherson has called the “opportunity society” created unease, anxiety, and restlessness for everyone consumed by getting and spending’ (Porter 1992: 61). This tension is captured in the words ‘All the world is melancholy, because all the world is in debt’ (ibid.: 61). 14 ‘Someone is said to have asked Newton what he thought of the prospects of the stock, and received the reply that he could calculate the motions of the heavenly bodies, but not the madness of the people’ (Carswell 1961: 131).

Part III

Economics and mathematics

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Mathematics as the role model for neoclassical economics Nicola Giocoli

Beware the underdog Mathematical analysis may deal with economic issues, as with any other scientific issue, in two different ways. The first is the method that I would like to call formal, by using which the analyst does not care at all about the intrinsic truthfulness or falseness of the theorem that he is willing to demonstrate, nor does he bother himself with investigating whether the problem’s data are based upon real or hypothetical foundations, as his only goal is that of replacing the involved and inexact forms of ordinary language with the simple and exact statements of mathematical language. On the contrary, the other method, which we can call objective, never satisfies itself with dressing up with a rigorous formula any concept whose reality and nature have not been ascertained beforehand, but rather it makes analysis subservient to the search of truth and its demonstration. The difference between these two systems is the same as that between nominalism and realism, between a vain science of words and a true and positive philosophy of things. Deductive reasoning about social phenomena invited the use of mathematics from the first. Among the social sciences, economics was in a privileged position to respond to that invitation, for its two central concepts, commodity and prices, are quantified in a unique manner, as soon as units of measurement are chosen. … As a formal model of an economy acquires a mathematical life of its own it becomes the object of an inexorable process in which rigor, generality and simplicity are relentlessly pursued. … An axiomatized theory first selects its primitive concepts and represents each one of them by a mathematical object. … Next, assumptions on the objects representing the primitive concepts are specified, and consequences are mathematically derived from them. The economic interpretation of the theorems so obtained is the last step of the analysis. According to this schema, an axiomatized theory has a mathematical form that is completely separated from its economic content. If one removes the economic interpretation of the primitive concepts, of the assumptions and of the conclusions of the model, its bare mathematical structure must still stand.

The first citation is taken from the entry ‘Mathematics applied to political economy’ in the Dizionario universale di economia politica e di commercio by the nineteenth-century Italian economist Gerolamo Boccardo (1877: 218, my

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translation). The second is taken from the entry ‘Mathematical economics’ by a probably more famous economist, Gerard Debreu (1987: 399 and 401), in the New Palgrave Dictionary. Boccardo was a committed positivist, who claimed that the scientific method could achieve the greatest perfection only through the application of the mathematical method: while, in fact, empirical observations were the indispensable starting point of any knowledge endeavour – including political economy – only mathematics could grant such observations the exact and systematic form that was required to turn any discipline – including, again, political economy – into a ‘true’ science, the paradigmatic case being of course that of physics (Boccardo 1877: 217). But if the primary role of mathematics was to grant exactness and order to observations, it followed that no discipline could achieve a truly scientific status by employing the deductive method only. Hence, Boccardo thought that those economists who, like William Whewell, championed the formal approach were actually reducing political economy to a mere mathematical game, devoid of any empirical import and similar in spirit to the theory of chess (ibid.: 219).1 It is a big leap from Boccardo to Debreu, in every respect. Indeed, one of the main points in the latter’s entry in the New Palgrave – as well as in other papers (see e.g. Debreu 1984; 1991) – is that physics cannot, and thus should not, represent the role model for economics precisely because it is a discipline which has never completely surrendered to mathematics and has always retained its experimental and observational foundations. Given that economics is not amenable to experimentation, it is forced to find its role model in the only scientific discipline which is non-experimental, namely, mathematics (Debreu 1991: 2). While I leave it to further research to check the validity of the first part of the latter sentence in the light of the recent boom in experimental economics, my focus here is on the implications that Debreu draws from the second part. Adopting mathematics as a paradigm entails, in fact, that mathematical economics is not any more a specialist branch of the whole discipline but, according to Debreu, the only possible form of any scientifically robust theorisation over economic phenomena. It also entails that economic analysis should not look for its premises in the outside world: a mathematical model’s life is totally independent of empirical reality, while its scientific validity can only be tested by the logical consistency of its propositions (Debreu 1987: 400–01). A simple explanation of the different attitude towards mathematics of Boccardo and Debreu would follow from embracing an incrementalist view of the history of economics. One could thus proclaim a few platitudes such as that poor Boccardo did not know what we, the intellectual children of the great Debreu, now know, that this is what progress in economics is all about, that mathematics is just a useful toolbox but no economist is ever really driven only by formal quibbles, and so on and so forth. Yet this canonical answer neglects the historical fact that the very same contrast between the alternative ways – the objective and the formal – of using mathematics in economics has occurred time and again throughout the twentieth century.

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Take for example the controversy in the 1954 Review of Economics and Statistics between another, Boccardo-style, underdog, a Mr Nobody statistical economist with a specialisation in industrial cost analysis named David Novick, on the one side, and a legion of future Hall-of-Famers in the dismal science (Paul Samuelson, Lawrence Klein, James Duesenberry, John Chipman, Jan Tinbergen, David Champernowne, Robert Solow, Robert Dorfman and Tjalling Koopmans) on the other. The topic of the controversy – which has been brought again under the spotlight by Phil Mirowski (2002: 396–406) – was no less than the most proper way to apply mathematics in economics. The gist of Novick’s bold two-page tirade against the new post-war neoclassical orthodoxy was his plea to never lose sight of the difference between mathematics as a language form and mathematics as a quantitative method. The latter was how mathematics had always been used in applied natural and physical sciences and thus the standard to which economics should also conform (Novick 1954: 358). On the contrary, he lamented that economists and the other social scientists had taken up the bad habit of using mathematics: as it has been used in theoretic physics or chemistry and not as the mathematical results of theory proved by statistics in physics or chemistry are applied in everyday engineering or mechanics. The current use of mathematical language in social science is largely a form of intellectual shorthand and in no way demonstrates that the methods heretofore so successful in the physical sciences have suddenly become adaptable to the social sciences. (Ibid.: 357) Novick concluded that modern economic theory might even be ‘… a most interesting one, susceptible to “toy” proofs, but [it was] not at all adaptable to the facts of the real world’ (ibid.). It is not hard to imagine the reaction to Novick’s attack by the defenders of the new mainstream. Indeed, by reading their replies one may get an illuminating perspective on the scientific background, research propensities and personal attitudes of the nine Hall-of-Famers listed above: from Dorfman’s patient catechism on what mathematics stands for in the social sciences to Klein and Tinbergen’s passionate defence of econometric techniques, from the elegant and partially receptive (though still overall critic) words of Champernowne and Chipman to the rude and dismissive tone of – guess who? – Samuelson and Solow. Yet the single most important reply was Koopmans’s – as he was the only one to fully realise that Novick’s complaints were directed not against the use of mathematics itself but, first and foremost, against the new kind of mathematics that had just entered economics, namely the mathematics of convexity, matrix algebra, set theory and the axiomatic method (Koopmans 1954: 377). Hence in the three pages of Koopmans’s answer we may find one of the earliest defences of the so-called formalist approach to mathematical economics, pre-dating even his classic 1957 Three Essays on the State of Economic Science.

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The simple lesson that I wish to draw from the episode is that the issue of the most proper kind of mathematics for the social sciences was very much open still in the fatal year 1954, that is, the year of Arrow and Debreu’s existence proof.2 It follows that the standard narrative of the history of twentieth-century neoclassical economics in terms of a steady increase in mathematisation and of a smooth passage from the stage of informal – that is, non-rigorous – investigation to the stage of formal – that is, rigorous – analysis is largely unsatisfactory. This for at least two reasons: first, because the transition was neither smooth nor steady, and, second, because it is by no means obvious that formal must be synonymous with rigorous. Indeed, both approaches to mathematics – the objective and the formal, to reiterate Boccardo’s terms – are, and have always been, rigorous, each of course in its own way. Or, how else could any David Novick perform his professional, and highly sensitive, task of costing weapon systems on behalf of the US Department of Defense if not by rigorously applying the most advanced mathematical techniques of engineering and industrial management? Hence I believe it is crucial for any narrative of how modern neoclassical economics came to be to realise that the change in its mathematical techniques that took place in the inter-war and, especially, the post-war periods has to be explained in terms of a change in the notion of mathematical rigour. Again, this point is not a new one, as it comes from the authoritative scholarship of Roy Weintraub, who in his most recent works (see e.g. Weintraub 1998, 2002a) has stressed time and again that there is a big difference between today’s meaning of the word ‘rigorous’, as synonymous with ‘formal’, or even with ‘axiomatised’, and how the same term was interpreted in the late nineteenth and early twentieth centuries. For the great Italian mathematician, and Pareto’s reviewer, Vito Volterra, to be rigorous in any scientific discipline, from physics to biology, from chemistry to economics, meant to model a phenomenon on the basis of a series of experimental results or direct observations. Hence the opposite of rigorous was not, as today, informal, but rather unconstrained: a non-rigorous argument was one devoid of a proper foundation upon experimental or observational data (see Weintraub 2002a: 42–51). Thus, it is hardly surprising that in Volterra’s time the paradigmatic case of a rigorous discipline was mechanics, while today the role model for any discipline aiming at achieving full rigour is mathematics itself. So the questions arise: how could it happen that neoclassical economics came to embrace a new notion of rigour? Why and when did the economists’ role model become the mathematician rather than the mechanical physicist? Remarkably, Volterra himself gave us a possible answer, as he famously expressed his scepticism about the economists’ possibility to avail themselves of a stock of empirical material capable in both quantitative and qualitative terms to meet the standard of rigour of mechanics (see Volterra 1906: 298; Ingrao and Israel 1990: ch. 6). According to this interpretation – a more refined version of the canonical one – the triumph of formalism in modern neoclassical economics should be explained in terms of the discipline’s increasing

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awareness of its lack of good experimental and observational data, and thus of its intrinsic inability to fully abide by the paradigm of mechanics. This entailed the progressive abandonment of the early marginalists’ dream of reaching the top place in the scientists’ ranking, that is, alongside the ‘real’ scientists like the physicists, and surely very much above all the other social scientists. Eventually, neoclassical economists realised that they had no choice but to embrace the alternative, purely formal notion of rigour and to look for their role model in the Mathematics Departments – a forced, almost reluctant choice which outsiders like David Novick simply failed to understand. As a landmark event in this narrative, one could mention the Cowles Commission’s late 1940s decision to reformulate its research agenda away from the disappointing results of the macroeconometrics project: a crucial move that opened the door to the rise of general equilibrium analysis, game and decision theory, operations research, etc. There is more than one grain of truth in such a story, but still it falls short of being exhaustive. I can see at least three major gaps in it: first, it does not properly take into account the history of mathematics itself, that is, the history of how and why the meaning of the word ‘rigour’ came to be modified; second, it neglects the possible existence of a specific motivation behind the economists’ decision to pursue the mathematicians’, rather than the physicists’, route; third, it does not provide a plausible explanation for the failure of inter-war and post-war economists to run proper economic experiments, given that the last two decades of the twentieth century have amply proved that this is far from being a really impossible or fruitless task.3 As I said before, here I will focus just on the first two issues. In particular, I will try to offer a taste of a (partially) alternative story which begins with the so-called formalist revolution in mathematics, then crosses the economists’ urge to bring their discipline to the highest possible level of generality and conceptual integrity, and ends with the radical transformation in what I call the image of economics.4

What would Boccardo have thought of him? I should like to sum up in a few sentences my general conception of the essence of the axiomatic method. I believe: anything at all that can be the object of scientific thought becomes dependent on the axiomatic methods, and thereby indirectly upon mathematics, as soon as it is ripe for the formation of a theory. … In the sign of the axiomatic method, mathematics is summoned to a leading role in science.

This is taken from one of David Hilbert’s most well known essays, his 1918 ‘Axiomatisches Denken’ (Hilbert 1918: 1115, emphasis added). The passage effectively summarises the gist of Hilbert’s formalist programme, namely, the idea that mathematics should assert itself as the unifying cornerstone for all kinds of scientific endeavour.5 The hectoring tone of the passage, which deliberately recalls Emperor Constantine’s motto, ‘in hoc signo vinces’, may

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justify the charge of ‘imperialism’ moved against the programme. Yet what is still seldom recognised is that such ‘imperialistic’ ambitions were in Hilbert’s view just the inevitable outcome of the role and the power of the axiomatic method in mathematics. Consider for instance the following passage, still taken from the 1918 essay: The procedure of the axiomatic method, as it is expressed here, amounts to a deepening of the foundations of the individual domains of knowledge – a deepening that is necessary for every edifice that one wishes to expand and to build higher while preserving its stability. (Ibid.: 1109, emphasis in original) As convincingly argued by the historian of mathematics Leo Corry (see e.g. Corry 2000: 48–49), Hilbert viewed formal axiomatic systems instrumentally, that is, as a powerful tool of mathematical research, to be employed whenever a field of knowledge had reached a point of sufficient ripeness. Thus, axiomatics was not an end in itself, but rather a tool to achieve a clearer understanding of any theory capable of being formulated in mathematical terms. This was the sense in which the axiomatic method would warrant the establishment of mathematics as the supreme standard and check for the advancement of all scientific knowledge. While the literature of the period does contain statements which seem to validate the traditional view of the Hilbertian approach as the sheer identification of mathematics with the study of merely formal systems, it is crucial to recognise that Hilbert himself claimed that the axiomatic approach entailed neither the reduction of mathematics to ‘a combinatorial game played with primitive symbols’ (cf. von Neumann 1931: 62) nor a conceptual break with the classic analytical problems of empirical sciences. Indeed, it is even unsure that he ever really (or, at least, seriously), formulated his famous proposal ‘to replace in all geometric statements the words point, line, plane, by table, chair and mug’ (cf. Ewald 1996: 1089). Rather, what he looked for was an improvement in the mathematician’s understanding of empirical sciences, as he believed that the growth of any scientific discipline involved both an expansion in its scope and an ongoing clarification of the logical structure of its existing parts. The axiomatisation was just a very important step in such growth.6 Even the term ‘formalist’, when applied to Hilbert, may be somehow misleading. Such a term does in fact betray the beliefs of a mathematician who wrote that: ‘if scientific knowledge is to be possible, certain intuitive conceptions and insights are indispensable; logic alone does not suffice’ (quoted by Ewald 1996: 1107), or who considered ‘entirely erroneous’ the opinion that: only the concepts of analysis, or even those of arithmetic alone, are susceptible of a fully rigorous treatment. … Such a one-sided interpretation of the requirement of rigour would soon lead to the ignoring of all concepts arising from geometry, mechanics and physics … But what an important

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nerve, vital to mathematical science, would be cut by the extirpation of geometry and mathematical physics! (Hilbert 1900: 1100) With the benefit of hindsight, can we be so sure that our old pal Boccardo would have placed Hilbert on his ‘black list’ of the supporters of a purely formal view of mathematics in the social sciences?

Axiomatic bigamy Why is it so important for historians of economics to clarify the real import of Hilbert’s axiomatic approach? The answer is that this effort may cast new light upon two meaningful issues for the history of twentieth-century neoclassical thought, namely the rise of general equilibrium theory and the foundation of game and decision theory. As I said before, there is an alternative, more traditional, presentation of the main tenets of Hilbert’s school, one that, according to Roy Weintraub (2002a: ch. 3), has led to a significant distortion in historical assessments of the relationship between formalism and neoclassical economics. This is because some historians – including Weintraub himself (see Weintraub 1985) – have emphasised the similarity between the notion of a metatheory and the modelling pattern of modern general equilibrium theory. Indeed, the idea of the metatheory as a ‘handbook’ of rules that can be applied to investigate certain sets of abstract objects and to demonstrate that the objects, their assumed properties and the theorems derived through them constitute a mathematical system that satisfies the fundamental requirement of consistency seems to find an almost perfect counterpart in the way general equilibrium analysis was interpreted in the 1930s, especially in Karl Menger’s Mathematical Colloquium. As a result of their strong commitment to Hilbert’s formalism – so the story goes (see e.g. Punzo 1989, 1991) – the participants to the Colloquium transformed the Walrasian model into the metatheory of the whole economic analysis. This in turn had an overwhelming influence on the subsequent history of neoclassical economics: the key requirement of any metatheory – namely, its being consistent – combined with the economists’ view of equilibrium as a state of mutual compatibility of economic variables to grant a foundational status to the existence proof of a general economic equilibrium. However, the way such a proof is usually carried out only shows the theoretical possibility of a certain mathematical property of a given set of economic relations. As a consequence, it is argued that rather than start from the empirical data about a given economic phenomenon and look for their analytical description, economic analysis in the general equilibrium tradition has reduced itself to a mere mathematical exercise, namely that it is possible to take a given formal structure (the Walrasian metatheory) and prove that it is not unreasonable to claim that one of its offspring may have generated the phenomenon in question. In short, economic models have become totally

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non-descriptive – or, as Ingrao and Israel (1990: 182) put it, ‘abstract schemata of possible contents … ’. The same argument has been applied to the birth of modern game and decision theory, in particular to von Neumann’s role in it. Two common statements in the literature are, first, that von Neumann’s overall contribution to economics should be read as just one further application of the metatheoretical approach of his mentor Hilbert (see again Punzo 1989), and, second, that there have been two von Neumanns, a pre- and a post-Gödel one, the latter being quite disillusioned with respect to the power of formalist methods. In support of the first statement, both the bold simplifying assumptions of his 1937 general equilibrium model and the apparent unrealism of the axioms of expected utility theory are usually called forth. In support of the second, reference is made to von Neumann’s own words in his well known 1947 essay ‘The mathematician’ – where he warned against the risk of pushing too far the search for absolute purity lest mathematics should become a mere aesthetic exercise (von Neumann 1947: 9) – and to an alleged difference between the philosophical underpinnings of his 1928 (i.e. pre-Gödel) and 1944 game theory.7 A more correct rendition of Hilbert’s axiomatic programme allows us to better appraise the validity of the mentioned literature. Take for instance the idea of the Walrasian model as the metatheory of modern neoclassical economics. The problem with this interpretation is that it does not seem to apply to the very case of the author who has most emphatically defended the view that even in economics an axiomatic theory must be totally emptied of its empirical references, ‘logically entirely disconnected from its interpretations … ’ (1959, viii) and perfectly neutral with respect to its possible applications. This author is, of course, Gerard Debreu, and the simple reason he does not fit in the metatheoretical story is that his intellectual reference for mathematical formalism was not David Hilbert but Nicholas Bourbaki. As everybody knows, the latter was the pseudonym adopted in the mid1930s by a group of young French mathematicians who aimed at no less than rebuilding the whole of mathematics. Despite proclaiming themselves the legitimate heirs to Hilbert’s formalism, the group’s central idea was that mathematics is an autonomous subject with no need of any input from the real world. Hence it was Bourbaki who actually brought to the extreme the separation of mathematics from its applications and sources of inspiration. Axioms and reality had no necessary link: what reality could do, at best, was to suggest some of the axioms, but afterwards mathematics had to cut all ties with it. Such an extreme attitude towards the role of axiomatics was however compensated by a relativistic view as to what mathematics could (and should) achieve. While Hilbert’s approach did pursue the axiomatisation of the one true mathematics, Bourbakists believed that mathematics was always relative, supported no explicit philosophy of mathematics and characterised their approach as that of the working mathematician, who has no direct interest in philosophical or foundational issues (see e.g. Dieudonné 1970: 143).

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As Mirowski (2002: 394) put it, ‘the marriage of Cowles … and Bourbaki was a match made in heaven’. Debreu had been trained in mathematics by Henri Cartan, a member of the Bourbaki group, and joined the Cowles Commission when the latter’s research director was Tjalling Koopmans, who had close relations with the members of Chicago Mathematics Department, the stronghold of Bourbakism in the United States. The warm reception of Bourbaki’s message at the Cowles Commission was also favoured by the major changes that had been going on there from the late 1940s:8 as I said before, most Cowlesmen were disillusioned with their early empiricist work and were redirecting their research agenda towards theoretical issues. More generally, Bourbakism provided an authoritative backing for those very few mathematical economists who in the early 1950s were pursuing the goal of the discipline’s generality and conceptual integrity – a goal which, as I argue in the next section, eventually marked the transformation of post-war neoclassical economics. Yet it would be very misleading to associate the entry of the axiomatic method in economics exclusively with the Cowles Commission. While the latter did marry with Bourbaki, most neoclassical authors seem at least bigamous. Already in the inter-war years there had been other prominent examples of the application of the axiomatic method, such as the first efforts to axiomatise demand theory carried out by Ragnar Frisch (1926) and Hermann Wold (1943–44). The former is especially relevant because he explicitly defended the view that in order to give an empirical content to economic theory the correct scientific method was to imitate what had been done by David Hilbert in his axiomatic foundation of geometry. In particular, following Hilbert’s lesson of the complementarity between the axiomatic and the empirical method, Frisch proposed in an oft-quoted 1932 lecture that the axioms of economic theory be deduced from a number of imaginary experiments capable of capturing the essential features of economic reality (Frisch 1932: 489). Hardly the same axiomatic bride as Cowlesmen’s! Even in the case of von Neumann, the existing renditions are weakened by their imperfect acknowledgement of Hilbert’s philosophy of mathematics. As I have argued elsewhere (Giocoli 2003b), von Neumann carefully distinguished between models, like the 1937 general equilibrium one, where nonconstructive proofs – incapable of positively connecting with the empirical substratum – would suffice and models where constructive – viz. computable – arguments were also required, like the crucial demonstration of the minimax theorem in the 1944 Theory of Games. Furthermore, any reader of the latter book may realise that the authors’ position on the axiomatic method was much closer to Frisch’s than to Debreu’s: Although an assertion … is required by common sense, it has no validity within the theory … unless proved mathematically. To this extent it might seem that rigour is more important than common sense. This, however, is limited by the further consideration that if the mathematical proof fails to

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Indeed, in their axiomatic characterisation of a game, von Neumann and Morgenstern strictly adhered to what they called the classic – i.e. the Hilbertian – approach to axiomatics, which, in their words, aimed at achieving ‘an exact formulation for intuitively-empirically-given ideas … ’ (ibid.: 76). More than that, they clearly distanced themselves from the modern axiomatic method, that is, from the requirement that mathematical concepts be formulated in a pure form, with no association with any intuitive perception (ibid.: 74). As a consequence, von Neumann and Morgenstern took extreme care in ensuring that the names assigned to the pure concepts of their theory always recalled their intuitive background and even spent quite a few pages to defend the axioms from an empirical viewpoint9 – hardly what a formalist diehard would ever do! Thus, it may be argued that, as far as the axiomatic method is concerned, the development of post-war neoclassical economics owes at least as much to Hilbert – the ‘true’ Hilbert sketched in the previous section – than to Bourbaki or metamathematics. This should set the record straight with respect to, say, the frequent claims that neoclassical axioms cannot but be detached from reality and that economists should not worry too much about the interpretation of their analytical results – two statements with obvious historical and methodological implications. Yet we still are not on target, because even the finest appraisal of the kind of axiomatics employed in modern economics falls short of capturing the real engine behind the latter’s post-war transformation. Demonstro ergo sum One of the main legacies of the Hilbertian school is the new notion of axiomatic rigour. Starting from the early twentieth century, the old Volterra-style notion of ‘empirical’ rigour has been progressively replaced by the Hilbertian one. The process was spurred by Hilbert’s definition of mathematical truth as logical consistency: if the arbitrarily given axioms do not contradict one another with all their consequences, then they are true and the things defined by the axioms exist. This is for me the criterion of existence and truth. (Letter to Frege, 29 December 1899, quoted by Corry 1997: 117) Such a definition neatly separates the purely logical aspects of the application of the axiomatic method from the, possibly empirical or intuitive, origin of the axioms themselves. Thus, an argument has to be called ‘rigorous’, that is,

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correct or true, if and only if it is the consistent outcome of a deductive process applied to the assumptions. That this is exactly the current and, above all, exclusive meaning of the word ‘rigour’ when used in science bears witness to the lasting impact of Hilbert’s axiomatic programme. How does this transformation relate to the evolution of modern neoclassical economics? The key can be found in the following passage by Roy Weintraub: The idea of formalization as axiomatization, associated with Hilbert, … had the consequence that modeling a phenomenon, or constructing a theory of a phenomenon or set of phenomena, came to be associated not with surfacing the link between the model and the experimental data, but rather with establishing the integrity of the formal reasoning chains which were the engine for discovery of new knowledge in that scientific field. (Weintraub 1998: 1843, emphasis added) My claim is that, beside and beyond the economists’ dissatisfaction with the empirical power of their analysis, what really drove the transformation of modern neoclassical economics in the direction of formalism and axiomatics was the economists’ desire to achieve the highest possible generality and conceptual integrity of their analysis. Generally speaking, such a desire may be said to pre-exist in any scientist’s mind, where it often is at least as powerful as the willingness to improve the explanatory power of her analysis. As far as neoclassical economics is concerned, both desires were stimulated in the inter-war and post-war years by new epistemological currents, such as logical positivism and mathematical formalism, but at the end of the day it was only the latter that made itself felt in the eventual outcome of the analysis, so much so that even behind the strongest declarations of allegiance to, say, the operationalist or experimentalist method, what we actually find is just the pursuit of an ever higher level of generality and conceptual integrity. The full credit for this argument must be given to Ivan Moscati, of Bocconi University. What Moscati has done in his Ph.D. dissertation (Moscati 2003; now see Moscati 2006, 2007a) has been to apply the categories of the NeoKantian epistemology of the Marburg school to the evolution of twentiethcentury demand theory. Moscati underlines that one of the core principles of this epistemology is precisely that what really drives the scientist’s intellect is not the goal of obtaining an ever improved representation of reality, but rather that of achieving the highest possible degree of systematisation via the ordering of phenomena according to a stable and structured system of theoretical objects which exhibit the highest possible degree of exactness and generality. Such a view also provides a strong test for evaluating alternative theories: the availability of a more general, exact and systematic theory will always lead to the discarding of the less general, exact and systematic. Moreover, the most proper way to express the relationships among the elements of a theory is through mathematical relations. This is because, according

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to the Neo-Kantians, mathematics is a science of relations, rather than a science of quantities. Hence the more exact and determined the connections between the elements of a theoretical system, the better they can be expressed in mathematical form. The progress of a scientific discipline towards its systematisation then inevitably manifests itself in terms of a tendency towards an increasing mathematisation. Let’s then take as a working assumption the thesis that the Neo-Kantian epistemology effectively captures the intellectual drive behind the evolution of neoclassical economics – especially of its so-called Neo-Walrasian version. Two issues arise. First, does the history of twentieth-century economics give any evidence backing this assumption? Second, what does the assumption entail for the overall characterisation of modern economic orthodoxy? The first query has been tackled in Giocoli (2003a), where I claim that the history of twentieth-century microeconomics provides ample support in favour of the strive-for-conceptual-integrity argument. Indeed, the whole evolution of modern decision theory may be read as the story of the neoclassical economists’ long struggle to achieve a rigorous and truly general systematisation of the agent’s rational behaviour under both certainty and uncertainty conditions. Even the strange trajectory of modern game theory – which, after a seemingly warm welcome, rapidly fell into oblivion for more than two decades, only to make a triumphant comeback in the 1980s and eventually gain its current status of theoretical core of contemporary economics – may be explained in terms of our working assumption, because it was only when neoclassical economists had become acquainted with the formalism of non-interactive decision theory (and of general equilibrium theory too!) that they could begin to fully appreciate the rigour and generality of its strategic version. This, however, is not the place to review either the history of demand theory – on which I refer once again to Moscati’s works that largely inspired my own rendition of the topic – or that of expected utility theory (EUT) or game theory. What I wish to do is something bolder – perhaps too bold – namely, to argue than even some of the achievements of modern experimental economics may be read through the same lenses. More exactly, I would like to direct attention to a feature of the few experimental outcomes that have made their way through the solid ramparts of neoclassical orthodoxy, namely their being only, and precisely only, those that do not really threaten the striving for conceptual integrity of mainstream economics. Let me immediately narrow the validity of such a claim. What I have in mind is just one of the two main experimental approaches to economics, namely, that pioneered by Kahneman and Tversky (K/T) – the so-called heuristics and biases (H&B) programme. Indeed, as far as I can see it, the alternative approach – championed by Vernon Smith and Charles Plott – seems to be less prone to the pressure of intellectual systematisation and thus much more promising in view of a real transformation of the research attitudes of contemporary economics.10 The same, I fear, cannot be said of behavioural

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economics – the field that attempts to integrate the findings of psychology into economics and that, as is well known, draws much of its inspiration from K/T’s research.

Formal dress (still) required The fundamental claim of the H&B programme is that people make their choices by relying on a limited number of heuristic principles which, while useful in reducing to simpler judgemental operations the complex tasks of assessing probabilities and predicting values, may well lead to severe and systematic biases in the actual choices (Tversky and Kahneman 1974: 1124). Such a claim has found one of its most important applications in economics with prospect theory – the new analysis of decision-making under risk developed by K/T in their classic 1979 Econometrica paper (Kahneman and Tversky 1979). As originally conceived of by K/T, prospect theory models choice under risk as a two-phase process: in the first phase, the available prospects are ‘edited’ using a variety of decision heuristics; in the second, choices among edited prospects are determined by a preference function which is represented by a simple decision-weighted utility function – that is, by a generalisation of expected utility which allows misperceptions or subjective weighing of objective probabilities to be captured by well defined decision weights. The long tradition of attempts to generalise the assumptions behind standard EUT11 easily explains why neoclassical economists focused their attention on the second phase. What they found was indeed quite significant: K/T’s utility function exhibited a series of properties (reference point, diminishing sensitivity, loss aversion)12 that effectively captured some of the experimental features that systematically falsified the predictions of EUT. Both these properties and the possible alternative forms of the weighting function have given rise to a large literature and have helped establish the names of Kahneman and Tversky as the patron saints of behavioural economics. This culminated with the awarding to Daniel Kahneman (jointly with Vernon Smith) of the 2002 Nobel Prize in economics – the first ever granted to a psychologist. Yet it is remarkable that economists have not given the same credit to K/T’s first phase of the choice process, the editing of prospects. In their 1979 paper K/T argue that individuals edit their prospects using several heuristics, such as the so-called dominance heuristic which allows the elimination from the choice set of stochastically dominated prospects. The editing phase explains why K/T’s prospect theory may be considered an instance of a procedural theory of decision-making – a theory that seeks to model the processes that lead to choice by assuming that agents draw on some kind of decision heuristics or rules and by specifying the conditions under which a particular heuristic or rule is followed in preference to another (Starmer 2000: 350). The experimental evidence provided by psychology in favour of a procedural view of decision-making is overwhelming. However, procedural models – including K/T’s editing phase – have been largely ignored even by

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those economists who most fervently believe in the cross-fertilisation between economics and psychology. For example, despite the ample space given to K/ T’s 1979 paper, editing is completely overlooked in Matthew Rabin’s essay in the Scandinavian Journal of Economics celebrating Kahneman’s Nobel Prize (Rabin 2003). Perhaps even more surprisingly, Kahneman and Tversky themselves seem to have downplayed the importance of editing in later versions of their theory (see e.g. Tversky and Kahneman 1992). Why did this happen? And why do most economists – even those of a more experimentalist penchant – still refuse to fully account for the evidence offered by psychology? Why are they so little interested in describing the actual processes – not merely the outcomes – through which agents make their choices? I believe there is a straightforward answer: the adoption of a procedural view of decision-making would entail too large a break with the economists’ selfimposed goal of achieving the maximum generality and conceptual integrity of their theories, and thus too big a transformation in the overall image of economics as a scientific discipline (see next section). This is not the case, instead, if behavioural economists limit themselves to encompassing in standard models the formal properties of a heterodox utility function specifically designed to capture just a bit of the available experimental results. Think again of the different fortune of the various parts of K/T’s prospect theory. Take their dominance heuristic, which, as I said before, is one of the key ingredients of the editing phase. This heuristic requires the decision maker to first scan the set of available options and then delete the dominated prospects only if they are detected. Hence the dominance heuristic leaves open the possibility for some dominated prospects to survive its application: this of course aims at capturing a feature of the actual behaviour of experimental subjects. However, the possible survival of dominated options also paves the way to potential violations of the transitivity and/or monotonicity of choices. Remarkably, the economists’ reaction to the latter possibility has been fully in line with the strive-for-conceptual-integrity assumption: the potential violation of transitivity and monotonicity has been deemed ‘an undesirable result’ of prospect theory (Quiggin 1982: 327) because the two axioms are considered the fundamental properties that any good theory of choice must satisfy. In view of these difficulties, we can easily understand why economists have been so far quite selective in their efforts to encompass the experimental evidence. Several models have been developed that may at the same time account for some of the empirical regularities of prospect theory, warrant the preservation of the key axioms and enjoy the neatness and tractability of singlefunction optimisation. The point is that the models in this class effectively get rid of the procedural elements of the editing phase. That they have nonetheless enjoyed considerable fortune shows that success in modern economics is still not necessarily dependent on a theory’s explanatory power with respect to experimental results. Indeed, the development of rank-dependent models has meant a reduction of this power, since important phenomena such as the well known framing effect cannot be encompassed without explicitly dealing

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with procedural elements. So it is somehow ironic, as well as highly revealing of the attitude of most behavioural economists, that in the celebratory essay after Kahneman’s Nobel Prize one may read that ‘framing effects are more difficult to reconcile with and embed within standard economic analysis than most of Kahneman’s other research topics … ’ (Rabin 2003: 174), as if the whole point of the economists’ newly (re)discovered propensity to avail themselves of the insights from experimental psychology would just amount to finding a way to reconcile these insights with core neoclassical principles.13 The scepticism about the willingness of behavioural economists to escape from the straitjacket of formal rigour and conceptual systematisation gets stronger when we realise that the same H&B programme that has been so successful in economics has been subjected to severe ‘homecourt’ criticism. Indeed, several psychologists have questioned both the empirical emptiness of the approach and its propensity to privilege a purely formal account of behavioural rules. According to Gerd Gigerenzer, K/T’s heuristics are ‘mere verbal labels, or one-word explanations. There is no process model … There is no explication of the characteristics of the situations in which a heuristic is successful and in which it would fail.’ (Gigerenzer 2005: 42). The H&B programme is charged with being merely descriptive and devoid of any real explanatory power. But: [i]f the psychology of judgment ultimately aims at an understanding of how people reason under a bewildering variety of circumstances, then descriptions, however meticulous and thorough, will not suffice. In place of plausible heuristics that explain everything and nothing – not even the conditions that trigger one heuristic rather than another – we will need models that make surprising (and falsifiable) predictions and that reveal the mental processes that explain both valid and invalid judgment. (Gigerenzer 1996: 595) The idea itself, underlying the whole of K/T’s analysis, that decision makers are systematically flawed bumblers has been challenged by those psychologists who, drawing on notions of bounded rationality, argue that individuals develop simple and effective decision rules that serve them well in many contexts, given the constraints under which the choice is made in terms of time, knowledge and cognitive ability. The focus in this alternative view is on learning processes: people do eventually converge to effective, and possibly rational, outcomes if only they have enough time and a high enough stake to think about them (Ortmann 2003: 569). Yet, from the viewpoint of the learning approach, the difference between standard neoclassical decision theory and K/T’s theory tends to vanish: given that both theories equate rationality with consistency and both call an error – i.e. irrational behavior – any deviation from consistency, what characterises the latter with respect to the former is just the idea that decision makers are never so smart to be able to abide by the tight standards of perfectly consistent behaviour (Altman 2004: 11).

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The learning perspective helps us understand why the H&B programme managed to conquer an audience in economics at the same time it was losing ground in psychology. Economists overlooked the disputed status of K/T’s results and happily took them on board, though the boarding itself was quite selective in that only those results fitting well within the discipline’s consolidated framework of conceptual integrity were kept, discarding all the rest. Indeed, as Rabin put it, ‘psychological economics clearly expands the range of phenomena economists can successfully study, and does so in what clearly is the spirit of economics’ (Rabin 2002: 658 n. 1, emphasis added). That there may be more than one way to summon ‘the spirit of economics’ seems to be of no concern to someone who in a highly influential JEL survey has proclaimed his distaste for methodological disputes by deliberately limiting his review to ‘what psychologists and experimental economists have learned about people, rather than how they have learned it’ (Rabin 1998: 12; also see Rabin 2002: 659). What Rabin fails to recognise is that his is precisely the attitude that – though probably involuntarily14 – helps preserve the influence of another spirit, that of Nicolas Bourbaki, upon modern behavioural economics.

May the force relation be with you The paradoxical case of K/T’s approach is just the latest instance of the long list of economic theories, when not whole sub-disciplines, that in the last fifty to sixty years have been shaped by the intellectual urge of so many economists to achieve the highest generality and integrity of their analysis. It was mathematical formalism – especially in its Bourbakist version – that gave the decisive impulse to dislodge the other urge, that for empirical realism. The change in the notion of rigour bears witness to the catalytic influence upon economics of the transformation going on in the mathematical realm: in the sign of the axiomatic method, an economic model came to be called rigorous only when built upon a cogent axiomatic base, while the criterion for assessing its truthfulness became the mutual consistency of its formal relations (cf. Weintraub 2002a: 100). What we have ended up with is neoclassical economics as a logical, rather than empirical, science, whose role model is the mathematician, not the physicist, and whose sociology and value system have been borrowed from the mathematicians’ community. A large part of the most significant advances in post-war microeconomics has been formal in essence, though often concealed behind an empiricist facade. What has really mattered for successive generations of neoclassical economists has been first and foremost to make their way towards the deduction of ever more rigorous theories, so much so that even when progress towards greater realism or empirical accountability has been made it has been received in the literature only after it has proved instrumental in expanding, or defending, the generality of the axiomatic theory. This argument can be effectively synthesised by referring to the notion of the ‘image of knowledge’ that has been proposed by the historian of mathematics

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Leo Corry.15 According to Corry, the appraisal of every scientific discipline requires two different kinds of questions to be tackled: questions of the first kind concern what he calls the ‘body of knowledge’, i.e. a discipline’s theories, facts, methods and open problems (Corry 1996: 3); those of the second kind deal with the image of knowledge, i.e. with the discipline qua discipline: The images of knowledge determine attitudes concerning issues such as the following: Which of the open problems of the discipline most urgently demands attention? What is to be considered a relevant experiment, or a relevant argument? What procedures, individuals or institutions have authority to adjudicate disagreements within the discipline? What is to be taken as the legitimate methodology of the discipline? What is the most efficient and illuminating technique that should be used to solve a certain kind of problem in the discipline? What is the appropriate university curriculum for educating the next generation of scientists in a given discipline? (Ibid.: 3–4) The images of knowledge exercise a considerable influence upon the creation, growth, relative evaluation and eventual oblivion of the body of knowledge. Thus, Corry believes that the main task for the historians of a particular discipline is to identify the image of knowledge prevailing in a given period, to account for its evolution through time and to explain its interaction with the body of knowledge (ibid.: 7). Armed with Corry’s dichotomy, we may eventually tackle the second issue that I left open in the fourth section, namely, what does our working assumption of the economists’ striving for conceptual integrity entail for the overall characterisation of modern neoclassical orthodoxy? My answer is that in the inter-war and, especially, post-war years such striving was boosted by the rise of mathematical formalism, so much so that it triggered a radical transformation of the discipline’s image. The two poles of the transformation were, on the one hand, the traditional image of economics as a discipline dealing with systems of forces and, on the other hand, the new image of economics as a discipline dealing with systems of relations. According to the traditional system-of-forces view, economics was a discipline whose main subject was the analysis of the economic processes generated by market and non-market forces, including – but by no means exclusively – the processes leading the system to an equilibrium. According to the new system-of-relations view, instead, economics is a discipline whose main subject is the investigation of the existence and properties of economic equilibria in terms of the validation and mutual consistency of given formal conditions, but that has little if anything to say about the meaningfulness of these equilibria for the analysis of real economic systems.16 From this fundamental distinction other crucial differences follow. Take Corry’s list of typical questions raised by the image of knowledge. Which of

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the outstanding problems of economics most urgently demands attention? According to the system-of-forces image, the answer is the explanation of how and why a certain equilibrium had been reached, while according to the systemof-relations image it is the demonstration of the existence of an equilibrium, though ‘not of [its] actual, empirical existence but of [its] conceivable, logically or mathematically non-contradictory “existence”’ (Hutchison 2000: 19). What is to be considered a relevant argument? In the system-of-forces image, a rigorous explanation of economic phenomena was one that explicitly accounted for the influence of all those market and non-market forces that could be identified via empirical observations; in the system-of-relations image, the fundamental requirement is the axiomatic rigour of the argument, i.e. its logical robustness and economy of assumptions. What is the most efficient technique that should be used to solve economic problems? In the system-offorces image, the mathematics was that of classical mechanics; in the systemof-relations image, it is topology and, more generally, all the tools that privilege the requirement of consistency over that of effective calculability. Finally, what is the appropriate university curriculum for educating an economist? The role model in the system-of-forces image was the physicist à la Volterra, while that in the system-of-relations image is the (Bourbakist) mathematician: this entails a radical modification in the incentive, rewarding and formative system of the economists’ community. The new image of economic knowledge is not devoid of practical consequences. To show that, I will conclude the chapter with the story of the potentially lethal danger to which the system-of-relations view has recently exposed one of the most fashionable – and remunerative – sub-disciplines of neoclassical economics.

When rigour becomes a penalty Starting from 1993, in a series of anti-trust cases known in the literature as the Daubert cases, the US Supreme Court has stated the rules for expert testimony to be admitted in courts. The Court has held that the trial judge must serve in a ‘gatekeeping role’ by making a ‘preliminary assessment of whether the reasoning or methodology underlying the testimony is scientifically valid and of whether that reasoning or methodology properly can be applied to the facts in issue’. The expert testimony is admissible only if it is ‘sufficiently tied to the facts of the case that it will aid the jury in resolving a factual dispute … ’.17 In a later (1997) ruling the Supreme Court has added that an expert testimony should not be admitted if the court concludes that ‘there is simply too great an analytical gap between the data and the opinion proffered’. According to the Court, in fact, the subject of an expert’s testimony must be ‘scientific knowledge’, and ‘in order to qualify as “scientific knowledge” an inference or assertion must be derived by the scientific method’. More specifically, the Court has listed five criteria to determine when a theory is indeed scientific

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knowledge: (1) whether the theory can be, or has been, tested; (2) whether it has been subjected to peer review and publication; (3) what is its known or potential rate of error; (4) whether there exist standards controlling the theory’s operation; (5) whether the theory has gained widespread acceptance. It is hardly surprising that these Supreme Court principles have caused a certain turmoil in the economics profession. Our US colleagues have been struck by the new rules, which threatened to curtail, if not put an end to, a very lucrative activity, that of acting as experts in anti-trust and other legal cases. The point was, in fact, whether modern industrial economics satisfied the standards of scientific reliability set by the Supreme Court. Brutally, is industrial economics really ‘scientific knowledge’? What kind of economic theories, if any, can be said to satisfy all the above-mentioned criteria? The alarm bell rang even louder after some US district courts started excluding economists because their testimony, ‘although thorough, sophisticated and often well-grounded in the relevant scientific literature … ’, suffered from ‘excessive speculation’, or contained ‘too many assumptions and simplifications that are not supported by real-world evidence’.18 These words reveal that, to say the least, US courts seem not so willing to be summoned beneath the sign of the axiomatic method … Now, assume you were a lawyer. Would you expose yourself to the risk of being ridiculed in court by presenting an industrial economist’s expert testimony, based on some highly sophisticated game-theoretic rationale, as a piece of real ‘scientific knowledge’? Or assume you were an economist whose expert testimony has been excluded on account of its unsatisfactory scientific foundations. How is this going to affect your future job opportunities as a court consultant? Fortunately, the crisis has been resolved by another (1999) Supreme Court ruling which has stated that similar admissibility rules also apply to technical, not just scientific, knowledge. This effectively saved the day for US economists, because it allowed them to part from the embarrassing company of the true scientists, such as the physicists, the chemists or the biologists, and join the ranks of the mere technicians, such as the accountants and the engineers (but also the plumbers and the carpenters), i.e. of all those professionals whose standards of admissibility in court require the conformity to the best – viz. the most rigorous – practices in their respective field, rather than the ability to provide real ‘scientific knowledge’. But as the underdog David Novick reminded us in 1954, a technician may also be defined as somebody who applies her, usually practical, knowledge on a case-by-case basis, i.e. by referring to the very specific data (and numbers) of the situation under scrutiny. The moral of this story is that US economists did manage to keep a profitable business alive, but only by swallowing their scientific pride via the tacit admission that their axiomatic models cannot be marketed as ‘science’. Or, if you like, it may well be true that ‘in Debreuviano signo vinces’ but when it’s real money that’s at stake you’d better stick to good old Gerolamo Boccardo.

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Acknowledgements The present chapter is based on the Blanqui Lecture ‘In the Sign of the Axiomatic Method: Mathematics as the Role Model for Neoclassical Economics’, given at the ninth annual ESHET Conference (University of Stirling, 9–12 June 2005). I wish to thank the President and the members of the Executive Board of the ESHET and the conference organisers. My special gratitude goes to the three persons whose friendship and scholarship have accompanied me along the years: Marco Dardi, Riccardo Faucci and Alberto Zanni. The financial support of MIUR PRIN 2002 ‘Mathematics in the History of Economics’ is gratefully acknowledged. I bear of course full responsibility for any mistakes.

Notes 1 The theory, note well, and not the real play, because only in the former case is the typical problem how to win starting from a preassigned position of the pieces on the board, regardless of the unrealism of the position itself. 2 This of course is hardly a novelty: see e.g. the amusing reconstruction in Weintraub (2002a: ch. 6) of how Arrow and Debreu’s seminal paper came to be accepted for publication by Econometrica. 3 The first systematic use of experimental methods in economics actually dates back to the early 1950s: see e.g. Roth (1993), Moscati (2007b). 4 The narrative is developed more fully in Giocoli (2003a). 5 On the rise and the meaning of mathematical formalism, see Menger (1933); Israel (1977); Kline (1980: chs 8–11); Eves (1990: chs 6 and 9); Ewald (1996: chs 24 and 28); and, above all, Corry (1996: chs 3 and 7, 1997, 2000). I also owe a lot to the excellent literature on the relationship between formalism and neoclassical economics: see Ingrao and Israel (1990: ch. 7); Leonard (1997, 1998); Punzo (1989, 1991, 1999); and, above all, Weintraub (1985: ch. 6, 1998, 2002a: chs 3–4). 6 The strong – if seldom acknowledged – empirical underpinnings of Hilbert’s conception of axiomatics and the central role he still warranted to intuition and experience are apparent in his 1905 lectures on the axiomatic method: see Corry (1997: 123 ff.). 7 This difference is the cornerstone of Mirowski’s narrative in chapter 3 of Machine Dreams: for a critique, see Giocoli (2003c). 8 On the history of the Cowles Commission, see Christ (1952); Hildreth (1986); Mirowski (2002: esp. ch. 5). 9 See von Neumann and Morgenstern ([1944] 1953: 24–29, 73–77, 628–32). 10 See Bergstrom (2003); Ortmann (2003); Altman (2004); Lee (2004). 11 For a review, see Starmer (2000). 12 The existence of a reference point imposes a kink on the shape of the utility function and entails that individuals evaluate gains and losses differently. Diminishing sensitivity means that the psychological impact of a marginal change decreases as we move further away from the reference point: this is captured by K/T’s utility function being concave for gains and convex for losses. Loss aversion means that losses loom larger than the corresponding gains, as in the well known endowment effect: this is captured by the utility function being steeper in the domain of losses. 13 This actually seems to be Rabin’s viewpoint: see e.g. what he says in Rabin (2002: 658 n. 1), where he establishes a parallel between the rise of psychological economics and the advent of modern game theory. The parallel is illuminating, if only for the lack of knowledge it reveals of the latter’s history!

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14 I say ‘probably involuntarily’ because if due attention is paid to the frequency with which Rabin resorts to numerical methods in order to show the implausibility of some traditional orthodox assumptions (such as exponential discounting: see Rabin 2002: 670–71) one might even argue that he is effectively back to using an ‘empirical’, rather than formal, notion of rigour. However, he overlooks that such computational arguments are quite alien to ‘the spirit of economics’ – or at least to the latter’s post-war axiomatic version he apparently supports. 15 The dichotomy has been first applied to the history of twentieth-century mathematical economics in Weintraub (1998, 2002a). 16 The two views have been originally proposed in Dardi (1983). 17 See Werden (2003–04) for a survey of the Daubert cases and the references of Supreme Court rulings. 18 See again Werden (2003–04) for the references of these rulings.

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The role of econometric method in economic analysis A reassessment of the Keynes–Tinbergen debate, 1938–1943 Giovanna Garrone and Roberto Marchionatti

Keynes played a central role in the debate on the emerging econometric methods in the late 1930s. In particular, his 1939 critique of Tinbergen’s first League of Nations study is considered to have sparked off the debate about the role of econometrics (Hendry and Morgan 1995), which saw him involved in direct exchanges with some of the other leading figures of the emerging field of econometrics. After an initial phase in which his objections were constructively discussed, since the early 1940s they were substantially rejected, and his attitude towards economics was considered old-fashioned. The assessment of Keynes’s criticism remains controversial, but the long prevailing view is that Keynes was an a priori anti-econometrician (see Samuelson 1946; Klein 1951). Stone (1978) maintained that Keynes’s review was ‘a model of testiness and perverseness’ (p. 61) principally due to his temperamental characteristics. Since the end of the 1970s new contributions have recognised the relevance of Keynes’s criticism. However, they concentrated on those remarks of his which dealt with ‘technical issues’ involved with applying regression (e.g. omitted variable bias, simultaneous equation bias, and so on). It was Patinkin (1976) who first found it ‘somewhat depressing to see how many of [Keynes’s criticisms of the use of correlation analysis to estimate equations] are, in practice, still of relevance today’ (p. 1095). Hendry (1980) wrote that ‘[Keynes’s] objections make an excellent list of what might be called problems of the linear regression model’ (p. 396). Some years later Pesaran and Smith (1985) recognised that Keynes was right on both the technical and the logical arguments; and Rowley (1988) maintained that ‘Keynes’s criticisms have been diluted, forgotten or mis-stated rather than absorbed into the prevalent orthodoxy’ (p. 25). He regretted that ‘we have waited too long for econometric methodology to come of age and address its logical bases’ (p. 30). Actually, it is in this wider context that Keynes has been considered in the 1990s. McAleer (1994) writes that ‘some of Keynes’s criticisms of Tinbergen’s pioneering econometric methodology remain relevant to this day’ (p. 332) and that his implicit research programme ‘subsequently led to the development of numerous econometric techniques that are now widely used in applied econometrics’ (p. 334). Similarly Keuzenkamp (2000) maintains that Keynes’s sceptical attitude remains substantially justified.

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In conclusion, it is recognised that Keynes’s criticism of Tinbergen was sound in many points. This chapter reconstructs Keynes’s reflections on the issue of the role of econometrics in the economic discourse in a time perspective longer than is usually considered in the literature. In the second and third sections we analyse respectively the Keynes–Tinbergen debate in the period 1938–40 and the exchange between Keynes and other econometricians in the period 1939–41. The last section provides some final remarks on the relevance of Keynes’s criticism.

Tinbergen’s econometric approach Tinbergen’s 1939 report for the League of Nations, Statistical Testing of Business Cycle Theories, represented a fundamental contribution to the contemporary statistical and econometric research on the business cycle, an increasingly important subject at that time.1 It was also an innovative contribution from the point of view of testing procedures (Morgan 1990: 108–14). The work was expected both to provide general economic forecasts and to guide government policies to control the business cycle (Epstein 1987). The first volume of the report, on which Keynes chose to focus, contained an explanation of the method of econometric testing and a demonstration of what could be achieved in three case studies. Tinbergen presented the method of his econometric study, a synthesis of statistical business cycle research and quantitative economic theory, in the spirit of Econometrica’s programme. In chapter 1 he distinguished the role of the statistician from that of the economist. The latter hands over the theories to the statistician to submit them to examination. This means that the ‘responsibility’ for the theories lies with the economist. As a consequence ‘the sense in which the statistician can provide “verification” of a theory is a limited one’ (Tinbergen 1939a: 12). On the other hand the role of the statistician is not confined to ‘verification’, but extends to the discovery of what causes are operative and how strongly each of them operates. This is the problem of ‘measurement’. Second, Tinbergen defined the form in which an economic theory must be expressed in order to be verified. It must be expressed in quantitative form, which restricts the inquiry to the examination of measurable phenomena.2 Moreover in order to inquire about business cycles, it must be a dynamic theory. It must be one which ‘deals with the short-term reactions of one variate upon others but without neglecting the lapse of time between cause and effect’ (ibid.: 13). The equation in which it is expressed relates to non-simultaneous events: the form taken is described as ‘sequence analysis’. To the extent that the additions to static theory are the result of statistical research, we may say that ‘the statistician may supply theoretical suggestions to the economist’ (ibid.: 14). In chapter 2 Tinbergen outlined the technical method of multiple correlation analysis by applying it to an economic business cycle theory translated into a parametrised mathematical-economic model. Then he tested for the plausibility

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of the parameter estimates. Finally, he checked the outcomes generated by the system as a whole to see whether a theory provides a business cycle mechanism or not. Tinbergen was interested in testing the economic importance of results. Namely, he investigated whether particular effects have a plausible sign and are quantitatively important. If so, significance tests were used to assess the statistical accuracy of estimates. In chapter 3 Tinbergen discussed the results obtained in applying the method to the relation and indicated the proximate objective causes of changes in investment activity ‘looked at from the side of entrepreneurs and public authority’ (ibid.: 34). The analysis was made in three case studies – on general investment, investment in residential building and investment in railway rolling stock.

The story of the Keynes–Tinbergen debate, 1938–1940 The Keynes–Tinbergen debate went through two different phases. The first phase took place in the short period between August and September 1938. It had a semi-private character, and took the form of an exchange of letters between Keynes, Tinbergen and other economists and League of Nations officers. The second phase took place between September 1939 and March 1940 and was marked by Keynes’s review of the first volume of Tinbergen’s book, published in the September issue of the Economic Journal, and by Tinbergen’s reply. The story begins on 11 August 1938, when Keynes received a letter from R. Tyler, of the League of Nations, who sent him a proof copy of the book by Tinbergen in order ‘to obtain from you any criticism you might have’ (Keynes Papers, CO/11/291). Keynes was already acquainted with Tinbergen’s work – as witnessed by letters in July and early August 1938 to Roy Harrod.3 While Harrod looked favourably on Tinbergen’s work, Keynes expressed perplexities, essentially based on his view of the appropriate role of mathematics and statistics in economics, and his negative evaluation of the recent evolution in their application in economics. After a first reading of the proofs, Keynes’s judgement was negative. In some letters to Kahn and Harrod (respectively in Keynes 1973c: 289 and 331–32) he declared that, ‘so far as I can understand the matter’, Tinbergen’s work was ‘all hocus’ (letter to Kahn, 23 August 1938, in Keynes 1973c: 289, see also the letter to Harrod of 23 August 1938, in Keynes 1973c: 332), because ‘there is not the slightest explanation or justification of the underlying logic’ (ibid.: 289). These early negative impressions were confirmed in a long letter to Tyler (also dated 23 August 1938), in which Keynes outlined the fundamental elements of his criticism of Tinbergen’s method of analysis. While he recognised the importance of testing ‘the quantitative influence of factors suggested by a theory’ (Keynes 1973c: 289), he pointed out the issue of the correct method to be employed. On 12 September 1938 Tinbergen – who had received Keynes’s comments through Alexander Loveday, director of the Finance and Economic Research Section of the League of Nations – wrote to Keynes replying to his critiques.

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He thought that there was ‘some misunderstanding behind some of [Keynes‘s] questions’ (Keynes 1973c: 291) but recognised that ‘It is difficult to meet [Keynes’s] remarks on methodology in general’ (ibid.), thus preferring to discuss technical questions. Tinbergen’s letter supported Keynes’s critical feeling that the work was methodologically weak, which made the results obtained of little practical value. Replying to Tinbergen on the same day, Keynes wrote: I hope you will continue your investigations. But I do emphasise the consideration that very little practical weight ought to be given to your provisional conclusions pending a justification of the application of your general method to statistics of the character and quality in question. (Ibid.: 293–94) Keynes’s letter to Harrod, on 13 September 1938, ended the first phase of his criticism to Tinbergen: I will await Tinbergen’s revised version … If Tinbergen was a private research student, he would deserve every encouragement. It is certainly worth his while pursuing all this. But I think it very dangerous for a collection of responsible economists to give it any sort of imprimatur in its present stage. (Ibid.: 304, emphasis added) In the September 1939 issue of the Economic Journal, one year after their first exchange, Keynes published a long review of Tinbergen’s just published work, ‘limited to an explanation of the statistical method which it is proposed to employ’ (Keynes 1939: 306). Although based on questions he had already raised, and employing some previous reasoning, his critical discourse on the whole appeared more complete, and very effective from a rhetorical point of view. Tinbergen was astonished by Keynes’s harsh reaction to his work (see the letter to Keynes of 18 December 1939). He replied extensively to Keynes’s ‘serious’ questions in the March 1940 issue of the Economic Journal.4 In his ‘Comment’ (Keynes 1940) Keynes defined Tinbergen’s reply as ‘very valuable’, but not adequate to answer his questions persuasively. Nevertheless, he declared (no doubt a bit ironically) that he was in favour of the continuation of Tinbergen’s type of research: ‘Newton, Boyle and Locke all played with alchemy. So let him continue’ (ibid.: 320).

Keynes’s criticism: ‘this brand of statistical alchemy is [not] ripe to become a branch of science’ Keynes stated first the central question: the ‘question of methodology’ in general, that is, ‘the logic of applying the method of multiple correlation to unanalysed economic material, which we know to be non-homogeneous through

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time’ (Keynes 1973c: 285–86). Then he discussed specific issues: the comprehensiveness of the factors, their independence and measurability, the constancy of the coefficients and the time lags. Finally, turning back to methodological grounds, he raised the problem of passing from statistical description to inductive generalisation.5 The logical condition for using the method of multiple correlation, Keynes wrote, is the existence of ‘numerically measurable, independent forces, adequately analysed’ – that is, ‘independent atomic factors and between them completely comprehensive, acting with fluctuating relative strength on material constant and homogeneous through time’. However, Keynes continued, ‘we know that every one of these conditions is far from being satisfied by the economic material under investigation’. Hence ‘how far does this impair the validity of the method? That seems to me to deserve a most careful preliminary enquiry’ (ibid.: 286). Unfortunately Tinbergen’s discussion appeared ‘grievously disappointing’: ‘it leaves unanswered many questions which the economist is bound to ask before he can feel comfortable as to the conditions which the economic material has to satisfy, if the proposed method is to be properly applicable’ (Keynes 1939: 306). Then Keynes raised a set of detailed issues about the conditions of validity of Tinbergen’s procedures.6 The first condition Keynes enunciated was the completeness of significant causes. Keynes asked, ‘is it assumed that the factors investigated are comprehensive and that they are not merely a partial selection out of all the factors at work?’ (Keynes 1973c: 286–87). If they are not all included, the estimated coefficients suffer from what today we call omitted variable bias. Only if they are included, and if ‘the economist has correctly analysed beforehand the qualitative character of the causal relations’ (1939: 307, emphasis added), can he then examine their quantitative importance, i.e. how strongly each of them operates. For Keynes this is the primary role of econometrics. It is quite different from affirming, as Tinbergen did, that the statistical test can prove a theory to be incorrect, or incomplete – that is to falsify a theory – by showing that it does not cover a particular set of facts.7 In addition, Keynes (1940) raised indirectly the related problem of testing theories when different econometric specifications can be derived from a theory: the seventy translators of the Septuagint were shut up in seventy separate rooms with the Hebrew text and brought out with them, when they emerged, seventy identical translations. Would the same miracle be vouchsafed if seventy multiple correlators were shut up with the same statistical material? And anyhow, I suppose, if each had a different economist perched on his a priori, that would make a difference to the outcome (Ibid.: 319–20) The second condition is that all the significant factors are measurable. Keynes wondered what place was left for expectations, for the state of confidence

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relating to the future and for non-numerical factors, such as inventions, politics, labour troubles, wars, financial crises. He suspected ‘that the choice of factors is influenced … by what statistics are available, and that many vital factors are ignored because they are statistically intractable or unprocurable’ (letter to Tyler, 23 August 1938, in Keynes 1973c: 287). Tinbergen claimed that ‘the method can be usefully applied if some of the factors are measurable, the results obtained from examining these factors being “supplemented” by other information’. But ‘how can this be done? He does not tell us’ (ibid.: 309). The third issue was the independence of factors. First, Keynes raised the problem of spurious correlation: ‘If we are using factors which are not wholly independent, we lay ourselves open to the … complications of “spurious” correlation’ – a term introduced by K. Pearson (1897) in a discussion of correlation between indices. Then he drew attention to the problem of simultaneity: What happens if the phenomenon under investigation itself reacts on the factors by which we are explaining it? … When he investigates the fluctuations of investment, Professor Tinbergen makes them depend on the fluctuations of profit. But what happens if the fluctuations of profit partly depend (as, indeed, they clearly do) on the fluctuations of investment? Professor Tinbergen mentions the difficulty in a general way in a footnote … , where he says … that ‘one has to be careful’. But is he? … In practice Professor Tinbergen seems to be entirely indifferent whether or not his basic factors are independent of one another. (Keynes 1939: 309–10) Then Keynes raised two issues of technical importance concerning the functional forms, the time lags and trends. First, Keynes maintained the implausibility of the widespread assumption of linearity and called for the examination of alternative functional forms. Second, about the general problem of dynamic specification, Keynes accused Tinbergen of scarce rigour in treating time lags and trends in an ad hoc manner by choosing them by trial and error: Professor Tinbergen … invents them [time lags] for himself. This he seems to do by some sort of trial-and-error method. That is to say, he fidgets about until he finds a time lag which does not fit in too badly with the theory he is testing and with the general presuppositions of his method. … The introduction of a trend factor is even more tricky and even less discussed. … In the case of fluctuations in investment, ‘trends’, Professor Tinbergen explains, ‘have been calculated as nine-year moving averages for pre-war periods … and as rectilinear trends for post-war periods’. (Ibid.: 314) This seemed to him inaccurate and arbitrary: ‘with a free hand to choose coefficients and time lag, one can … always cook a formula to fit moderately well a limited range of past facts. But what does this prove?’ (letter to Tyler,

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cit. in Keynes 1973c: 287). In other words, Keynes questioned the manipulation of data to ‘make it possible to fit any explanation to any facts’ (Keynes 1939: 312). In conclusion, Keynes went back to what he considered the critical condition, that of the likely structural instability putting the constancy of the parameters into question:8 ‘the coefficients arrived at are apparently assumed to be constant for 10 years or for a larger period. Yet, surely, we know that they are not constant’ (ibid.: 286). This issue is directly connected with the problem of inductive generalisation, that is, the inductive and predictive value of the estimates, or the relevance of the estimated model to the future. It is ‘the slippery problem of passing from statistical description to inductive generalisation’, which, Keynes (1939: 315) remembered, ‘thirty years ago I used to be occupied in examining … in the case of simple correlation’. He was referring to his dissertation, then published, after extension and revision, in the Treatise on Probability (1921), in which he maintained that ‘the validity and reasonable nature of inductive generalisation is … a question of logic and not of experience, of formal and not of material laws’ (ibid.: 246), that is, it depends ‘not on a matter of fact [the empirical confirmation], but on the existence of a relation of probability’ (ibid.: 245). In fact ‘an inductive argument affirms, not that a certain matter of facts is so, but that relative to certain evidence there is a probability in its favour’ (ibid.). Inductive reasoning makes use of analogy. Keynes demonstrated that the method of reasoning by means of analogy breaks down if the system analysed is not homogeneous and an organic complex: as a consequence induction becomes impossible.9 According to Keynes, a low degree of homogeneity and a high degree of complexity are peculiarities of an economic system. The most important examples discussed in The General Theory, in which the characteristics of non-homogeneity and the complexity of the material make it unanalysable in a probabilistic way, are the cases of long-term expectation and the business cycle. Long-term expectations depend on the most probable forecasts that the agents can make and on the confidence with which they make those forecasts. Confidence is defined in terms of ‘how highly we rate the likelihood of our best forecast turning out quite wrong’ (Keynes 1936a: 148). Our knowledge of the future is often ‘fluctuating, vague and uncertain’ (Keynes 1973c: 113). In the presence of such uncertainty ‘there is no scientific basis on which to form any calculable probability whatever’ (ibid.: 114) – that is, it is not possible to use a probabilistic theory of expectations. In presence of such uncertainty ‘it is reasonable, therefore, to be guided to a considerable degree by the facts about which we feel somewhat confident’ (Keynes 1936a: 148). Agents have to fall back on conventional judgement and animal spirits, or, more precisely, to neither rational nor irrational motives (see Marchionatti 1999). Expectations are very important in business cycle phenomena which, in Keynes’s view, are determined by investment. If expectations and investment cannot be modelled with probabilistic relations, the business cycle too has to be beyond the domain of probabilistic inference.

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Let’s now go back to the criticism of Tinbergen on the problem of inductive generalisation. Keynes asked: How far are these curves and equations meant to be no more than a piece of historical curve-fitting and description, and how far do they make inductive claims with reference to the future as well as the past? … Put broadly, the most important condition is that the environment in all relevant respects … should be uniform and homogeneous over a period of time. We cannot be sure that such conditions will persist in the future, even if we find them in the past. But if we find them in the past, we have at any rate some basis for an inductive argument. (Keynes 1939: 315–16) Keynes maintained that Tinbergen made ‘the least possible preparation for the inductive transition’ (ibid.: 316). The period under examination should have been broken up into a series of sub-periods, ‘with a view to discovering whether the results of applying our method to the various sub-periods taken separately are reasonably uniform’ (ibid.). Such procedure is suggested also in the Treatise on Probability (1921), where the criticism of the application of mathematical methods to statistical inference leads Keynes to propose other methods ‘more consonant with the principle of sound induction’. In fact to argue from the mere fact that a given event has occurred invariably in a great number of instances that it is likely to occur invariably in future instances ‘is a feeble inductive argument, because it takes no account of the analogy’ (ibid.: 445). To strengthen the argument we need to increase the analogy between the instances. This ‘chiefly consists’, Keynes argues, ‘in determining whether the alleged association is stable, where the accompanying conditions are varied’ (ibid.: 427). A technical method that supplies the qualified procedure, according to Keynes, is that proposed by the German statistician and economist William Lexis. It consists in breaking up a statistical series into a number of sub-series, ‘with a view to analysing and measuring, not merely the frequency of a given character over the aggregate series, but the stability of this frequency amongst the sub-series’ (ibid.: 428). Only if the results are reasonably uniform, then ‘there is some ground for projecting the results into the future’ (Keynes 1939: 316). Tinbergen failed to follow this procedure: For his pre-war investigations he takes a period of about forty years and makes no attempt to break it up into sub-periods. If he had done so, would his regression coefficients, calculated for each decade taken separately, differ somewhat widely from those calculated as the best fit for the whole period? This is worth examination. For the main prima facie objection to the application of the method of multiple correlation to complex economic problems lies in the apparent lack of any adequate degree of uniformity in the environment. (Ibid.)

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The chief dilemma Tinbergen faced, Keynes concluded, was ‘that the method requires not too short a series, whereas it is only in a short series, in most cases, that there is a reasonable expectation that the coefficients will be fairly constant’ (Keynes 1973c: 294): this is, and will be, the leitmotif of Keynes’s criticism. Actually: the broad problem of the credit cycle is just about the worst case to select to which to apply the method, owing to its complexity, its variability, and the fact [that] there are such important influences which cannot be reduced to statistical form. (Ibid.: 294–95, emphasis added) This does not mean, Keynes added, that ‘there may not be problems within the general field of the trade cycle which would provide suitable material’ (ibid.: 295). However, ‘surely there is no general presumption that any enquiry one might fix on will be suitable. The presumption is to the contrary’ (ibid.). According to Keynes ‘the method will prove valuable’ when applied to more elementary cases ‘where adequate statistics exist’ (ibid.: 294). A type of problem to which the multiple correlation method can be applied is cited in his letter to Tyler: the case of the demand for investment in new rolling stock. At that time he was publishing in the Economic Journal an article by the English statistician E. J. Broster who applied the multiple correlation method to the relation between volume of traffic and operating costs on the British railways in the years 1928–37 (Broster 1938). He introduced multiple linear regression equations expressing total operating costs as a function of passenger miles, ton miles, passenger train miles and freight train miles: ‘That is the sort of case’ – Keynes remarked – ‘where one has at any rate a modest expectation of useful results.’ In later correspondence with Broster on Tinbergen’s method, Keynes expressed approval of his methodological line, adding, however: I was raising the logical difficulties. You say … that, if one was to take these seriously, one would give up the ghost in the first lap, but that the method, used judiciously as an aid to more theoretical enquiries and as a means of suggesting possibilities and probabilities rather than anything else, taken with enough grains of salt and applied with superlative common sense, won’t do much harm. I should quite agree with that. That is how the method ought to be used. Though, even so, I think it requires more careful selection of topics than Tinbergen has made. He, however, is really claiming much more of it – as though it was of more demonstrative character than other methods of approach. (Letter to E. J. Broster, 19 December 1938, Keynes Papers, CO/11/447) Keynes’s conclusion was that Tinbergen needed to demonstrate that his method was applicable, rather than simply applying it. For, when applied inappropriately, the method could result in ‘a false precision’, beyond ‘what

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either the method or the statistics actually available can support’ (Keynes 1973c: 289).

Tinbergen’s reply: ‘The proof of the pudding is in the eating’ The core of Keynes’s discussion was the issue of the logical conditions for applying the method of multiple correlation – that is, a problem that precedes its application, and to which the technical questions were subordinate. Tinbergen’s reply avoided instead, as much as possible, the logical question and the ‘slippery problem of passing from statistical description to inductive generalisation’, and stressed – with many illustrations of his approach in business cycle research – the flexibility of his empirical method, leaving Keynes’s central objection substantially unanswered. Tinbergen politely rejected Keynes’s reaction. However, he did not offer any comprehensive [systematic] technical methodology for dealing with the problems under discussion, although he seemed to anticipate some contemporary advances (see Dharmapala and McAleer 1996; McAleer 1994). Regarding the need for a complete list of the relevant factors – i.e. for a correct specification, Tinbergen assumed that ‘the factors included are comprehensive as far as the more important are concerned’ (Tinbergen 1940a: 142, emphasis added). He added that ‘it does not matter if non-relevant factors have been forgotten’, because ‘what factors are relevant and what are not will not always be cleared beforehand. It must then be tried out’ (ibid.). In other words, he maintained that a correct specification is subjected to statistical testing. What is important, according to Tinbergen, is that some conditions (drastic restrictions, as a matter of fact) are met: (1) that the explanatory variables chosen are the relevant ones; (2) that the non-relevant explanatory variables may be treated as random residuals, not systematically correlated with the other explanatory variables (‘this may be tested afterwards – e.g. by calculating the serial correlation for the residuals and the bunch maps’) – and (3) that ‘the mathematical form of the relation is given’ (ibid.: 141). As regards expectations and the state of confidence, Tinbergen thought expectations are ‘products of the human mind which are based on past experience, even though they relate to future moments’ (ibid.: 147). They are ‘hidden’ in some systematic variables such as profits, etc. He did not deny that ‘external events’ may also influence expectations. However, he thought that ‘these external events will be, as a rule, of an unsystematic character, and may thus be part of unexplained residuals’ (ibid.). As for the question whether the explanatory variables should be independent of each other, Tinbergen distinguished between the statistical and the economic meanings of the word independent, arguing that, for statistical purposes, explanatory factors needed to be uncorrelated rather than independent in an economic sense. Regarding the constancy of the coefficients, he explained that it was assumed as a first approximation. As to lags and trends, he admitted that

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‘they are sometimes assumed by commonsense guessing’ and that ‘in principle both [lags and regression coefficients] have been determined so as to make the correlation the highest possible and by only admitting such values as seemed to have economic sense’ (ibid.: 150, emphasis in original). As regards Keynes’s observation that it was arbitrary to use nine-year moving averages as trends in pre-war periods and straight lines in post-war years, and that manipulation makes it possible to fit any explanation to any facts, Tinbergen answered with arguments in favour of examining linear models: for short periods there is not much difference between a straight trend and a moving average. For long periods there is, and then the moving average is decidedly better. The advantage of straight-line trends is that no observations are lost in the extremes. This is why they have been preferred for the (short) post-war period. (Ibid.: 251) Finally, about the crucial question of the inductive generalisation, Tinbergen maintained that: If there is no reason to suppose that the laws that have governed the reactions of individuals and firms in the past will have changed in the near future, it seems possible to reach conclusions for the near future by measuring as exactly as possible those same reactions in the past (Ibid.: 152) Of course, he added, ‘this is only true if no structural changes take place’ (ibid.). However, he concluded, ‘even if [structural changes] take place, it will, in many cases, be possible to “localise” their influence – i.e. to indicate which of the elementary or direct causal relations they affect’ (ibid.). On the whole, Tinbergen rejected Keynes’s pessimistic view not because he considered his criticism irrelevant, but because in his opinion ‘the method under discussion promises much more than Mr Keynes thinks’. Mainly interested in getting on with the job, he concluded, ‘The proof of the pudding is in the eating.’

An appendix to the debate: Rothbarth’s review of Tinbergen’s second volume A review of the second volume of Statistical Testing of Business Cycle Theories, published in the June–September 1941 issue of the Economic Journal, sheds further light in understanding Keynes’s real attitude to statistical-econometric work. Kalecki defined it as ‘a model of careful econometric analysis’ (Kalecki 1944–45: 121). The author was Erwin Rothbarth, a twenty-eight-year-old German economist who had emigrated to England after Hitler’s rise to power.

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At the time he was teaching economic statistics in Cambridge and worked very closely with Keynes (Cuyvers 1983). In November 1938 Rothbarth had already reviewed Tinbergen’s An Econometric Approach to Business Cycle Problems. His highly competent discussion of Tinbergen’s analysis of the Dutch economy was preceded by the acknowledgement of the ‘unassailable’ case for the econometric method, ‘forced on the economist’ by the fact that ‘the system as a whole acquires a certain measure of stability by the interactions of a fairly large number of not very stable relationships’ and by the need ‘to be able to exclude some possibilities at least on empirical grounds’. However, Rothbarth expressed caution as regards how far the econometric approach could go: ‘the advance of this branch of economics seems to be bound up with the advance realised in the theory of time series’ (Rothbarth 1938: 489). Rothbarth considered Vol. II of Tinbergen’s study a ‘brilliant pioneering effort’ (Rothbarth 1941: 293). Again, before discussing Tinbergen’s results, Rothbarh highlighted the relevance of his attempt to demonstrate that it is possible to construct a mathematical model of the trade cycle which is sufficiently simple to be tested statistically and a sufficiently good approximation to reality to be useful. Such relevance, Rothbarth wrote, is ‘independent of the question whether Professor Tinbergen succeeds in explaining the trade cycle in the USA. In my view he fails, but his failure is almost insignificant beside the great merit of the attempt’ (ibid.: 294). In fact, Rothbarth analysed Tinbergen’s findings with painstaking accuracy, questioning in a few cases Tinbergen’s reading of his own results. For instance, he pointed out how the econometric findings in themselves do not allow us to decide between two alternative interpretations of the influence of profits on consumption (either through speculative gains or through the increase in demand for durables and semi-durables – the acceleration principle). He regarded other results, such as the negligible role of short-term interest rates in determining investment in stocks, as not finally conclusive in the light of the poor statistics available and behaviours that might not be constant in time. As regards the treatment of long-term interest rates, he highlighted, in a Keynesian line of reasoning, the potential importance of immeasurable factors. In considering whether the model can account for longer cycles, Rothbarth once more revealed his familiarity with the econometric methods and his quantitatively oriented mind, checking whether an increase in the period of the system could be caused by ‘a moderate variation in the coefficients … such as might arise from sampling error’ (ibid.: 296). Finally, he also raised the issue of collinearity and the problem of the degrees of freedom, which Tinbergen ‘seems entirely to neglect’ (ibid.: 297). Rothbarth concluded by stressing a recommendation to ‘Professor Tinbergen and his adherents’ (ibid.) in favour of smaller models – which is consistent with Keynes’s methodological suggestions. In fact, constructing smaller models implies that greater responsibility is placed on the economist before he passes the material to be analysed on to the statistician, that is, more weight is given to economic theory and the investigation of the economic material

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previous to manipulation of the data. The very last paragraph brings us back once again to one of Keynes’s main perplexities, the issue of non-homogeneity over time: [With a smaller model, Tinbergen] would have needed a separate model for the 1919–22 cycle; but I cannot help feeling that this would have been an additional advantage rather than the reverse. It would have focused the reader’s and Professor Tinbergen’s attention on the strong differences existing between this cycle and both the 1929 and 1937 cycles. (Ibid.)

The early reception of Keynes’s criticism by the econometricians, 1939–1941: three exercises in reconciliation. The econometricians’ first reactions to the debate consisted in careful consideration of the issues raised by Keynes. The reviews of Tinbergen’s League of Nations study often mentioned Keynes’s criticism. Allen (1940) considered Keynes’s questions ‘pertinent’. Tintner (1941) agreed with Keynes that the expectations ‘are not introduced explicitly enough’ in the study (ibid.: 622). ‘J. E.W.’ (the reviewer for the Journal of the Royal Statistical Society) (1940), raised some of Keynes’s methodological questions (without quoting him) on factors’ measurability, the constancy of coefficients, the linearity, etc. Bartlett (1940) noted that Keynes ‘set out with gusto the host of statistical difficulties that still remain [in Tinbergen-type investigations] – the validity of the data, the measurability of all relevant variables, the linearity of the relations, the absence of specified time-lags, the stability of the series’ (ibid.: 18). Keynes’s attack also prompted some attempts by eminent econometricians to reconcile his criticism with statistical-econometric work. Three particularly interesting cases are those in which Keynes was directly involved in expressing his opinion in his correspondence between 1939 and 1941. The first case is an exchange of letters with Victor Szeliski of the Institute of Applied Econometrics, New York,10 about the use of the multiple correlation methods in the study of automobile demand. On November 1939 Keynes received a letter from Victor Szeliski, who had read Keynes’s review of Tinbergen’s study ‘with considerable interest and approval’, and ‘naturally’ wondered to what extent Keynes thought ‘the same criticisms apply to Roos’s and my study of automobile demand’. He added: ‘Of course our purpose was narrower than his; we were not trying to prove or disprove business cycle hypotheses, but to develop a “law” connecting retail automobile sales with factors which, a priori, are causes of sales’ (Keynes Papers, CO/11/444).11 This study ‘Factors governing changes in domestic automobile demand’, part of a research project commissioned by General Motors, investigated the determinants of demand for automobiles and estimated its price elasticity, among other things. The study was critically reviewed by Willford I. King,

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president of the American Statistical Society. On top of raising questions on the suitability of the data series used, on the neglect of the effects of the movement of the supply curve, and on the identification problem – how the shape of one curve can be reconstructed from data on the intersections of demand and supply – King (1939a) expressed general distrust of inductive methods. Roos’s and Szeliski’s reply (1939b) throws light on their approach to the role and application of econometric methods and to their relation to the premises of economic theory. They begin by wishing for economics an analogous shift to that which took place in the physical sciences, where ‘concepts are to be defined, not in terms of properties, but in terms of the series of operations by which they are measured’ (ibid.: 652). They praised the development of econometric methods as a step in such a direction, but lamented the focus on mathematical technicalities and counted Keynes among the few who explored the theoretical premises upon which econometric investigation should rely. They argue for general demand functions, including many arguments such as the prices of other goods and time, from which the classical (Cournot–Marshall) demand function D = F(p) is derived by holding other things (including time) constant. They claimed that, far from ‘eliminating’ the effects of external influences, they had determined several dynamic demand functions, each of which ‘is a family of curves, not the curve’ (ibid.: 656, emphasis in original). As for the identification problem, they correctly pointed out that ‘unless the supply curve shifts, it is impossible to determine the demand curve at all’ (ibid.: 659). In his rejoinder King (1939b) expressed a clear a priori anti-econometrics position and reaffirmed the supremacy of deductive methods applied to commonly observed facts: I consider that statistical and mathematical processes can, by themselves, but rarely be relied upon to establish economic laws or relationships, and that when findings are based purely upon the results of such procedures they are even more likely to be invalid than when they are based solely upon deductions drawn from everyday observations … in the economic field, statistics and mathematics are mainly useful for verifying and reducing to quantitative terms concepts which have first been worked out thoroughly by a process of deduction from facts commonly observed. [Roos and Szeliski], on the other hand, believe in relying almost entirely upon the inductive method. (Ibid.: 664) In a further reply Roos and Szeliski (1939c) reaffirmed their methodological standpoint: Actual demand schedules can only be found by analysis of statistics. The issue here is how they shall be analysed, and above all how the method of analysis can be related to the theoretical background or what kind of techniques are required by the theoretical background. … We do not rely

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Keynes’s reply to Szeliski (19 December 1939), expressing approval of his and Roos’s study, supports our claim that his view was not one of an a priori anti-econometrician: In reply to your letter of November 1921, it is now some time since I looked through your study of automobile demand, and only a general impression is left in my mind. This general impression, however, is to the effect that you have chosen just the sort of problem where multiple correlation methods may be useful. You are dealing with details of a specific problem where the main causes are pretty well known a priori, and where the statistics are definite and precise. The method is always full of danger, but, in my opinion, it is the kind of problem to which you have applied it rather than in those to which Tinbergen has applied it that the method is properly in place. (CO/11/445, emphasis added) The second case is the well known article written in defence of Tinbergen by Jacob Marschak and Oskar Lange. Shortly after publishing Tinbergen’s rejoinder, Keynes received a journal submission from Oskar Lange and Jacob Marschak entitled ‘Mr Keynes on the statistical verification of business cycle theories’.12 (It was sent from Chicago, 15 February 1940, immediately before Tinbergen’s reply and Keynes’s final comment were published.) It was not published in the Economic Journal and it appeared for the first time in Hendry and Morgan (1995), where it is presented as an example of the ‘more constructive criticism that emanated from those in favour of Tinbergen’s approach, who saw problems with it but wished to advance the methods adopted’ (ibid.: 56). Such an assessment, in our opinion, overrates the paper. Marschak and Lange start by claiming themselves in ‘profound agreement with the economic theories of Mr Keynes’ and therefore keen to support the idea they are capable of empirical and statistical verification (ibid.: 390). However, the case for statistical verifiability is not discussed in depth before they move on to the importance of giving quantitative precision to what is already known in qualitative terms. Marschak and Lange agree on some of the weaknesses of Tinbergen’s work pointed out by Keynes, and even add a few to the list. They criticise Tinbergen’s treatment of regression coefficients as exact numbers, rather than as estimates, and his subsequent failure to compute standard errors.13 The rest of their essay is devoted mainly to remarks of a more technical nature, some of which are dealt with acutely, while on others the line of argument appears seriously flawed. The cobweb model is presented in order to show how cyclical movements can be generated by linear relationships. The issue of the measurability of variables is addressed by noting that many qualitative dimensions can be treated statistically (e.g. through the use of dummy variables).

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Far less convincing is the defence of the use of trends, which Marschak and Lange interpret as a means both of capturing the gradual variation in time of parameters and of eliminating the ‘nonsense correlations’ arising in time series. Even more obscure is the passage which deals with the unit of measurement of profits and the correct shape of the relation to be estimated. The explanatory variable influencing investment should be ‘the difference between profits measured as a percentage on current cost of capital goods and the rate of interest’ (ibid.: 394). Writing P for profits, C for the cost of capital goods, R for the interest rate and I for investment, Marschak and Lange start by conceding that while Tinbergen fits his data to: I ¼ aP  bC  cR þ d

ð1Þ

(small letters indicate coefficients to be estimated), the correct estimation equation implicit in Keynes’s remark is:  I ¼m

 P R þn C

ð2Þ

They introduce then a measurement error, arguing that, in the absence of direct measurements of profits, indicators such as the non-labour income must be used: P ¼ hP0 þ k

ð3Þ

By substitution, they transform ‘Keynes’s equation’ into:  0  hP þ k R þn I ¼m C

ð4Þ

and thus: I ¼ mh

P0 k1  m  mR þ n C C

ð5Þ

Their line of argument is that this formula, they claim, ‘resembles Tinbergen’s equation’. It seems to us that the only obvious resemblance lies in the variables that enter it (P, C, R), while the shape of the relationship being estimated is crucially different. Introducing the measurement error convincingly accounts for different coefficients (in absolute value) for P and R (mh and m respectively), but the first regressor is still a profit rate with C in the denominator, and the second one is the inverse of C.14

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On the whole, the tone of the paper is conciliatory. Hendry and Morgan express surprise at Marschak and Lange’s apparent ignorance of the homogeneity tests carried out by Tinbergen, and hint that the authors here might have felt the need to concede something to Keynes, as they were submitting the paper to the Economic Journal. Hendry and Morgan’s claim that Tinbergen did test for homogeneity over time seems to based on a table (III.6, on pp. 70–71 in the original edition) in which Tinbergen does in fact present the results of a rudimentary test of structural change. This is performed by running separate regressions for different time periods: ‘(i) before 1895, the turning point of the “long cycle”, (ii) between 1895 and the war, and (iii) after the war’ for Germany, the United States and the United Kingdom and by comparing the estimated coefficients. No clear-cut conclusion is drawn from this exercise, though. In first place, Tinbergen reports the difficulty of obtaining comparable figures for the pre-war and the post-war periods, especially as far as profit figures for the United States and United Kingdom are concerned. Using different series (share prices for the United States, estimated non-labour income for the United Kingdom) leads to quite different coefficient estimates from those obtained with profits for the post-war years. Moreover, considerable differences in estimates are found for the United Kingdom and Germany in the comparison of the two pre-war periods. Tinbergen seems to interpret these results as evidence of some structural change taking place, without being troubled by any methodological implication. Hendry and Morgan hypothesise that Keynes decided not to publish this paper because he thought that the issue had already been discussed enough. Actually, having to make a decision on whether to publish Marschak and Lange’s article in addition to Tinbergen’s reply (which had reached the EJ earlier), Keynes had written an extensive reply to Lange (available in the Lange archives).15 Despite the negative advice he had received from Arthur C. Pigou, to whom he had referred the matter, Keynes expressed his reluctance to close a discussion which he felt was extremely important. He thus suggested Marschak and Lange could, after reading Tinbergen’s reply, submit a shorter manuscript, for which he was willing to find room, focused on specific issues that were not dealt with Tinbergen’s own article. Turning to the substance of their paper, Keynes denied arguing the impossibility of testing statistically a business cycle theory. He conceded that Marschak and Lange were right about the possibility of cyclical variations arising be obtained from linear functions.16 However, he pointed out that the formula presented by Marschak and Lange for the cobweb model was incorrect, as it yielded negative prices if computed backwards. Finally he raised once again the issue of the stability of the coefficients across sub-periods. The two authors, however, did not follow Keynes’s suggestion. In fact, in our opinion the analysis of the article’s contents shows that it added little substance to the debate. In spite of the conciliatory tone, the defence of the method appeared weak and unaware of the deep methodological issues. In a letter to Pigou of 29 March 1940 (Keynes Papers, EJ/1/6), Keynes maintained that ‘Tinbergen’s reply was of far higher quality than this one’:

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He really does try to meet my specific points to the best of his ability and says some very interesting and important things about them, whether or not one considers him convincing. This document, on the other hand, seems to me very largely a mere expression of opinion. On most of the main issues the authors tell us what their view is but do not give their reasons. (Ibid.) The third case is an exchange with Tjalling Koopmans over his 1941 paper ‘The logic of econometric business cycle research’, which was a clear restatement of Tinbergen’s method (Koopmans 1941). On 23 May 1941 Keynes received a letter from Tjalling Koopmans, announcing that he was sending him an offprint of the article in which he attempted ‘to answer some of the questions raised in your review of Tinbergen’s investigation for the League of Nations’ (Keynes Papers, CO/4/155). In fact, Koopmans’s paper was intended as a contribution to a more systematic exposition of the logic of methods applied in econometric business cycle research. The stated aim of the article is to investigate the possibilities and limitations of extracting information from statistical observations regarding the relations underlying short-run economic movements, by addressing the issue ‘to what extent business cycle econometric results derive from statistical observation and to what extent they depend on other hypothesis or information?’ (Koopmans 1941: 158). Koopmans starts off by enumerating ‘the elements of the logical situation facing the student of that problem’ (ibid.). The first one is the availability of time series data. He noted how from ‘the combination of uniqueness and manifold interrelation of data’ – which are two crucial characteristics of economic data – some ‘fundamental difficulties and limitations’ arise that are specific to the application of these methods to economic problems (ibid.: 160). The second element is the adoption of the ‘general working hypothesis’ that causal connections between the variables dominate ‘mere chance fluctuations’ in determining the fluctuations of the internal variables (apart from ‘recognised but unmeasurable external factors’ such as earthquakes or strikes).17 Koopmans recognised the possibility of unmeasurable internal factors acting as a cause on other variables – one of Keynes’s main questions – and maintained that the only way to make sense of this concept was to regard non-measurable phenomena like ‘expectations’ or the ‘state of confidence’ as themselves determined mainly by measurable internal and/or recognisable external phenomena. The need for introducing additional information18 – the third element – stems from the fact that the high degree of interrelation allows different ways in which fluctuations of one variable may be reconstructed by combining some others. In the absence of additional information, the only unconditional inference one may draw is negative (that is to say, proving a theory incorrect) and inconclusive. Koopmans then discussed the relevant features of Tinbergen’s investigations and identified the sets of premises in his study.19 The method prescribes

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that the list of premises produced by the economist then goes to the mathematical statistician, who applies the principle of statistical censorship, which requires that ‘the additional information should not imply statements which can be unconditionally rejected because they are contradicted by the data’ (ibid.: 163). He will investigate ‘whether at least one set of coefficients and lags exists’ which is compatible with all sets of premises (ibid.: 166).20 Koopmans seems to take in some of Keynes’s concerns in highlighting the crucial centrality of economic premises: Knowing how easily a statistically undetectable omission of one relevant determining variable, or an incorrect specification of an a priori known lag, may … distort the values and even the signs of the other coefficients, the investigator will devote a full share of his suspicion to the less technical part of the procedure: the choice of the premises. (Ibid.: 167, emphasis added) If the statistician finds a good fit, that does not confirm that the list of premises is valid, but merely suggests the conditional conclusion that takes the form of ‘best estimates’ (ibid.). The validity of these estimates needs to be assessed against the width of margins of error and problems such as the presence of multiple collinearity. After the statistician’s verdict on the premises as a whole – they may be contradicted by the data, or not be contradicted and provide sufficient basis for quantitative precision, or not be contradicted but provide insufficient basis for conclusions – it is again the economist’s task to divide premises into acceptable and ‘dubitable’ ones. It can then be the case that the statistician is able to confirm the dubitable premise. Koopmans stressed the importance of expressing the alternative to a dubitable premise in terms of a subsidiary premise such that it is mutually exclusive to the dubitable one and that either one or the other could be true. He illustrated this by discussing two premises that Keynes found most problematic: the use of linear relations and the constancy of coefficients. For testing the linearity assumption, Koopmans prescribed technical devices such as including in the equation the squares or other curvilinear functions of the explanatory variables as a conclusive test that Tinbergen failed to perform. Matters are far more complicated in reference to the constancy of the coefficients: ‘Here I appeal to economists to specify the criticism in order to make its relevance liable to statistical test’ (ibid.: 175).21 He admitted having no suggestions as to how to test for constancy of lags: ‘Purely technical study is urgently required on this important point’ (ibid.: 177). Koopmans’s conclusion was that: No single clear-cut answer can be given to our initial question … [the combination of data and additional information] is a complicated process, the result of a continuous dialogue … of a game of give-and-take, between economist and statistician. (Ibid.: 178)

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While he looked at Tinbergen’s results in the light of his rigorous definition of the method, he nevertheless basically defended and reaffirmed the validity of the method itself: ‘the only method by which the relevant information contained in statistical time series can be extracted and made available for giving such quantitative precision to the supposed relationships of business cycle theory as it truly supports’ (ibid.). He maintained that in the cases where ‘a basis of premises both solid and sufficient has been reached with respect to each variable to be explained’ (ibid.: 179) it is legitimate to extrapolate for policy and prediction purposes. As regards policy, the objective is to quantify the effect a certain measure would have within the studied period in the country analysed: using it as a guide to actual policy presupposes ‘the persistence of main dynamic features of the economy in the future’ (ibid., emphasis added). Prediction represents a ‘much more hazardous undertaking’ (ibid.). Koopmans concluded that Tinbergen’s results fall instead under the cases where ‘a basis both solid and sufficient … could not be established’ (ibid.: 180). On 29 May 1941, Keynes answered Koopmans. He seems to have appreciated his work, but he reaffirmed his fundamental criticism, emphasising ‘the dilemma of many of these enquiries’ relative to the stability of the environment over the long run: Many thanks for sending me your article … I enjoyed it very much. I am sure these matters need discussing in that sort of way. There is one point, to which in practice I attach a great importance, you do not allude to. In many of these statistical researches, in order to get enough observations they have to be scattered over a lengthy period of time; and for a lengthy period of time it very seldom remains true that the environment is sufficiently stable. That is the dilemma of many of these enquiries, which they do not seem to me to face. Either they are dependent on too few observations, or they cannot rely on the stability of the environment. It is only rarely that this dilemma can be avoided. (Keynes Papers, CO/4/170, emphasis added)

The rejection of Keynes’s criticism by Haavelmo (1943): the probabilistic approach takes over The attempts at reconciliation end with Trygve Haavelmo (1943b), who, by introducing full probability reasoning in econometrics, marks a turning point in the econometricians’ reception of Keynes’s criticism. His contribution to the development of econometrics (especially Haavelmo 1943a and 1944 – an amended version of his doctoral dissertation), marks a watershed by wholly restating econometrics methods in probabilistic terms. Such an approach, requiring economic theories to be formulated as joint probability laws for observable variables, provided the basis for much of the Cowles

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Commission’s methodology. Haavelmo (1943b) explicitly addresses the issues raised in the Keynes–Tinbergen debate. It began by remarking that the criticisms directed at Tinbergen’s study went beyond technical matters, but also implied that Tinbergen ‘had tried to go too far with statistical methods’ (ibid.: 13). Keynes is explicitly (and incorrectly, in our view) identified as a believer in the supremacy of ‘the noble art of theoretical deductions based on “general economic considerations”’ (ibid.). With respect to the reactions of the other econometricians (including Tinbergen) discussed above, Haavelmo took quite a different tack: instead of focusing on the more technical of Keynes’s remarks, and discussing them one by one, he tried to make them irrelevant. The first key point is that any model is seen as a formal logical construction, such that a non-logical jump is always needed in the end. However complex the formal construction is, ‘we shall not, by logical operations alone, be able to build a complete bridge between our model and reality’ (ibid.: 15). Actual data series are to be somehow arbitrarily chosen as counterparts of theoretical variables, and a statement deduced for the latter is then made about the former. However, verifying such a statement does not imply accepting the theory, as ‘the same statement might usually be deduced from many different constructions’ (ibid.). In this context, Haavelmo gets rid of the worry about the completeness of the list of causes: a regression equation containing an incomplete list of causes ‘means only the testing of a somewhat simpler hypothesis’ (ibid.) and is likely to produce ‘an addition to our knowledge’ (ibid.). The second key point is to redefine both theoretical and observed variables as stochastic objects. This is necessary, Haavelmo claimed, for ‘an objective and intelligent discussion of such questions as those of Lord Keynes’ (ibid.: 13). The aim of statistical testing becomes ‘to draw some inference … as to which of these mechanisms (probability laws) actually produced the data’ (ibid.: 17). Prediction relies on the hope of the persistence of such a mechanism. In order to be tested, a business cycle theory must then take the form of hypotheses regarding joint probability laws and allowing for probability statements about facts, which leave room for type I and type II errors: We now have the possibility that the theory might be true even when the deduced statement about the facts turns out to be wrong. Also, the theory might be wrong … while the statement it makes about the facts might sometimes be true. (Ibid.) That theories are undistinguishable from the point of view of observations is accepted as an ineliminable problem: ‘Theories with different economic meaning might lead to exactly the same probability law … just as different pairs of supply and demand curves might have the same intersection point’ (ibid.: 18, emphasis in original).

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With the establishment of Haavelmo’s approach through the work of the Cowles Commission, Keynes-type discussions are increasingly ignored and, as Leamer (1985) writes, ‘the slippery issue of causal inference’ was to be ‘kept in the econometric closet for over thirty years’ (ibid.: 255).

Conclusion Our reconstruction shows that there is no evidence for regarding Keynes as a critic and an opponent of econometric work per se. What he opposed were the attempts at statistical inference without any prior effort at ascertaining the suitability of the economic material for making such inferences. At the core of Keynes’s criticism of Tinbergen’s work lies the question of methodology. He argued that, in applying correlation analysis to economic matters, there was no reason to expect the system to be stable over the long run, and thus no reason to infer stable correlations. Keynes raised a question that prima facie seemed to him to have a positive answer: whether ‘the slippery problem’ of passing from statistical description to inductive generalisation (which he showed to be relevant in the case of simple correlation in his Treatise on Probability) arose also for the method of multiple correlation. Keynes focused upon the inductive aspects of Tinbergen’s analysis and examined the legitimacy of its implicit ‘fundamental assumptions’ – uniformity and homogeneity of the environment over a period of time, completeness of the list of the significant causes, measurability of all the significant factors, independence of the different factors of one another. According to Keynes ‘every one of these conditions is far from being satisfied’ in the field of the business cycle: ‘The successful application of this method to so enormously complex a problem as the business cycle does strike me as singularly unpromising project in the present state of our knowledge’ (Keynes 1921: 286, emphasis added). Econometricians at first took Keynes’s criticism in earnest. Then, with Haavelmo and the establishment of the Cowles Commission approach, they abandoned the debate. Today, however, econometricians recognise that most of the problems Keynes raised were real and his warnings on the specific question of the business cycle are still relevant, even if econometrics has made considerable efforts to overcome the difficulties.

Acknowledgements We are grateful to Giuseppe Bertola, Albert Breton, Bruno Contini, Marco Dardi, Geoffrey Harcourt, Mary Morgan, Jan Toporowski and two anonymous referees for their useful comments on a preliminary version of this chapter. Special thanks are due to the librarian and staff of the Modern Archives, King’s College, Cambridge, where the Keynes papers are kept, for their kind assistance in our archival research. Financial support from MURST is gratefully acknowledged.

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Notes 1 Institutions like NBER and IFO were established in the 1920s to study business cycles in a descriptive way. Yule (1927), Slutsky (1937), Frisch (1933) elaborated theoretical models. Yule and Slutsky showed that exogenous shocks can generate cyclical patterns. Frisch proposed a propagation–impulse model of business cycle. In 1936 Tinbergen built a macroeconomic model of the Dutch economy, a simplified version of which was published in English in a small volume entitled An Econometric Approach to Business Cycle Problems (1937). Tinbergen’s may be considered an intermediate approach in order to close the gap between economists and mathematicians in the statistical study of business cycles. 2 ‘The inquiry is, by its nature, restricted to the examination of measurable phenomena. Non-measurable phenomena may, of course, at times exercise an important influence on the course of events; and the results of the present analysis must be supplemented by such information about the extent of that influence as can be obtained from other sources’ (Tinbergen 1939a: 11). 3 Harrod had taken some part in discussing Tinbergen’s work for the League of Nations and participated in a small meeting of experts held in Cambridge in July 1938 and then at the Cambridge meeting of the British Association for the Advancement of Science in early August 1938 (see letters of Harrod to Tinbergen, 20 January 1938, and Loveday to Harrod, 30 May 1938) in Harrod (2003), in which a draft of Tinbergen’s book was discussed. 4 In the same year, 1940, at the invitation of the editors of the Review of Economic Studies, Tinbergen also wrote a paper ‘to go into some more detail concerning the method’ of analysis. It offers a restatement of the method and integrates Tinbergen’s reply to Keynes. In particular, Tinbergen emphasises the flexibility of his method (see Tinbergen 1940b: 236). 5 On some points Keynes’s critique shows his limited knowledge of developments in the econometric literature of the previous two decades (despite the fact that Keynes had been on the editorial board of Econometrica since 1933) and a few misunderstandings of technical issues. The fact is well known and widely emphasised (see for example Hendry and Morgan 1995). We focus instead on the essential points of Keynes’s criticism, which may be considered long-lived in a historical perspective. 6 Keynes also cites the inadequacy of statistics – an ‘obvious’ difficulty: ‘These many doubts are superimposed on the frightful inadequacy of most of the statistics employed, a difficulty so obvious and so inevitable that it is scarcely worth while to dwell on it’ (Keynes 1973c: 317). 7 The question of whether testing can prove a theory to be correct is not controversial. Both Keynes and Tinbergen agree that testing cannot prove the correctness of a theory, whatever amount of empirical evidence is available. As noted in Keuzenkamp (1995), the idea that scientists cannot prove a theory but may be able to falsify it was ‘a commonsense notion in the statistical literature since (at least) the turn of this century’ (ibid.: 240). 8 Pesaran and Smith (1985) re-estimated some of Tinbergen’s relations by the OLS method using the original undetrended series. (Their purpose was to examine the effect of detrending on Tinbergen’s results.) They found that ‘the undetrended OLS results suffer from a significant degree of residual autocorrelation which sheds considerable doubt on the size and the statistical significance of the estimated regression coefficients … The method of detrending employed by Tinbergen can, and often does, deal with the problem of residual autocorrelation. But … its application can also introduce erroneous dynamics into the relation and its residuals’ (ibid.: 141–42, emphasis added). The presence of residual autocorrelation can be due to the factors stressed by Keynes: omitted variables, functional form

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11 12 13

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misspecification, structural change and a host of other factors ‘all of which are highlighted in Keynes’s review’ (ibid.: 143). An exhaustive account and extensive discussion of the inductive reasoning in the Treatise on Probability is in Carabelli (1988). See also Klant (1989), Lawson (1989), Bateman (1990), Keuzenkamp (2000). The Institute was founded in 1938 by Charles F. Roos, one of the founders of the Econometric Society in 1930 and the director of the Cowles Commission for Research in Economics from 1934 to 1937. In 1937 he left for New York to engage in the practical application of econometrics to the problems of business. Here he founded the Econometric Institute, of which he was the president and director of research from 1938 until his death in 1958. The reference was to Roos and Szeliski (1939a, b). From a history of economics point of view, the relevance of this paper lies also in the fact that some points were the result of discussions with Trygve Haavelmo, Jacob Mosak and Theodore Yntema. However, Marschak and Lange do not seem to be accurate on this point. Tinbergen apparently did compute standard errors for at least some of the regression equations, as explained in the paragraph on ‘Significance calculations’. See table III.10, p. 78–79, and graph III.12, p. 84 (Tinbergen 1939a). Marschak and Lange (1940: 395 emphasis added) went even further: ‘the resemblance becomes complete if we remember that he measures each variable as so much per cent excess of its average (or trend) … The ratio between profits and cost can be approximated by the difference between the deviation percentages.’ This passage raises the suspicion that they are mistaking the mathematical form of a percentage rate with the meaning of a profit rate as a ratio between variables. What can be approximated by the difference between the deviation percentages is the percentage deviation of the profit rate, not the profit rate itself. There is no ground on which to substitute such difference into the above equation (which is not explicitly done in Marschak and Lange’s paper, but seems to be the following logical step) in order to end up with the one used by Tinbergen. Besides, they dropped the subject without explaining what happens to the second term, or whether the other variables (I, R) would need to be transformed at all. The letter is quoted in Toporowski (2005). We are indebted to Jan Toporowski for this information. A point Keynes believed was not in Tinbergen. Actually, it is not in Tinbergen’s book but it is in his reply, although only mentioned and not explained at length as in Marschak and Lange. ‘Internal’/’external’ correspond to ‘endogeneous’/’exogeneous’ in today’s terms. Additional information may take the form of observations not expressible as statistical time series, experiences from other countries or periods of time, deductions from economic theory or ‘mere working hypothesis with a certain degree of plausibility’. They are (1) that all influences on variable x1 (dependent) not emanating from a set of ‘determining’ variables x2 … xn are attributable either to influences adding up to a random component or to a function of time (trend) or stem from recognised unmeasurable external forces affecting only a few observations; (2) that the influence exercised by x2 … xn can be represented by mathematical functions; (3) assumptions on the sign or value range or on the relative proportions of coefficients, and on value range for lags. I.e. that (1) has the properties specified in the third set of premises and (2) when combined with the series x2 … xn … (according to the prescriptions given in the second set of premises) leaves only such “unexplained residuals” … as do not contradict the premises adopted in the first set’ (ibid.: 166).

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21 In some cases ‘abrupt change at specific moment in time’ might be identified, while in order to allow for ‘gradual and smooth change’ (ibid.: 175), number of observations permitting, one may break up the period in two or more sub-periods. A different case arises when the influence of a determinant variable x2 on x1 depends on the value of x3 (due to bottlenecks in the economy or to unmeasurable factors), with the result that the additivity of influences should be abandoned.

Part IV

Economics and architecture

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Economics and architecture Maurice Lagueux

When it comes to discussing the relationship between economics and other disciplines, the latter that are spontaneously considered are other sciences, either pure or applied. However, the fine arts are also disciplines whose relation to economics might be considered, even if only for the sake of mutual clarification. And, among the fine arts, architecture is the one which is most closely related to economics for various reasons that I will discuss below, for it is this relatively unexpected kinship between these two disciplines that I intend to explore. While I will emphasise the significance of these relations, I am quite aware that, since architecture is an art and economics is a science, or, at least, aims to be a science, any similarity between them must be interpreted with this important difference kept in mind.

Two ways of discussing the relationship between economics and architecture In fact, a rapprochement between two disciplines can be thought of in two quite different senses. In the first of these senses, the point is to consider the ways according to which any one of these disciplines, through its normal activity, is concerned with the domain of the other. On the one hand, architecture is a business whose professional members use various marketing devices to obtain contracts and to promote their buildings and their ideas about the proper way to build. This economic activity, like any other, needs to be studied with the help of economists’ tools.1 On the other hand, economic activities are carried on in buildings, like banks, stock exchanges, office towers, factories, commercial centres and various kinds of market places, which are designed by architects who normally manage to accommodate economic requirements in an elegant fashion, sometimes by producing some of the most impressive architectural masterpieces.2 This type of inquiry, whether economics of architectural business or architecture for economic activity, characterised by the attention that one of the disciplines involved bears to the domain of the other, can be highly interesting and fruitful. Such inquiries should be developed further, but since they do not directly concern the methodology of economics, it is rather in the second

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sense alluded to above that I want to discuss the relations between these two disciplines. In this second sense, the point will be to analyse the internal similarities between their respective objectives, principles and historical developments. The existence of such similarities rests on the fact that, in contrast with other artists, architects – and urban planners who are architects of larger sectors of the inhabited world – design and configure a sizeable part of our everyday world itself or, if one prefers, of the very framework in which human activities take place. Consequently, they have to cope with constraints which force them to raise questions requiring solutions which, since they are based on rational calculations, are not dissimilar to the solutions commonly met in economics, or at least in applied economics. Moreover, in contrast to most other artists, architects cannot build without selling their ideas to customers ready to finance their costly projects. Still more important, these ideas concern ways in which these potential customers will have to live. These circumstances explain the fact that architecture is an art much less gratuitous and much more tightly bound with the everyday world than other arts; from this point of view, it is much closer than other arts to economics and, as we will see, the respective historical developments of these two disciplines have been astonishingly parallel.3 However, since architects are artists – otherwise they could hardly be distinguished from engineers – they are faced with a constant dilemma, because they must pursue artistic achievements while complying at the same time with their customers’ requirements. Moreover, since they must be guided in their work by rational considerations, similar to those which are taken into account and analysed by economists, they are subject to another kind of tension because, as artists, they should be mainly guided by their sensibility and their creativity, and what derives from these faculties is not always compatible with the requirements of rationality. Thus, while being praised for finding a rational (and economic) solution to a social problem, they can be blamed if this solution remains aesthetically unattractive, and vice versa.

Before the twentieth century In fact, these tensions were much less serious when architecture was a matter of building for God or for kings. When magnificence was the unique measure of success as evaluated by the ‘customer’, and rationality consisted in nothing but the most efficient way to achieve this magnificence, very little room was left for significant manifestations of such a tension. Naturally, the architects of castles and cathedrals had to solve complex technical problems in order to achieve the grandiose artistic result that was required of them, but usually they did not have to systematically defend their aesthetic convictions against overly insistent requirements of an economic type of rationality. Matters might have changed with the early developments of capitalism, but the practical instincts of the bourgeoisie were largely overwhelmed by the emphasis put on rising national states’ power that was closely associated with gold and

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other manifestations of wealth. In this context, mercantilists were as much devoted to suggesting ways to increase the wealth of their respective states than baroque architects were involved in building highly ornamented palaces and churches that made ostensible the wealth of their state. This situation changed radically during the eighteenth century. After the luxuriance of the baroque and rococo styles, architects progressively turned towards the more sober neoclassical style.4 Economists, for their part, more and more criticised the mercantilist obsession with the accumulation of wealth through international trade, and insisted instead on the fundamental role of more basic economic activities like agriculture and manufacturing.5 In this context, Adam Smith, in a rather critical mood, took care to point out that architectural decisions should be understood as an economic matter: A great bridge cannot be thrown over a river at a place where nobody passes, or merely to embellish the view from the windows of a neighbouring palace: things which sometimes happen, in countries where works of this kind are carried on by any other revenue than that which they themselves are capable of affording. (Smith 1776: V.i.d, 6) Guided by similar economic considerations, the philosopher Jeremy Bentham developed his original view of utility, which Stanley Jevons was to apply to economics much later, but which he applied himself to ethics, and also to architecture. Indeed, aided by his architect brother, Bentham spent a large part of his life promoting the Panopticon, a model of prison whose bold circular and concentric structure had been designed not so much to satisfy aesthetic considerations as to maximise social utility. Given that it was of importance ‘that for the greatest proportion of time possible, each man should actually be under inspection’, Bentham concluded that the circular form was the optimal solution for a prison, since it is ‘the only one that affords a perfect view, and the same view, of an indefinite number of apartments of the same dimensions … ’ (Bentham 1843, IV: 44).6 The determinant role of economic factors when it comes to architecture was more surprisingly heralded by J.-N.-L. Durand, one of the most respected and influential professors of architecture of the early nineteenth century. In the lectures on architecture he gave at the École polytechnique of Paris, he claimed that the search for the greatest advantage at the lowest cost was the only principle which should guide the architect in the practice of his art (Durand 1809: 84). According to him, ‘in architecture there is no incompatibility, and no pure compatibility, between beauty and economy: for economy is one of the principal causes of beauty’ (ibid.: 86). These principles brought him as well as Bentham to recommend the circular plan as the most efficient and the most economic (ibid.: 85) – the kind of economic consideration, incidentally, which was to incite the American Shakers to build their beautiful circular barns. Be that as it may, it is interesting to note that, as early as the early nineteenth

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century, this kind of cost–benefit analysis was strongly recommended to architects in order to guide them in their aesthetic choices. Throughout the nineteenth century, liberalism, which was born amidst the general opposition of the rising bourgeoisie to the lavishness of the aristocracy, became progressively associated with the lavishness of the bourgeoisie itself. This fact stimulated the rise of a socialist economics, which put emphasis on a better world made possible by the emancipation of the labouring class, the advantages associated with sobriety and the development of new technology. One of those socialist thinkers, Charles Fourier, did not hesitate to draw the architectural plans of the kind of building that he christened Phalanstère and considered appropriate for the community life that the emancipated workers were supposed to find particularly attractive (Fourier 1829: 123).7 The tension between a taste for rather superficial ornamentation, more and more appreciated by the rising bourgeoisie, and the preference granted to the use of new technologies and the display of raw materials like iron, which was associated with machines and workers’ life, was central to nineteenth-century architecture. Whereas most architects involved in ‘noble’ architecture were designing public buildings and bourgeois housing according to the rules of highly ornamental historical styles, engineers and the most innovative architects were experimenting with the use of new materials and new techniques of construction in factories, warehouses and other commercial buildings, whose owners were involved in fierce economic competition. When governments had to respond to the special needs of the private industrial sector, as was typically the case with the construction of railway stations, this tension was even manifest inside single buildings. Indeed, if the problem is to provide an efficient shelter for trains inside the station, why not use the very materials and techniques that made the railway system possible? But, as such stations are among the most visible of the services provided by the state, why not emphasise the state’s prestige by using materials and forms more appropriate to such a role? Thus at St Pancras in London, for example, as in many nineteenth-century railway stations, a bold, spectacular and efficient metal structure is hidden behind a stylish facade, looking, in this case, like a Gothic castle.8 However, since new techniques and new materials, which had been rapidly developing since the industrial revolution, were particularly cost-efficient, the history of architecture from the mid-nineteenth century to the mid-twentieth century was, for a large part, the history of the slow generalisation of their use in architecture.

Modernism in architecture and neoclassicism in economics In spite of such timid uses of modern techniques in architecture throughout the nineteenth century, it is only with the last decades of that century, in particular with the multiplication of the first skyscrapers in downtown Chicago, that we can unequivocally refer to architectural modernity. It is noteworthy to observe the extent to which economic factors were determinant in

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this development. According to Lewis Mumford (1972: 20), ‘the skyscraper … was an almost automatic response to land speculation: mechanization was subservient to the desire to achieve profitable congestion’.9 Architecture was never so close to Adam Smith’s views. Indeed, it is clear that, by the end of the nineteenth century, buildings in Chicago were being erected not ‘merely to embellish the view from the windows of a neighbouring palace’. However, since commercial and financial competition is also a matter of prestige, a brand new type of architecture and decoration took shape to fit the new requirements of commerce and finance in a genuinely rational and economic way. This rationality was not based on abstract aesthetic principles; architects in Chicago built some of the most respected architectural masterpieces of their time by strictly adapting means to ends, by providing solutions designed to maximise their clients’ utility by elegantly satisfying their need for both efficiency and prestige. And because most architects of this period were convinced that formal aesthetic requirements should be derived from a rational conception of architecture, Louis Sullivan, possibly the most aesthetically minded among them, claimed that ‘form follows function’, a phrase which was to become the slogan of the functionalist trend (which is based on the idea of rationally adapting means to ends) in modern architecture. Be that as it may, what I want to emphasise here is the fact that economic considerations became a determinant element in the aesthetic decisions affecting architecture. With the twentieth century, the opposition to the pedantic ornamentation associated with various historical styles adopted in the previous century grew harsher, especially in Europe, where the commitment to traditional architecture was more profoundly anchored. As early as 1908 Adolf Loos, a Viennese architect whose buildings and writings are both still highly respected, launched a typically modern charge against traditional architecture and especially against complacency in ornamentation in architecture that he characterised as nothing less than ‘a crime against the national economy’. It is a question here of national economy because Loos invokes explicit economic arguments in his plea for rejecting ornamentation, which, according to him, would ‘result in a waste of human labour, money, and material’ (Loos 1908: 21). Claiming that ornamentation ‘inflicts serious injury … on the national budget and hence on cultural evolution’, Loos formulated his views with typically economic reasoning based on the idea that the taste for ornamentation characterises cultures of the past: If two people live side by side with the same needs, the same demands on life and the same income but belonging to different cultures, economically speaking the following process can be observed: the twentieth-century man will get richer and richer, the eighteenth-century man poorer and poorer … The twentieth-century man can satisfy his needs with a far lower capital outlay and hence can save money. … The one accumulates savings, the other debts. (Loos 1908: 21–22)

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It is important to understand that Loos’s economic considerations were tantamount to an aesthetic analysis and that this came from an elitist architect particularly proud of his cultural refinement. For him, ornamentation was a mark of infantilism comparable to tattooing. Primitive people can be excused for enjoying this kind of entertainment, but civilised people who indulge in such ridiculous practices, instead of adopting behaviour more in keeping with the level of their civilisation, could literally be accused of a depravity that Loos characterised as criminal. According to Loos, what is true of tattooing the body is equally true of ornamenting facades in a country whose people should be civilised enough to appreciate the sober beauty of a flat wall. Moreover, ornamentation is doomed to change with every shift in fashion, but unadorned facades, perfectly well built with high-quality materials, like any unadorned useful object of good quality, never go out of fashion, according to Loos; therefore, such facades have another economic advantage: ‘If all objects would last aesthetically as long as they do physically, the consumer could pay a price for them that would enable the worker to earn more money and work shorter hours’ (Loos 1908: 23). Consequently, for modern people who have ‘grown finer’ and ‘more subtle’ (ibid.: 24), economy and valuable art (and especially architecture) go hand in hand. Loos is usually perceived as an architect who was ahead of his time, but by the same period in Germany an association of artists, the Deutsche Werkbund, promoted an alliance between art and industry in the name of ideas about art similar to his own, associated with a conception of design emphasising standardisation and objectivity (more evocatively Sachlichkeit in German). Here again, this convergence of artistic and economic values was not seen as the surrender of art to the economic requirements of industry, but rather as a remarkable opportunity to rescue German art from its degenerate condition and from the ‘lack of culture’ of this epoch.10 After the First World War these trends were intensified by avant-gardist artists and architects. ‘Modernism’ is the name of the somewhat utopian architectural movement which promoted a revolutionary kind of architecture characterised by the will to radically transform the life of people with the help of an architecture based on the rejection of applied ornamentation, the adoption of geometric forms with flat and usually white (clean) walls, and the maximal use of modern science and techniques in order to liberate people from the servitude that was associated with the traditional way of life. Modernist architects considered their mission to be the transformation of this way of living, thanks to saner buildings designed according to rational and even scientific principles and not according to the rules associated with the current style à la mode. It is important to understand that this movement was part of what, in the 1920s, was going on in almost every area of social life. Many social thinkers, including some economists, were seduced by the version of Marxism which proposed to transform societies with the help of ‘scientific’ analysis. The idea of planning, which was closely associated with Marxism, was understood as the affirmation of Reason imposing an order to replace wild competition and

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laissez-faire policies in economic matters. Mainstream economists remained more moderate in their claims about the construction of a better society, but many of them nonetheless estimated that state interventions were required to improve the working of the market. The idea that it is a mission of economists to improve the state of societies progressively made its way throughout the nineteenth century, but, as is well known, it is with The Economics of Welfare, published by Arthur Pigou in 1920, that a programme of research was developed that was oriented towards the systematic improvement of capitalist society, progressively becoming a whole branch of neoclassical economics. Incidentally, Pigou encouraged government intervention in architecture and urbanism in order ‘to limit the quantity of building permitted to a given area [and] to restrict the height to which houses may be carried’ (Pigou 1920: 194). For Pigou, such interventions were based on aesthetics (or at least on valuable urbanism) as much as on economics: It is as idle to expect a well planned town to result from the independent activities of isolated speculators as it would be to expect a satisfactory picture to result if each separate square inch were painted by an independent artist. (Ibid.: 195) More precisely, in the context of the early 1920s, reason must take command of human activities and look after their global orientation. ‘No “invisible hand”,’ Pigou continues, ‘can be relied on to produce a good arrangement of the whole from a combination of separate treatments of the parts.’ In fact, for most economists in those days, the market economy remained the most efficient structure when it came to satisfying the needs of a population largely because perfect competition in markets corresponded to a situation where each firm produced at an optimal level, where each factor of production was paid according to its contribution and where the prices of commodities were just equal to what was required to pay the factors that had produced them. However, for more and more among them, perfect competition could not be reached automatically in a world that was too unstable; therefore, actual markets were seen as handicapped by a lot of imperfections that had to be corrected or compensated for. For example, certain situations facilitate the development of monopoly, which means the destruction of the advantages of competition. Therefore many economists of the period claimed that legal interventions to break monopolies should greatly improve the working of economic societies. Moreover, it was manifest that commodities were not all fitted for being smoothly exchanged through the market. They were not all perfectly identifiable, finely divisible and easily appropriable, as commodities referred to in economic models are supposed to be. This situation initiated a long debate about market failures associated with what were later called ‘externalities’. Roughly speaking, an externality arises when a commodity, instead of being traded in a market, directly affects someone’s utility function by benefiting or harming this person without normal compensation. Because such a situation

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is antithetic to perfect competition, neoclassical economists, from the 1920s to the 1960s, from Arthur Pigou to Paul Samuelson, proposed various more or less ingenious ways to overcome the problem either by providing appropriate compensation or by creating more encompassing markets (see Lagueux 1998). With John Maynard Keynes’s General Theory, and with Keynesian economics in general, the case for substituting rational intervention for laissez-faire, whose ‘end’ had been proclaimed by Keynes in 1926, was pushed a decisive step further. The Keynesian way of thinking indeed implied that it is the duty of the economist, thanks to his knowledge of the global determinants of economic production, to propose to governments a plan capable of ensuring the most harmonious development of national economies. Incidentally, Keynes insisted on the importance for societies of governments generously subsidising the arts, and especially the construction of monuments, architecture being ‘the most public of the arts’ (Keynes 1936b: 345).11 Thus Keynes and most neoclassical economists of the period were promoting the idea that it was the responsibility of economists to improve the working of the economy by guiding state intervention in a way that can be compared to the way modernist architects of the period were promoting the idea that it was a responsibility of architects to improve the living condition of citizens with the help of the state.12 It is not surprising that, in this enthusiastic climate, architects, who are planners by profession, were naturally inclined to plan buildings rationally fitted to satisfy the needs of people as they saw them, with the help of the emerging social sciences, and to propose, for a number of towns, brand-new plans guided by similar rational principles and revolutionary spirit. Le Corbusier, who was particularly active during these years, was so convinced of the necessity of starting anew that in 1925 he proposed the destruction of a substantial part of central Paris in order to replace it by a more rational and ‘well planned’ group of eighteen giant cruciform skyscrapers correctly arranged along two perpendicular axes.13 When it came to architecture as such, his ideas for the design of ‘machines for living’ were inspired by the most rationally designed products of modern technology such as motor cars, steamships, aeroplanes and North American grain elevators (Le Corbusier 1925). This is not to deny the high aesthetic and poetic quality of the wonderful houses that this architect built during the 1920s, but rather to show how close his interventionist and rationalist views were to those of economists of the same period. As for German modern architects who had been strongly influenced by the ideas of the Werkbund, it looked still more evident to them that architecture, and even other arts, should be closely associated with industry and consequently should satisfy some economic requirements. Whereas the Werkbund was simply an association of artists who worked independently all over the German world, the Bauhaus, an institution founded by Walter Gropius, was a group of artists acting as tutors to students which gathered in Weimar and later in Dessau. According to Gropius, these people were trained to be designers, ‘able, by their intimate knowledge of materials and working processes, to influence the industrial production of our

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time’ (Gropius 1943: 25). Once the Bauhaus was installed in Dessau, where the famous Bauhaus building was erected by Gropius and his students, the place of architecture became more central in its activities, and artistic considerations became more and more subordinate to economic ones. For example, in keeping with this approach, Gropius developed a theory to optimise the height of buildings in order to apply it to those being mass-constructed by that time in Germany. With the help of basic analytical tools familiar to economists, he carefully examined which height either maximises sunlight when costs of land are held fixed or, alternatively, maximises the number of beds when the amount of sunlight is held fixed, and he arrived at the conclusion – which he presented to an international meeting in 1930 – that high-rise housing can be seen to be much preferable to medium-height housing.14 Such approaches oriented towards maximisation of efficiency and minimisation of cost were particularly popular among architects and designers during this period. To a large extent, articles of great aesthetic quality produced at the Bauhaus – like the Wassily chair of Marcel Breuer or the tea infuser of Marianne Brandt – were inspired by a philosophy according to which type objects designed for industry should maximise utility and efficiency given budget constraints or, if one prefers, to maximally satisfy consumers’ needs while minimising costs. In Frankfurt the city architect, Ernst May, pioneered the research for maximising efficiency in housing which resulted, among other things, in the famous Frankfurter Küche, a minimal kitchen with maximal efficiency.15 In various other European countries, like the Netherlands, Switzerland and the Soviet Union, such references to dually interrelated maximisation and minimisation were perceived as normal within the standard language of architects. For most of their adherents, these considerations so familiar to economists were also perceived as an essential component of a functionalist aesthetics, according to which the most beautiful forms of buildings and other objects are derived from their function. However, the most extreme step in this trend was taken by the architect Hannes Meyer, the second director of the Bauhaus, who emphatically downplayed art and architecture in favour of real life and building techniques. According to him, all those things (‘industrial fairs, grain silos, music halls, airports, office chairs, standard goods’) that architects and designers had to produce in the modern world ‘are the product of a formula: function multiplied by economics. They are not works of art … Building is a technical, not an aesthetic process’ (Meyer 1926: 93, emphasis added).16 And the case is the same even with housing: The new house is a prefabricated unit for site assembly and, as such, an industrial product and a work of specialists: economists, statisticians, hygienists, climatologists, industrial engineers, standards experts, heat engineers … and the architect? … He was an artist and has become a specialist in organization! (Meyer 1926: 97)

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After listing thirty materials used in modern buildings, Meyer explains that ‘we organize these building materials on economic principles into a constructive whole’ (ibid.: 95). These radical conceptions were inimically received by German society of this period, and Meyer, who was a communist, was dismissed as director of the Bauhaus in 1930, to be succeeded by Mies van der Rohe. As for the Bauhaus as such, it was virtually reduced to silence, moved to Berlin and finally closed by the Nazis in 1933. In brief, during the inter-war period, both economists and architects had insisted on the importance of interventions aiming to radically transform and improve the way of life in Western societies, by granting priority to rational organisation over the valorisation of traditions. It is precisely such trends that Friedrich Hayek was to criticise under the name of ‘constructivism’. During the 1930s and following decades, the respective histories of architecture and of economics developed along lines whose parallelism is still more evident. With the rise of Nazism, the most creative minds of German-speaking countries, architects as well as economists, migrated to England and to a greater extent to America. After the Second World War, ‘constructivist’ ideas, which in the inter-war period had germinated in the minds of a minority of pioneers, were accepted by almost all members of the profession, in architecture as well as in economics. The few decades following the war were characterised by the triumph of a ‘Keynesian’ brand of neoclassicism (particularly well illustrated by Paul Samuelson) in economics and of the ‘International style’ in architecture. In both cases the revolutionary ideas of the inter-war period were deradicalised – some would say emasculated – in a way fitting the requirements of a booming capitalism and a rapid expansion in international trade. The Samuelsonian type of neoclassiscism, which associated welfare measures, moderate Keynesian interventionism and equilibrium analysis, was, for a few decades, a synthesis apparently apt for reconciling the interests of governments, finance and other sectors of society. The International style in architecture, which in the masterful hands of Mies van der Rohe was an adaptation of modernist principles to the architectural requirements of finance and of the public sphere, was quickly diffused throughout the world.

Postmodernism and neoliberalism After a few happy decades, however, it became clear that these syntheses could not hold for very much longer. The Samuelsonian type of neoclassicism began to disintegrate: the social welfare function turned out to be impossible to construct, especially when the wide variety of tastes for which a society makes room is taken into account (see Little 1957: 11), and, in the context of the stagflation which prevailed in the 1970s, fine-tuning could no longer be practised by Keynesian economists. Moreover, welfare programmes often turned out to be counterproductive for the groups targeted, minimum-wage policies heightening some types of unemployment and rent-control policies for housing discouraging improvements and generating slum conditions. Roughly

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in the same period, the International style came under increasing criticism: most financial, commercial, and public office towers which had transformed the centres of Western cities were far from being as carefully designed as those of Mies van der Rohe, and in any case, the accumulation of such impersonal skyscrapers was increasingly perceived as aesthetically boring and antithetic to human relations. Even the ‘well planned’ urbanistic schemes, so highly praised by Pigou, were harshly criticised, in particular by Jane Jacobs, for being much less suitable than traditional layouts of cities for providing security to citizens and for facilitating communitarian relations between them (Jacobs 1961). Moreover, many multi-level housing units, which, according to the principles of modernism, were designed in order to provide fresh air and greenery for people, turned out to be spaces more favourable to the development of slum conditions and criminality. It is for such reasons that, in a humorous but thoughtful fashion, Charles Jencks emphatically declared that ‘Modern architecture died in St Louis, Missouri on July 15, 1972 at 3.32 p.m. (or thereabouts)’ (Jencks 1984: 9) because, at that precise moment, some slab blocks of Pruitt-Igoe, a habitation plan that suffered from the predicament described above, were dynamited after a decision that acknowledged the failure of such schemes to provide the kind of happy consequences that their construction had promised. It is not clear that such a symbolic event could be easily chosen and precisely dated to determine when the ‘death’ occurred of what I have called the Samuelsonian brand of neoclassical economics, but it is clear that at some point, also located in the 1970s, as many economists would agree, the dream that was born with Pigou and Keynes, which in the 1960s had seemed to be on the road to realisation, was nothing but a dream. Naturally, in both cases, such dating is purely symbolic, since some economists more or less faithful to Keynesian and even Pigovian tenets have still been active in recent decades, as were architects considered to be modernist (or at least ‘late modernist’). Nonetheless, with the 1980s most economists of the mainstream progressively adopted a neoliberal approach, which was itself quickly rechristened ‘neoclassical’,17 but which no longer made room for the interventionist and ‘constructivist’ agenda of the Keynesians and the Pigovians. For those economists, the free market was seen as much more reliable than the interventions purportedly guided by a more rational view of social needs. Similarly, in the 1980s, so-called ‘postmodern’ architecture invaded our cities, substituting baroque shapes and unexpected colours for the flat and sober forms of the International style when it came to providing offices towers for financial, commercial and industrial companies’ headquarters. With this new style the regularity and austerity which was inherited from the heyday of modernism were totally rejected and architects found themselves free to take their decorative inspiration from the historical styles which had been so violently condemned by modernism. Consumers of architecture, like consumers of other goods, tended to rebel against the choices made by specialists claiming that they would optimally satisfy their needs. It was in this context that

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the theoretician of architecture Martin Pawley claimed, without, however, really substantiating this intuition in his one-page paper, that ‘Post-Modernism is the architecture of Friedman and Thatcher as unmistakably as Modernism was the architecture of Keynes and Attlee’ (Pawley 1984: 63). It is true that both architectural postmodernism and neoliberal economics were rejecting the responsibility of making a better world with the help of the state that architectural modernism and Samuelsonian neoclassical economics had promoted; it is true that both were less reluctant than the latter two to serve purely commercial interests and popular fashions; it is also true that both do not hesitate to revitalise approaches associated with the past like baroque ornamentation and free liberalism respectively. These common characteristics of architectural modernism and of Samuelsonian neoclassical economics are closely akin to some of those that Arjo Klamer (2001: 218–19; see also Klamer 1995: 319–20) attribute to modernism in both art (including architecture) and economics (such as a break with history, and endorsement of Enlightenment). Two other of his eight characteristics, but perhaps less convincingly, might be invoked in the same context: the tension between science and therapy (that Klamer associates respectively with the square and the circle) seems to be largely dissolved in neoliberal economics and in postmodern architecture; and the ‘invariant structure of reality’ is no longer looked for in neoliberal economics or in postmodernist architecture, which does not aim to be based on fundamental principles. However, it would be excessive to force much further the parallel between architecture and economics. The self-evident differences between an art and a science would make such an attempt unconvincing. Both architectural postmodernism and economic neoliberalism were criticised on various grounds in the 1990s and, in both cases, the development of highly diversified trends took place. However, in most cases, these reorientations were brought about by problems not necessarily similar, which were internal to each of these disciplines. It is clear that the turbulences in the respective histories of architecture and economics did not seriously alter the fact that they have both increasingly exploited available techniques and technologies. In architecture, the new techniques and materials were experimented with in spite of their rejection by traditional architects in the nineteenth century. Later they were acclaimed by modernism, and were still largely exploited by postmodernist and even by socalled deconstructivist architects; concurrently, the most recent developments of high technology have been adapted to architecture by a ‘high tech’ current which has produced spectacular buildings since the 1970s. Moreover, the use of computers is radically transforming all trends in contemporary architecture. In a roughly parallel fashion, mathematical tools have been developed in spite of their rejection by most economists in the nineteenth century, before progressively conquering neoclassical economics in the early twentieth. These techniques have been resorted to no less by neoliberal economists and by those associated with new classical economics and rational expectations, and recent developments in econometrics push this exploitation still further.

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Moreover, as is well known, all these researches of recent decades have been radically transformed by the use of computers. This situation largely explains why postmodern architecture did not have a very long life, and why ‘postmodernism’ turns out to be a rather unsatisfactory concept for characterising the developments of both architecture and economics that have followed the demise of the modernist ideal. Klamer refers to Charles Jencks, who uses the label ‘late modernism’ to characterise many significant architectural works of this recent period and he exposes Jencks’s view by saying that late moderns ‘may have lost the original faith of moderns, but still practice much of what the moderns preached’ (Klamer 2001: 222). On this basis, Klamer convincingly argues that new classical economics, for example, can fairly well illustrate what can be described as ‘late modernism’ in economics (ibid.: 223–24). In fact, when one associates modernism with problematisation of representation, predilection for formalism, machine metaphor and self-referential work, as Klamer does in his four characteristics that I have not mentioned above, it is difficult to decisively dismiss modernism when referring to mainstream economics and to contemporary architecture.18 Even when they seem to dissolve modernist principles, both of these movements look like late manifestations of modernism, if the latter is defined through these four characteristics. The latter might indeed be attributed to Samuelsonian neoclassical economics, but could hardly be used to contrast this approach with the one derived from neoliberal economics, which from this point of view is not clearly antithetic to neoclassical economics. It is only with heterodox critical economic theory (rather than with neoliberal or new classical economics) that such characteristics of modernism have been directly challenged. Even if these four characteristics of modernism were more or less put aside during the evanescent manifestation of the most popular version of architectural postmodernism, it is difficult to clearly identify an equivalent architectural heterodoxy – which would surely not be the ‘deconstructivist’ architecture – that could similarly challenge them.19 In any case, it is not surprising that the appropriate way to put forward the parallel development of economics and architecture in the twentieth century depends on the characterisation of modernism and consequently of postmodernism. A last observation related to the parallel evolution of economics and architecture can be added. It concerns the new sensibility to ecological (or conservationist) questions, which most architects and economists of the nineteenth century would have found negligible. Such questions were occasionally raised by a few prophetic figures in the first half of the twentieth century before being progressively taken into account by some respected members of most concerned disciplines in the second half of the century. As is well known, ecological questions concern both the conservation of biodiversity and the management of resources used by human activity. With the latter aspect, economics and architecture are among the disciplines that should be most directly concerned, economics because it is immediately concerned with the management of scarce resources, including land and rare materials, architecture

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because it is an activity whose output, namely buildings and cities, transforms radically, and in many cases almost permanently, the world in which we live. From this point of view, it is remarkable to see how much architecture was transformed since the 1970s, or thereabouts, by the new attention paid to the existing built world. Since that period, the option of recycling old buildings has more and more often been considered before destroying for rebuilding. Existing buildings like factories, churches, railways stations, etc., are regularly recycled into shopping centres, housing, museums, etc., rather than being destroyed and replaced. It is true that this phenomenon is far from being new in the history of architecture – for example, many Greek or Roman temples have been transformed into churches in the past. What is new, however, is the fact that this recycling trend became much more systematic, and was founded in an ecological conscience regarding the need to conserve still valuable buildings instead of generating waste and using fresh resources in rebuilding. In economics, the problem is quite different, since here the ecological conscience suggests that theoretical analyses be modified rather than suggesting that the decision be made to recycle. In any case, the unavoidable ecological conscience was manifested, sometimes very timidly, by attention increasingly paid, in the economic analyses of the last decades, to the fact that energy and other resources are seriously limited and that waste raises a problem more and more difficult to solve, whereas such questions were not really considered during previous periods. As mentioned, the point here is not to overemphasise the kinship between economics and architecture by establishing the existence of a parallel development for any period and any sector. It is rather to show that economics, which entertains close relations with other social sciences, since each of them analyses from a particular point of view the same object, namely human society, and which entertains another type of relation with the natural sciences, from which it borrows a few schemes of thought, can also, for the sake of mutual clarification, be put in relation with fine arts and especially with architecture, which is, for the reasons exposed above, the most closely related to economics among the fine arts.

Acknowledgements The author thanks Matthew Brown, William Colish, Bruna Ingrao and the editors and assessors of the present collective volume for their very useful comments, and the SSHRC (Ottawa) for financial assistance.

Notes 1 As an interesting illustration of this kind of research done by a sociologist see Blau (1987). 2 The wonderful Trajan’s Market in Rome shows that this fact is far from being new, but more modern buildings like the Amsterdam Stock Exchange, designed by Berlage, the Fagus factory by Gropius or a few banks designed by Sullivan or

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Wagner exemplify the fact that great architecture can serve economy just as it can serve religion, education or politics. I have discussed this parallelism in a somewhat different context in Lagueux (1992). In the United States, a parallel evolution on a smaller scale happened with the passage from Georgian to Federal and Greek Revival styles. It is typically the case of François Quesnay for agriculture, and of Adam Smith for manufacturing. One may find a few others of the scattered Bentham texts concerning the Panopticon in Mack (1969: 189–208). Fourier’s Phalanstère has never been built, but a housing scheme (named Familistère) with glass-covered central court inspired by its plan has been erected by one of Fourier’s disciples, Jean-Baptiste Godin, at Guise, in northern France. This two-way solution was underscored by some theoreticians of architecture; for example, see Frampton (1985: 33–34). Mumford presented Montgomery Schuyler (1843–1914) as an early proponent of a similar view. See, for example, the chapter on the Deutsche Werkbund in Frampton (1985: 109–15). See also this paper in its entirety. I thank Gilles Dostaler, who drew my attention to this text. Given this similitude between the policies associated with the modernist movement in architecture and the neoclassical economics of this period, one could characterise Keynes and Keynesian economists as ‘modernist’. It is interesting to note that Keynes is also presented as a modernist on the basis of his close association with ‘modernism’ as understood in another art, namely literature (on this point, see Klaes 2006: 263–66). As for the possibility (claimed by Amariglio and Ruccio 1995, whose thesis is more or less endorsed by Klamer 1995: 332, alluded to by Klamer 2001: 220–21, and briefly discussed by Klaes 2006: 261–62) of characterising Keynes as a postmodernist as well, given his views about uncertainty, it is based on a quite interesting analysis of Keynes’s thought, but it crucially rests on a debatable characterisation of modernism by the negation of ‘true uncertainty’ and on the possibility of making room for contradictory moments more or less scattered inside general movements like neoclassicism and modernism, a position that would risk diluting the theoretical interest of identifying such movements; however, it would be out of context to discuss this question here. Le Corbusier frequently referred to this bold project; for the set of his relevant drawings, see Le Corbusier (1983: 381–93). Arjo Klamer (2001: 219) implicitly refers to this fact and compares it to Samuelson’s attitude towards ‘old frameworks’ in economics, both illustrating the ‘break with history’ typical of modernism. Gropius (1965: 103–7); see also Frampton (1985: 140). Designed by the architect G. Schütte-Lihotzky; see Frampton (1985: 138). Note, however, that Meyer’s architectural works were much more aesthetically designed than his economically oriented theories might lead one to expect. To avoid any confusion, from now on, I will use the phrase ‘Samuelsonian neoclassicism’ to designate what I have up to now called ‘neoclassicism’. I do not deny that these four traits were present in what is usually called modernism; my only point is that, depending whether we take them into account as decisive traits or not, what we will consider as postmodernism will dramatically differ both in economics and in architecture. This is possibly due to the fact that heterodox architects have not the freedom to build comparable to the freedom to publish that heterodox economists enjoy.

10 Economic policies and urban development in Latin America Michele Alacevich and Andrea Costa

The central role of cities in economic development is widely recognised. Many scholars have dealt with this topic from the point of view of economic history, sociology, anthropology, urban planning, geography, and economic theory, both from a micro and from a macro perspective. Our aim in this chapter is to analyse theories of urban planning after the Second World War, conceived as a means to foster economic and social development in less developed countries. More specifically, we will focus on urban and economic planning in Latin America and will describe the role of three outstanding figures in the development of Latin American cities, in particular of the Colombian capital Bogotá: the urban planners Paul L. Wiener and José L. Sert, and the economist Lauchlin B. Currie. The stature of the individuals involved, the broad vision they brought to the task, and the role of Latin America in the international political and economic scenario make this case particularly meaningful for the analysis of post-war development policies. Through the use of archival material from the Wiener, Sert, and Currie collections, it has been possible to sketch the relations among the three advisers and their approach to Latin American urban problems. Not unexpectedly, their reflections show the importance of blending political economy, sociology, and urban planning analysis. Our reconstruction of their activities, in turn, crosses borders between economic history, urban planning analysis, and the history of economic ideas – an approach that, we believe, can offer useful insights to development studies. Moreover, the use of archival material has made it possible to highlight the evolution of the three advisers’ thought. Wiener and Sert progressively softened their initial dogmatic positions and adapted them to the reality of the existing urban environment.1 Lauchlin Currie built his proposals for the urban planning of Bogotá on his previous experience regarding the smaller Colombian city of Barranquilla, and subsequently changed some of his ideas in light of the experience accumulated in these two cases. These modifications, we think, are very important features of the actual process of urban and economic advising, and only historical reconstruction can put the right emphasis on them. The chapter is organised as follows. The next section will briefly describe the origins of the new interest in the economic and urban development of

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Latin America after World War II. The third section will discuss Wiener and Sert’s trip to Latin America, and the beginning of their urban planning project in the region. The fourth will conduct the same kind of inquiry, this time applied to the interests of a development economist, Lauchlin Currie. The fifth section will examine the interconnections and linkages between the two urban planners and Lauchlin Currie in the development of urban and economic plans for the city of Bogotá. The following section will include reflections on the relations and convergence between urban design and economic perspectives on urban planning in the work of Currie and Sert, subsequent to their collaboration in the early 1950s. Finally we offer some concluding remarks.

Economic and urban planning after the Second World War One of the main features of the era that began after the end of the Second World War was the growing importance of development issues. This, of course, was due to the demise of the colonial empires and the birth of numerous new countries with specific problems of economic and social backwardness. Their economies, until then studied only as a function of metropolitan countries (Meier and Seers 1984), became the specific object of a new academic subdiscipline – development economics. Above all, increasing international tensions, culminating in the Cold War and in Truman’s containment strategy, ‘made the fate of the underdeveloped countries a matter of foreign policy concern in the developed countries’ (Myrdal 1968: 8). A distinguished development economist and adviser to various US federal administrations of those years – Walt W. Rostow – made this concept explicit in his best-known book, The Stages of Economic Growth: We must demonstrate that the underdeveloped nations – now the main focus of Communist hopes – can move successfully through the preconditions into a well established take-off within the orbit of the democratic world, resisting the blandishments and temptations of Communism. This is, I believe, the most important single item on the Western agenda. (Rostow 1960: 134) Latin America, which in certain respects had had a very different history from the rest of the so-called Third World – mainly because of the precocious independence achieved by almost the entire subcontinent in the first half of nineteenth century, and the presence of countries which had been part of the developed world until not many years before – nonetheless shared some typical features with other less developed regions. Usually stressed among these features were a high rate of population growth, sustained rural–urban migration, the general weakness of the middle classes, and an international trade structure based on the exporting of just one or two primary products. Colombia was considered a typical case, albeit with good potential for development, which in this case was provided by a section of the ruling class

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with a real commitment to modernising the country, and by a growing industrial sector. It was thus considered a case worth studying, and in fact it was to Colombia that the International Bank for Reconstruction and Development (IBRD) sent its first comprehensive survey mission to a less developed member country in 1949. The mission was headed by Lauchlin B. Currie, formerly personal economic adviser to the President of the United States, Franklin D. Roosevelt. The strategic role that South America could play in the new post-war political context had already been investigated by the State Department of the United States during the war years. Among various possible policies, architecture and urban planning were considered viable ways to develop economies and societies, while at the same time creating good business opportunities for American industries. In December 1940 the Secretary of State, Cordell Hull, wrote to the architect Paul Lester Wiener inviting him to give a series of lectures in South America. Wiener accepted, proposing a list of topics. Among them ‘Designing–Planning for industry. Public works for a peaceful growth. Modern theories to plan at territorial scale. New technologies for South American building industry. New materials. Social services (hospitals, schools)’ (Rovira 2000: 113). In those same days, José Luis Sert, a Spanish exile in New York since 1939, joined Wiener in the architectural offices of Town Planning Associates (TPA), based in New York, and worked with him on the lectures project. They left together for Latin America in 1942.

Rethinking Latin American cities: architects’ ideas Sert made a major contribution to Wiener’s lectures because he brought to them the most advanced principles of modern urban development theory. The founder of an association for modern architecture in Barcelona – Gatcpac, 1930 – Sert had worked for some years with Le Corbusier. In 1933 he attended the Congrès international d’architecture moderne (CIAM, International Congress of Modern Architecture) in Athens dedicated to the ‘Functional City’. His work on the Athens congress proceedings, together with reflections subsequent to his American exile, led in 1942 to the publication of his bestknown book, Can our Cities Survive? This book was both the synthesis of urban theories elaborated in Europe during the 1930s (Le Corbusier–Groupe CIAM-France1943) and a shift from the principles of the Athens congress to new – but still not fully developed – ideas. Sert’s experience in Latin American was crucial for the systematisation of his ideas. He was able to present to new audiences the four main features of the Functional City – dwelling, work, leisure and circulation – while maintaining that these should be the analytical and operational tools of urban planning. At the same time he was able to compare these ideas against the actual conditions of Latin American cities, a process of contextualisation which purged them of their most dogmatic aspects. Sert and Wiener’s intention –

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shared by many European architects in the 1950s and 1960s – to create completely new urban centres from virgin environments had to take into account already – established urban realities. The Latin American lectures met with great success among both academic and political circles. As a consequence of their trip, in 1944 the two architects received their first commission, to draw up plans for a new industrial town – Cidade dos Motores, Brazil – which was followed by several others (Chimbote and Lima, Peru, 1946–47; Tumaco and Medellin, Colombia, 1948). The plans display Sert and Wiener’s evolution in their conception of the city. The first proposal (Figure 10.1) for the Cidade dos Motores was an

Figure 10.1 Paul L. Wiener and José L. Sert standing in front of the map of the first project for Cidade dos Motores, Brazil, 1944–47. Source: Paul Lester Wiener Papers, Bx 155, Special Collections and University Archives, University of Oregon Libraries.

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orthodox application of the Athens Congress’s principles. The city was divided into functional zones linked by a hierarchical system of roads. The building pattern was totally independent of streets and realised with a series of highdensity housing estates (Figure 10.2). Empty space, taking the form of a continuous park, was the dominant landscape of the town. The next two proposals for the same town reveal a progressive criticism of the CIAM principles. The third project, especially, shows the first use of the neighbourhood unit, an urban cluster that would be amply experimented with in the plans that followed. The neighbourhood unit was an autonomous part of the city defined by a population threshold, which in this case approximated 7,000 inhabitants, and by a system of social services (Schnitter Castellanos 2003). Dwelling typologies became more varied, with a significant transition from high-rise and isolated buildings to a more dense composition of lower,

Figure 10.2 Preliminary sketch of the first project of Cidade dos Motores, Brazil, 1944– 47. The east–west line of high buildings that shapes the new town is clearly visible. Source: Sert Collection, Frances Loeb Library, Harvard University, Cambridge, MA, courtesy of the Frances Loeb Library, Harvard Graduate School of Design.

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three-storey dwellings. For Sert and Wiener, the town became a collection of neighbourhood units surrounding a civic centre: two urban devices intended to give a human scale to the city (Sert 1944). The application of these new principles was evident in the Chimbote plan, which was part of a broader effort to foster economic development. The Peruvian government, in fact, explicitly referred to the US Tennessee Valley Authority when it created, in 1943, the Peruana Santa Corporation (CPS), which commissioned the study from Wiener and Sert in 1946. The two architects transformed the existing grid in Chimbote (dating from the mid-nineteenth century) into a complex and articulated ‘urban carpet’ based on the extensive use of courtyard houses (Figure 10.3). The purpose of this innovation was to mix privacy and community using the neighbourhood unit method. Moreover, this meant that, for the first time, the planning process took explicit consideration of the site and of environmental conditions. First, geographical constraints – a hot and dry climate required a compact and shady city – led to the valorisation of a river within the urban fabric through the creation of a large park along its course. Second, scant economic resources

Figure 10.3 Preliminary sketch of the Chimbote plan, Peru, 1946–50. The project was built on a pattern of existing settlements, streets and water lines that were to be merged in a new urban frame. Source: Sert Collection, Frances Loeb Library, Harvard University, Cambridge, MA, courtesy of the Frances Loeb Library, Harvard Graduate School of Design.

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Figure 10.4 Chimbote plan, aerial view of a neighbourhood unit. Sert and Wiener’s proposals make extensive use of patio houses, the most common type of house in the area. Source: Sert Collection, Frances Loeb Library, Harvard University, Cambridge, MA, courtesy of the Frances Loeb Library, Harvard Graduate School of Design.

obliged the architects to experiment with low-cost building solutions, offering a simple pre-cast system for self-construction by the future inhabitants themselves (Figure 10.4). This was ‘a close and sensitive observation of the vernacular typology and of the processes of spontaneous settlements’ (Freixa 1979: 55, emphasis in original) that contributed to changing the CIAM principles at the Congresses of Bridgewater (1947) and Bergamo (1949), where the Chimbote plan was presented and discussed among many other projects. The tools thus defined became the basis of subsequent projects for the Colombian cities of Tumaco and Medellin (1948) – the precursors of the larger-scale plan for Bogotá.

An economist’s approach to urban development As noted above, in 1949 Colombia hosted the first general survey mission conducted by the IBRD in a less developed member country. In those years, the Bank was shifting its main focus from post-war European reconstruction to development. The Marshall Plan had rendered the Bank’s presence in Europe redundant, and the Bank consequently switched its main focus to development issues, embarking on a huge surveying programme. The Colombian mission was the Bank’s first comprehensive undertaking – that is, one intended to analyse the general social and economic conditions of the host country – and for this reason it was widely expected to make a decisive contribution to defining the Bank’s future activities in developing countries (IBRD 1949: 10, 1950b: 23).

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Lauchlin Currie, head of the mission, had been a leading exponent of intervention by the Roosevelt administration in the US economy. During the 1930s, he worked at the Federal Reserve with Marriner Eccles, becoming the ‘intellectual leader’ of the New Deal ‘spenders’ (Stein 1969: 165; see also Sandilands 2008), and after 1939 as the economic affairs personal assistant to the US President (Barber 1996; Sandilands 1990). In the Colombian mission’s final report (IBRD 1950a), and in subsequent years when he was economic adviser to the Colombian government, Lauchlin Currie attempted to combine a broad vision of a balanced development programme with economic policy interventions which would stimulate the latent potential of specific sectors. In later reflection on his approach to economic analysis and advisory practice, Currie wrote: Although I have a great respect for the power of economic incentives and the efficacy of decentralized decision making, I am still an inveterate planner … . The ‘invisible hand’ became two hands, the traditional one working more or less silently through economic incentives, and the more visible one of national economic policy making. The resulting strategy is a mixed one, difficult to classify.2 For Currie, the building sector offered an important example of the results that could be achieved with this mixed strategy. The first opportunity was provided in 1952–54 by a rehabilitation programme involving investments in a large slum area in the city of Barranquilla, the so-called ‘Zona Negra’.3 The programme – initially (1952) conceived as a simple expansion of the municipal waterworks, sewage system and slaughterhouse facilities – soon focused on the possibility of supplying new and better houses to the inhabitants of the Zona Negra. The programme was financed by an increase in municipal facility tariffs, and mostly by a mortgage programme managed by the Instituto de Crédito Territorial, which channelled unproductive savings into the building sector (Consejo Nacional de Planificación 1954). The Barranquilla plan had a number of distinctive features. First, it was able to combine a sound economic investment with an evident social aim. The mortgage programme was almost fully repaid, while the housing programme positively – and directly – affected the quality of life of the Zona Negra inhabitants. Second, the rehabilitation programme intervened in a sector – housing – that was crucial for the modernisation of a developing country like Colombia in the 1950s. On the one hand, it gave direct stimulus to a part of the national economy – the building sector – characterised by latent and, until then, unsatisfied demand. Moreover, it was a sector which relied principally on internal capital and was labour-intensive: two features particularly suited to the general conditions of scarcity of foreign currencies and lack of skilled labour, typical of Colombia and many other countries. Hence, an impetus was given to internal demand for houses through an investment programme linked with

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a mortgage plan. Thus set in motion was a self-sustaining process of development of the construction sector, which could grow independently of the growth rates of other sectors, and even of the rest of the national economy. On the other hand, this rehabilitation programme helped adjust the country’s internal services, facilities and infrastructure to the changing equilibrium between the rural and urban population. If per capita productivity increased, urban sectors and the urban population would grow faster than rural ones, and this fact had to be considered in a comprehensive development programme which took account of the evolving geographical distribution of the population and the structure of demand.4 The building sector was thus the hub of numerous linkages in Currie’s view of the developing process.5 This became clearer with his more ambitious plan for the development of the city of Bogotá.

Plans for Bogotá Although the Plan para Bogotá (Consejo Nacional de Planificación 1953) was published before the Barranquilla plan (Consejo Nacional de Planificación, Plan de fomento para el Atlántico, 1954), its implementation was subsequent to it. Yet the need to tackle Bogotá’s impetuous growth with planning tools dates back at least to 1946, when the Departamento del Plan Regulador was created, followed in 1948 by the Oficina del Plan Regulador de Bogotá. The urban plan In the previous ten years Bogotá had almost doubled its population – from 332,000 in 1938 to 567,000 in 1947 (Rovira 2000: 150) – but the only action to construct new settlements had been taken by the Instituto de Crédito Territorial, which entirely lacked a comprehensive urban development plan. The architecture journal Proa, founded in 1946 and well connected with members of the government, had campaigned for a new approach to the planning of Colombian cities based on European examples, suggesting that Le Corbusier should intervene in the Bogotá plan. In a Proa article entitled ‘Bogotá puede ser una ciudad moderna’, the model proposed for the Colombian capital was the Plan Macià, designed in 1933 by Le Corbusier and a group of Catalan architects, among whom was José Luis Sert (cited in Rovira 2000: 138). Owing to the Proa campaign, Le Corbusier was eventually invited to participate in the second phase proposed by the Oficina del Plan – the drafting of the Plan piloto – with Sert and Wiener involved in the information collecting phase, which partly overlapped with the IBRD mission. Le Corbusier’s Plan piloto was characterised by the rigid application of the CIAM principles set out in his 1946 book Manière de penser l’urbanisme (Le Corbusier 1946). Prominent among these principles was a hierarchical layout of roads – classified according to the ‘7 Vs’ rule’ (from regional motorways to pedestrian walkways) – which defined the new shape of Bogotá. This pattern

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became the main constraint with which Sert and Wiener had to cope during the elaboration of the subsequent Master Plan. This further and crucial step in the plan6 was a composite of essentially three well planned units: the neighbourhood unit, the sector or sub-city unit, and what can be called the whole city unit. Bogotá was divided into thirtyfive ‘sectors’ with populations varying between 35,000 and 70,000 inhabitants (Figure 10.5). This required a change of scale and complexity, compared with previous Latin American projects, and it was part of an attempt to replace the idea of a ‘functional city’ with an ‘organic’ one. The distribution of social and public services reflected the conceptual organisation of the three-unit framework. The neighbourhood unit level comprised primary social services – nursery and elementary schools, sports fields, shops, a library, a church, and a clinic – all at walking distance from residential sites. Provided at the sub-city level (or, in the case of Bogotá, at the ‘sector’ level) were services like secondary schools, museums, a concert hall, a theatre, a supermarket, and some decentralised town offices. Finally, the highest level was the symbolic and physical centre of the town: the town hall, the national parliament and government buildings, the main square, and the cathedral (Figure 10.6).7 The architecture of the neighbourhood units of Bogotá combined high-rise with low-rise housing (Figure 10.7) designed following the examples of the plans for Medellin and Cidade dos Motores. The old centre was still ‘the heart of the city’: the place served as the main expression of community life (Sert et al. 1952), but it assumed a radically different shape from the one originally intended by Le Corbusier, who wanted to redesign the city’s colonial structure with a series of high buildings and add a completely new, linear commercial district. The Bogotá plan thus highlights a contradiction between two different approaches: on the one hand, the late functionalism of Le Corbusier; on the other, the endeavour to create an organic city which progressively characterised Sert and Wiener’s work in Latin America. The two architects questioned the usual procedures of urban planning and extended analyses from a strictly architectonical perspective to include economic and social considerations, abandoning the schematism of the first project for Cidade dos Motores. The problem of land ownership, for example, always crucial in urban planning and often forgotten by CIAM members, became one of the determinants of the Bogotá plan. Green public areas reutilised land owned by the municipality to form a network of parks and pedestrian paths while preserving the natural topography. The control of land rents thus became a central concern of planning in order to achieve balanced urban growth. The building techniques were those used in Tumaco and Chimbote, which blended architectural drawings with vernacular solutions. The blending of architectural skills with local potential was indeed one of the main features of Sert and Wiener’s work in Latin America (Figure 10.8).

Figure 10.5 Bogotá plan, Colombia, 1949–53, overall map. Sert and Wiener defined an urban boundary separated from rural areas. The main feature of the plan is the realisation of a hierarchical road network. Source: Paul Lester Wiener Papers, Bx 155, Special Collections and University Archives, University of Oregon Libraries.

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Figure 10.6 Bogotá plan, map of the central area. A new pedestrian way links the administrative centre of Plaza Bolivar to a large park and leisure area: the existing blocks are transformed into a commercial axis. Source: Sert Collection, Frances Loeb Library, Harvard University, Cambridge, MA, courtesy of the Frances Loeb Library, Harvard Graduate School of Design.

Figure 10.7 Bogotá plan, layout of a neighbourhood unit. Sert and Wiener combined compact courtyard houses and high buildings to obtain a mixed architectural landscape. Source: Sert Collection, Frances Loeb Library, Harvard University, Cambridge, MA, courtesy of the Frances Loeb Library, Harvard Graduate School of Design.

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Figure 10.8 Bogotá plan, pre-cast houses under construction. Source: Paul Lester Wiener Papers, Bx 155, Special Collections and University Archives, University of Oregon Libraries.

The Plan para Bogotá In parallel with the urban plan, under elaboration was a more comprehensive development plan for the city of Bogotá directed by Lauchlin Currie and Enrique Peñalosa. The Plan para Bogotá (Consejo Nacional de Planificación 1953) drew on the experience acquired with the previous rehabilitation plan for the city of Barranquilla, but it was much more ambitious in its aims. In fact, it was intended to address ‘prácticamente todas las actividades del Municipio y de las entidades municipales’,8 besides administrative reorganisation, a financial plan, and the creation of a capital city district along the lines of the District of Columbia for the US capital.9 Notwithstanding great difficulties in obtaining data from the various public offices,10 the Plan provided a comprehensive framework for the analysis and organisation of basic services, the provision of which was growing increasingly difficult because of the city’s exceptional rate of population growth. The Plan, in fact, forecast more than 750,000 inhabitants for the year 1955: a growth of 250,000 units every five years (Consejo Nacional de Planificación 1953: 6). The most important public services were the delivery of potable water, the renewal, implementation, and extension of the sewerage and drainage systems,

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Figure 10.9 Bogotá plan, tram station under construction. This design had been usually adopted for roof-vault houses. Source: Paul Lester Wiener Papers, Bx 155, Special Collections and University Archives, University of Oregon Libraries.

and the supply of electricity. There was deep concern about the hygiene conditions of the population at large, a concern which obviously involved the already mentioned water and sewerage services but others as well: for example, the supply of milk and dairy products.11 The Consejo’s comprehensive plan was seen as strictly complementary to the town plan being prepared by Sert and Wiener. ‘Los dos planes juntos,’ the comprehensive plan’s preface stated, ‘proveen a un completo planeamiento de la ciudad futura’12 (Consejo Nacional de Planificación 1953: 3). The Consejo’s plan had a section specifically devoted to the urban plan, with explicit references to the work of Le Corbusier, Sert and Wiener. But the comprehensive plan also made recommendations concerning such aspects of city planning as road networks, public transport (Figure 10.9), parks, and relations between residential and public service buildings (markets and slaughterhouses, for example). The first step in linking the two plans was made by the architects, who – quite surprisingly – found out about the comprehensive plan only by accident. In March 1953 they wrote to Currie:

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Michele Alacevich and Andrea Costa Dear Mr Currie: Friends in Bogotá sent us a newspaper clipping which tells about your ‘Five Year Plan’ for Bogotá. We are very happy that you have undertaken this important and necessary work. We have been worried for years because we could not see how our Master Plan of Bogotá could be carried through without corresponding administrative, legislative and financial reorganisation. Our Master Plan for Bogotá is nearing completion. … We have been working for four (4) years on this Plan; the Pilot Plan, which has been approved several years ago, gave only general directives which are now being detailed along the lines of the program.13

This first contact yielded a very positive response. Currie, who felt he had been ‘very seriously handicapped’14 by the absence of a town plan, insisted that the two plans must be made consistent and co-ordinated, and asked if he could see the architects’ materials before their publication. Owing to the difficulty of sending materials that consisted mostly of very large drawings,15 it was decided that Currie would fly to New York to discuss the two plans with the architects at Town Planning Associates.16 In the meantime, presentation of the comprehensive plan prepared by Currie and Peñalosa for the Consejo would be delayed so that any suggestions made at the meeting could be incorporated into it.17 Currie’s prime concern regarding the co-ordination effort was the adequacy of the financial resources available for the many infrastructural interventions envisaged. Accordingly, he asked the two architects to provide an estimate of the financial commitment required by items of expenditure, such as street widening, new schools, paving and repaving, sewers and sewage treatment, office buildings, public markets, playing fields and public parks.18 However, besides these initial requests, Currie, Wiener and Sert discussed broader issues concerning the government of a rapidly growing city. The modular organisation into neighbourhood–sector–full city units proposed by the architects was a way to create a positive settlement pattern which would guarantee a good quality of life for the urban population at large, which was also the main concern of the comprehensive plan prepared by Currie for the Consejo (Consejo Nacional de Planificación 1953: ch. I). But Currie was sceptical of the rigid definition of a city boundary that the two architects had proposed as the basis for an operational plan regulating the local administration. He thought that it would not be enforced by the municipal authorities and would thus give rise to clandestine boroughs.19

Subsequent developments However, this promising start of a close collaboration was abruptly interrupted. ‘Unfortunately,’ Currie wrote to Sert and Wiener on June 15, ‘my trip was indefinitely postponed because of the sudden change in the government.’20

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Two days earlier, in fact, a military coup by general Rojas Pinilla overthrew the Colombian government led by Laureano Gómez Castro.21 Historical accident therefore prevented Currie and Sert and Wiener from continuing their collaboration. Nevertheless, the consistency of their analyses and proposals concerning urban issues is apparent in their subsequent work. Sert continued to work in Latin America until the end of 1950s, when he left the TPA, and as the CIAM – of which he had been president since 1947 – was entering its final phase. From Colombia he moved to Venezuela, where he designed the towns of Puerto Ordaz and Ciudad Piar, and the neighbourhood unit of Pomona, close to Maracaibo, and then to Cuba. The patterns that he applied in those projects were basically the same as those that he had defined in Peru and Colombia. The main difference concerned the customer, which was the Orinoco Mining Company – a US corporation – with little interest in realising the entire organic scheme drawn up by Sert. After 1959 he worked on other projects, redefining his ideas about city planning. The partial failure of Latin American plans – in many cases, implementation encountered numerous difficulties – induced him to develop, both in his academic teaching at Harvard and in his project work, a comprehensive approach that included planning, architecture and landscaping: the urban design. This new approach was in line with his conceptualisation of the ‘heart of the city’ presented to the seventh and eighth CIAM congresses (Sert et al. 1952), and was also a reaction against ‘the division and the specialisation of American work’ which made the diverse and separate branches of knowledge ‘lose sight of their essential aims to satisfy people’s needs’ (Rovira 2005: 162–63). It is possible to discern in these attempts the effects of the interdisciplinary linkages established by Sert in Latin America. City planning – in his view – was not only a matter of shape, and architecture could not be an autonomous discipline. Currie’s interest in urban design accompanied him throughout his professional life. He wrote many papers on the topic, and in 1974 he was invited by the secretary-general of the United Nations Habitat Secretariat – his old friend Enrique Peñalosa – to prepare a series of background papers for a UN conference which was to be held in 1976 in Vancouver, Canada (Sandilands 1990: 278).22 Currie attempted to give an economic foundation to a solution which closely resembled Sert’s ‘organic city’.23 From the point of view of the determination of value by market forces, it was easy to demonstrate that a limited supply of land, and a relative inelasticity of space to prices, resulted in the monopoly position of private owners of land and houses. This caused segregation of people among different city zones based on income, an inadequate presence of open spaces and playgrounds within city borders, and urban transport problems due to the daily migrations of people from residential areas to working areas. These problems were especially evident in less developed countries, with their huge slum areas. Although Currie’s first housing projects in Colombia relied on house rehabilitation programmes for low-income earners – as in the case of Barranquilla’s

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Zona Negra – he later opposed this ‘direct approach’ on the grounds that it led to very poor constructions, ill designed urban solutions (and thus failed to solve the problems it addressed) and excessively subsidised spending – and was thus not replicable. Currie stressed the need to ‘think in incremental terms’ (Currie 1981: 141), upgrading a country stock of houses and thus responding to demand by middle and high-income groups. This upgrading, if pursued at least at the same rate as new family units formed, would create a general upward shift in the quality of houses inhabited by every income group.24 Currie pointed out that, if this proposal was to be financially sustainable, it would have to be part of a framework of urban planning different from traditional urban design. Land property should remain in the hands of a publicly owned corporation in order to mitigate the negative effects of rent increases. Above all, residential, commercial, and services areas should be organised into self-sufficient nucleuses belonging to a broader metropolitan area. This was the so-called ‘cities within cities’ approach (Currie 1976). The modern city should acquire an archipelago structure, a mode of conceiving its further development which was at the foundation of both Sert’s and Currie’s views on urban growth.

Conclusion The analysis of the activities of urban planning by Sert and Wiener and by Currie, and their encounter in the case of Bogotá, have shed light on the transformation – or, better: the evolution – of their approaches. Furthermore, it has highlighted their convergence, and the need that both the architects and the economist felt for comparing their views, and for cross-fertilisation. That a coup d’état prevented the three from deepening their relation was a historical accident, but it is a fact that their subsequent reflections on urban planning for the following decades revealed the imprinting received during the Latin American experience in the late 1940s to early 1950s. The disciplines of development economics and urban planning have historically had a strong practitioner side. Perhaps today this is more apparent in urban studies than in development economics (it is even debatable that development economics still exists as a discipline), but after the Second World War, when the two disciplines focused for the first time on developing countries, this was indisputable. This, in our opinion, shows the importance of the historical reconstruction of the practices of urban and economic advising, beyond theoretical positions: only thus is it possible to understand how these disciplines evolved and how they built the shared knowledge that characterises them.

Acknowledgements We would like to thank Roger Sandilands for his very useful comments on a previous version of this chapter; the staff of the Rare Books, Manuscript, and

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Special Collection Library of Duke University, Durham, NC, for their very helpful and friendly assistance; the Special Collections and University Archives, University of Oregon Libraries, and particularly Ms Linda Long, for granting permission to use some images from the Paul Lester Wiener Papers; and the Frances Loeb Library at Harvard University, and particularly Ms Mary Daniels, for granting permission to use some images from the Sert collection.

Notes 1 This evolution has also been observed by Hyde (2008). 2 Lauchlin Currie, conference held in Panama, 1975, as reported in Sandilands (1990: 372). 3 For a more detailed description of this case, and the attempts to involve the International Bank in its implementation, see Alacevich (2005, 2009). 4 Currie’s opinion on the importance of the building sector and urban development never changed, but he subsequently altered his ideas on how to pursue the sustainable growth of the building sector. For a discussion see Sandilands (1990: 260–84). 5 Later, in the 1970s, Currie proposed his so-called ‘leading sector’ strategy, where urban housing was one potential candidate (Currie 1974). For a new interpretation of the ‘leading sector’ strategy, see Chandra (2006). 6 The first step was the survey conducted by Le Corbusier and Sert and Wiener; the second was the Plan piloto. 7 Sert derived this pattern from analysis of the medieval European city. 8 ‘Basically all the municipality’s activities and services’ (Lauchlin B. Currie to Jesús María Marulanda, President of the Consejo Nacional de Planificación, Junio 5, 1953, in Lauchlin Bernard Currie Papers, Rare Book, Manuscripts, and Special Collections Library, Duke University, henceforth LBCP). 9 In 1945 a constitutional law had already laid out that Bogotá should become a Special District, Acto legislativo 1 de 1945, Febrero 6, Riformatorio de la Constitución Nacional, http://calsegen01.alcaldiabogota.gov.co:7772/sisjur/normas/ Norma1.jsp?i=13470#0. 10 Lauchlin B. Currie to Rafael Delgado Barreneche, Junio 19, 1953, in LBCP. 11 Emilio Toro, President of the Consejo Nacional de Planificación, to Rodrigo Toro, March 24, 1953, in LBCP, and Manuel Briceño Pardo, Alcalde Mayor de Bogotá, to E. E. Stewart, President of the Dairy Product Corporation, April 10, 1953, in LBCP. 12 ‘The two plans, taken together, offer a thorough planning of the city to come’. 13 Paul Lester Wiener and José Luis Sert to Lauchlin B. Currie, March 12th, 1953, in LBCP. 14 Lauchlin B. Currie to Paul Lester Wiener and José Luis Sert, March 20, 1953, in LBCP. 15 Paul Lester Wiener and José Luis Sert to Lauchlin B. Currie, March 26th, 1953, in LBCP. 16 Lauchlin B. Currie to Jesús María Marulanda, President of the Consejo Nacional de Planificación, Junio 5, 1953, in LBCP; Manuel Briceño Pardo, Alcalde de Bogotá, to Jesús María Marulanda, Presidente del Consejo Nacional de Planificación, junio 6, de 1953, in LBCP; Lauchlin B. Currie to Paul Lester Weiner [sic], June 9, 1953, in LBCP; Jesús María Marulanda to Manuel Briceño Pardo, junio 10, 1953, in LBCP; Lauchlin B. Currie to Señores Miembros del Consejo Nacional de Planificación, junio 11, 1953, in LBCP. 17 Lauchlin B. Currie to Paul Lester Wiener and José Luis Sert, May 18, 1953, in LBCP.

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18 Lauchlin B. Currie to Paul Lester Wiener and José Luis Sert, June 15, 1953, in LBCP. 19 Currie added, ‘your idea is better if it could be enforced, but I’m satisfied it won’t be’ (Lauchlin B. Currie to Paul Lester Wiener and José Luis Sert, June 15, 1953, in LBCP). 20 Lauchlin B. Currie to Paul Lester Wiener and José Luis Sert, June 15, 1953, in LBCP. 21 Currie collaborated with the Consejo until his mandate concluded – at the end of the year – and then retired to private life. 22 Currie eventually worked up these papers into his book Taming the Megalopolis (1976). For a summary of Currie’s ideas see also Currie (1981). 23 And also probably very close to the contents of an unfinished book by Sert, whose revealing title was to be Balanced Habitat (Rovira 2005: 167). 24 Currie compared this kind of upward mobility to the automobile market in the United States. The continuous upgrading of cars by well-off people creates a large and organised used car market which enables poorer income groups to purchase cars of a quality they would otherwise be unable to afford (Currie 1981: 142). We are grateful to Roger Sandilands, who brought this to our attention.

Part V

Economics and geography

11 ‘Space’ in economic thought Giovanna Vertova

While political economy has dealt with international capitalism since the beginning of the discipline, the concept of global capitalism is of more recent origin. There is a primary difference between the two. International capitalism has been conceptualised in terms of nation-states. The focus was mainly on the way national capitalism, based on competing national economies and working through national companies, operated across borders. Form Smith’s The Wealth of Nations to Keynes’s General Theory space has been conceptualised mainly in political terms: space is a territory over which the state has some kind of political power. By contrast, global capitalism deals with a global economy dominated by globalising corporations. These conceptual changes have been accompanied by some real transformations of the world economy, impacting on the way production is organised in space. Since the crisis of the so-called ‘Fordist–Keynesian’ era, political, economic and social changes have affected all geographical scales – notably international, national and local – and a new international division of labour has been brought about. Just after the Second World War, it was common to split the world into great areas, the core, the semi-periphery and the periphery (Myrdal 1957; Wallerstein 1979). Nowadays, the world is a more complex and kaleidoscopic structure, involving the fragmentation of many production processes and their geographical relocation. The world economy can be represented as a system of prosperous polarised regional economies, surrounded by hinterland, ancillary communities, prosperous agricultural zones, and underdeveloped areas. At the international level, the last thirty years have been characterised by an increasing number of integration agreements, with the aim of setting up discriminatory trade liberalisation in order to lower trade barriers against one another vis-à-vis the rest of the world. The main consequence has been to bring about changes to the landscape of contemporary capitalism, by creating spaces where the exchange of goods, services and people is simplified, but also by raising barriers against the excluded countries and/or areas. At a national level, some claim the ‘death of the nation-state’ and the exaltation of the ‘borderless economy’, thus believing that state borders are increasingly permeable and no longer contain those distinctive institutions and practices which used

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to characterise them (Ohmae 1995). Others remark that the role of the nation-state is still relevant and important, albeit altered, thus leading to distinct national capitalisms (Weiss 1998). At a local level, the new technological paradigm has led to a more flexible form of production. It is now possible to reduce the scale of production and, at the same time, maintain technological efficiency. More important, the production chain of a single product has increasingly become an international linked sequence of functions in which each stage, most of the time geographically relocated, adds value to final goods or services. The ‘post-Fordism’ era has begun. Some believe that this form of organisation, based on smaller organisational units, is a new characteristic of the current phase of capitalist development (Piore and Sabel 1984). Others remark that less rigid and smaller-scale production methods have always coexisted with mass-production methods, because this is the way capitalism develops (Harrison 1997). The transformations of the world economy have shaped and reshaped the global map, with major impacts on people and places. Nevertheless, globalisation is a very questionable phenomenon. A ‘globalisation debate’ has been going on for some time, with two sets of opponents: those who consider contemporary globalisation as a real and significant new phenomenon (Ohmae 1995, Dicken 2003) and those who believe that globalisation is just an ideological and mythical construction with marginal explanatory power (Hirst and Thompson 1996, Held and McGrow 2000). In order to understand the current phase of capitalist development it is crucial to see how space is conceptualised. This chapter aims to critically review the current literature dealing with space, with a ‘bottom up’ approach. All current theoretical approaches, related to space and other spatial economic issues, acknowledge to be indebted to previous theoretical traditions. The New Economic Geography refers back to the Weberian agglomeration economies, the industrial district literature to the Marshallian external economies of scale, the Marxist economist geographers to the Marxian historical materialism. The different conceptualisation of space is linked to different ways of thinking about the economy, which means to different traditions of political economy. I therefore discuss the different approaches in order to test how they are able to deal with the differentiation of the ‘qualities’ of productive resources, techniques, means of production and labour power, as something structural and essential in capitalist accumulation. This internal drive to a differentiation of the methods of production is inevitably rooted in space and deeply affects the local dimension and its history, with the ascent and decline of entire economic regions. The next two sections illustrate how the two main neoclassical currents, stemming from Walras and Marhsall, deal with (or elude) the topic. The fourth section describes the alternative Marxian approach, starting with Harvey’s re-reading and developments. The fifth section sketches a comparative discussion among the various schools and the final section concludes.

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The Walrasian-based approaches Many times in his work Krugman (1991a, 1998; see also Fujita and Krugman 2004), the principal founder of the New Economic Geography, refers back to the German location school as the theoretical tradition from which to start when investigating spatial economic issues. Since the German location school has its roots in Walras’s general equilibrium, it is necessary to go back to it in order to understand the specific features of the New Economic Geography. Walras’s (1874) general economic equilibrium theory presents the relations of a one-point economy and the conditions for its equilibrium. The underlying assumptions – i.e. zero transport costs, perfect mobility of capital and labour, uniform technical conditions, no local differences in supply and demand and the principle of ‘pure’ competition – are meaningful only when considering an economic system abstracting from space as well as time. During the first half of the twentieth century, the German location school introduced space in terms of transport costs within the Walrasian theoretical framework. At that time, after the industrial revolution was well established and the development of rail transport, energy and communications provided more options for distributing firms across space, the problem of location of industries was particularly relevant. Weber (1909) was the first economist to develop a general theory of industrial location, with the aim to explain and, moreover, predict the location pattern of industries. His highly mathematical model takes into account three main spatial factors: the cost of distance, based on transport costs among the locations of raw materials, the factory, and the final market; labour distortions, due to lower labour costs; and agglomeration (deglomeration) forces, inducing firms to concentrate into (move away from) the optimal location. All these three sets of elements contribute to determining the optimal location. Weber’s model works under five assumptions: (1) isotropic space, meaning a uniform topography, climate, technology, and economic system; (2) finished products, shipped to single markets; (3) fixed raw materials and markets in a certain location; (4) geographically fixed labour in unlimited quantities; (5) transport costs as a function of weight of the item and the distance shipped. With these assumptions, Weber could create the ‘locational triangle’, thus giving the solution to the system: the point of optimum location is where transport costs are at the minimum. As an exception to this general rule, firms can locate in a different place when the advantage of lower labour costs or agglomeration (deglomeration) economies offset those of minimum transport costs. Weber concludes by identifying transport costs as crucial factors influencing firms’ decision to locate, together with labour costs and agglomeration (deglomeration) economies as distorting elements. Weber’s work paved the way for the treatment of space in terms of transport costs and geographical distance, and the idea that location is a mathematical problem that can be solved with proper assumptions and tools. Along these lines, Lösch (1944) elaborated a theory of location valid for independent producers and consumers, for agriculture as well as industry, hence a universal

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model. Each producer or consumer is represented by a set of co-ordinates and their boundaries are described in equation form. A system of equations determines the equilibrium pattern of location of n units (i.e. independent producers) producing m products. The regional economy is given by a system of mathematical equations, whose solution presents the hexagon as the perfect shape for the market. Christaller (1933) developed his central place theory to explain how urban settlements evolve and are spaced out in relation to each other. His model is explained using geometrical shapes, such as hexagons and triangles, and location is assumed to be placed in a Euclidean and isotropic space. A central place is therefore a settlement that serves the surrounding area with goods and services. Under the assumptions that all goods and services are purchased by consumers from the nearby central place, that demands on all central places in a plain are similar, and that none of the central places makes excess profits, a hierarchical arrangement of settlements of hexagonal shape will emerge. The model, therefore, predicts the hexagon as the optimal shape of markets. Yet, in this case too, predictions may change according to local factors, such as climate, topography, past developments, technological improvements and preferences of consumers and suppliers. Isard (1956, 1960) attempts to integrate classic and contemporary location theory with the well developed theories of price, production and trade. The pattern of analysis involves the economic principles of substitution – substitution between transport, land, labour and capital inputs, under conditions of point-formed demand or point-formed supply – and that of ‘transport inputs’ to determine the location of any transport-oriented business firm – since there are no differences between the various types of economic activities, because they all compete for space and must contend with the distance factor. Isard’s equilibrium model is the result of the application of game theory to abstractly defined regions. All these approaches share the same unrealistic assumptions necessary to make their models work and give the equations a solution: a uniform plain region with a uniform distribution of raw materials, a uniform transport surface, a uniform distribution of population, uniform tastes and preferences, uniform technical knowledge and uniform production opportunities. The geographical dimension is related only to the choice of the optimum localisation of production activities, and space can be considered only in physical terms (i.e. geographical distance and transport costs). Technology is exogenous and consumer sovereignty rules. The problem is, therefore, to identify the ‘best’ distribution of productive activities across space and the ‘right’ settlement to minimise costs. The only problem is, therefore, the ‘efficient’ and ‘rational’ allocation of resources, relative to the ‘natural’ aim of the satisfaction of needs. Most of these authors were aware of the lack of realism of their assumptions. Weber (1909: ch. V, section III) breaks through the limitations of such artificial assumptions in a section entitled ‘Reintroducing the realities’. Lösch (1954: ch. II, section B15) did the same in a small section entitled ‘Economic regions in reality’. Isard (1956: 264–65), commenting on his diagrams and

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figures, remarks that they ‘pertain to a situation which abstracts from interest conflicts, undercutting and retaliation, advertising strategies, collusive action, market encroachment, and similar phenomena characteristic of firm behavior’. Moreover, in order to give a description closer to reality, most authors introduce some kind of externalities and distorting elements (i.e. agglomeration economies, different labour costs), which, however, do not change the general framework. In more recent years, the inessentiality of money, time and space has been considered as a serious limitation by the same authors working within the general equilibrium. The inter-temporal formulation à la Arrow–Debreu (Arrow and Debreu 1954; Debreu 1959) was an attempt to overcame the neglect of time and space. Walras’s model was, thus, extended to a sequence of periods by assuming the existence of complete markets and perfect forecasting. Commodities can be distinguished not only according to their product characteristics and the moment they are available, but also by the place where they are available and the state of nature. In this way, both time and space are considered but ‘neutralised’. The model is also framed so that present and future co-ordination is guaranteed, and there is no uncertainty. At the same time, other internal limitations of the basic foundations of neoclassical theory have been stressed. I refer to the discovery that the general equilibrium approach, even in its inter-temporal formulation, is globally unstable, with multiple equilibria, and the very existence of equilibrium occurs only under specific and restrictive conditions. All these problems pushed forward a revision of the model in neoclassical theory. The Walrasian world is no longer something that can be immediately applied to the analysis of ‘real’ economies (as, however, some neo-Walrasians still think). Instead, it is seen simply as a solution to an intellectual problem: finding out the conditions needed for ‘coherence’ in a social setting in which individual economic agents are ‘dissociated’ and ‘opportunistic’; or the way a perfectly competitive market may give rise to ‘order’ and ‘equilibrium’, rather than chaos. The fact that the solution to this intellectual problem gives rise to a world where money, time and space are ‘inessential’ is not to be considered as a ‘failure’ of the theory. Instead, it asks researchers to define those minimal changes in the basic hypothesis which have to be introduced so that money, time and space ‘matter’. Several attempts have been made along these lines. I just want to recall the most important one: the impossibility of economic agents foreseeing all future states of nature. Once neoclassical theory is open to ‘imperfections’, others can be taken into account: exogenous shocks, increasing returns, market failures, and imperfect and asymmetric distribution of information. We are here on the terrain of the New Economic Geography. Krugman (1991a, 1991b, 1995) thinks that increasing returns, economies of scale and imperfect competition depict the real world better than constant returns, perfect competition and comparative advantage. Moreover, these increasing returns, created by technological and pecuniary externalities, arise through a process of regional and local agglomeration (Krugman 1991b). Thus, it is necessary to understand

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increasing returns in order to understand trade, and it is necessary to study regional concentration and agglomeration in order to understand increasing returns (Krugman 1993). Local clustering is due to centripetal agglomeration forces, such as labour market pooling, technological spillovers and intermediate goods supply and demand, while dispersion is due to product-market and factor-market competition, working as countervailing centrifugal forces (Krugman and Venables 1994). The key determinants, in pushing towards either dispersion or concentration, are transport costs and labour mobility. The forces of spatial agglomeration overcome those of spatial dispersion when transport costs are lower; on the other hand, the forces of dispersion prevail when labour is more immobile (Krugman 1991a, b; Krugman and Venables 1996). Moreover, in many cities firms discover, accidentally, the benefit of being located close to other firms engaging in similar types of operations, and a process of clustering spontaneously emerges (Krugman 1996, Fujita et al. 1999). Once the agglomeration process has exogenously started, it is possible to assess its cumulative evolution over time, its mechanisms of adjustment and adaptation, its new equilibrium. History, geography and even policy can definitely have a decisive role in the process. Yet the more complex representation of the rise and decline of industrial concentration does not modify what remains in substance a ‘static’ approach. Clusters of firms, technological poles and urban systems are evident signs of the presence of increasing returns to scale. The analytical framework is, however, still a mechanical one, where imperfections are just what the name suggests: a mere ‘deviation’ from the ideal world where economic agents have the same power, the same position in the market, the same information. In other words, perfect equilibrium is again the reference point on which, ideally, the system is judged and must tend. As a consequence, policy has the task of correcting that deviation, and accelerating convergence. The current theoretical situation is then reached. Even though theoretically weak on many fundamental grounds, and even though within an individualistic and unhistorical method, the neoclassical paradigm of general equilibrium has shown itself to be so eclectic and greedy as to be able to deal with the very many ‘complications’ of reality, giving room also to the ‘local’ dimension. Here differentiation (among firms, sectors, and also geographical areas) appears as something theoretically marginal, and fortuitous. Yet this random accident is what explains the structure of economic regions, organisations and territories in their actual and concrete history.

Marshallian-based approaches This section deals with the literature that claims to have Marshallian roots based on the concept of external economies of scale. For Marshall (1890) the firm is a tree within the forest which is the industry. In the industry, the cluster of firms produces a sufficiently homogeneous commodity so that it is possible to construct a demand curve for it. Industry is, therefore, the organisational

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form of ‘perfect’ competition, without which the formation and determination of price cannot be theoretically constructed. Each tree has its own life, characterised by different moments such as birth, development, decay and death. Yet the forest continues to exist nearby individual trees: it is not their simple sum and it survives even when the single unit of production, the small firm, disappears. The decay and death of firms is vital to the preservation of perfect competition, otherwise firms would grow larger and larger, and perfect competition would transform into monopoly. In the Walrasian system, there is no intermediate agent between the firm and the economic system as a whole. In the Marshallian one, it does exist and it is the industry. The distinction between industry and firm enables Marshall to distinguish between ‘internal’ and ‘external’ economies. It is not a task of the present work to criticise the vagueness of Marshall’s definition of industry, or to discuss the difficulties in separating internal from external economies. Instead, I want to stress one point: Marshall’s intuition becomes important when two aspects, missing in the Walrasian approach, are taken into consideration. The first one is the fact that industry sets itself as a systemic ‘fact’. The second is that this element is intermediate between the micro level of the firm and the macro level. Starting from the Marshallian concepts of ‘industry’ and ‘external economies’, Becattini (1979) develops the notion of the ‘industrial district’ as the better unit of analysis in industrial economics. Becattini (1990: 38) defines the district as ‘a socio-territorial entity which is characterized by the active presence of both a community of people and a population of firms in one naturally and historically bounded area’. This definition includes economic as well as sociological elements: the ‘population of firms’ must exist within a ‘community of people’. Moreover, the definition brings in two new elements. First, the firm is never alone and the collectivity of firms captures more attention than their individuality. District firms are highly specialised in one or few phases of the production process leading to the creation of the ‘district commodity’ – which is a representative commodity making the district distinguishable from others. Firms are necessarily linked to one another, thus giving the district the characteristics of a typical flexible production system (Piore and Sabel 1984). Second, the ‘community of people’ is set as the creator and maintainer of a homogeneous system of values, which enables the reduction of transaction costs and opportunistic behaviour thanks to the high level of trust among the agents. These sociological features create a sense of belonging to the local industrial community, thus boosting local economic growth. Consequently, the importance of Marshallian external economies of scale is enhanced by the strong and trustworthy relationship among all agents. At the very beginning, this literature concentrated on the Italian districts, since a group of economists started researching the ‘Third Italy’ as a different model of economic growth occurring in Italy during the 1970s (Bagnasco 1977; Becattini 1979, 1987, 1989; Brusco 1982, 1990). Some stylised facts about Italian districts were then found (Goodman et al. 1989; Pyke et al. 1990): (1) a strong tendency to specialise in traditional sectors, because they

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were derived historically from craft and artisan production; (2) a flexible production system, which enables firms to reorganise production quickly in order to meet new demand; (3) small urban dimensions, since they develop around small cities or even villages; (4) an important role played by family ties and trust, with particular importance given to personal relations which create a sense of belonging to the local community and a trustworthy business climate; (5) high social mobility due to a very flexible labour market, which makes it possible to develop a continuum of job positions, from home-based work to part-time wage to self-employment to entrepreneur; (6) political homogeneity based on political subcultures, dating back to the beginning of the previous century (i.e. the socialist orientation of the central regions and the Catholic orientation of the north-east). The Italian rediscovery of the Marshallian industrial district opened the way to a stream of literature showing that districts can take a variety of forms (Markusen 1996), can exist also in other parts of Italy (Silva and Viesti 1989; Garofoli 2002) as well as in other countries (Schmitz and Musyck 1994; Christerson and Lever-Tracy 1997; Hashimoto and Kobayashi 1998; Rabelotti and Schmitz 1999; Molina-Morales and Martinez-Fernandez 2004) and in other sectors, including high-tech ones (Storper 1993; Saxenian 1994). In the ensuing literature about industrial districts the focus is on co-operation among firms rather than on mere competition, on the network spread across the territory rather than on concentration and increasing scale, on the quality of labour rather than on its cost, on participation rather than on conflict. The belonging to a shared (not only industrial) history and to the same (not only productive) community becomes, at the same time, a competitive asset as well as a barrier to entry. Along the same Marshallian lines, the GREMI group1 developed the milieau innovateur approach with the aim of investigating the innovative activities and capacity of some places (Aydalot 1986; Camagni 1991). In analysing the relationship between technology and space, the GREMI group focused attention on the local environment as a ‘unit’ encompassing both firm and technology. The milieu is considered as an ‘incubator’ of innovation and innovative firms, where the single firm is just one of the many players involved in the innovation process. Indeed, only the milieu seems able to innovate, while firms do not play an active role in the innovation process. The milieu determines the innovative behaviour of firms to the point where it is not the firm that is innovative but the territory. Hence, new technological paradigms and trajectories are defined by the milieu, which is the depository of local knowhow, skills, competence and experience specific to a particular territory. Therefore, rather than on individual learning, the focus is on collective learning that firms realise through interactions, which are thus given great emphasis. They are considered more important then the availability of local factors and resources. Non-market interactions, as well as personal relationships, create local synergies that turn out to be a more powerful explanation of innovation and, consequently, of local growth (Maillat 1995). This idea of

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territory is evidently quite different from that of standard industrial economics, where industries come first and create the territory. In this approach, industry and space are ontologically equal, as the territory has a twofold interrelated nature: on the one hand, it is the result of innovative processes; on the other, it performs different collective tasks in order to foster innovation. After these two pioneering approaches, new literature came into life with the aim of explaining local growth by merging together the Marshallian approach based on external economies of scale, with the neo-Schumpeterian evolutionary approach to innovation and technological change (Nelson and Winter 1982). I am referring to the literature about the regional system of innovation (Braczyk et al. 1998; Cooke 2001), the local systems of innovation (Breschi and Lissoni 2001a, b; Torre 2006), innovative districts (Cainelli and de Liso 2005; Muscio 2006). In this literature, complementarities among firms, spillovers and externalities are all at the core of the picture. Technology and firm dimension go hand in hand with other advantages which may generate a ‘stratification’ due to the concentration of professional skills, the presence of specialised suppliers, and the facility to access information and to diffuse knowledge. To conclude, the merit of all these approaches is to reject the idea of the firm as an isolated entity with a maximising behaviour and, instead, consider it as ‘embedded’ in its territory. Yet this is also one of their drawbacks: to focus too much on the ‘space’ outside the firm, without considering what happens inside (Leoncini et al. 2006). In all these traditions, firms are rooted in their territory through the industrial atmosphere created by relations and networks established with other firms, institutions and organisations in the same geographical area. Social aspects (Granovetter 1985) as well as institutional (Hodgson 1999) become crucial for the explanation of a firm’s behaviour, because they both are territorially rooted and sources of external economies. Consequently, space is no longer considered in Euclidean terms, but in relational terms. The distance which matters is not only geographical but mainly economic, social, cultural and institutional. This literature has led to abundant descriptions of particular situations (e.g Bagella and Becchetti 2000; Paniccia 2002; Belussi et al. 2003). Yet they have not produced a radical break with the mainstream, and appear to fall in the same shortcomings of the neoclassical tradition. Market-driven capitalist competition is, once again, seen as economically and socially beneficial: the main difference is that there is now a richer (and less individualistic) sociological definition of the actors, which are now the territories with their own idiosyncratic assets making that particular place economically unique. Places compete among themselves, and the best-endowed ones will survive. Moreover, the role of state and local authorities is very often limited to either the correction of market imperfections or the creation of proper ‘factors’ which are believed to sustain local growth. Yet some deeper perplexities cannot be passed over. To start with, history roots these local systems of production in some long-run evolutionary process, thus making their ‘building’ in different

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places impossible. Second, it is difficult to consider those approaches to industrial and territorial organisation the ‘whole’ rather than just partial elements which can work and prosper only under particular conditions and macroeconomic policy. Finally, the co-operative and harmonious view of the relationship between firms and other social actors they put at the centre of their analysis seems too idyllic.

The Marxian-based approaches Marxian-based approaches believe in the Marxian analysis of capitalist systems. In contrast to the non-monetary general equilibrium of the neoclassicals, the basic model here is the cycle of money capital as described by Marx (1885) in the second volume of Kapital. The capitalist process is illustrated as a circular sequence sparked off by money capital, leading to the production of more money. Value and surplus value are nothing but the monetary expression of the abstract labour ‘congealed’ in commodities. The production of (surplus) value presupposes a social and physical ‘infrastructure’, which encompasses the legal system, the education system, the state administration, and a particular configuration of transport, environment and cities. The capitalist economy as a production of (more) money by means of money can be reduced neither to a stationary economy, where the surplus value is entirely consumed (‘simple reproduction’), nor to a ‘balanced’ proportional growth of the system, with the different branches growing at the same rate. Following Marx, accumulation must, rather, be seen as an uneven process where: 1 The extraction of surplus value comes from a lengthening of the social working day beyond the point where the living labour of wage workers reproduces the value represented in the wage bill. 2 Technical progress is endogenously driven by the necessity to extract living labour from a potentially conflictual labour power. 3 Capitalist competition is not expressed only by the ‘homogenising’ tendency among industries, due to the mobility of capital, which leads to an equalisation of the profit rate on the money capital advanced. It is also, and even more fundamentally, the struggle among firms within industries for extra surplus value (and extra profits), which is the origin of an unending ‘differentiation’ and ‘stratification’ of units of production of different quality. It leaps to the eye that such a vision of the capitalist system is opposed in every single element to the neoclassical theory. The capitalist process is characterised as an economic system where access to money (as capital) is the privilege of one class. The relations of production are antagonistic, and the determination of wages is conflictual. The introduction of innovations is internally forced by a permanent fight to obtain extra profit and ensure survival. Competition is not an ‘ideal goal’ but the leading force driving the system.

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The Marxian starting point has significant consequences. Capitalist development is a process inherently ‘out of equilibrium’, generating instability from within. This instability periodically appears during crises which, at the same time, express and solve the inner contradictions of the system. Investments and innovations become embodied in methods of production that use more elements of constant capital (means of production, raw materials, etc.) and expel living labour from production. Marxist economic geographers put ‘space’ at the core of a re-reading of the capitalist process as uneven development (Peet 1977; Harvey 1975, 1982; Massey 1984; Smith 1984; Storper and Walker 1989; Swyngedouw 2000). They believe that each mode of production creates distinct spatial arrangements, and that a succession of modes of production alters landscape in any give space. The reason is that, under the abstract dictatorship of intra-capitalist competition, capital must expand continuously, and also geographically, stalking the earth in search of higher profits. Therefore, space can be understood in terms of the historical articulation of several modes of production. Space becomes a social product because each mode of production produces its own space. The idea is not how the economy is reflected in space but, on the contrary, how the economy arranges the political, cultural and social organisation of space. If the Marxian inquiry about capital accumulation mainly stresses the realm of the ‘abstract’ and ‘universal’, the consideration of geographical dimensions opens to the realm of ‘concrete’ and the ‘particular’ through which valorisation necessarily must pass. The capitalist system has a pathological expansionistic logic because capital needs to expand to new markets in order to obtain profits. Therefore, capital accumulation has a distinctive spatial dimension. Yet space is not only an opportunity to invest. The exploitation of labour power, technical change, and the production of commodities is not possible without a coherent territorial structure, a so-called ‘spatial fix’ (Harvey 1981). Labour power can be controlled and organised, and the subsistence level of wages can be defined, only within a ‘region’. Moreover, within a ‘region’, infrastructures and fixed social capital are needed in order to enable and, when necessary, to limit the mobility of capital and labour power. Furthermore, newly local patterns and improvements in transport and communication technology are an inevitable and necessary part of capital accumulation. In fact, the increasing scale of production and the concentration and centralisation of capital have been matched by urban agglomeration in a widening international capitalist space. Yet the collapse of spatial barriers does not imply a decreasing significance of space. On the contrary, diminishing spatial barriers give capitalists the power to exploit spatial differentiation. Local availability of material resources, local variations of market taste, local differences in entrepreneurial ability, venture capital, scientific and technical knowhow, local differences in social attitudes and local labour markets consequently become sources of competitive advantage. The publication of Harvey’s Limits to Capital (1982) marked a major event in the development of Marxist geographical theory. The book elaborates the

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theoretical foundations for a historical-geographical materialism, thus providing a solid conceptual base in a systematic way and going beyond the occasional remarks we find in Marx’s work. Harvey’s book sparked off a stream of empirical works. Some concentrate on the spatial division of labour, with the aim to set the changing geography of industry and employment within the wider context of the development of capitalist society (Clapp and Massey 1983; O’Keefe 1983; Shakow and Graham 1983). Among these, Massey (1984) explores the geography of industry and jobs through an interpretation of the spatial organisation of the social relations of capitalist production within the United Kingdom space-economy of the 1960s. The focus is on the relation among industrial organisation, the geography of occupational structure, and their particular geographical distributions. Other empirical works focus on the geographical consequences of industrial restructuring (Peet 1986; Labrianidis 1987; Holmes 1988; Sandberg and Bradbury 1988). Among these, Storper and Walker (1989) attempt to unify geographical and territorial industrialisation in a single explanatory framework, in order to study what they call ‘the macrogeography of capitalist economies’. The attention is here concentrated on three main features of uneven capitalist development: territorial expansion, continuing differentiation among places, and instability of the relations between places. Industries keep moving due to the dynamism of capitalism development. Differences in industry growth paths are due to technology and the organisation of labour. Moreover, each wave of industrialisation brings into existence new centres and peripheries, stimulating disinvestment in some areas and radical restructuring in others, thus reshuffling spatial production relations. Other empirical studies pay attention to uneven development as the spatial form taken by the geography of capital accumulation (Amin 1973; Carney 1973; Breathnach 1988). Uneven development is the general rule rather than the exception and it is intrinsic to capitalist development. Its source is related to the spatial division of labour, which is the product of competition between capitalists and which perpetually divides places, as much as firms and people, on the basis of their ability to differentiate their systems of production from those of their neighbours and competitors. Therefore uneven development is at the heart of the capitalist development, enhancing the wealth of some places at the expense of others. Within this theoretical framework, the capitalist contradiction becomes the dialectic between the spatial, concrete ‘rootedness’ of capital, on the one hand, and the unlimited expansion of abstract wealth on the other. At a given point in time, labour, production, innovation and finance can occur only within a limited space, and on the basis of infrastructure with a certain degree of fixity resulting from political and state intervention. Furthermore, a geographical dimension can also be found in the way capitalism answers the recurrent tendency to crises. ‘External’ markets, capital ‘exports’, ‘regional’ alliances, competition among territories are all part of the history of the cyclical dynamics of capitalist accumulation. Through time, the continuous revolutionary changes due to capital accumulation put those spatial and regional configurations under

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pressure and create tensions. The state must intervene by enhancing the constitution, stability or dissolution of regional spaces. Nevertheless, it can never eliminate the tendency towards crises within the capitalist system of production.

A comparative discussion In this section I compare the theoretical approaches previously presented in order to cast some light on their difference and similarities in the conceptualisation of ‘space’ and other spatial economic issues. I am well aware that this survey is not exhaustive. Nevertheless, I think that the main current of the approaches dealing with space are here represented. By tracing back their inner roots in different traditions of political economy, I think this survey is different from previous ones. There are works comparing Krugman’s New Economic Geography with Marxian-based economic geography (Martin 1999; Marchionni 2004; Hudson 2006); others just review Marshallian-based approaches by themselves (Gay and Picard 2001; Moulaert and Sekia 2003). Here, on the contrary, the comparison is made among all approaches according to their roots in different theoretical traditions of political economy. The first important difference among these approaches is about the concept of space. The Walrasian-based approaches see space only in geometrical terms: space is given by the geometrical distance between two points (i.e. locations). In this way it is possible to transform immediately the concept of space into mathematical formulation, thus solving the equations and obtaining the solution. The Marshallian-based approaches consider space more in relational terms. Space is, thus, given by all market and non-market relationships which firms can create among themselves and with other agents located in the same geographical areas. Therefore, transport costs may be offset by some kinds of external economies, making more economic sense to locate in a specific place. Also Krugman (1991b) speaks about external economies, such as pecuniary as well as technological externalities, as distorting forces from the optimal location. In this case, the distinction between Walrasian- and Marshallian-based approaches has become quite blurred. Both speak about ‘technological externalities’ and information and knowledge ‘spillovers’ as element to be taken into consideration. The only difference is that for the Walrasian-based approaches these elements are imperfections to be considered in order to calculate the point of equilibrium, while for the Marshallian-based traditions they are the reason for the impossibility of reaching a general equilibrium and switching to more partial analyses. The Marxianbased approaches consider space as a social construction, because the organisation of production needs a ‘spatial fix’ (Harvey 1981). These approaches theorise that each aspect of social life has a particular relation with space, and each mode of production creates distinct spatial arrangements. Any social form can be understood in terms of the historical articulation of several modes of production, which means in terms of the combinations of economic, political, institutional, and ideological system. The idea is not how economy

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reflects into space, but how the economy arranges the political, cultural, and social organisation of space. The unit of analysis is a second difference. Completely in accordance with the general economic equilibrium, the Walrasian-based approaches deal with the single firm and attempt to solve the problem of the optimum firm’s location choice. Individualist methodology is at the core of this analysis and the single firm is the representative agent. The many ‘complications’ of reality (historical and institutional factors, path dependence, social issues, firms’ size, dimension and specialisation, and so on and so forth) are included in the models only when they can be properly formalised in mathematical terms. The main aim is to find the firm’s optimal location as a point along a linear economy. The Marshallian-based approaches still deal with the firm but, in this case, not the single firm but firms within a district, a milieu, a local system of production. The single firm’s choice is important only in relation to other firms, belonging to the same industry, district or local system. Therefore, their relationships are at the core of the picture. In this case, the economic agent is enriched with its history, nationality, specialisation, dimension and relations with other agents. These approaches do not attempt to find an equilibrium but some stylised facts, deriving from the analysis of many empirical cases. The Marxian-based approaches have a class perspective in mind. The capitalist economy is characterised by two classes – capital and labour – in constant conflict. Capitalists attempt to exploit labour power and technology in order to extract surplus value. Yet this exploitation is not possible without a coherent territorial structure, because labour power must be controlled and organised, infrastructures must be created, institutions must be encouraging. Therefore, space is a social construction resulting from the conflict between capitalists’ attempt to extract surplus value and labourers’ resistance. Geographical expansion in spaces where labour costs are lower, and labour conditions less favourable to the working class, enable capitalists to extract more surplus value. Consequently, class struggle is at the core of this constant reorganisation of production in space. The third important different is about behaviour. Despite living in a world of increasing returns, economies of scale and imperfect competition, the Walrasian-based approaches work with maximising behaviour. The economic agent – the single firm – is supposed to have all the information it needs to make the calculation of the optimal location. After knowing the geographical distance among the locations of inputs and demands, after taking into consideration all possible external economies, after balancing the costs and benefits given by all other location factors, the single firm should be able to make the proper decision about where to open a plant. Imperfect information is allowed, but it is always mathematically calculable through probabilistic assumptions. If the ‘state of the art’ is not perfectly known, it can be at least probabilistically known and, consequently, the single firm is able to find out where the most suitable location to set up a plant is. In the Marshallian-based approaches, firms have a more satisfying behaviour. Rationality is bounded,

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due to the fact that too many ‘complications’ should be taken into consideration in order to make an optimal decision. When a firm has to decide where to locate a plant, it has to look also at all institutional, sociological, political, relational issues, representing the territorial characteristics of a location. Therefore, the complexity of reality leads to both substantial limits – a firm will never obtain all information needed to make an optimal choice – and procedural limits – also assuming that the firm has all information it needs, it might not be able to process it promptly. A firm can only take into consideration some limited amount of information and decide accordingly. The result cannot but be satisfying, instead of optimal. In the Marxian-based approaches, firms’ behaviour is considered as a whole, as the behaviour of the capitalist class. Capitalists have an endogenous tendency towards the extraction of surplus value. Dynamic competition among capitalists is the reason for this tendency, because, in order to survive, each single capitalist has to do better than his/her competitors. Yet the result of the single capitalist’s behaviour is that the capitalist class as a whole is driven by the tendency to extract surplus value. And this has strong spatial consequences. Capitalists organise and reorganise production in space, exploiting spatial differences among territories. Local availability of material sources, local variations in market tastes, local differences in entrepreneurial ability, venture capital, scientific and technical know-how, local differences in social attitudes and local labour markets become sources of competitive advantage. In this way the quest for profits shapes geographical landscapes. The way labour is considered is the source of another important difference. In line with the neoclassical tradition, the Walrasian-based approaches think of labour only as a cost of production. Therefore it has to be reduced, and the best location is where this ‘input’ costs least. Again, everything is expressed in mathematical terms and labour costs are treated in the same way other costs are. There is no difference among labour costs, the costs of raw materials or the costs of other inputs. In order to maximise profits a firm must produce where labour costs are at their minimum. By contrast, in the Marshallian-base approaches, labour is considered as a human resource to be valorised. The quality of labour is a source of differentiation among territories and, at the same time, is the result of this differentiation. Since labour is less mobile than capital, the quality of labour is very likely to be the result of local institutions and local policies. At the same time, differences in labour quality are important in order to attract investment and new firms, thus leading to new differences in labour quality due to local learning processes. Therefore, localness is, contemporaneously, the source of differences in labour quality and the result of it. The Marxian-based approach considers labour power as the only source of value (and, consequently, profits) in the capitalist economy. Therefore, labour power must be organised in space, for the extraction of surplus value. Since labour power is ‘attached’ to a human being, this latter may resist capitalists’ control with conflict and struggle, which, in turn, may lead capitalists to move away from a certain location to a new one. Class struggle, together with the search for profits, are crucial sources of the shaping and reshaping of the geographies of capitalism.

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Conclusion This chapter shows that the conceptualisation of space and dealing with spatial issues is strictly related to the kind of economic theory in question. It is clear that thinking of the economy in a certain way leads to a certain conceptualisation of space. The best way to see this is by looking at the globalisation debate and the answers given by the different approaches here reviewed to the uneven development of the world economy. There is no doubt that the role of space has been undermined by worldwide processes, leading to uneven development at the global scale: some places are richer than others. Obviously, the explanations of these geographical differences are related to the way ‘economy’ and ‘space’ are theorised. The Walrasian-based approaches, together with the neoclassical growth theory (Solow 1956, 1957), believe that this concentration of economic activities is either a short-term phenomenon or the result of market imperfections. In the first case, economic growth will be broaden everywhere by the simple operations of market forces, which, in turn, will lead to homogenisation of space, without any kind of state intervention. In the second case, state intervention is limited to the removal of market imperfections, in order to permit market forces to spread growth evenly everywhere in the world. The Marshallianbased approaches believe that global space is characterised by strong and increasing differentiation among localities and territories, as a result of the relationships firms form with local organisations and institutions. Social, economic, political and institutional relations characterise the space where firms and their networks operate. Localness becomes a fundamental source of competitiveness in the global economy. The ability of a territory to succeed and compete is due to its local assets. ‘Glocal’ – think globally but act locally – has become the new key word, suggesting that global competition can be won by relying more heavily on local capacity, expertise and competences. The Marxian-based approaches believe that capital accumulation has a dynamic and inevitably expansionary logic, because capital needs to expand to new markets in order to obtain profits. Newly local patterns and improvements of transport and communication technology are an inevitable and necessary part of capital accumulation. In fact, the increasing scale of production and the concentration and centralisation of capital have been matched with urban agglomeration in a widening international capitalist space. Yet the collapse of spatial barriers has not implied the decreasing significance of space. On the contrary, the diminishing of spatial barriers gives capitalists the power to exploit spatial differentiation. Local labour markets, local availability of material sources, local variations in market tastes, local differences in entrepreneurial ability, venture capital, scientific and technical know-how, local differences in social attitudes, become sources of competitive advantage. Uneven development is, therefore, the general rule rather than the exception, and it is intrinsic to capitalist development and not just a temporary out-ofequilibrium situation or the result of market failures. The source of uneven

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development is related to the spatial division of labour, which is the product of competition between capitalists and which perpetually divides places, as much as enterprises and people, on the basis of their ability to differentiate their systems of production from those of their neighbours and competitors. This chapter shows that the spatial issue can be dealt with in different ways, according to the different economic theories in question. Moreover, the debate about spatial issues is often related to the debate about the underlying economic theories, thus leading to an intellectual conflict among different schools. Unfortunately, this debate does not encompass all schools. One the one side, the Walrasian-based approaches so strongly resist confronting other traditions as to be accused of economic imperialism (Marchionni 2006; Mäki and Marchionni 2007). By contrast, there is a more open mind between the two other traditions. Antipode, the radical journal of geography, hosted an interesting debate about the economic theory underlying economic geography, opened by an intervention by Amin and Thrift (2000). The authors remark that economic geography is at a critical turning point: it should renounce its dependence on ‘mainstream’ economics in favour of more heterodox, socially and culturally based ‘economic knowledge’ because these latter offer more incisive insights and are also a growing influence in policy circles. There were many reactions to this challenge and they all share the idea that throwing out ‘economics’ in order to turn to more ‘cultural’ explanations may have serious limitations (Martin and Sunley 2001; Perrons 2001; Sayer 2001). Nevertheless, a debate about different interpretive frameworks with the use of different methods of analysis and empirical studies has occurred. Along similar lines, other debates were opened in Regional Studies by Markusen (1999) with a challenging article denouncing the fuzzy conceptualisation, scanty evidence and policy distance of regional analysis. In this case too there were many responses, some of them sympathetic (Hudson 2003), others unconvinced (Peck 2003; Lagendijk 2003). To sum up, different approaches to space reflect different economic theory in mind and this should be taken into consideration. Therefore, in order to deal with spatial issues, it is crucial to decide which economic theory is more attractive to each of us and which is definitely not acceptable. Nevertheless, it is important to engage in theoretical contention in order to improve our understanding of the geographies of capitalism development.

Acknowledgements The author would like to acknowledge the financial support of grant 2006112945_003 PRIN (Inter-university Research Programme, funded by the Italian Ministry of Universities), entitled ‘New Frontiers in Marxian Theory: the Role of Value-form and Space in the Critique of Political Economy’.

Note 1 GREMI stands for Groupe de recherche européen sur les milieux innovateurs.

12 Economics, geography and colonialism in the writings of William Petty Hugh Goodacre

Introduction The consolidation of economics as an academic discipline is commonly associated with the crystallisation of a formalistic, ‘marginal’ methodology out of the discursive literature of classical political economy. Yet this was only the final phase in a long process stretching back to medieval, and even ancient, times, a process in which ideas now identified as economic were formulated in inseparable connection with branches of inquiry which were subsequently to become located within other social science disciplines. The relation of economics and geography in Western thought provides a prime example of the common roots of the different social sciences: in ancient times, that most economically-minded writer, Xenophon, was at the same time arguably its most geographically conscious as well; the topics of economics and geography were, in medieval times, both classed within the same disciplina, namely rhetoric; and when, in the early modern period, the demand arose for an education of a more practical and less doctrinal aspect, a notable response from within the scholastic system was the expansion of the rhetoric syllabus to accommodate more material of topical geographical, and inevitably also economic, interest (see Dainville 1940). An example of the enthusiasm with which this educational innovation was received is provided by the English writer William Petty, best known as a founding father of English political economy, who singles out the study of geography as first on the list of motives which prompted him to undertake his further education (PP Vol. II: 2461). Indeed, it has long been recognised that Petty’s writings provide ample illustration of the inextricably linked trajectory of early modern geographical and economic ideas. It is over a century, for example, since his editor commented that ‘Petty’s thought exhibits much affinity’ with that of Von Thünen, the acknowledged pioneer of spatial economics (Hull 1899: lxv). Since that time, a number of historians of economic thought have drawn attention to what they perceive as Petty’s anticipation of the concept of locational rent (for references see below), and some have even declared that the roots of Petty’s economic methodology as a whole lie in his experience as a land surveyor (see, for example, McNally 1988: 46–48, Poovey 1994: 20–32, Poovey

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1998: ch. 3 and Wood 2002: 161). But though a small specialist literature exists on the spatial-economic analysis of Cantillon, Steuart and Smith (Hébert 1981; Beckmann 1981; Stull 1986; Fernández López 2002), it appears that there has hitherto been only one systematic attempt from within the economics discipline to draw attention to the relevance of Petty’s writings to the intellectual ancestry of modern spatial-economic analysis (Pinto 1997). This neglect contrasts with the substantial interest shown by a number of French authors, who, from within the neighbouring fields of geography and demography, have generated a whole literature on the spatial-economic dimension of Petty’s thought – a literature which has yet to gain currency in the Englishspeaking world (see, in particular, Goblet 1930, Dockès 1969: 132–57 and Reungoat 2004: 121–34). There was indeed ample reason why Petty should display acute consciousness of the spatial dimension of socio-economic activity, since it was he who supervised the most extensive land survey of his time, the celebrated ‘Down Survey’ of Ireland. In what follows, the spatial aspect of Petty’s economic thought will be placed in the context of this biographical background, showing how this context, and in particular its bureaucratic-military and predatory colonialist aspects, drew him ineluctably towards ever greater confidence in his notorious scheme to transfer the bulk of the population of Ireland into England, in connection with which he drew together strands of economic and geographical thought that remain intertwined till today, most notably in the marginalist sub-discipline of spatial economics. William Petty (1623–87) and his survey of Ireland The peak of Petty’s official career came when, quite early in life, he served in Cromwell’s army of occupation in Ireland in the 1650s, initially as its Physician-in-Chief, from which position he moved on to become responsible for the survey of land expropriated from the Irish (see Goodacre 2005b for references to the primary and secondary literature). This expropriation was a central element of the programme of punitive measures proclaimed by the English parliamentary authorities against the people of that country, following its rebellion against colonial rule in the preceding decade. The initial plan was for mass executions of Irish ‘rebels’ – defined sufficiently broadly to include the great majority of all adult Irish males – as well as deportations and enslavements, and the complete ‘transplantation’ of the remaining Irish population from three of the country’s four provinces to a kind of reservation in the west, largely in the province of Connaught. This last measure has been described as a scheme for the creation of an ‘immense concentration camp’ (Goblet 1930 Vol. I: 74, writing at a time when this term referred to British policy in the Boer War of 1899–1902). Though, as it transpired, neither the planned executions nor the ‘transplantation’ to Connaught were carried out on the massive scale initially envisaged, the expropriation and distribution of land went ahead, and, in this process, Petty’s role was of pivotal importance:

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not only did the army of occupation assign to him the crucial task of surveying the expropriated land, but he subsequently also became centrally involved in the process of actually distributing it to the occupying forces and other English beneficiaries. The collapse of the Cromwellian regime and the ensuing restoration of England’s monarchy in 1660 left Petty without an official position. Nevertheless, to the end of his days he never relinquished the ambition of relaunching his career on the high-flying course it had taken under Cromwell, and to that end he concocted a seemingly endless series of policy proposals for fiscal reform and related issues, in the vain hope that they might be entrusted to him. One of these schemes was a kind of reversal of the Cromwellian ‘transplantation’ policy – a scheme to transfer the bulk of the Irish population not westwards to Connaught but eastwards into England. The logic behind this scheme was quintessentially spatial-economic, embodying as it did his view that the key to economic advance was compactness of population, a view which he derived from his observations of Holland, which was, in his time, not only Europe’s most densely populated country, but also its most economically advanced. Petty also pointed out that his scheme would have the concomitant benefit of putting an end to Ireland’s independent national life and anti-colonial traditions, since it would make it possible for the Irish to be ‘transmuted into English’, not only through their dispersion but also through a programme of state-sponsored intermarriage. The outcome would accordingly be a ‘perpetual settlement’ (or, in the term used by his editor in 1899, a ‘final solution’) that could at last ‘cut up the roots of those evils’ which ‘have made Ireland, for the most part, a diminution and a burthen, not an advantage, to England’ (TI: 551, 546 editorial comment, 558 §5). It was in his final work, his Treatise of Ireland, with its extensive calculations of the balance of this ‘burthen’ and ‘advantage’, in other words costs and benefits, that he advanced the most elaborate example of his ‘political arithmetic’, which was in turn the forerunner of all subsequent quantitative economics. ‘Terms of measure’ Almost every historian of early modern economic thought has highlighted Petty’s commitment to expressing economic relationships in quantitative terms – in his own words, ‘to express myself in terms of number, weight, or measure’ (PA: 244). However, it does not seem to have been noted that his use of the terms ‘weight’ and ‘measure’ had, in his time, a literal significance that would have been immediately evident to his readers: ‘terms of weight’ were a characteristic feature of the newly expanding body of quantitative information on economic subjects, particularly on imports and exports, while, more important in the present context, ‘terms of measure’ would undoubtedly have been taken to refer specifically to the measurement of physical space. Petty wrote at a time when the demand of English landowners for estate and county maps, as well as local information generally, had been steadily

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increasing for nearly a century, and there was now, in addition, both a demand for, and an increasing supply of, the equivalent aggregate information at national level. One particularly relevant example, which exemplified the provision of information in terms of ‘number, weight or measure’ was a ‘kind of yearbook’ (Aspromourgos 1996: 55) published from 1669 onwards, Edward Chamberlayne’s Present State of England. Not only does Petty refer to this work in his own writings (PA: 284, 308), but there are also connections of a more direct kind: Petty’s work, the Political Anatomy of Ireland, appears to have been originally designed as a companion volume to this publication, whose 1683 issue includes the whole of his Political Arithmetic as a supplement (see PAI: 122 f., editorial comment, and Keynes 1971: 21–22). The specifically spatial reference of the term ‘measure’ is vividly illustrated in Petty’s attempts to convey a suitably awesome impression of the enormous scale of his survey of Ireland. To this end, he expresses the distance ‘measured by the chain and needle’ in terms of multiples of the earth’s circumference; this distance was equivalent, he claims, to ‘the measuring of as much land-line as would have near four times begirt the whole earth at its greatest circle’, a multiple which he subsequently revises upwards to ‘near five times’, ‘above five times’, ‘near six times’, and finally ‘eight times’ – a progression which has aptly been described as ‘Falstaffian’, after Shakespeare’s character whose tales similarly grew in the telling (Reflections: 12; BA: xvii; Fitzmaurice 1895: 314; PP Vol. I: 104; TI: 614 f.; Strauss 1954: 151; see also Andrews 1985: 80 and 69 n. 67). Petty’s pervasive use of units of spatial measurement in relation to different categories of economic activity is seen in its most explicit form in his discussions of the agrarian economy, both internally and in its relation to the economic influence of London. The measurements he suggests take the form of an assortment of radii, circumferences, and areas (square, circular and ‘oval’), but they are all readily reducible, for comparison, to terms of radius. The perspective this reveals is now familiar, in the field of agrarian history, in studies of market areas (see Everitt 1967: 496–502 and Goodacre 1994: 21–34) – a perspective in which each spatial measurement or unit is associated with a particular economic category, concept or function. To use the jargon of the economic geography of today, Petty’s units of analysis are not ‘scale-independent’. For example, the parish, though obviously, in the first instance, a unit of ecclesiastical administration, is frequently identified by Petty with the range of transactions within the subsistence economy, the terms ‘parish’ and ‘village’ being effectively used interchangeably in this context. He consequently sees the optimal dimensions as being the same in both cases: the ideal organisation of parishes should be such that ‘none need go two miles to church’, while he discusses the agrarian economy at base level (whether in terms of the parish or the village) as consisting of ‘people living within a market day’s journey’, which suggests much the same optimal range of around two miles, or, at any rate, less than about five, given that allowance must normally be made for porterage (i.e. carriage by foot), as well as time for transactions.

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A substantial cash sale, in contrast, has a range of anything up to ten miles. The optimal range for tax collection is the intermediate distance of five miles – longer than that of the subsistence economy, since transport of goods is not involved, while, at the same time, short enough to allow for a return journey within a day. This latter concept, once again, forms the basis for a definition – a person’s ‘country’ (TTC: 11; PAI: 180; TTC: 35 §15.10; VS: 116; PP Vol. I: 209 §6; see also Goblet 1930 Vol. II: 260 f.). It is not only at the base level of the agrarian economy that Petty provides his categories of economic analysis with such explicit spatial specification; he also traces the various grids and sub-grids of economic activity all the way up to the metropolis, London, once again specifying each of them in terms of scale-specific economic (and in this case military) considerations. For example, he considers that the defence of London can be secured by a wall of twelve miles in circumference (later expanded to around twenty miles), which would be adequate, he remarks, evidently with an eye to siege conditions, ‘to plant necessary garden stuffe [for] food, milk and cows’. Outside this zone, London’s impact on grain prices may extend for a considerable distance, which he clearly assumes to be considerably more than twenty, and on one occasion specifies as forty, miles. He also speculates on a hypothetical situation in which London’s population is increased sevenfold; in that case, he calculates, its agricultural provisions could be grown within a radius of thirty-five miles (PP Vol. I: 30 §10, 32 §6; TTC: 51 f. §13, 48 §5; PAL: 471 §2.) Petty’s experience as a land surveyor and cartographer is thus revealed in the most explicit way throughout his economic writings, giving them a pervasively spatial-economic character. Indeed, the payment of a map maker according to the extent of land mapped constitutes the purest and most elementary form of the transformation of spatial into economic categories. In this transaction, the act of summation of the extent of land measured is identical with the act of drawing up an account of payment due for work performed; thus, the tabular listings which Petty provides of the land he surveyed are, simultaneously, both geographical and accounting documents, a dual nature which is reflected in the term he uses to describe them – ‘accounts of lands admeasured’ (DS: 137–53, 143). Furthermore, the fact that the allotments of Irish land to the Cromwellian soldiery were in lieu of pay was, in a sense, the beginning of his lifelong quest for ‘a par and equation between lands and labour’ (as long since noted by Hull 1899: lxxi, discussing PAI: 181). Thus, it was second nature for Petty to perceive monetary units as identically interchangeable with units of the measurement of land, and to equate these, in turn, with units of labour; in other words, from his point of view, the fundamental categories of economic life could be immediately correlated with those of spatial measurement. To emphasise the formative influence of Petty’s survey of Ireland on his approach to spatial-economic analysis is not to deny that other intellectual influences were also at work in this connection. His medical training was evidently one such influence, and indeed not necessarily unconnected, since

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‘economic geography easily lends itself to the metaphor of anatomy/body’ (Aspromourgos 2001: 15 and 22 n. 12), a theme which is the subject of a steadily expanding literature within the field of economic geography today. Furthermore, his call for the Irish to be ‘transmuted into English’ has been shown to rely on terminology and concepts drawn from early modern chemistry (McCormick 2006, 2007). Besides these wider influences, Petty’s involvement with the promotion of experimentation by the Royal Society is also reflected in more immediate and practical ways in his spatial-economic analysis, as will be seen in the case of his approach to the mechanics of transport. But, while medical, mathematical, technological and mechanical influences gave form and character to Petty’s spatial-economic analysis, it was, undoubtedly, above all his survey of Ireland which first set him on his lifelong course of ‘grounding his economic and political theories on the facts of the map’ (Lynam 1932: 418).

Petty and the spatial-economic analysis of rent A prime example of Petty’s spatial-economic analysis is a frequently cited passage concerning rent and the value of land. He divides the value of land into two components, ‘intrinsic’ and ‘extrinsic’. The ‘intrinsic’ value, by which he indicates, in the first instance, its fertility, could, he suggests, be established by a massive land survey of England, which he proposes in terms which leave no doubt as to whom he regards as the best qualified candidate to be appointed as supremo of such a project. As for the ‘extrinsic’ value, this includes, most notably, the premium upon ‘lands intrinsically alike near populous places, such as where the perimeter of the area that feeds them is great’ (TTC: 49 §6). His most elaborate discussion of this issue relates to the ‘the shires of Essex, Kent, Surrey, Middlesex and Hertford next circumjacent to London’ (ibid.: 51 f. §13–16). ‘Provisions,’ he states with respect to this five-county area, ‘must be cheaper or dearer as the way to London was more or less long, or rather more or less chargeable.’ He then extends the discussion to embrace a further area lying beyond the five ‘circumjacent’ counties, and suggests that if the five-county area ‘did already produce as much commodity as by all endeavour was possible, then what is wanting must be brought from afar, and that which is near advanced in price accordingly’. There is, however, an alternative to such importation, which is to increase the productivity of the land within the fivecounty area itself by means of ‘improvements’; he gives a list of these, all of which are achieved ‘by greater labour than now is used’ (‘digging instead of ploughing’, etc.), and states that ‘then will the rent be as much more advanced as the excess of increase exceeds that of the labour’. He concludes that ‘the touchstone to try whether it be better to use those improvements or not is to examine whether the labour of fetching these things even from the places where they grow wild, or with less culture, be not less than that of the said improvements’.

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Petty’s formulation of the issues he here addresses is somewhat ungainly, and is not susceptible to expression in consistent formal terms. However, he certainly provides a kind of ‘primeval soup’, to which all subsequent theories concerning rent and location can with justification trace at least some elements of their conceptual ancestry. Indeed, this passage and its equivalents elsewhere in his writings have received considerable attention in precisely such terms: Petty has been seen, for example, as the originator of the concept of ‘locational rent’ (Dockès 1969: 141, rente de situation; Routh 1975: 36; Hueckel 1986: 62 n. 33; Kurz and Salvadori 2000: 36). He has similarly been credited with anticipating the overlapping concept of differential rent (Beer 1938: 171; Desai 1967: 61; Roll 1938: 106 f.; Aspromourgos 1996: 161 f.), the concept of the extensive margin (Whittaker 1960: 59 f.), or a combination of these in the form of ‘a localisation of differential rents’ (Aspromourgos 1996: 192 n. 29).

From Petty to Von Thünen and beyond In considering Petty’s discussion of the effect upon agricultural rent of distance from a central town, we have arrived at the archetypal topic of spatial economics, for this same issue is precisely the starting point of Von Thünen’s seminal work of 1826, The Isolated State. The celebrated opening paragraph of that work posits an isolated town supplied by a surrounding agricultural area, with land rents reaching their maximum nearest the centre, where the most perishable crops, or those with the highest transport costs, are grown, and declining to zero at the outermost limit of cultivation. The outcome is that the agricultural landscape is configured in a pattern of concentric rings, each devoted to a particular crop or range of crops (Von Thünen 1826: 1; for a fuller account, see Blaug 1962: 614–17). The unrivalled profile enjoyed by Von Thünen’s ‘model’ in accounts of the history of spatial economics has resulted in the idea that the origins of the subdiscipline lie in a kind of primal bifurcation in economic theory: on the one hand, it is suggested, there developed an ‘Anglo-Saxon’ tradition of economics which, from Ricardo onwards, despatialised its analysis in favour of an exclusive focus on issues susceptible to definition in terms of time (interest, credit, and so on); on the other hand, there developed a ‘Germanic’ tradition, beginning with Von Thünen, which, conversely, detemporalised its analysis and focused on issues susceptible to definition in terms of physical space. This version of theoretical history apparently originates in the work of Walter Isard (see, in particular, Isard 1956: 24–27), the pioneer of the attempt to revive spatial-economic analysis in the ‘Anglo-Saxon’ world and founder of the discipline of ‘regional studies’, who famously criticised the marginalist tradition in its ‘Anglo-Saxon’ form for having created a ‘wonderland of no dimensions’ (Isard 1949: 28). This perspective on the history of spatial economics achieved dominance among the economic orthodoxy (see, for example, Ohta and Thisse 1993, and, for more nuanced versions, Blaug 1979 and 1962: 614–31),

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and remains implicitly endorsed by Paul Krugman, who, however, adds an extra leg to the narrative by claiming that the German theories were ‘lost’ until ‘rescued’ as a result of the ‘increasing returns revolution’ in economics (see Krugman 1995: 34; Fujita and Venables 1999: 25–26). By thus eliding the history of spatial-economic analysis before Von Thünen, spatial economists are able to locate the theoretical origins of their subdiscipline entirely within the marginalist tradition. For Von Thünen’s theory may justly claim to be the first economic theory to be framed in marginalist terms, an assessment confirmed by no less an authority than Marshall, who states: ‘The term ‘marginal’ increment I borrowed from Von Thünen’ – in other words not, as might have been expected, from Jevons or other early marginalist writers in the post-Ricardian ‘Anglo-Saxon’ tradition, but from the original ‘Germanic’ spatial economist (Marshall 1890: x n.), as noted by Hall in his editorial introduction to Von Thünen 1826: xi). This seminal position of Von Thünen’s theory in the emergence of marginalist economics helps to explain the effortless manner in which it is commonly resolved into neoclassical terms by spatial economists, for this amounts to no more than marginalism reclaiming its own. In one account, for example, his theory is credited with a complete set of neoclassical initial assumptions: ‘both producers and consumers have perfect knowledge and act perfectly rationally … [and] behave in an optimal fashion’, to assure ‘maximisation of profits’ and ‘to minimise their outgoings in meeting their consumption needs’ (Dicken and Lloyd 1990: 17 f., 61–67). In the same vein, other accounts credit the theory with illustrating ‘the simultaneous determination of goods and factor prices’, ‘the ability of markets to achieve efficient outcomes’, interpolating further such anachronistic terms as ‘unplanned competition’ and ‘perceived self-interest’, until, eventually, the theory is hailed as a classic example of how to model unintended outcomes in the economy based on convincing microfoundations, or, to use Krugman’s favoured expression, a model of ‘micromotives and macro-behaviour’ (Krugman 1995: 53, 77, 1996: 10–12; Fujita and Venables 1999: 16, 15–18, 133 f.; Krugman 1998: 7, borrowing his expression from the title of a 1978 book by Schelling.) This retrospective incorporation of Von Thünen into the theoretical heritage of the orthodoxy has the effect of obscuring what is actually new in his theory. For, as has now been seen, its innovative features do not lie in raising new questions, introducing new explanatory factors, or drawing new conclusions, for in all these respects he had in fact long been anticipated by the ‘Anglo-Saxon’ William Petty; indeed, if there had been no Von Thünen, it is possible to imagine that, in tracing the history of spatial economics back to its roots, we might now be making do with Petty’s ‘circumjacent’ counties round London as an alternative ‘brand name’ (a term used by Krugman 1995: 37, discussing Blaug 1962 [1985]: 618–23). (Actually Smith, who had meanwhile further developed these ideas, would have served this purpose better than Petty, and Steuart even better still; see Stull 1986 [1993] and Beckmann 1981.) Rather, what is actually new in Von Thünen’s theory is that,

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even without the formalistic makeover it receives in today’s neoclassical expositions, it is already predicated upon an unprecedented degree of abstraction in its mode of analysis. Von Thünen’s abstraction of spatial and economic categories stands out particularly clearly when compared with the approach of Petty, whose ideas are expressed in terms of immediate, or ‘real’, places and activities – London, Middlesex and other named counties, ‘digging instead of ploughing’, and so on. In total contrast, Von Thünen emphatically abstracts the economic relationships in question from all such concrete reference, positing a featureless ‘town’ surrounded by an equally featureless ‘plain’, with constant fertility, constant transport costs, and so on. Spatial economists use the term ‘isotropic’ to denote such featurelessness – a term which is, significantly, borrowed from physics and chemistry, not from geography. Thus abstracted from any concrete historical, geographical or empirical reference, spatial economics, ‘as conceived by [Von] Thünen, was deductive and abstract in its very foundations’ (Blaug 1979: 23; see also ibid. 28 f.). This process of conceptual abstraction by no means came to an end with Von Thünen. Further stages in the process may be illustrated by comparing his original diagram of agricultural rings, which still bears signs of its origin in the map, with the increasingly schematised graphical representations in subsequent editions of his work, and the yet more abstract diagrams in the work of later writers, culminating in the ‘rent cone’ of more recent spatial-economics. In short, Von Thünen’s spatial-economic analysis marked both the beginning of a new era in economic theory and also the culmination of a previous one. On the one hand, his theory did indeed provide the starting point for a process of further conceptual abstraction – a process which was to culminate in Paul Krugman’s marginalist ‘new economic geography’ (for a critical account of which see Goodacre 2005a). On the other hand, the fundamental categories of spatial-economic analysis upon which Von Thünen draws were not generated within the marginalist tradition of economics pioneered by him, as hitherto widely assumed, but already had, as illustrated in the writings of Petty, a long and revealing pre-marginalist history.

The spatial-economic logic of Petty’s final scheme The logic of Petty’s spatial-economic analysis led him inexorably towards ever greater conviction in the potential benefits of his scheme to transfer the population of Ireland into England. This process may best be explained by placing that logic in apposition to what Krugman identifies as the central concern of his ‘new economic geography’ – the ‘three-way interaction between increasing returns, transport costs, and factor mobility’ (Fujita and Venables 1999: xi). To begin, then, with the concept of increasing returns, this is, of course, deployed by Krugman in a formalistic and mathematical manner that has no

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parallel in pre-marginalist economic thought. Nevertheless, Petty’s discussions of the advantages of the spatial agglomeration of economic activity, or ‘living compactly’, to use his own term (PA: 300 §8), clearly address the same range of issues. On many occasions, he explicitly associates the advantages of economies of scale, division of labour, and technological improvement with towns, or at any rate with compactness of population. These issues are, characteristically, raised in an immediate and concrete form, often being embodied in the advantages of Holland (see in particular ibid.: 255–58), sometimes in implicit contrast with the sparseness of population density in Ireland, these two countries representing, for him, ‘polar cases’ (Aspromourgos 1996: 189 n. 2.3) with respect to the effects of, respectively, compact and dispersed population. The second element of Krugman’s ‘three-way interaction’ is transport costs, a topic which was of direct interest to Petty, both in his practical activities and in his writings. His practical involvement ranged from the experimental construction of ships with twin hulls to the design of luxury wheeled vehicles, while in his writings he discusses a variety of practical and experimental issues in transport technology and mechanics, along with numerous other topical transport issues of his day. When it comes to the third element of Krugman’s ‘three-way interaction’, factor mobility, this is effectively reduced by Petty to the issue of labour mobility alone, since that other mobile factor, capital, was as yet very imperfectly conceptualised in his writings, being represented largely by valuable personal belongings; indeed, today’s authority on Petty’s value theory regards him as displaying ‘no systematic conception of capital and profitability’ (Aspromourgos 1996: 40 f., 1998: 197). The idea that labour could be perceived as mobile, or rather transferable, was nevertheless inseparable from the initial stages of – or at least the preconditions for – capitalist development, epitomising as it did the decline of the feudal order, in which the labouring population had been perceived as effectively an adjunct to the land. Having thus placed some outstanding characteristics of Petty’s spatialeconomic analysis in broad apposition to the ‘three-way interaction between increasing returns, transport costs, and factor mobility’, the spatial-economic logic of his final scheme can be addressed in a more systematic manner, as a project to compact the population and thereby to increase the benefits of spatial agglomeration – or, in terms more akin to his own concrete mode of thought, to create another Holland in England. Compactness, defined as the overcoming of the obstacles of distance, cannot, of course, be reduced to the issue of physical distance alone; on the contrary, precisely equivalent economic advantages may be gained by reducing the mileage cost of transport, either by improvement of the means of conveyance or improvement of transport routes. As for means of conveyance, much of the transport in the early modern agrarian economy was by porterage, packhorsing, and, in the case of livestock, droving. None of these escapes Petty’s relentless theorising: he discusses, for example, the biomechanics of human motion, or ‘man in his motion or

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gression’ (PP Vol. II: 34); he addresses issues of packhorsing in some of his discussions of mechanical experimentation (see, for example, PA: 249 f.); and he effectively assumes that the cost of the droving of livestock is zero, or even, in the case of a horse, negative, since ‘an horse is such a commodity as will carry both himself and his merchant to the market’ (TTC: 31 §41). Clearly, however, none of these means of conveyance was susceptible to any substantial improvement, and his more systematic attention to improvements in conveyance was directed towards inland navigation vessels – largely as an extension of his far closer involvement in maritime ship design – and, to a lesser extent, wheeled vehicles. (See, for example, DB: 5–6, 44–45, 103; PP Vol. II: 147–51, and ELC.) As for the improvement of transport routes, Petty repeatedly calls for ‘employing our idle hands about mending the highways, making bridges, causeways and rivers navigable’ (Petty TTC: 42 §11, also 20). Indeed, the prominence which he gives, in his discussions of fiscal priorities, to improvement of the inland waterway network has led one commentator to include him among the pioneers of the ‘canal lobby’ which was to motivate the large-scale canal-building projects of the following century (Willan 1936: 28–51, 39 f.). Despite the attention they have received, however, Petty’s calls for the improvement of inland navigation routes lack the elaboration and specific detail of his more enthusiastic policy proposals. This halfheartedness may perhaps reflect a conflation of this issue with the closely related subject of the advantages of Holland, bringing the whole question, in his eyes, almost entirely into the sphere of physical geography. For his calls for the improvement of inland waterways must surely have been encouraged, if not inspired, by Holland’s ‘rivers, dikes, bridges, wharves, cranes, carriage’ (PP Vol. II: 186), and however much that country’s average distance to water transport was reduced by the artificial means included in that list, its initial low value is clearly a natural endowment. The advantages of the dense inland waterway network enjoyed by Holland, which Petty contrasts with the case of inland France, leads him to place great emphasis on the limits set to transport cost minimisation by natural constraints. Thus, he divides the ‘impediments to a country’s greatness’ into the two categories of ‘contingent and removable’ and ‘natural and perpetual’ (PA: 247, 278, 298 (headings to chs 3 and 5)). Some transport issues, such as a country’s average distance to the coast, clearly fall into the latter category (for Petty’s suggested means of calculating such an average, see ibid.: 293 and, for discussion, Goblet 1930 Vol. II: 318–22 and Willan 1936: 5). However, even the ‘contingent and removable’ category evidently seemed to Petty to offer little possibility of a medium-term, let alone a short-run, impact on the overall transport cost minimisation problem, despite the fact that, at one time or another, all possible means of such minimisation received his attention. An alternative to transport cost minimisation as a means of compacting a country’s economy and society is to raise its population through increased fertility, a topic in which Petty displays considerable interest (see, for example,

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PP Vol. II: 47–58 and, for relevant discussion, Furniss 1920; Riley 1985: ch. 3; Finkelstein 2000: 122–24 and 305 nn. 113–25; Reungoat 2004: part 4). However, such ‘multiplication’ of the population, to use Petty’s term, is clearly, like the improvement of transport routes, a long-term measure at best. It was in this way that the entire logic of Petty’s spatial-economic analysis drew him steadily towards what, thus, appeared as a comparatively short cut to achieving the goal of compactness – the transfer into England of the bulk of the population of Ireland, to which, as his enthusiasm for the project gathered strength, he added the population of the Highlands of Scotland for good measure. At first, he pondered his scheme merely as a ‘reverie’ (PA: 285) but in the final years of his life he advanced it in the form of an elaborate policy proposal which he, at least, considered to be plausible; indeed, on at least one occasion, he managed to gain an audience with the monarch, in a vain attempt to arouse enthusiasm for the scheme at the highest level (see editors’ notes to TI: 547 and PP Vol. I: 46). In an extensive two-volume work on Petty’s contribution to ‘political geography’ published in 1930 the French geographer Yann Morvran Goblet describes the spatial-economic logic underlying Petty’s scheme in the following terms: Petty, who was, at the same time, both economist and geographer, and a precursor of anthropogeography as much as of political economy, recognised that the constant obstruction placed by nature in the way of the development and efficiency of human activity is distance. And, since he sees no practical mechanical means to lessen the duration of transport, to bring nearer in time the parts of the state which are dispersed across space, to place in easy contact the producer and the consumer, the factory and the market, he seeks to suppress or deflect the effects of this insurmountable obstacle. (Goblet 1930 Vol. II: 344; original in French2)

Conclusion: economics, geography and colonialism Petty’s survey of Ireland must surely be recognised as a pivotal episode in the history of the relationship between economic and geographical thought, an episode which, furthermore, places in the highest possible relief the inextricable connection of his spatial-economic analysis with the context in which he forged it, a context of bureaucratic-military officialdom and predatory colonialism. It is consequently fitting to conclude by attempting to explain why it is that the strands of economic and geographical thought which he drew together remain unabashedly intertwined in the sub-discipline of spatial economics of today, in a form which, though of course vastly more elaborate and formalistic, nevertheless shares the same fundamental analytical categories. The colonialist context of Petty’s thought was a central preoccupation of the work of Goblet, who was, as the above quotation indicates, an adherent of

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‘anthropogeography’, a methodology developed by the nineteenth-century German nationalist geographer Friedrich Ratzel. By Goblet’s time, Ratzel’s work had been reformulated in unrestrainedly populist terms by the founders of Geopolitik, notably Karl Haushofer, and was eventually incorporated into the propaganda of Nazism (Gyorgy 1944). Goblet’s aim was to recapture what he saw as the positive achievements of Ratzel for the liberal intellectual tradition, a project which was, ultimately, disappointing theoretically, and resulted in his adoption of a somewhat esoteric position which failed to make a substantial impact (see Goblet: 1955). The fact that his theoretical project remains stranded in these intellectual episodes of the past has undoubtedly contributed to the neglect of his magnum opus on Petty. This neglect is regrettable, since writers in the field of the history of economic thought as practised in the English-speaking world have all too often completely ignored the colonial context of Petty’s writings, and Goblet’s work might have served as a much-needed corrective to this shortcoming. Even today, Goblet’s work remains unique in the insight it brings to the historical significance of Petty’s population transfer scheme, pointing out, as he does, that it was grimly prophetic of what was actually to transpire in the two centuries that followed. For in that time Ireland was indeed to be emptied of the majority of its inhabitants as Petty had advocated, and reduced to a state where its language and traditional way of life were fighting for survival. This prompted Goblet to ask: What politician has ever put forward a plan, be it never so formal and official, which has been realised so comprehensively, point by point, as the ‘reverie’ of Sir William Petty? (Goblet 1930 Vol. II: 305; original in French) As a reviewer of Goblet’s work wrote at the time, the ingredients of Petty’s scheme ‘would be ludicrous if the next two centuries had not proved them to be in many ways prophetic’ (Lynam 1932: 418). Goblet’s unusual methodological stance cannot fully explain the oblivion to which his work has been consigned by historians of economic thought; part of the explanation surely lies in the fact that his study of Petty implicitly challenges the comfortable assumption that the roots of today’s economics lie in the Enlightenment movement in eighteenth-century European philosophy, as represented, above all, by Adam Smith. The question that needs to be answered is whether or not the Smithian tradition has ever really succeeded in surmounting the unappealing legacy of its unenlightened forebears, and in detaching the analytical categories bequeathed by those forebears from the goals for which they were forged. This question is posed in a particularly acute manner by Petty’s writings, where we already find, in primitive form, much of the analytical apparatus still in use by economists today, with no attempt to disguise the fact that the sole purpose of that apparatus is to serve the interests of the bureaucratic-military officialdom and predatory colonialism

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that prevailed in his time. This context stands revealed in a particularly raw and unvarnished form in Petty’s spatial-economic analysis, and nowhere more so than in the ‘transplantation’ scheme, whose elaborate calculations occupied the last months of his life. These calculations constituted not only a grisly swan song to his own failed career but also a harbinger of today’s quantitative methodology in economics, a fact which emerges with particular clarity with respect to the sub-discipline of spatial economics, whose aim is to extend that quantitative methodology into the neighbouring discipline of geography.

Notes 1 The abbreviations for the works of William Petty used in this chapter are indicated in the References in square brackets following the titles. The works are listed in the order in which they are thought to have been written, with compilations (EW, PP, DB) at the end. Citations of TTC, VS, PAI, PA, PAL and TI refer to the page numbers in the 1899 Hull edition (EW). 2 Quotations in this chapter are newly translated by the present author from the French.

Part VI

Economics and sociology

13 Economics and sociology Gustav Schmoller and Werner Sombart on social differentiation Joachim Zweynert

In the opening essay, ‘Introducing economic sociology’, in The Handbook of Economic Sociology, Neil J. Smelser and Richard Swedberg (2005: 6) describe the difference between economic sociology and mainstream economics as follows. While economists concentrate on the relations within the economy and consider society as a ‘given’, ‘the study of changes in the institutional and cultural parameters that constitute the economy’s societal context’ (ibid.) is at the heart of economic sociology, and, following Smelser’s and Swedberg’s definition, this in turn makes Gustav Schmoller and Werner Sombart economic sociologists rather than economists. As Smelser and Swedberg themselves emphasise (ibid.: 3–4), however, one should be careful with drawing too clear a border between economics and sociology. For especially since the late 1990s in economics we have witnessed growing interest in the issue of how beliefs, values and norms affect economic performance and development. Therefore, the boundary between the two disciplines has weakened again and there is now a certain ‘sociological turn’ (Nee 2005: 53) in institutional and evolutionary economics. Gustav Schmoller and Werner Sombart lived in a period in which Germany turned from a feudalist into an industrial society with a capitalist exchange economy. Such a transition means that a subsystem of society emerged which was driven by a purely economic logic so that it turned – in the striking terminology of Max Weber (1958: 26) – into a peculiar ‘value sphere’ of society.1 The emergence of such an economic subsystem of society is a process of social differentiation, a process in which the ‘division of labour’ between different parts of society reaches a new quality. The transition of social relations that in the Feudal Age had been economic and social in nature (as that between master and servant) into purely economic ones (as that between capitalist and worker) caused a far-reaching destabilisation of traditional social ties. The question of how society could cope with this destabilisation was at the core of Schmoller’s and Sombart’s economic thought. As this question seems to have become topical again in the so-called age of globalisation,2 in which, as many believe, economic rationality gains the upper hand over morals and political rationality and endangers social cohesion, can we hope to find solutions for today’s problems in their works?

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My answer to this question is negative rather than positive. In my opinion neither Schmoller nor Sombart gave a convincing answer to the central question they were occupied with. The study of their views on the problem of social differentiation and especially on the issue of how a stable order could be maintained in an ever more complex society is nevertheless interesting because it helps us to understand the basic methodological problems connected with this issue and may therefore prevent us from repeating mistakes and dead ends. However, the question I am mainly interested in is a purely historical one that will hopefully not become topical again, namely the possible connection between the historicists’ views on social differentiation and Germany’s path into totalitarianism. In 1939 Peter F. Drucker, later to become famous for his works on management theory, made an interesting statement on the connection between German economic thought and the emergence of totalitarianism: ‘It is not that the standard of knowledge of the economists has deteriorated. It is the belief in the desirability and in the necessity of the sovereignty and autonomy of the economic sphere that is disappearing; and, with the belief, the reality’ (Drucker 1939: 49). According to this view, the German ‘road to serfdom’ had something to do with the German economists’ evaluation of the process of social differentiation. Indeed, the historicist economists have repeatedly been accused of having undermined the understanding and the backing of the capitalist economy and thus – if unconsciously – having paved the way to its subordination under the political system in the Third Reich. By comparing Schmoller’s and Sombart’s views on social differentiation I hope to contribute to a clarification of this question. The chapter is organised as follows. In the next section I will outline the historical background on which the problem of social differentiation was discussed in Germany in the second half of the nineteenth century and the early twentieth. The third section gives a short overview of the contemporary sociological theories on social differentiation which Schmoller and Sombart referred to in their writings. the fourth and fifth sections deal with Schmoller’s and Sombart’s ideas on social differentiation. In the sixth section I will draw some preliminary conclusions and provide an outlook on future research in this field.

The background of the German reception of the idea of social differentiation The fact alone that in the recent literature on the historical schools of economics the idea of social differentiation has hardly ever been recognised as a key concept (exceptions are Priddat 1995 and Düe 2001) is clear evidence of how far the alienation between economics and sociology has proceeded and how difficult it is today to think back to a time when both disciplines were more or less inseparable parts of social science (see Häuser 1994: 69). Nowhere, however, had the connection between economics and other disciplines been so tight as in the development of the theory of social differentiation. It was Adam Smith’s observations on the division of labour that to a great extent

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inspired Charles Darwin to formulate his ‘sociology of nature’ (Radl 1905, quoted by Peters 1972: 335), which then was re-imported from biology into the social sciences mainly by Herbert Spencer, who significantly influenced Gustav Schmoller and other representatives of the younger historical school (see Herkner 1922: 6). In the process of social differentiation Spencer envisaged a universal law determining animate and inanimate nature: ‘From the earliest traceable cosmical changes down to the latest results of civilisation, we shall find that the transformation of the homogeneous into the heterogeneous is that in which Progress essentially consists’ (Spencer 1857: 40). It is evident from this quotation that Spencer – like Darwin and contrary to Smith – elaborated the idea of social differentiation in the context of a theory of social evolution. Certainly it was Spencer’s firm belief in the moral progress of mankind that made him, the utilitarian and liberal, attractive to the members of the historical school. At the core of his theory of social differentiation was a sociological problem that was also constitutive to both of Adam Smith’s main works: how can social cohesion be maintained if the individuals in a society are increasingly freed from patriarchal and hierarchical bonds? Spencer’s answer to this question was that in more highly developed societies the growing differences between the individuals formed the prerequisite of social order: to him, all social development could be described as ‘from incoherent homogeneity to coherent heterogeneity’ (quoted by Rüschemeyer 1985: 167). Spencer shared with Smith the dismissive approach towards the absolutist, or, as he called it, ‘militant-hierarchical’ state. He was convinced that the ‘industrial society’, in which social cohesion was achieved not by power and subordination, but by the voluntary interaction of free individuals, represented a higher level of human civilisation.3 In Germany the idea that order in a society could be maintained as a byproduct of the spontaneous interaction of individuals traditionally was not too well received (in detail see Priddat 1998; Tribe 1995). This can be explained both by social and by intellectual history. The decisive factor in social history was that until the end of the nineteenth century, compared with England, Germany was a backward country in both economic and political terms. Not only had the German princedoms been feudalist ‘militant-hierarchical’ entities, but also German unification and indeed industrialisation itself had been pushed through by a state that to many historians is still paradigmatic of military discipline and hierarchical subordination. In terms of intellectual history, the Smith–Spencer tradition was a hard nut to crack for German intellectuals, because it contradicted two typical German traditions of social thought: holism and what one might call ‘anti-hedonism’. However, both traditions are tightly connected with the economic and political backwardness of the country. In a society which was still fully subordinated to political power and in which, hence, individuals were embedded in hierarchical social relations, it was indeed hard to imagine how order could be maintained by the actions of individuals seeking to satisfy their needs. This is also, in my opinion, the main reason why most German social thinkers had

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a critical attitude towards hedonistic ideas and remained true to a deontology that since the time of Immanuel Kant was deeply rooted in the German mind.4 Within the logic of a ‘militant-hierarchical’ society the liberation of the individual from clearly defined liabilities would indeed be likely to lead not to cohesion but to ‘atomisation’, a term that again and again was brought forward by German social thinkers against the process of social differentiation. In the second half of the nineteenth century Germany entered the Capitalist Age. It did so by a process of catch-up development. If someone wants to catch up with someone else, he or she has to move more quickly than the person ahead. Germany turned into a capitalist industrial society much faster than the ‘Western’ powers Britain, the Netherlands and France. Formulated in the terms of modern institutionalist economics, as a result of the German industrial revolution there emerged a gap between the far-reaching changes in the material environment (formal institutions) and the patterns of life and thought (informal institutions) that had been shaped by the pre-capitalist past of the country. That is to say, the real problems caused by the industrial revolution in Germany were more severe than they had been in other countries, but also that German intellectual traditions – which on their part had been shaped by economic backwardness – made German thinkers particular sensitive to the destabilisation of social relations.

‘Community versus civil society’ in contemporary sociological thought The title of Ferdinand Tönnies’s famous book of 1887 put in a nutshell what German sociological thought was concerned with in the second half of the nineteenth century. As a reaction to the so-called Stein–Hardenbergschen reforms that in the early nineteenth century prepared the ground for the economic transformation of the country, Romantic thinkers like Adam Müller or Johann Gottlob Fichte (see e.g. Harada 1989, 2004) set the protest against the ‘fragmentation’ or ‘mechanisation’ of society on the agenda of political discourse. The Romanticists’ creed, to hinder the dissolution of the traditional ties in society and to maintain the unity of the social body, strongly influenced the evolution of German social thought in the nineteenth century. I shall concentrate here on the four key figures of contemporary sociology whose ideas on social differentiation directly influenced Schmoller and Sombart: Karl Marx, Ferdinand Tönnies, Emile Durkheim and Georg Simmel.5 Karl Marx can be regarded as a key figure in the development of the differentiation paradigm because he was among the first social scientists to describe the emergence of the capitalist economy as a process of institutional separation between the economy and the other social spheres. According to Marx, this differentiation takes place when the maximisation of monetary profit becomes the main goal of the entrepreneur, that is, when the formula ‘commodity–money–commodity’ is being replaced with the formula ‘money– commodity–money’ (Marx 1867: 109–18). From this moment on, the economy is governed by its own inherent (that is, purely economic) logic, which

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does not necessarily take into account the political, social and cultural consequences of economic actions. Marx also dealt with another aspect of social differentiation caused by the emergence of capitalism. To him, the division of labour and private property were different expressions of the alienation of man in bourgeois society (Marx 1845/46: 359). Enough has been written on Marx’s concept of alienation, so there is no need to go into the details. One point is important here. As firmly as Marx had one foot planted in Western European Enlightenment, as deeply was his concept of alienation rooted in a Romantic tradition of German social thought (see Levin 1974) that condemned the loss of unity of society and the adherents of which could not imagine how order could be maintained without conscious organisation. As Jeffrey C. Alexander (1982: 73) has shown, in a way Marx’s analysis of bourgeois society led him back to the Hobbesian position, that is, the very position against which Smith had addressed his vision of a self-organising society (see Perlman and McCann 1998: 58–71).6 The dichotomy of Gemeinschaft (community) and Gesellschaft (society) had been discussed by numerous romantic thinkers before Ferdinand Tönnies. Indeed, his contribution to the theory of social differentiation can be seen mainly in a reformulation of Romantic ideas in scientific vocabulary.7 Tönnies agreed with Marx that the bourgeois society of his time had to be and would be overcome in future. Yet if there was anything Marx liked about the Capitalist Age it was that it furthered the development of rationality, necessary for conscious organisation of society in the socialist state. Contrary to this, Tönnies saw rationality as the very root of all evils of the Modern Age.8 His deep disregard for rationalism also distinguished his position from contemporary historicism. In his view the historicists’ belief in the Prussian state as the major integrating force of German society was mistaken, because the state itself was an expression of the damnable rationalistic tendency of the Modern Age (see Mitzman 1973: 102). Durkheim’s work on the division of labour, first published in 1893 – although his opponent is never named in the whole book – can be seen an anti-Tönnies manifesto (see Tyrell 1985: 206).9 Durkheim addressed the same question as Tönnies, but he reached exactly the opposite conclusion from his German contemporary.10 The message of his book was that, unlike relatively small and homogeneous social groups, modern complex societies can be kept together not by the similarity, but only by the heterogeneity, of their members. Only the division of labour, a term which Durkheim used in exactly the same sense as Spencer had used the term ‘social differentiation’, ensured that ‘society becomes more capable of collective movement, at the same time that each of its elements has more freedom of movement. This solidarity resembles that which we observe among the higher animals’ (Durkheim 1893: 131). Quite obviously, Durkheim revived Spencer’s formula of progress ‘from incoherent homogeneity to congruent heterogeneity’. His work certainly was a brilliant attack on the hostile attitude of many contemporary (especially German) social thinkers towards the process of social differentiation that had

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found its most congruent expression in Tönnies’s main work.11 The main problem with Durkheim’s theory is that, while it was good in refuting the hope of a return to Gemeinschaft, it did not explain with any precision where solidarity would come from in a differentiated society. In his Philosophy of Money Georg Simmel gave a fascinating answer to this question. In today’s sociological terminology, Simmel discovered the role of money as a ‘generalised medium of social exchange’.12 It was money, he argued, that played the key role in the ‘general tendency … of making the individual more and more dependent upon the achievements of the people, but less and less dependent upon the personalities that lie behind them’ (Simmel 1900: 296). As much as the ‘mechanisation’ of personal relations was to be regretted, money was a prerequisite for modern mass society, because it offered the only possibility of creating connections between people who did not need to know one another personally. To sum up, in contemporary German sociological thought two currents were prevalent. One line of development ran from the Scottish Enlightenment and its representative Adam Smith to Charles Darwin’s theory of biological evolution, from where it was re-imported into the social sciences by Herbert Spencer, whose ideas were taken up by Emile Durkheim and Georg Simmel. The thinkers who stood in this tradition traced social cohesion in modern societies back to the spontaneous interaction of individuals, whose dissimilitude was the very prerequisite for a stable order. The other tradition was rooted in German Romantic social thought as founded by Müller, Fichte and others. The thinkers who stood in this tradition condemned social differentiation as a loss of unity, an ‘atomisation’ of society, and were highly sceptical that the spontaneous interaction of individuals could bring about social cohesion.

Gustav Schmoller on social differentiation To Gustav Schmoller the ‘social question’ was not only an issue of the unequal distribution of property and class struggle. These phenomena were only the consequence of the fact that as a result of the industrial revolution the binding forces of society had loosened: Every great economic advance which inundates a nation with previously unimagined riches brings its entire civilisation into flux, changes as a rule all the previous habits of trade, of the exchange of goods, of social interaction. The old moral bonds and concepts are dissolved; the equilibrium of the moral forces is not restored immediately. (Schmoller 1874: 79) As I have shown in the last section, in contemporary sociology two contradictory answers were given to the question how social cohesion could be achieved in modern society. At first glance, it seems to be obvious to which camp Schmoller belonged:

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Atomism, the blind, raw struggle of individuals, egoism threatened our public and social life: in the face of this we adhere to the conviction that the individualist epoch should now be followed by a socialist one in the best sense of the word, a period of reforms, of social legislation, of the concentration of forces. … (Schmoller 1881a: 112) This statement seems to make it extremely clear that Schmoller saw the main task of his age in the reintegration of society (that is, in de-differentiation) under the guidance of a strong state, in which he (1881b: 149) saw the ‘centre and the ventricle of all institutions’. How little Schmoller trusted in spontaneous action as the main foundation of social order emanates from his definition of the ‘single economic unity’ as ‘a circle of people who belong together, who are tied by any physical, moral or legal bonds, who manage their affairs with, and partly also for, one another or others’ (Schmoller 1900 Vol. I: 3). In other words, for the leading German economist of his time even the coherence of small economic units derives first of all not from economic but from non-economic factors (see also Düe 2001: 51). In view of this definition, it does not really come as a surprise that according to Schmoller (1900 Vol. I: 5) a national economy can emerge only ‘where people of the same race and the same language, bound by common sentiments and ideas, morals and laws, at the same time have common national economic institutions and are linked by a uniform system of trade and a lively exchange’. The common sentiments, which provide the psychological basis of the national economy, Schmoller calls Volksgeist (national spirit).13 However, it should not pass without notice that, besides the common national spirit, Schmoller also mentions a ‘unified system of trade’ and ‘lively exchange’ as sources of social cohesion. It was especially due to these two factors that ‘the single economic units of the same state are now bound in a way in which formerly only neighbouring economic units were’. Obviously, to Schmoller the common national spirit was the dominant, but not the only, source of the cohesion of the modern economy. Not without reason could Schmoller (1913: 130) not remember a book that had impressed him so deeply when first reading it as Smith’s Theory of Moral Sentiments and not without reason did he enthusiastically praise Herbert Spencer’s sociological studies (see Schmoller 1895: 1046, quoted by Nau 1998: 30 n. 86). A closer look at Schmoller’s ideas on social differentiation indeed reveals that he was searching for a third way, not only between liberalism and socialism but also – closely connected with this – a third way between the two answers to the question of what were the forces that knit together a society in the Modern Age. Schmoller’s two essays on the division of labour that were published in 1889 and 1890 – that is, before Durkheim’s and Simmel’s works had come out – represent his main contribution on the theory of social differentiation.14 As is evident from the introduction to the first essay, Schmoller – and this is an interesting parallel with Durkheim – uses the terms division of labour and

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social differentiation synonymously.15 As typical for a historicist, Schmoller begins his elaboration on the division of labour with a short excursus into the history of economic thought. While Adam Smith had put the ‘social division of labour’ in the centre of his system and tried to ‘draw general conclusions from it’, his successors had ‘in a remarkable poverty of ideas’ reduced the division of labour to its purely economic aspects. Only Spencer and Schäffle had reminded economists that the division of labour is ‘a generally social fact, not simply an economic one’ because it ensured that ‘all those who are working for one another form a certain not only economic but also moral and legal unity’ (Schmoller 1889: 58). Following Spencer and Schäffle, Schmoller defines the division of labour in the broadest possible way as: the constant individual adaptation to a specialised life work which places the individual in the service of the others, which compels each and every one to give their individual life a complicated, composite meaning, to enter into a bond between their own nearest purposes and the furthest purposes of others. (Schmoller 1890: 47) If such statements were looked at in isolation, one certainly would be tempted to classify Schmoller in the Smith–Spencer–Durkheim tradition. But Schmoller would not have been Schmoller if he had not immediately qualified such statements. As he hastens to remark, the division of labour always has the double effect of ‘forming a bond between people and forging them to one another, but also separating them again in its psychological effects and even making them into opponents when it has reached certain points’ (ibid.: 54– 55).16 Which of these consequences prevails depends on the stage society has reached in its development. Both in the early and in the late stages of development social differentiation leads to Vergesellschaftung.17 In the early stages it is restricted to groups that are knit together by moral forces anyway. As Schmoller was convinced, in the long run there would emerge a perfect division of labour, following long struggles surrounded by moral institutions. The disintegrating effects of the division of labour dominate in the intermediate period, when ‘the new bonds of service and exchange are still too weak, too little permeated by moral spirit and a strong sense of solidarity’ (ibid.: 54–55). Hence, although ‘all political and organisational progress rests on it [the division of labour]’ (ibid.: 66), in the intermediate period, in which he believed German society to be at the time, it was – as Manfred Prisching (1993: 212) rightly claims – Schmoller’s main concern ‘that the extension of state authority keeps pace with the differentiation of society, i.e. with the division of labour and the formation of classes’. Under the influence of Durkheim and Simmel, in the Grundriss Schmoller emphasised the role of social differentiation in the process of Vergesellschaftung more strongly than in his previous works. Yet this emphasis did not make things clearer, on the contrary it even deepened the potential conflict between

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his two explanations of social cohesion. This becomes evident as early as p. 20 of the first volume of the Grundriss: The circles of economic consciousness are originally identical with those of blood relationships, the neighbourhood of the tribe. … In contrast to this, exchange, trade, the circulation of money and everything connected with them in the modern economy develop by means of individualistic and egoistic instincts, but nevertheless in such a way that the persons exchanging, seeking their particular profit, in a stronger or a weaker way form a circle of consciousness (Schmoller 1900 Vol. I: 20) It is obvious that in this passage Schmoller comes close to saying that the common circles of economic consciousness have two different sources in premodern and in modern societies: ‘blood relationships, neighbourhood and custom’ in traditional, ‘exchange, trade and the circulation of money’ in modern societies. Yet apparently he could not bring himself to affirm that the spontaneous interaction of the economic subjects in a modern, differentiated society leads to the emergence of a common circle of consciousness. Instead, he chooses a formulation which anxiously avoids any assertions of causality (‘but always in a way’) and leaves open the crucial question of whether the common circles of consciousness of the economic subjects are a result of cultural homogeneity, or whether exchange and trade themselves can become the sources of ‘solidarity’ in modern societies. This question remains unanswered also on the remaining thousand and more pages of the Allgemeiner Grundriss. But in contrast to his two papers from 1889 and 1890 – and clearly under the influence of Georg Simmel – he repeatedly emphasised the role of money in the process of Vergesellschaftung in modern society: It is money which brings larger groups of people in the state and commune much more easily to working together and to the division of labour … A very considerable part of that for which the division of labour and commerce are praised … is due to money or rather to the social institutions which have arisen through money with the division of labour and commerce. (Schmoller 1904 Vol. II: 103) But money is not only the foundation of ‘higher Vergesellschaftung’, it is also the main cause of the destabilisation of social relations in the Modern Age: Because money becomes the most craved for and most omnipotent economic good … for many it changes from a useful means to an end in itself, to an object of striving which pushes all other aims in life into the background, which bursts all bonds of ethics, of custom, of law … (Ibid.: 104)

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As is typical of Schmoller, it remains unclear how these two consequences of the institution of money relate to one another. Instead of elaborating the issue theoretically, Schmoller simply switches to the normative level of argumentation: ‘That is true of money which is true of our modern technology: we must only learn to use it properly, to find the right institutions for it, and then we do not need to slander it as childish fear demands’ (ibid.: 105). Schmoller’s elaboration on the institution of money again makes it clear that in his view there is a trade-off between material and technical progress on the one hand and social progress in a broader sense on the other. Material technical progress is necessary to raise productivity. However, it is always connected with social differentiation, which tends to destabilise the old ties. For Schmoller, progress in a broader sense consists in the reconciliation of the new forms of economic life with the moral, social and political aspects of society: Economic progress as we know it in the history of mankind thus certainly comprises on the one hand an increase in needs, the progress of technology, the increase of capital and the population, but on the other hand, and even more so, the increasingly successful process of social organisation, of moralpolitical discipline. Only this discipline can create greater, more harmoniously co-operating economic bodies in which … better and greater organs of production and distribution, more complete social institutions exist. (Ibid.: 747) What Schmoller is concerned with here is the problem of ‘the determined, formable co-evolution of the institutional, moral and cultural environment of the new industrial and market dynamic’ (Priddat 1995: 307). Schmoller recognised this problem, but he failed to find a convincing explanation of the interplay between the spontaneous and the conscious development of economy and society. Thus he complains in the Grundriss that ‘the inner connection between the cultural areas of society are today still little explored’ (Schmoller 1904 Vol. II: 655) – and his eventual capitulation reads as follows: An exhaustive picture of this history of intellectual and moral development and its connection with the institutions can hardly be presented at all at the present time. In any case, it is certainly not our responsibility to make an attempt of that kind. (Ibid.: 678)

Werner Sombart on social differentiation Joseph Schumpeter’s (1954: 817) statement that the older Sombart ‘even outschmollered Schmoller’ is as much quoted as it is misleading. A look into Sombart’s doctoral dissertation from 188818 reveals that even at this point in time he held a much less liberal position than his teacher. It was certainly in line with Schmoller when he condemned the ‘loosening of family bonds’ in the

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rural areas of Germany and the emergence of a proletariat. But his state socialist perspective, according to which individuals had to fully subordinate themselves to the state19 ‘as the representative of the whole’, was not in the spirit of Schmoller, who had warned explicitly against the ‘centralistic despotism’ of socialism (Schmoller 1890: 58).20 In the second half of the 1890s there was a definite shift in Sombart’s ideological views. However, the turn towards Marx left his attitude to the problem of social differentiation unchanged. The industrial revolution, he (1896: 12) argued in his bestseller Socialismus und sociale Bewegung, has led to a ‘severing of former associations’, that is, the exchange economy had a purely negative impact on social cohesion. Yet while in his previous works he had seen the solution to this problem in the maintenance of traditional forms of production even at the cost of economic efficiency, now, clearly under the influence of Karl Marx, he emphasised that ‘the realisation of the good and the beautiful is enclosed within the limits of economic necessity’ (ibid.: 74). This ‘good and beautiful’ was nothing other than the ‘formation of completely new forms of community on a communist foundation; new amalgamations in the cities and large-scale enterprises’ (ibid.: 12). The destruction of old ties was a necessary prerequisite to the emergence of these new communities, and only in this sense could the unfolding of the productive forces be seen as a process of Vergesellschaftung: The old, original communities are now increasingly disintegrating. The individuals are being torn from the soil in which they have their roots, whirled in disorder in the modern states and especially in the modern cities: … no more organically bound than … the individual grains in a pile of wind-borne sand. … But like an anthill which is destroyed by a kick too soon sets about regrouping itself, we also observe everywhere in the motley mass of people a striving to come together again in new associations. The artificial communal and social formations arise which have their common mother in the common interests of certain groups of people. (Sombart 1900: 3) According to his evolutionary interpretation of Marx’s teachings, the emergence of the new communities was inevitably to come, if only the natural course of things were not disturbed. It was in this dialectic sense that in the first edition of The Modern Capitalism he regarded the ‘occupational specialisation or … the differentiation of economic activity’ as an indicator of the degree of Vergesellschaftung (Sombart 1902: 58). At the same time he emphasised, following Marx, that in the firm capitalist Vergesellschaftung (that is, integration) of specialised work was ‘more or less stuck half way’, because the ‘negation of the negation, the synthesis to higher work’ had not yet been achieved (ibid.: 29). Apart from the question of whether The Modern Capitalism, as Schmoller (1903: 142) wrote in his review, could really be seen as ‘a single glorification

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of capitalism’, the nostalgic attitude of Die deutsche Volkswirtschaft im 19. Jahrhundert (1903) came as a surprise to most readers. As in his previous works the foundation of his critique of modern society was that modernity had deprived society of all binding forces. What was new, however, but what in the end meant nothing else but a return to the position he had taken in his doctoral dissertation, was that his hopes were no longer directed towards a socialist future, but towards reawakening the old social bonds to new life. This central message of the book found its clearest expression in the final sentence: ‘We want to live again more like Goethe did. That is bitterly necessary for us’ (Sombart 1903: 552). As soon as he had lost the hope that capitalism would inevitably lead to ‘new communities on a communist foundation’ the process of social differentiation lost all its appeal to him. The critique of the ‘great process of depersonalisation, of de-emotionalisation, of making soulless’, which ‘puts an elaborate system of impersonal relations in the place of living relationships from person to person within a small circle of people one knows’ (Sombart 1903: 253), from now on moved to the centre of his thought. Especially in Der Bourgeois, published in 1913, he tried to develop a systematic elaboration of how the ‘capitalist spirit’ had ‘smashed the Old World to pieces’ (Sombart 1913: 23). Sombart actually saw a connection between the emergence and unfolding of the capitalist spirit and the development of civilisation. If the buccaneer’s profit been directly based on violence (ibid.: 101), and that of the feudalist entrepreneur on his relations with state power, in the modern Capitalist Age the entrepreneur’s activity had been ‘de-powerised’ and rested upon ‘peaceful persuasion’ and ‘the skilful negotiation of contracts’ (ibid.: 134). This was absolutely in line with Spencer’s transition from ‘military-hierarchical’ to ‘industrial society’. What Sombart did not agree with Spencer on was only the normative evaluation of this transition, for he (1915: 22) explicitly criticised Spencer for having regarded ‘industrial society’ as the ‘morally higher state’. Even before the outbreak of the First World War the term ‘civilisation’ to Sombart (1914: 103) had become a negative attribute21 and ‘the old relationship between master and servant, in which … basically both parties … feel most comfortable’ to him had become the only possible way to prevent the individuals in society from turning into ‘wind-borne sand’. Although Sombart (1927 Vol. III/1: xix) still affirmed that his work ‘desires to be nothing other than a continuation and in a certain sense the completion of Marx’s work’, it indeed could ‘not escape the attentive reader’ that it was Ferdinand Tönnies,22 under whose influence Sombart (1916 Vol. II/2: 1076) described the economic history of Europe ‘from the point of view of progressive modernisation’, praised the medieval German city as a functioning ‘community’ (1916 Vol. I/1: 181)23 and condemned the capitalist spirit as ‘that spirit which, since the end of the Middle Ages, has torn humanity from the quiet, organically developed relationships of love and community, and hurled them on to the path of restless selfishness and self-determination’ (ibid.: 321).

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It goes without saying that in the second edition of Der Moderne Kapitalismus Sombart did not refer to ‘occupational specialisation or differentiation of economic activity’ as an indicator of social progress. Instead he again and again – and sometimes with direct reference to Georg Simmel – condemned the subversive effect of money: And nowhere does the striving for infinity, the striving for power, find a field of activity so very suited to its most inner nature as in the chasing after money, this completely abstract symbol of value which is absolved from any organic, natural limitation, the possession of which then always also appears as a symbol of power. (Ibid.: 328) As he clarified in one of his last large works, it was the ‘secularisation of all spheres of life’ that had caused the ‘disintegration of the old uniform culture’ and thus the ‘atomisation’ of society (Sombart 1930: 86–87).24 From the position he had now arrived at, a position that regarded the Western type of rationality as the source of all evil of modernity, it was only as a consequence that he criticised Schmoller for having ‘persisted in a natural science position’. Not only had he ‘striven for exactness’ but also – and the impression seems well grounded that this was his real major sin – he had called Herbert Spencer his favourite philosopher (ibid.: 153). In contrast to Schmoller, there is not the slightest doubt into which of the two currents of contemporary sociological thought Sombart has to be classified. If his ideological position changed over time, his assessment of the problem of social differentiation did not. The idea that capitalism had deprived society of any cohesion and hence had turned individuals into a ‘pile of wind-borne sand’ runs like a thread through Sombart’s writings. Neither the young nor the older Sombart was willing to accept the main idea of Smith, Spencer and Durkheim – and he never even discussed this possibility seriously in any of his writings – that social cohesion could emerge as a result of the spontaneous actions of the individual.

Conclusion In 1902 Sombart (p. xxix) wrote that it was the influence of Marx which distinguished him from Schmoller. A much more precise description of the difference would be that what separated Schmoller from Sombart was the influence of Adam Smith and Herbert Spencer. In contrast to the dyed-in-the-wool anti-capitalist Sombart, Schmoller strove throughout his life to reconcile the two opposing views on social differentiation outlined in the third section of this chapter. On the one hand he was certainly a very ‘German’ thinker in that he repeatedly emphasised that ‘moral bonds’ were the basic foundation for cohesion in society.25 On the other hand he never broke with the sociological

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tradition that had its roots in the teachings of the Scottish Enlightenment and particularly in those of Adam Smith. Schmoller was critical of the attempts of the classical/neoclassical economists after Smith to analyse economic relations in isolation from social, juridical and power relations (see Nau 1998: 17). His attempt to come to a truly integrated social science26 was a reflection of his basic conviction that ‘all human activity is mutually conditioned, a compromise between the different tasks and objectives of persons, the integration of each individual action and of each individual person into the interrelationship of the whole’ (Schmoller 1864: 417, quoted by Nau 1998: 19–20). This reference to the ‘social whole’ makes it clear that Schmoller was critical of a too far-reaching autonomisation of an economic ‘value sphere’ from the ‘rest’ of society. But, as he was aware of the role the exchange economy had played in the process of civilisation, he did not intend to abolish the autonomy of the economic system in principle. However, in his view Germany suffered from a disequilibrium between a relatively overdeveloped market and relatively underdeveloped state institutions that alone were able to provide the framework within which spontaneous interaction would unfold its positive effects. That is why he demanded a (relative) strengthening of the state. In the literature, Sombart is often seen as the most prominent figure in German neo-historistic economics (see e.g. Rieter 2002: 155–57). Together with authors like Carl Brinkmann, Alfred Müller-Armack, Edgar Salin and Arthur Spiethoff he tried to bridge the gap that had emerged between historical and theoretical economics. It is argued that while Schmoller made a clear break with classical/neoclassical economics, the neo-historicists tried to reconcile the historical and the classical/neoclassical current and hence helped German economics to overcome its isolation from the international scientific community. All that is true, but if we compare Gustav Schmoller’s and Werner Sombart’s views on social differentiation, we see a quite different picture. While Schmoller persisted in attempting to reconcile the two competing currents of sociological thought, Sombart broke with the tradition that had been founded by Adam Smith and which therefore lay also at the very heart of the classical/neoclassical tradition of economic thought. To him, capitalism had only one social consequence, namely to destroy the old bonds between individuals, which could be restored only by a return to some community-type social ties. Therefore the question of how capitalism could be overcome stood at the centre of his thought from the beginning. The connection between his basic sociological position and his anti-capitalism is obvious. If the capitalist economic system, i.e. the spontaneous actions of exchange, does not create order but even endangers the cohesion of society, then the institutional separation between the state and the economy has to be eliminated and the economic system has to be reintegrated into the body politic. And yet this is precisely the position which Peter F. Drucker saw as a part of the intellectual soil in which totalitarian ideology could take root.

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Indeed, I hold that the breach between Schmoller and Sombart deserves attention in view of Germany’s descent into totalitarianism. At the same time I am aware that one should not draw too far-reaching conclusions from the comparison between only two authors. A proximate objection would be that Sombart’s ideological position was not typical of the neo-historicist current of German economics. Yet this is not clear, for around the year 1933 Carl Brinkmann (1934), Alfred Müller-Armack (1933) and Edgar Salin (1932) – that is, four out of the five authors who are usually mentioned as the most prominent members of the neo-historical current – also propagated fascistic or National Socialist ideas.27 However, much more research is necessary before any conclusive results might be reached. I see this chapter only as one piece of a puzzle and I intend to continue research in this field.

Notes 1 According to Weber, the main feature of Western modernity was the existence of different rationalisations of the environment in different value spheres of society. ‘There is, for example, rationalization of mystical contemplation … just as much as there are rationalizations of economic life, of technique, of scientific research, of military training, of law and administration. Furthermore, each one of these fields may be rationalized from many different ultimate points of view and toward many different ultimate ends, and what is rational from one point of view may well be irrational from another’ (Weber 1958: 26). 2 For a more detailed study of ‘Gustav Schmoller and globalisation’ see Rieter and Zweynert (2006). 3 Again it is the idea of progress that distinguishes Spencer from Smith. While Smith had seen the patterns of what one may call a modern civil society as being in accordance with human nature, to Spencer they were bound to the transition from feudal to industrial society. 4 On Kant’s influence on cameralism see Tribe (1995: 30–31), on his impact on the reception of classical economics in Germany see Pribram (1983: 200–06). 5 In this paragraph I mainly follow Schimank (2000). 6 It is understood that Marx proposed a different solution to this problem from Hobbes, but the decisive point is that he was convinced that order could not be provided by the unconscious actions of individuals in a differentiated society, but had to be established by conscious organisation. 7 Interestingly, in his early works on Hobbes he had used the term Gemeinschaft in a negative sense, in order to characterise full monarchy (see Mitzman 1973: 67). Only after his disappointment with modernity and his rediscovery of the German Middle Ages did he come to a positive evaluation of community. 8 However, for Tönnies (1887: 173) modern science might in a very specific way pave the way back to Gemeinschaft. In the only, and very short, passage in Gemeinschaft und Gesellschaft in which he referred to a possible end stage of society, he expressed the hope that ‘when science develops into philosophy, man again achieves, through the purest and highest knowledge, that joy of intuition and love which was ruined for him through all sorts of reflections and strivings’. 9 For a concise comparison between Tönnies and Durkheim see Cahman (1970). It should be noted that in the second edition of his principal work, published in 1902, Durkheim abandoned the view that the division of labour was the main and basic foundation of cohesion in modern society. Instead, he emphasised the importance of what Schmoller called ‘moral forces’. However, as both Schmoller and Sombart

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solely referred to the young Durkheim, I will ignore the later development of his ideas. In the Age of Biology the adjectives ‘mechanic’ and ‘organic’ had a clear normative bias, with ‘organic’ having a positive and ‘mechanic’ a negative connotation. While Tönnies ascribed to Gemeinschaft an organic and to Gesellschaft a mechanical character, Durkheim described the transition to modernity as a transition from mechanical to organic solidarity and thus clearly expressed the ideological message of his book (see Mitzman 1973: 109). Not least because having been a visiting scholar in Berlin, Magdeburg and Leipzig during the academic year 1885–86 Durkheim was well acquainted with contemporary German sociological thought (see Steiner 2003: 249–50). This term has been introduced by Talcott Parsons (e.g. 1977). The following statement comes closest to a definition of the term Volksgeist (national spirit): ‘Just as formerly there was a strong internal psychic solidarity only among members of families, communities or tribes, so today such a solidarity has arisen among the members of a nation. A sum of common sentiments inspires the nation, a sum of common ideas crossed the threshold of national consciousness and creates that which we call the common national spirit … ’ (Schmoller 1911: 220). Revised versions of these essays were later integrated into the Grundriss der allgemeinen Volkswirtschaftslehre. It is likely that both Schmoller and Durkheim were inspired in their terminology by Albert Schäffle (1875–78 Vol. II: 394), who had stressed the role of the ‘division and unification of the collective intellectual work’ as one of the main sources of social cohesion in modern societies. In this sense, to Schmoller the division of labour was both ‘a battlefield on which the struggle for domination and delusion leave their traces, but at the same time it is a peaceful community with a growing moral order’ (Schmoller 1890: 58). The term Vergesellschaftung could be translated as ‘societalisation’ or ‘sociation’, but it is too closely linked with German sociology at the turn of the twentieth century for an adequate translation to be possible. I therefore use the original term. Even in German usage there are complications, however, as the meaning of the term varies depending on who uses it – thus it has been applied very differently by authors like Tönnies, Weber and Simmel. Schmoller uses it in much the same sense as Simmel (1908), who applied it to the process that produces cohesion in a modern society. In my elaboration on Sombart’s dissertation I basically follow Lenger (1994: 42–47). ‘It is not the subjective condition of the individual which here decides about reform or no reform, but rather the conditions of existence of a Kulturnation are at stake’ (Sombart 1888: 290, quoted after Lenger 1994: 46). It is quite obvious that Sombart’s political views in the 1880s were strongly influenced by the state socialism of his second teacher, Adolph Wagner (see Lenger 1994: 44). His critique of civilisation was already expressed in a number of articles that he wrote for the journal Der Morgen in 1906/07: ‘He [the man of culture] hates the external attainments of modern civilisation, above all, technology, because they crush and kill the spirit; he hates bustle, swarm, mass and commercialism because in them the individual is cut up, rubbed away, specialised, and thus loses the characteristic, the personal’ (quoted by Mitzman 1973: 232). Sombart himself admitted (1916 Vol. II/2: 1081) ‘that I have oriented my discourse with a predilection to the brilliant idea of that man, which proves to be unusually fruitful in the examination of the most different sociological problems’. Explicit references to Tönnies in Sombart’s work appeared for the first time in a series of articles on the ‘North American proletariat’ that was published in the Archiv für Sozialwissenschaft and in which he contrasted the ‘Moloch’ of US cities with the ‘deeply inward-looking community’ of medieval hand craft (see Lenger 1994: 150).

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23 ‘Again [as in the village community which preceded the medieval town – J.Z.] a large number of people considered themselves to be an organic unit, many felt themselves members of a family, and the consciousness of belonging together was so strong that it overcame all disintegrating, corrosive powers within and led all towards common action, to united behaviour towards the outside world’ (Sombart 1916 Vol. I/1: 181). 24 Consequently, in a series of lectures he gave in Vienna in 1928 he called for the ‘cultivation of a religious spirit which alone is the basis of community’ (see Lenger 1994: 348). 25 And he was definitely influenced by Romantic ideas when he called the few branches of the German economy which had remained untouched by industrialisation ‘healthy and natural exceptions to the great process of dissolution.’ (Schmoller [1900] 1923 Vol. I: 373). 26 As Manfred Prisching (1993: 188) aptly put it, ‘It was Schmoller’s aim to integrate the social sciences, i.e. rather, to prevent their disintegration into specialised disciplines based on the division of labour, without taking refuge in the creation of a speculative homogeneity … ’. 27 However, it should be emphasised that all of them, including Werner Sombart, sympathised with the National Socialists only for a short period of time.

14 Is Homo oeconomicus a ‘bad guy’? Isabelle This Saint-Jean

Over the last few years we have seen many economists trying to take interpersonal relations into account and to rescue Homo oeconomicus from the loneliness to which he was confined.1 However, in analysing those works, I was struck by the fact that – at least for most of them – interpersonal relations are considered as ‘positive’: ‘positive’ for individuals and ‘positive’ for the group they belong to. We can find a good illustration of this optimistic vision in the little story presented by Gui in the introduction to the special issue of Annals of Public and Cooperative Economics devoted to this question. Speaking of two identical residential buildings, he writes: The yard of the first was full of expensive flowers, but people never met there. … The yard of the second building had ordinary flowers, but people often met there, while their children played together. … Intangible phenomena make life gloomy in the first building … and fun in the second. … (Gui 2000: 133) Therefore, according to a first thesis more or less implicit in most economic analysis of human interactions, these interactions are ‘positive’ for the individual. They not only give opportunities of material gain for the both parties, but they are also synonymous with ‘sociality, gathering and friendship’ (ibid.: 133). ‘Maintenance of rich interpersonal relations is not even only a question of welfare or of preference satisfaction, but it is a question of human “thriving”, or of personal realization’ claims Gui (ibid.: 140). He quotes the French philosopher Emmanuel Mounier, who ‘warns us that the establishment of relations of mutual openness and genuine communication represents one of the highest peaks of human experience, a true “mutual fertilizing”’ (ibid.: 137). So if we take into account interpersonal relations in economy, we can break with the ‘dismal science’ of traditional economics (ibid.).2 We can also find in many economic articles dealing with this subject a second thesis. Interactions seem always to exert a ‘positive’ effect at the collective level. They produce ‘efficient’ situations and are therefore socially desirable. Such an idea appears in particular in the economic analysis devoted

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to altruism. Phelps, for example, in the introduction to the book he edited concerning this question, wrote: The price system would work less well and would be less widely applied, were it not that the economic agents … in fact display a decent regard for the interests of those with whom they exchange and for society as a whole. (Phelps 1975: 3, quoted by Zamagni 1995: xx) Finally, a third thesis – linked with, but different from, the first – appears in economic analysis with interpersonal relations. Individuals are almost always imagined as benevolent, or even altruistic or, at worst, indifferent and egoist.3 We rarely meet agents with negative feelings toward others. They are not illwilled, full of hatred, motivated by anger. They are not ‘ bad boys’. However after completing a study of the ‘vertical’ dimension of interpersonal relations in economics (Gazier and This Saint-Jean 2005), we have been more and more sceptical about these theses, especially the last one. Economic sociology in particular often reminds us that relationships usually have a ‘vertical’ dimension, especially in the economic world; that ‘authority’, ‘hierarchy’, and even ‘power’ or ‘domination’ exist.4 And immediately many notions, such as ‘violence’, ‘conflicts’ or ‘strength relations’, are called forth. But if one is convinced by the relevance of vertical relations beside or above horizontal ones and by the importance of power, conflicts and strength relations in vertical relations, it becomes difficult to neglect the ‘dark side’ of relations. Thus it becomes very difficult to consider, as in the first thesis, that interpersonal relations are always ‘positive’, at least for the both parties in a relation. In a comment Gui admits himself that ‘the expression ‘relational’ … does not necessarily mean nice, pleasant, or positive. Indeed, there also exist a ‘dark side’ of relations … and ‘negative interpersonal exchanges” (2000: 143). In the same way, contrary to the second thesis, interpersonal relations are not always ‘positive’ and desirable at a collective level and sometimes create ‘inefficient’ situations. Even peaceful relations could also be undesirable and associated with inefficiency. And, conversely, interactions in which conflict and aggression exist can result in socially desirable situations. In fact those ideas are not at all new in economics. One just has to remember the alleged virtues of competition and emulation! The link between interpersonal relations and socially desirable situations is far from simple. Finally, contrary to the third thesis – and it is the main point for us – we are driven to think that, besides the indifference of the egoist that we generally find in economic models and the benevolence of the altruist that we often find in analysis devoted to interpersonal relations, there also exist bad, wicked, perverse people, full of hatred. Some bad boys! Therefore we think it is necessary to understand why it seems so difficult for our discipline to accept this idea of ‘bad’ individuals. In order to find an

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explanation for such an omission, we will proceed by three steps. First, we shall recall that, if in most economic analysis dealing with interpersonal relations we find that altruism and egoism are presented as alternatives, in philosophy the main opposition concerning man in his relations with others has for a long time been between love and hatred. Then we shall provide a sketch of recent economic analysis in which this ‘dark side’ of the individual appears, especially studies with negative interdependent utilities, with ‘envy’ or with ‘conflict’ and ‘threat’, especially in game theory. We think such an account is necessary for at least two reasons: first, in order to establish an account which is a little less unfair to our discipline than the one we have had before; second, we hope that, by sketching such an account, we can find some elements allowing us to understand the relative weakness of that literature. In our third step, we shall then investigate different possible answers to our question.

Hatred: a central passion Without being too long, we would like to recall here that, if in most economic analysis dealing with interpersonal relations we meet as an alternative the opposition between altruism and egoism, in philosophy the main opposition concerning man in his relations with others has been for a long time between love and hatred. Even without looking in Nietzsche’s philosophy or in Freud’s texts, hatred holds a central position in the main tableaux des passions that we can find especially in Aristotle,5 Descartes,6 Hume and Spinoza.7 Given the influence exerted by Hume on our discipline, let us turn our attention briefly to the two texts he devoted to the passions, that is, A Dissertation on the Passions (Hume 1757) and Book II of A Treatise on Human Nature (Hume 1739–40). For Hume, hatred is one of the four central passions and the pair ‘love– hatred’ is always analysed in a perfectly symmetrical way. Is it necessary to recall here that in Book II of the Treatise hatred and love are two of the four sides – pride and humility the other two – of the central ‘square’ of passions?8 Such a symmetry appears also in the definition he gives of these passions: ‘Love or Friendship is a complacency in another, on account of his accomplishments or services: Hatred, the contrary’ (Hume 1757: s. II, 1). Thus, if the object of these two passions is identical, their cause is opposed: ‘The object of love and hatred is some other person: The causes, in like manner, are either excellencies or faults’ (ibid.: s. II, 2).9 Let’s recall also that for Hume each of these two passions is associated with all kinds of other passions. He writes thus: The passions of love and hatred are always followed by, or rather conjoined with, benevolence and anger. It is this conjunction, which chiefly distinguishes these affections from pride and humility. For pride and humility are pure emotions in the soul, unattended with any desire, and not immediately exciting us to action. But love and hatred are not complete

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within themselves, nor rest in that emotion, which they produce; but carry the mind to something farther. Love is always followed by a desire of happiness to the person beloved, and an aversion to his misery: As hatred produces a desire of the misery, and an aversion to the happiness of the person hated. These opposite desires seem to be originally and primarily conjoined with the passions of love and hatred. It is a constitution of nature, of which we can give no farther explication. (Ibid.: s. III, 3, emphasis added)10 However, unlike Aristotle,11 he considers hatred and anger as two different passions and he does not think that ‘love is nothing but the desire of happiness to another person, and hatred that of misery’ (Hume 1939–40: Book II, Part II, s. VI). Beside hatred and anger appear then two other passions: ‘envy’ and ‘malice’.12 They take place in the ‘circle’ of passions: ‘All resembling impressions are connected together, and no sooner one arises than the rest immediately follow. Grief and disappointment give rise to anger, anger to envy, envy to malice, and malice to grief again, until the whole circle be completed’ (ibid.: s. IV, 283). Hume writes: Malice and envy also arise in the mind without any preceding hatred or injury; though their tendency is exactly the same with that of anger and ill-will. The comparison of ourselves with others seems to be the source of envy and malice. The more unhappy another is, the more happy do we ourselves appear in our own conception. (Hume 1757: s. III, 4) Thus envy and malice arise from – and require – an interpersonal comparison between envious or malicious man and the situation of others. This comparison even plays a central role: ‘The direct survey of another’s pleasure naturally gives us pleasure, and therefore produces pain when compared with our own. His pain, considered in itself, is painful to us, but augments the idea of our own happiness, and gives us pleasure’ (Hume 1757: Book II, Part II, s. VIII, 375).13 What differentiates envy and malice is the following feature: The only difference betwixt these passions [malice and envy] lies in this, that envy is excited by some present enjoyment of another, which, by comparison, diminishes our idea of our own: whereas malice is the unprovoked desire of producing evil to another, in order to reap a pleasure from the comparison. (Ibid.: Book II, Part II, s. VIII) The passion of envy shares also with anger a similar feature: there exists ‘a very close relation between these two … passions’ (Hume 1757: s. III, 5). Hume writes, ‘It is not a resemblance of feeling or sentiment, but a resemblance

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of tendency or direction. … [E]nvy is naturally accompanied with anger or illwill. … [T]o delight in another’s misery almost unavoidably begets aversion towards him’ (ibid.: s. III, 5). It is necessary in order to complete our demonstration of the essential part given by Hume to hatred and other associated passions to recall that he gives a fundamental role to all the passions. He writes, for example: It seems evident, that reason, in a strict sense, as meaning the judgement of truth and falsehood, can never, of itself, be any motive to the will, and can have no influence but so far as it touches some passion or affection. (Ibid.: s. V, 1) Or, in another frequently quoted passage, he claims: We speak not strictly and philosophically, when we talk of the combat of passion and of reason. Reason is, and ought only to be, the slave of the passions, and can never pretend to any other office than to serve and obey them. (Hume 1939–40: Book II, Part III, s. III)14 However, if it is true that hatred and other associated passions play a central part in Hume’s work, is economic activity not beyond their influence? The following passage shows that, for Hume, it is not the case and that the passions of hatred, anger, ill will and envy are central also in economic activity: Suppose that two persons of the same trade should seek employment in a town that is not able to maintain both, it is plain the success of one is perfectly incompatible with that of the other; and that whatever is for the interest of either is contrary to that of his rival, and so vice versa. Suppose, again, that two merchants, though living in different parts of the world, should enter into co-partnership together, the advantage or loss of one becomes immediately the advantage or loss of his partner, and the same fortune necessarily attends both. Now, it is evident that, in the first case, hatred always follows upon the contrariety of interests; as, in the second, love arises from their union. (Ibid.: Book II, Part II, s, IX)1516

When Homo oeconomicus seems to be a ‘bad boy’ However, if in philosophy the main opposition concerning man in his relations with others has been for a long time between love and hatred, in most recent economic analysis dealing with interpersonal relations the central alternative opposes altruism and egoism. Hatred and other associated passions rarely appear. In economic models we seldom meet agents with negative feelings toward others, feelings which drive them to desire pain for others, to be

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happy when the other is unhappy and unhappy when he is happy. Agents are rarely ill-willed, full of hatred, angry or envious (except in a very specific sense of the notion). At the same time, for nearly thirty years, models with altruistic or benevolent agents have multiplied. However, a certain number of economic works show situations in which an agent seems to be a bad one (call him ‘BB’ for ‘Bad Boy’). He seems to desire pains or sorrow for the other (‘X’). He seems to be happy when the other is unhappy and unhappy when he is happy. So let us sketch an account of economic analysis in which this ‘dark side’ of the individual and the ‘negative’ dimension of human relations appear. We will successively examine studies with ‘negative interdependent utilities’, with ‘envy’ and then with ‘conflict’ and ‘threat’, especially in game theory. When familiar notions of utility and preferences are used, this ‘dark side’ appears when BB’s utility depends negatively on X’s utility (in fact often on the quantity of goods possessed by X). This is what authors call ‘negative interdependent utilities’. We can notice here that in 1972 Mishan was surprised that, when economists take into account interdependences between utilities, they usually consider them ‘positive’ and rarely suppose they also could be ‘negative’ as in situations of ‘malevolence’ and ‘envy’ (Mishan 1972: 974).17 He thus writes, ‘Once we introduce (interdependent utilities) … , then we are bound to recognize the existence of “malevolence” as well as “benevolence”. (If malevolence is too strong a word, perhaps “envy” is more acceptable as the response entailed by negative interdependent utilities.)’ (ibid.: 974). However, he continues, it has not always been the case: ‘negative interdependent utilities appear to have been more popular with economists than positive ones’ (ibid.). Thus, one of the first appearance of interdependent utilities’, Duesenberry’s assumption of relative income (Duesenberry 1949), corresponds to a ‘negative’ one. The notion of interdependence holds a central position in Duesenberry’s book. As he explains in his introduction, the starting point of his work is a criticism of the Keynesian theory of aggregate demand, which, according to him, is based on two unacceptable central assumptions. The first is that ‘every individual’s consumption behavior is independent of that of every other individual’ (ibid.: 1). On the contrary, according to Duesenberry, ‘[T]here are strong psychological and sociological reasons for supposing that preferences are in fact interdependent’ (ibid.). He emphasises that it is not at all a new idea in economics: [T]he interdependence of preference system has been recognized since the earliest days of economics. One can find discussion of emulation and the desire for distinction in the nonanalytical part of Jevons and Marshall, not to mention such writers as Veblen and Frank Knight. But in Jevons and Marshall, remarks on this subject are mere obiter dicta and do not affect the formal analysis. … Both Veblen and Knight made real contributions to our understanding of consumer behaviour problems. But because their interest lay in other fields, they did not try to develop a

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He thus proposes a theory in which a man’s utility is greater the lower the income of others in relation to his own income. More precisely Duesenberry claims that ‘it seems quite possible that, after some minimum income is reached, the frequency and strength of impulses to increase expenditures for one individual depend entirely on the ratio of his expenditures to the expenditures of those with whom he associates’ (ibid.: 32). That is, more formally, if Ci is the total consumption expenditure of the individual i and Ui his utility, then: ‘Ui = Ui (Ci /ΣαijCj), with Cj the consumption of the individual j and αij the weight that i gives to the j’s expense’ (ibid.). However, if we consider the justification Duesenberry gives for such an assumption, we see that he supposes not only that, if society is ‘formally classless’, it is ‘nevertheless characterized by a system of differentiated status’ (ibid.) but also – and it is the main point for us – that motivations which are behind such a utility function are rather different from those of an agent who takes pleasure in the sorrow of the other and conversely suffers from his happiness. It is true that his utility depends negatively on the other’s consumption, but for Duesenberry the central notion concerning motivations is the notion of ‘self-esteem’, as is clear in pp. 28–31 of his book. He writes, ‘The maintenance of self-esteem is a basic drive in every individual’ (ibid.: 28). Everything else follows from this notion and there is nothing ‘bad’ or ‘nasty’ in the motivation of the agent. He thus explains: Our social goal of a high standard of living, then, converts the drive for self-esteem into a drive to get high quality goods. The possibility of social mobility and recognition of upward mobility as a social goal converts the drive for self-esteem into a desire for high social status. But since high social status requires the maintenance of a high consumption standard, the drive is again converted into a drive to obtain high quality goods. (Ibid.: 31)18 The follow-up to this quotation is very interesting too: In both cases the drive operates through inferiority feelings aroused by unfavourable comparisons between living standards. The strength of such feelings suffered by one individual varies with the frequency with which he has to make an unfavourable comparison between the quality of the goods he uses with those used by others. This frequency will depend, as we have already shown, on the ratio of his expenditures to those of others with whom he comes into contact. (Ibid.: 31)

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What we find here in fact is the notion of ‘envy’; an agent suffers from the other’s happiness only because of ‘inferiority feelings aroused by unfavourable comparisons’. He is not ‘wicked’ or ‘nasty’, but simply ‘envious’. Many economists deal with the notion of envy and put it at the heart of their thoughts. They assume an individual who estimates his situation (generally his endowment in goods, but sometimes also his income or his level of consumption) and his satisfaction, via a comparison with another’s situation. An unfavourable comparison produces dissatisfaction and conversely, a favourable comparison produces satisfaction.19 In particular, since the beginning of the 1980s and the return of interpersonal relations to economic theory, envy appears in different kinds of economic works. But we find this notion in economic works a long time before, especially in analyses of consumption (Veblen 1899; Duesenberry 1949) and in analyses devoted to criteria of social justice. In his article ‘Envy’ in The New Palgrave, Peter J. Hammond notes that, if different definitions of this notion exist in economics,20 most economists – and especially those dealing with social justice21 – use it in a ‘narrow technical sense’ (Hammond 1987: 164). They adopt the following definition. Considering xgi the endowment of each individual (i) in the n goods (g), each individual is supposed to have preferences represented by the ordinal utility function Ui of xi vector, Ui(xi). One says that i ‘envies’ j if Ui(xj) > Ui(xi), that is, i prefers j’s endowment to his own. This notion has been used after Foley (1967) by different economists in order to define ‘equitable’ allocations: they say that a vector of allocation x is ‘equitable’ if Ui(xi) ≥ Ui(xj) for every i and j. Hammond (1987) explains that all these economic works on ‘absence of envy’ in fact find their origins, far away from philosophy, in mathematical analysis devoted to the question of ‘fair division’.22 Thus, when he defined this notion, Foley (1967) pursued a line of analysis on the ‘fair division of a cake and with non-envy’, as those realised by Steinhaus (1948, 1949) and Dubins and Spaniers (1961). Brams and Taylor (1996: 2) emphasise that the use of the concept of absence of envy in mathematics appears also in Gamow and Stern (1958). Foley has been followed in particular by Kolm (1971), then by Schmeidler and Vind (1972), who generalise these works to the case of an exchange economy with several goods, Pazner and Schmeidler (1974) and Varian (1974), who consider a production economy, and Feldman and Kirman (1974), who loosen the condition of ‘total absence of envy’ and define three different measurements of the ‘degree of envy’ of each allocation. Hammond emphasises the ‘purely technical’ dimension of this notion of envy because ‘it tells us nothing about i‘s emotional or psychological state, whether i is unhappy because he prefers what j has, or whether i’s “envy” makes him want to harm j’ (Hammond 1987: 165, emphasis added). He speaks of an ‘unemotional’ notion (ibid.). He explains also that there is no notion of ‘sin in this unemotional concept’ (ibid.) and he claims that it would be preferable to ‘say that “i finds j’s position to be enviable”, to minimize the

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suggestions of emotion’ (ibid.). Feldman and Kirman explain also that ‘this concept of fairness is appealing [for economists] because it only depends, like other economic concepts, on individual tastes and endowments’ (Feldman and Kirman 1974: 995). Elsewhere (This Saint-Jean 2007) we have emphasised that this very specific ‘technical’ notion of envy sketched in normative economic works is completely different from the notion of envy that we find in the main philosophical texts devoted to this notion. Focusing mainly on the works of Aristotle (Nicomachean Ethics and Rhetoric), Thomas Aquinas (Summa Theologicae), Hume (Treatise of Human Nature and Dissertation on the Passions), Smith (Theory of the Moral Sentiments), Kant (Die Metaphysik der Sitten) and Rawls (Theory of Justice), we show that, in these texts, six salient features of envy appear.23 First, envy is defined as a passion in which the envious man suffers from others’ prosperity and – in a symmetrical way – enjoys others’ misfortune. Second, this passion gives rise to an action by which the envious man seeks to harm the other – even if, in order to accomplish this aim, he must act against his own personal interests. This passion is therefore associated with suffering by two different links. Third, envy is a ‘bad feeling felt by bad persons’ (Aristotle 1967: II, 11, 1388 a, b) and must be morally condemned. Therefore it must be distinguished from the fair sorrow we feel in front of the undeserved good fortune of others (often called ‘indignation’, after Aristotle). It must also be distinguished from the pain caused by seeing the possession by others of good things that are highly valued and which we could feasibly acquire for ourselves (called ‘emulation’ by Aristotle). And, at least, it must be distinguished from the fear for an individual of seeing others’ prosperity going against his own material interests. Fourth, envy can appears only if an interpersonal comparison is possible; therefore a certain kind of social proximity is necessary (‘potter against potter’, ibid.: II, 11, 1388a, b; ‘kings against kings’, Bacon 1601). Moreover, such a comparison is often based on an oriented social scale, in other words, on a social hierarchy. Fifth, this passion is, if not omnipresent in the social world, at least very widespread. Sixth, envy is usually associated with other ‘dark’ passions, such as hatred, anger or ill will. If we now come back to the economics literature devoted to the absence of envy, we can easily measure the distance between envy defined here and the notion identified in philosophical writing. It is true that, in ‘technical’ envy, the envious man makes a ‘comparison’ between his situation and that of the other. It is also true that this comparison is unfavourable for him. But is this unfavourable comparison similar to the suffering generated by others’ prosperity? Where are the destructive behaviors provoked by envy? ‘Technical envy’ is a valuation made by the envious man of a situation he cannot change, a simple report of a given situation, and the behaviour eventually provoked by such a valuation is not taken into account. In fact, if a decision and a behaviour follow, they are not those of the envious man but those of the ‘policy maker’ (Feldman and Kirman 1974: 997–98), the ‘benevolent dictator’ (ibid.: 1004) or the ‘enlightened ruler’ (ibid.: 1000) trying to establish a redistributing

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policy in order to ‘maximize equity’. There is no idea of rating, or even of hierarchy, in this comparison.24 This envy is not open to moral condemnation or a fortiori vicious. The notion of ‘technical envy’ is so broad that it is not even possible to distinguish between ‘envy’ and ‘indignation’.25 However, other economic analysis shows an individual who is moved by the envy he suffers from and can by his decision and his behaviour in turn harm the other.26 One can mention for example, after Brennan’s (1973) analysis of a situation where some agents can support redistributive policies in order to reduce the rich’s consumption, Banerjee’s (1990) model of equilibrium with envy in which a system of graduated income tax can be used in order to reduce the consequences of envy. Kirchsteiger (1995) introduces also envy in a bargaining model. Rapoport and Weiss (2001) show that sometimes co-operation inside a community can produce, not positive effects for its members, but negative ones; when co-operative behaviour is limited to a restricted group (social, ethnic or religious), co-operation generates envy among those who are not members of the group and hostile behaviours towards co-operative individuals. Strom (1995) tries to show that the notion of envy is important in order to understand how the labour market really functions; he introduces ‘an internal comparison effect’ in a model of wage negotiation (satisfaction of a first kind of agent negatively depends on the wages of a second kind), testing this model with econometric data on Norway. Mui (1995) tries to take into account the consequences of envy on innovation by the way of ‘retaliation’ behaviour. If the individual sketched in all these analyses seems to be more similar to the ‘envious man’ of the philosophers, we know nothing, however, of these deep motivations. It is then always possible that he obeys ethical considerations, consideration of ‘social status’ or – as in Duesenberry – considerations of ‘self-esteem’. Here again we cannot be confident that we are in front of ‘real’ bad boys! We can make this last remark concerning other kinds of economic analysis where we could imagine meeting individuals we are interested in. We could in fact expect to find them in all the reflections on the notion of ‘conflict’ in economics (Schelling 1960; Boulding 1962; Intriligator 1982; Hirshleifer 1987, 1995, 2001) and in particular in those taking place in the theoretical framework of game theory (especially the ‘ultimatum’ and ‘dictator’ games). However we must dismiss in all this wealth of literature every work analysing ‘conflict’ where an individual BB tries to diminish X’s well-being, because their material interests are opposed: all that X possesses is lost for BB. Here BB can be absolutely indifferent toward X and engage in hostile behaviour only because X represents for him an obstacle in his search for wealth.27 In the same way, we must dismiss situations where BB acts in a hostile way against X because such an action improves his material interest in the long term. This is often the case in analyses of ‘negative reciprocity’ where an agent responds in a hostile way to a hostile action of the other (Fehr and Gätcher 2000: 160; Fehr and Schmidt 1999).28 This seems to exclude from

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our field of investigation most of the analysis of game theory devoted to ‘punishment’ and ‘threat’. We must also rule out all analysis in game theory, evolutionary games and experimental economics in which hostile behaviour rests on motivations linked with ethical considerations (especially in terms of ‘justice’ or ‘equity’) (see here Fehr and Schmidt 1999). Zizzo and Oswald (2001), for example, present an experiment where players can pay in order to reduce the income that another player was allocated in an arbitrary way; they show that the majority of players were ready to pay in order to reduce others’ income. Their motivation seems, however, determined by ‘justice’ considerations, because the authors show also that the players accept to pay more to reduce the income of rich players than poor ones. They also show that the probability of a player seeing his income diminished diminishes if the other players consider the income ‘deserved’. If one tries to assess all the economic works we have just mentioned briefly above, two points must be underlined. First, this literature is not after all very extensive (even if it is likely that our inventory is incomplete). Second – and it is the main point for us – it seems very difficult for the authors to accept the idea that individuals can take pleasure from the misfortune and unhappiness of the other, unless that misfortune or that unhappiness improves their own situation in terms of material interests – present or future – or in terms of ‘social status’, or if it is in keeping with the ideas they have of ‘justice’. At the same time, the idea that individuals can take pleasure in the other’s happiness, without any other justification, seems not to pose a problem. It is this double statement that we must now try to understand.

Can a rational man be full of hatred? So let’s take the question seriously and try to find some explanations for this ‘reticence’ that economists seem to have about taking into account the ‘dark’ dimension of human beings. A first explanation could be that the individual who is ‘envious’ (in the strong sense) or ‘ill-willed’ or ‘full of hatred’ or motivated by ‘anger’ cannot be rational and therefore has no place in the current theoretical universe of economics. Concerning ‘hatred’, the French philosopher Ogien very explicitly adopts the opposite position. According to him it is possible to analyse ‘hatred’ in terms of rational behaviour and beliefs. He writes: it is possible to deny that bad coincides with irrational or good with rational. In the case of hatred for example, I think it is not impossible to show that behaviour full of hatred is in no way irrational, even if it is possible to judge it as bad. (Ogien 1993: 43, our translation) For him the question is important because he thinks that if a man full of hatred is irrational, then he is ‘immune to moral blame or indignation’ (ibid.:

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48, our translation). In order to clarify this question, we must first try to specify what we mean by ‘rational’. Could ‘envy’, ‘hatred’, ‘ill will’ or ‘anger’ be ’rational’ according to the different meanings of this term in current decision theory? If ‘rational’ means an individual for whom choices result from a preference relation (defined on a choice set) which is ‘transitive’ and ‘complete’, nothing prevents this rational individual from being envious or ‘illwilled’, ‘full of hatred’ or motivated by ‘anger’. Nothing in the properties of ‘transitivity’ and ‘completeness’ forbids it. And if by ‘rational’ we mean the property of ‘compatibility’ between choice and preferences, we cannot see why the answer would be different.29 So how could we explain that economics sets limits on the extension of the theoretical framework based on rationality, in the face of the individual who is ‘envious’ (in a strong sense), ‘ill-willed’, ‘full of hatred’ or motivated by ‘anger’? So let us propose a second explanation. If economic works suppose that individuals are not of this kind and if, conversely, they are supposed to be either altruistic or egoistic, it is only because such an assumption would conform to ‘real’ behaviour in the economic world. Perhaps some could admit that such an assumption is perhaps inexact but is, nevertheless, a good approximation. If they do that, they have to demonstrate such a claim. Probably some, rather optimistically, could think that this demonstration will come from experimental economics. However – independently of the general question of the validity of the ‘empirical proofs’ given by experimental economics30 – those works will never be able to provide such a demonstration. They can only prove that, in particular situations in which agents are put (particular choices they have to make), behaviour and decisions are not those of individuals who are ‘envious’, ‘ill-willed’ or ‘full of hatred’. However, we could always think that in other situations – not yet conceived of – the ‘dark’ side of human beings will appear! Moreover the authority of all the philosophers who see in ‘hatred and love’ the main alternatives in the social world authorises us to doubt the validity of this ‘approximation’. But others could then answer that this kind of situation, in spite of their omnipresence in the social world, is not important in the economic field. In the economy, the only passion we have to consider is the passion for material gain and that an economic actor is motivated only by his self-interest, in the narrow sense of this term. However, if this assumption clearly played a fundamental role in the history of Political Economy, the situation seems to have changed nowadays. Edgeworth, in his Palgrave’s Dictionary of Political Economy article, ‘Pleasure and pain’, writes: For the most abstract part of economics, the theory of exchange, it need not be postulated that each party acts from self-interest, but only that he is not actuated by regard for the interest of the other parties, those with whom he competes or bargains. The efforts and sacrifices which are required to supply markets – including the labour market and the loan market – are often incurred for the sake of one’s family rather than

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We can also quote what Becker explains in his Nobel address: Unlike Marxian analysis, the economic approach I refer to does not assume that individuals are motivated solely by selfishness or material gain. It is a method of analysis, not an assumption about particular motivations. Along with others, I have tried to pry economists away from narrow assumptions about self-interest. Behavior is driven by a much richer set of values and preferences. (Becker 1993: 385) And we add that nothing forbids us a priori to think that the economic individual could be ‘envious’ (in the strong sense), ‘ill-willed’ or ‘full of hatred’ or motivated by ‘anger’, if he can be altruistic or benevolent. And the work of Veblen, for example, is here to recall for us the importance of envy in consumption behaviour. So this second explanation does not seem convincing, either. We can then propose a third explanation. Taking account of (strong) envy, hatred and other harmful passions, is it not again opening the door of our discipline to considerations concerning the motivations of agents and then to psychology? In fact, in order to identify man as being ‘bad’, ‘full of hatred’, ‘envious’ (in the strong sense) or ‘ill-willed’, we must look at the motivations of individuals. Therefore we must give up our discipline’s reluctance to take these elements into consideration. When he proposes to introduce ’negative interdependent utilities’ in the analysis of consumption, Duesenberry (1949) explains very clearly why some economists could be reticent to such a modification of our frontiers. Before presenting his new consumption choice theory, he writes: The preference system analysis of consumer behavior is a somewhat remarkable tour de force. It seems to say something about consumer behavior without saying anything about the motivations of the consumers in question. In its present form it is a more or less deliberate attempt to sidestep the task of making any psychological assumptions. It has the

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advantage that it allows one to avoid getting out on a psychological limb which may collapse at any moment. (Ibid.: 17, emphasis added) On the other hand, when we introduce ‘interdependences’, economists must cope with the problem our discipline decided to avoid: ‘In short, we have to face up to the problems of psychological bases of consumer choice’ (ibid.: 18). And he adds, not without humour, ‘But as soon as one considers that problem one sees why economists have tried to avoid it’ (ibid.). Elster (1998) develops rather similar ideas. He explains that economists, with a few exceptions (especially Frank 1988), eye emotions – such as ‘anger, hatred, guilt, shame, pride, pridefulness, admiration and liking’ but also ‘envy, malice, indignation and jealousy’ (ibid.: 48) – with distrust. He then writes: Although economists occasionally use emotional terms such as envy or guilt, the referents of these words usually have little to do with emotions as philosophers and psychologists from Aristotle onwards have understood them. And whereas a handful of economists have in fact appealed to emotions in this more traditional sense, it is always to address specific issues rather than to suggest a general way in incorporating emotions into the toolkit of economists. (Ibid.: 47, emphasis added) Concerning ‘envy’, it should be observed here that the appearance in current economics of works trying to introduce a notion more similar to the philosophical one (in particular experimental economic works)31 is concomitant with the current multiplication of exchanges between our discipline and psychology. And most of the economic works dealing with the ‘technical notion’ of ‘envy’ have been written before such an evolution of the frontiers of our discipline. However, this explanation is not sufficient in order to understand why economics could have introduced ‘psychological factors’ corresponding to ‘positive’ interpersonal relations more easily than to ‘negative’ ones. We must therefore pursue our inquiry. So let’s try a third explanation. When we say that an individual is ‘envious’, ‘ill-willed’, ‘full of hatred’ or ‘motivated by anger’, in fact we always make a normative statement.32 So it is perhaps the reason why economists – who are so anxious about keeping normative statements in the background and sure that they can do it – set those representations of individuals aside. But they forget then that ‘badness is not only a moral category, characteristic of normative judgment, but also a principle of explanation’, as Dupuy (2002: 13) recalls. They forget one rule stated by Spinoza, who claims that we must consider: love, hatred, anger, envy, ambition, pity, and the other perturbations of the mind, not in the light of vices of human nature, but as properties, just

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But if we adopt such an explanation, how are we to understand why economists had accepted ‘altruism’, that is, a notion quite as much ‘intrinsically evaluative’? We can then suggest a last explanation. When we ask economists why individuals who are envious, full of hatred, ill-willed or motivated by anger are nearly absent from their theoretical framework, they sometimes answer that with such individuals there cannot be co-ordination. Does not Smith say that envy is one of those affections that ‘drive(s) men from one another, and … tend, as it were, to break the bands of human society’ (1759: VI, s. III, ch. I)? If we assume individuals to be envious, full of hatred, ill-willed or motivated by anger, don’t we take a tremendous risk? We risk opening the door to the formidable question of the foundation of social order, a question that political economy thought, if not resolved, at least to have moved aside, with the assumption of Homo oeconomicus and with the indifference this agent has for others. If we assume individuals who are envious, full of hatred, ill will or motivated by anger, we will find again Hobbes’s question. And in order to solve this last question, would it not be necessarily to introduce Politics again to our discipline? What seems here in question is not least the autonomy of economics – a fundamental question, not an anecdotal one.

Conclusion In order to understand why our discipline seems to have such a difficulty in considering ill will, hatred, anger, or envy (in a strong sense) and to accept the idea of ‘bad’ individuals, we have proceeded in three steps. First, leaning on Hume’s work about passions, we have recalled that in philosophy the main opposition concerning man in his relations with others has long been the opposition between love and hatred, and not – as in most of economic analysis dealing with interpersonal relations – between altruism and egoism. Then, presenting recent economic analysis in which this ‘dark side’ of individuals seems to appear, we conclude that the authors seem to have some difficulty in accepting the idea that individuals can take pleasure from the misfortune and unhappiness of the other, unless this misfortune or this unhappiness improves their own situation in terms of material interests – present or future – or in terms of ‘social status’, or if it is in keeping with the ideas they have of ‘justice’. At the same time, the idea that individuals can take pleasure from the other’s happiness, without any other justification, seems not to pose problem. Trying to understand this double statement, we have examined four explanations. Only the last one seems acceptable. Perhaps economists, in assuming individuals who are envious, full of hatred, ill-willed or motivated by anger, fear taking the risk of opening the door to the

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formidable question of the foundation of social order that they have, if not resolved, at least moved aside with the assumption of Homo oeconomicus and with the indifference this agent has for the others. Whatever may be the reason why economists seem to have such difficulty and why they set bounds to the extension of their theoretical framework based on rationality, we understand that this difficulty is probably not insignificant and refers probably to more or less implicit assumptions, at the heart of our discipline. Thus, even if our answers to the questions asked here are probably not definitive, we hope nevertheless that the reader is now convinced that these questions are in fact probably important.

Acknowledgements We warmly thank here P. Garrouste, B. Guerrien, O. Gün, A. Lapidus, E. Picavet, P. Steiner, F. Vergara and anonymous referees.

Notes 1 Concerning this ‘return’ of interpersonal relations in economics see, for example, Manski (2000), Gui and Sugden (2005), Cahuc et al. (2001), Gui (2000). 2 He borrows this famous expression from Kolm (2000). 3 On altruism, see for example Zamagni (1995) and Gérard-Varet et al. (2000). 4 Whatever the name given and even if we are convinced that these notions must be more clearly defined that they often are. 5 See in particular Aristotle (1967: II). 6 Descartes (1649), in particular Art. 79, Art. 140, Art. 142. 7 Spinoza (1677: Books III, IV, 1677: ch. VI). 8 He writes, ‘let us suppose I am in company with a person, whom I formerly regarded without any sentiments either of friendship or of enmity. Here I have the natural and ultimate object of all these four passions placed before me. Myself am the proper object of pride or humility; the other person of love or hatred. ‘Regard now with attention the nature of these passions, and their situation with respect to each other. ‘Tis evident here are four affections, placed as it were in a square, or regular connexion with, and distance from, each other. The passions of pride and humility, as well as those of love and hatred, are connected together by the identity of their object, which to the first set of passions is self, to the second some other person. These two lines of communication or connexion form two opposite sides of the square. Again, pride and love are agreeable passions; hatred and humility uneasy. This similitude of sensation betwixt pride and love, and that betwixt humility and hatred, form a new connexion, and may be considered as the other two sides of the square. Upon the whole, pride is connected with humility, love with hatred, by their objects or ideas: pride with love, humility with hatred, by their sensations or impressions’ (Hume 1739–40: Book II, s. II, 333). 9 ‘With regard to all these passions, the causes are what excite the emotion; the object is what the mind directs its view to when the emotion is excited’ (ibid.). 10 This passage follows very precisely (with the exception of the last sentence) Hume (1739–40: Book II, Part II, s. VI). 11 Aristotle (1967: II, 4 1380b 35–38 and 1381a 1–2). 12 On ‘envy’ in philosophy (and in particular in Hume) and in economics see This Saint-Jean (2007).

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13 Like Aristotle, Hume remarks also that this difference has not to be too important: ‘Envy arises from a superiority in others; but it is observable, that it is not the great disproportion between us, which excites that passion, but on the contrary, our proximity. A great disproportion cuts off the relation of the ideas, and either keeps us from comparing ourselves with what is remote from us, or diminishes the effects of the comparison. … A poet is not apt to envy a philosopher, or a poet of a different kind, of a different nation, or of a different age. All these differences prevent or weaken the comparison, and consequently the passion. This too is the reason why all objects appear great or little, merely by a comparison with those of the same species. A mountain neither magnifies nor diminishes a horse in our eyes; but when a Flemish and a Welsh horse are seen together, the one appears greater and the other less than when viewed apart’ (Hume 1757: s. IV, 5, 377) 14 Concerning the very complex relations between reason and passions for Hume see, for example, Diaye and Lapidus (2005). 15 J. P. Cléro (1991) reminds us that one can find this example in Aristotle, who writes, ‘Sont nos amis … ceux qui nous ressemblent et ont les mêmes occupations que nous, pourvus qu’ils ne nous gênent pas et n’aient pas les mêmes moyens d’existence ; car dans ce cas “Le potier fait concurrence au potier”’ (Aristotle 1967: II, 4, 1381 b 14–17). 16 Just after, Hume also writes, ‘taking the first case of rivalship, though the pleasure and advantage of an antagonist necessarily causes my pain and loss, yet, to counterbalance this, his pain and loss causes my pleasure and advantage; and, supposing him to be unsuccessful, I may, by this means, receive from him a superior degree of satisfaction. In the same manner the success of a partner rejoices me, but then his misfortunes afflict me in an equal proportion; and it is easy to imagine that the latter sentiment may, in some cases, preponderate. But whether the fortune of a rival or partner be good or bad, I always hate the former and love the latter’ (ibid., emphasis added). 17 His article is directed mainly against Buchanan (1968) and Hochman and Rogers (1969), devoted to redistribution. His accusation is that they ‘empty the contents of the distributive aspect into a purely allocative container … making some agreeable assumptions about human nature’ (Mishan 1972: 971, emphasis added). 18 Other economists used also the notion of ‘negative interdependent utilities’, especially Johnson (1951, 1952), Vickrey (1962) and J. Mercier-Ythier (1998). Johnson in fact criticises Duesenberry’s analysis because he claims that we cannot find Duesenberry’s results when the αij coefficients are always inferior for the group of rich people to those of the poor. 19 In fact, such symmetry does not appear in every economic analysis devoted to envy. Sometimes another terminology is used for the second situation. For example, Feldman and Kirman (1974) (see below) consider this symmetry only in their second measure. Rawls, for example, calls ‘jealousy’ the symmetrical behaviour of ‘envy’. He mentions here the definition given by Aristotle of malevolence (Nicomachean Ethics, 1108b1–6) (Rawls 1999: 576). 20 He refers here to Veblen (1899), Nozick (1974), Chaudhuri (1985) and Brennan (1973). 21 We must underline, however, that all the economists who define social justice as ‘absence of envy’ do not use this definition of envy. Some define envy with ‘negative externalities’ (Duesenberry 1949; Mishan 1960; Kolm 1966; Scott 1972; Brennan 1973; Hirschman 1973; Boskin and Sheshinski 1978; Goldman and Sussangkarn 1983; Villar 1988; Nieto 1991 and others), others with interpersonal comparisons of utility (for example, Varian 1987, which then uses the Rawlsian term ‘resentment’; Rawls in fact distinguishes the ‘rancorous envy’ of the ‘justifiable feelings of resentment at being treated unjustly’, Rawls 1971: 532 ff.). 22 It is also what S. C. Kolm recalls: ‘The history of the concept … has to be known in order to understand and appraise the field. One can certainly propose that men

Is Homo oeconomicus a ‘bad guy’?

23 24 25

26 27

28 29 30

31 32

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have always considered that they could prefer the situation of certain others to their own. The specific application we consider here can be said to have started in 1925, when a young student of physics asked his professor, the famous Dutch physicist Ehrenfest, how one could define a fair wage. After some reflection, the professor proposed the principle that each individual should prefer his wage with his job to the wage–job pair of any other. Twenty years later the student, whose name was Tinbergen, incorporated this idea in his book on income distribution … (1946). There the criterion is called the “principle of exchange”. Yet Tinbergen also points out how nice a society without envy would be. A description in English of this part of Tinbergen’s book was presented by Jan Pen in his Income Distribution (1971: 303–5). Foley (1967) just mentions the criterion for consumption bundles. The book Justice and Equity (Kolm 1971) analyses the general properties of the principle with the name ‘equity’ or ‘fairness’, while noting its particular relation to the absence of envy or jealousy (Kolm 1996: 202). For more details, and presentations of the later analysis, see Thomson (1994), Arnsperger (1994) and Hammond (1987). We justify at length this choice of works in our article and also base our argumentation on other philosophers. Except if there is only one good in the economy. Such a distance has been emphasised several times before, even by authors who belong to this theoretical field (Varian 1974: 67; Arnsperger and Van Parijs 1994: 4; Arnsperger 1996: 218; Kolm 1996: 202; Thomson 1994; Dupuy 1992: 48). However, the use of this expression continues, and some persist in defending it; for example, M. Fleurbaey claims that ‘the inequality Ui(xj) < Ui(xi) seems in reality the sounder way to represent, if not the feeling of envy, at least its immediate root’ (Fleurbaey 1996: 223, our translation). Or conversely when he is in a superior position and draws satisfaction from it he can, by his hostile behaviour, maintain the other in his inferior position. In fact both motivations are not necessarily incompatible: X can be an obstacle to BB’s search for wealth and BB can have malicious motivations towards X. Then the situations we consider here are those in which the second motivations are excluded. Moreover, in negative reciprocity, the ‘wickedness’ of BB is purely reactive; the first hostile move has no explanation, if it is not in terms of material interests. Naturally it would be necessary to demonstrate those claims. For these definitions of ‘rationality’ see, for example, Mas-Colell et al. (1995: ch. 1, 5–16). Concerning the complex links between rationality and envy, see Elster (1998: 68 f.). A criticism – called the ‘parallelism criticism’ – is often addressed to all experimental economics. It emphasises that the ‘results’ obtained in laboratories cannot be transposed outside, because subjects are not in the same conditions. Conversely, Smith and many others after him assume that the experimental ‘results’ are still valid outside the laboratory. They claim that those thinking that this assumption – called ‘parallelism’ – is unacceptable must prove that behaviour inside and outside laboratories is different (Smith 1982: 937; on this question see Jallais 1993: 258–99; Guala 2000, 2002; Siakantaris 2000). See above. In his book devoted to ‘hatred’ Ogien (1993) sees in this normative judgement a central element in the definition of ‘hatred’. Quoting Spinoza, who writes, ‘hatred can never be good’ (Spinoza 1883: Part 4, prop. XLV), he writes, ‘the term “hatred” is not purely descriptive but intrinsically evaluative and negative; good hatred cannot exist and being full of hatred cannot be good, by virtue of the moral properties of “hatred”’ (Ogien 1993: 7, our translation). So there is ‘an analytical, conceptual, a priori, link between hatred and badness’ because ‘hatred is constitutively bad, bad by definition or, in other words … the link between hatred and badness is … analytical, conceptual, a priori (I call it also logical by convenience)’ (ibid.: 17).

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Index

A Discourse upon the Nature and Origin of Moral and Civil Laws 80 A Dissertation on the Passions 264–66 A Treatise on Human Nature 264–66 ‘absorptive capacity’ 25 action, automatic programmes of 25 agents, in economic models 42 agriculture, anatomical analogies 113 Airframe 33 Akerlof, George A. 27 Alacevich, Michele 5 allocation problem 22–23 altruism 101–2, 263 ambition 61 American literature 34–35 Amin, Ash 227 An Essay on Man 75 analogy and metaphor, in the history of science 73–74 analytical rigour 4 analytico-synthetic method 76 anatomy, discoveries 113 animal principle 73 animal spirits 120 anthropogeography 240 applied mathematics 75 architecture 5; as a business 175; for economic activity 175; modernism and neoclassical economics 178–84; postmodernism and neoliberalism 184–86; recycling 188; before twentieth century 176–78; ways of approaching relationship to economics 175–76 archival material, use of 190 Argument from Design 82, 85, 90 Aristotelianism 75 Arrow, Kenneth J. 16, 20 asymmetries 41, 42

attention 14 Au Bonheur des dames (Paradise for Ladies) 33 Augustinian tradition 75 Austen, Jane 33, 34 authority 28 authors, personal experiences 34 automatic programmes, of action 25 automaticity, and creativity 20 autonomy, of economics 2 axiomatic bigamy 133–39 axiomatic method 131–33, 135, 136 axiomatic rigour 136–37 Bain, Alexander 103–4 Balzac, Honoré de 32, 33–34, 35, 40, 41 bankruptcy, in literature 32 Barnard, Chester 14, 17, 28 Barranquilla 197 basis of exchange 26–27 Bauhaus 182–84 Becattini, Giacomo 217 Beccaria, Cesare 50, 60 Becker, Gary S. 273–74 behaviour 25, 97, 224–25 behavioural economics 64 Bentham, Jeremy 65, 177 Bernoulli, Daniel 51 biological evolution, modern synthesis 96 Bittermann, Henry J. 90 Bleak House 33 blood, as metaphor for money 111–12 Boccardo, Gerolamo 127–28 body politic/human body analogy 109 Bogotá see also development economics: convergence of architecture and economics 206; developments following coup 204–6; land ownership

322

Index

199; Plan para Bogotá 202–4; urban plan 198–202 Bonfire of the Vanities 33 boundaries, external and internal to mind 14 boundary conditions 13 bounded cognition 14 bounded rationality 14, 52, 141, 224–25 Bourbaki, Nicholas 134 Bourbakism 134–35 Boyle Lectures 74, 86 brain, development and adaptation 22 Bratya Karamarazovy (The Brothers Karamazov) 43, 44–45 Broadie, Alexander 81–82 Brontë, Charlotte 33, 34 Buddenbrooks 33 business novels 33 Caffentzis, Constantine G. 108 Camerer, Colin 18 capital accumulation 220, 221, 226 capitalism 6–7, 220, 222, 225 Cartesianism 74, 86–87 Casson, Mark 26 Cattaneo, Carlo 17 central place theory 214 Cesar Birotteau (The Rise and Fall of César Birotteu) 32, 33 character 1, 43–44 Cheyne, George 123 Chimbote plan 195–96 Choi, Young B. 25 choice-theoretic models 15 Christaller, Walter, central place theory 214 Cicero 82 circulation, pre-classical idea 123 civilisation and society 63 classification systems 18 Clément, Alain 4 co-evolution, of medicine 4 co-ordination 28 Coase, Ronald H. 14–15, 27 cognition, limitations 14, 22 cognitive economics 51, 54 cognitive power, scarcity 15 cognitive resources 24–28, 29 cognitive specialisation 24–25 cognitive speciation 24–25 cognitivism 3 Colombia 5, 196–98 comparative anatomy and physiology 112–16 comparisons, and envy 268–70

competition 220 competition, perfect 216–17 complementarities, organ to activity 112–13 concepts of force, in society 89 conceptual integrity 138 Connell, Philip 39 conservation 187–88 consistency 141 constrained optimisation 13 constructivism 184 contagion 117 controversies, economists and writers 38–39 Copernicus 21 Corry, Leo 143–44 Costa, Andrea 5 Cournot, Antoine-Augustine 43 Cowles Commission 135 creativity 20, 61, 62 credit 120–21 Cremaschi, Sergio 3 Crichton, Michael 33 critical literature, economics and literature 34 critical realism 8 cultural evolution, selectionist 98 culture 96 Currie, Lauchlin B. 190, 192, 197–98, 205–6 cycle of money capital 220 Darwin, Charles 95, 98–99, 101, 103 Daubert cases 144–45 Davenant, Charles 109, 113–14, 114–15, 118–19, 120–21, 122 De motu cordis (On the circulation of the blood) 111 Debreu, Gerard 8, 127–28 debt, in literature 32 decision-making 14, 139–40 decision utility 54 deductive logic 14 Defoe, Daniel 109, 121–22 Dei delitti e delle pene (Of crimes and punishment) 50 Der Bourgeois 256 Descartes, René 24, 75 desire, and power 61 Desmedt, Ludovic 4 Deutsche Werkbund 180 deux corps du roi 110 development economics 191, 196–98, 206 see also Bogotá

Index development, uneven 222, 226–27 Dickens, Charles 33, 34 Die deutsche Volkswirtschaft im 19. Jahrhundert 256 Die Verwandlung (The Metamorphosis) 42 diet, healthy 119 disciplinary associations, of economics 30 Discorsi 49–50, 56–57 Discorso sull’indole del piacere e del dolore 56, 57, 60, 63 division of labour 252 domain-relevant similiarity 18 Dostoevsky, Fyodor 32, 40, 43 Dow, Sheila 64 Drucker, Peter F. 7, 246 Duesenberry, James S. 267–68, 274–75 Durand, Jean-Nicolas-Louis 177 Durkheim, Emile, social differentiation 249–50 Easterlin, Richard 54 ecology 187–88 econometrics 4–5 economic activity, social organisation of 14–15 economic events, narration in literature and economics 43–44 ‘economic’ fiction 32 economic models, agents in 42 economic planning 5 economics: absence of negative feelings 266–67, 276–77; development as academic discipline 228; disciplinary associations of 30; in literature 32–35; of literature 35; and psychology 50– 53; simplistic view 108 economists, and literati 38–40 Edgeworth, Francis 273–74 Edizione Nationale delle Opere di Pietro Verri 49 Elementi di economia publica 50 Elster, Jon 275 endowment effect 64 envy 265, 268–71, 275 equilibrium theories 26, 27, 214–15 Essays on Philosophical Subjects 57–58 esteem 102–3, 105 ethics, and literature 46 eusociality 102 evil 7 evolution, meaning of term 97–98 evolutionary biology 95

323

evolutionary models 3–4 evolutionary theory, and social sciences 95 exchange 26–27 expansionism 221 experienced utility 54, 59, 65 experiment 83 experimental philosphy 82–85 ‘experimental’, use of term 81 expert testimony, admission in court 144–45 explanatory power, desire for 137 explanatory unification 2 ‘Factors governing changes in domestic automobile demand’ 160–62 fashion 25 Feldman, Allan 270 Ferguson, Adam 84 final and efficient causes, in society 89–90 final causes 77 firms 27 focusing illusion 54, 65 food resources, analogy of humours 119–20 foreign merchants, as parasites and vultures 116–17 foreign plague 117 formalism 130–31 see also Hilbert, David forms of organisation, aiding knowledge 28–29 Forster, Edward M. 33 Fourier, Charles 178 free trade 118 French literature 34 Frisch, Ragnar 135 Functional City 192 functional differentiation 6–7 fundamental scarcity 13–17 Galileo-Newton tradition 59, 60 game theory 15, 16, 21, 36, 37, 138 Garrone, Giovanna 4–5 Gemeinschaft 6, 249 gene-culture co-evolution 97 general economic equilibrium theory 213, 216 general equilibrium 21 generality, desire for 137 genre 41 geography, and economics 228 George, Stephan 39

324

Index

German historical school 6 Germany, sociological thought 248–50 Gesellschaft 6, 249 Gigerenzer, Gerd 19, 141 Giocoli, Nicola 4, 138 global capitalism 212 globalisation, debate 213 ‘Glocal’ 226 Goblet, Yann Morvrann 239, 240 Gogol, Nikolai 32 good and evil 74–75 Goodacre, Hugh 6 gravitation 89 GREMI group 218 Gropius, Walter 182–83 Grotius 82 Grundriss 252–53, 254 Gui, Benedetto 262–63 Haavelmo, Trygve 167–69 Hammond, Peter J. 269–70 happiness 54–55, 56, 59–64 hard science, as source of knowledge 31 Hard Times 33 harmony 113–15 Harrison, Mark 3 Harvey, David 221–22 Harvey, William 111 hatred 264–66, 272–76 Hayek, Friedrich 18–19, 20, 21, 22–23, 25, 39–40, 184 hedonic philosophy 64 Hendry, David F. 164 heuristics and biases (H&B) programme 138, 139–42 Hilbert, David 131–33, 136 Hirschman, Albert O. 37 historical context, value of 2 historicity 6 history 8–9 history of science, analogy and metaphor in 73–74 Hobbes, Thomas 111–12 Holland in England, spatial-economic logic 236–39 Homo oeconomicus 53–54; as ‘bad guy’ 7, 266–72 Howards End 33 human anatomy and physiology: as analogy for society 110; as model for economy 108–9; representation of economic processes 110–16 human body: as analogy for political 4; and political body 110–12

Hume, David 17, 20, 59; on hatred 264–66; Newtonianism 80–84 humoral medicine 118–19 Hutcheson, Frances 78 hypotheses 77 iatro-political analogy 73 ideology 3 Idiot (The Idiot) 44 Il Caffè 59, 60 illness, bodily and economic 116–20 Illusions perdues (Lost Illusions) 33, 34 images of knowledge 142–44 imagination 2–3, 17, 31 imbalances 114 imitation 23–24 ‘In the Sign of the Axiomatic Method’ 4 income, in literature 32 individuals: as bad 263–64; hatred 264–66 industrial districts 217–18 industrial organisation, as applied theory 15 Industry and Trade 26 influences, methodological 8 information, conflation with knowledge 16 information flow, in literature 44 innovation 218–19 instinct-and-habit theory 99, 106 instinct of workmanship 97, 100–102 instincts, human 98–99 institutions, development of 25 integration agreements 212 intelligence 27 intelligent living 17 interaction, changing knowledge and changing organisation 29 interdependences 275 international capitalism 212 interpersonal relations 262–63 interpersonal rivalry, Veblen’s explanation 102–5 interpretation, difficulties and differences 16 Ireland, Petty’s survey 229–30 Isard, Walter 234; equilibrium model 214–15 Italy, theories of industrial districts 217–18 James, William 95, 99 Japan, business novels 33 justified moral standards 78

Index Kafka, Franz 42 Kahneman, Daniel 138, 139–42; overview of work 50–53; phase 1 of work 53–54; phase 2 of work 54; relation to Verri 64–66; research on happiness 55 Kelly, George 19, 24, 28 Keynes, John Maynard 4–5, 39, 182 see also Keynes-Tinbergen debate Keynes-Tinbergen debate see also Keynes, John Maynard: continued relevance of debate 169; econometricians’ reception of Keynes’ criticism 160–67; ‘Factors governing changes in domestic automobile demand’ 160–62; Haavelmo’s rejection of Keynes’ critique 167–69; Keynes’ critiques 150–56; Keynes’ reply to Szelinski 162; ‘Mr Keynes on the statistical verification of business cycle theories’ 162–63; re-evaluations of Keynes’ views 148–49; Rothbarth’s review 158–60; story of 150–51; ‘The logic of econometric business cycle research’ 165–67; Tinbergen’s econometric approach 149–50; Tinbergen’s reply to Keynes 156–57 King Lear 36–37 King, Willford I. 160–62 Kirman, Alan 270 Klaes, Matthias 47, 189 Klamer, Arjo 186–87 Knight, Frank 15, 16–17, 18, 27–28 ‘knowing how’ 18, 21 ‘knowing that’ 18, 21 knowledge 16–18, 28–29, 31 Koopmans, Tjalling 129, 165–67 Kranton, Rachel E. 27 Krugman, Paul 213, 215–16, 223, 235; three-way interaction 236–37 Kuhn, Thomas S. 1 La Comédie humaine 41 La Maison Nucingen (The Firm of Nucingen) 32 labour, and theories of space 225 Lagueux, Maurice 5 land ownership, Bogotá 199 Lange, Oskar 162–65 language 23, 26–27, 37–38, 40–45 L’Argent 33, 34 L’Assommoir (The Dram Shop) 33 Latin America 5; architects’ ideas for cities 192–96; economic and urban

325

planning after Second World War 191–92; economists’ approach to development 196–98 laws, societal 90–92 Le Corbusier 182, 198 Le Petit Poucet (Tom Thumb) 34 learning approach 141–42 Leviathan 112 liberalism 178 Limits to Capital 221–22 literary characters, individuality 41 literature 3; asymmetries 41; as carrier of knowledge 30, 31; complex motivation 43; in economics 35; economics of 35; and ethics 46; information flow in 44; lack of optimising procedures 42–43; markets in 44; path-dependency 42; plurality of characters 41–42; status in 45; use in economics courses 36; use of language 37; value for economists 45–46; wealth in 32, 45 Little Dorrit 33 living, intelligent 17 Lloyd, Henry 62 Lloyd Morgan, C. 98 Loasby, Brian 2 location theories, units of analysis 224 locational triangle 213 Locke, John 75, 82 logic, in decision-making 14 ‘logic of appropriateness’ 25 Loos, Adolf 179–80 Lösch, August, theory of location 213–14 loss aversion 53, 64 Lyell, Sir Charles 98 MacLaurin, Colin 76–77 malice 265 Mann, Thomas 33 Marchionatti, Roberto 4–5 marginalist economics 235, 236 market theory 26 markets 26, 26–27, 44 Marschak, Jacob 162–65 Marshall, Alfred 17–18, 19–20, 22, 25, 26, 39, 216–17, 235 Marx, Karl 220, 248–49 Massey, Doreen 221–22 materialism and sensationalism 57 Mathematical Colloquium 133 mathematical truth, as logical consistency 136–37

326

Index

mathematics 8, 75, 128–30, 134 Maupertuis, Pierre-Louis Moreau de 57, 58, 63 McCloskey, Deirdre N. 37 measurement 149 mechanico-political analogy 73 mechanisms, of society 88–89 medicine, co-evolution of 4 Meditazioni sulla economia politica 3, 49, 56, 61, 62 memes 96 memetic evolution 96–97 Ménard, Claude 26, 28 Menger, Carl 26 mental health, as metaphor for credit and financial activities 120–22 merchants, role in circulation of money 115 Merton, Robert K. 15–16 Mertvye dushi (Dead souls) 32 metaphor and analogy, in the history of science 73–74 metaphors 37–38 metatheory 133–34 methodology, pluralist 8 Meyer, Hannes 183–84 ‘Micawber threshold’ 36 Milanese school 56; utilitarianism 50 milieu innovateur 218 Mill, John S. 39 Mirowski, Philip E. 92–93 Mishan, Ezra J. 267 modern synthesis theory 96 modernism 5, 178–84 money: circulation and trade 115; in literature 32; as power of command 44; represented by blood 111–12; and Vergesellschaftung 253–54 money circulation, and vital activity 115–16 Montchrestien, Antoine de 109, 110, 112–13, 113–14, 116–17 moral Newtonianism 57–58, 59, 86–88, 88–93 moral philosophy, reforming 82 Morgan, Mary S. 164 Morgenstern, Oskar 135–36 Moscati, Ivan, Ph.D. dissertation 137 motivation, complexity in literature 43 Mounier, Emmanuel 262 ‘Mr Keynes on the statistical verification of business cycle theories’ 162–65 Mr Micawber 36 myths, relationship of physics and economics 73

natural and artificial states 110–11 natural economy 112–13 natural-moral analogy 73 need 62 negative interdependent utility 267 Neo-Kantian epistemology 137–38 neoclassical economics: and architectural modernism 178–84; characterisation 143; idea of rigour 130–31; priorities 142 neoclassical growth theory 226 neoliberalism, and postmodernism 178–84 Neoplatonism 73 neuronomics 30 New Economic Geography 213, 215–16, 236 Newton, Sir Isaac 74 ‘Newtonian method’ 21 Newtonianism 74; David Hume 80–84; Dutch 75; George Turnbull 78–80; moral 86–88; and physico-moral analogy 74–75; Scottish moral 77–85; Scottish tradition 75–77 Novick, David 129 Oakley, Francis 90–91 ‘Objective happiness’ 54 Ogien, Ruwen 272–73 olympic rationality 53 ontogenic evolution 97–98 openness 1, 8 opportunism 25–26 Opticks 74 optimisation 52 order, scientific and sensory 18 organic paradigm 108 organisational economy 27 organisations, limited tolerance of variety 28 other people, supplementary to cognitive abilities 25–26 Our Mutual Friend 33 pain 57–59, 62 Panopticon 177 parables 38, 40–45 paradigm shift 73–74 Pareto, Vilfredo 52 parish, as term of measure 231–32 Pasinetti, Luigi 55 path-dependency, literature 42 patterns, drive to make 21 Pawley, Martin 186

Index Peñalosa, Enrique 202 perfect competition 28, 216–17 Perrault, Charles 34 personal experiences, of authors 34 personalities, split, in literature 43 persuasion 26–27, 37 Peru, Chimbote plan 195–96 Petty, William 6, 110, 112, 115; colonial context of work 239–40; Holland in England, spatial-economic logic 236–39; influences on spatial-economic analysis 232–33; links between geography and economics 228–29; population transfer scheme 229–30, 240; spatial-economic analysis of rent 233–34; survey of Ireland 229–30; ‘terms of measure’ 230–33 Phelps, Edmund S. 263 philosophical hypotheses 83 philosophy: experimental 82–85; hedonic 64 Philosophy of Money 250 phylogenetic evolution 98 physico-moral analogy 78; and Newtonianism 74–75 physico-social analogy 73 physics, relationship to economics 73 Pigou, Arthur 181 Plan para Bogotá 202–4 planning, urban and economic 5 pleasure 57–59 plenty 62 Plott, Charles 138 pluralist methodology 8 Polanyi, Karl 6 policy, and public happiness 63 political body 110–16 political economy, and moral Newtonianism 88–93 Pope, Alexander 75 Porta, Pier Luigi 3 post-Fordism 213 postmodernism, and neoliberalism 184–86 power, and desire 61 power of command, money as 44 Pownall, Thomas 88 praise, of economics 1 preferences 52, 106 Prestupleniye i nakazaniye (Crime and Punishment) 43 price theory, applied 15 Pride and Prejudice 43

327

principal-agent models 16 Principles of Moral and Christian Philosophy 78–79 probabilistic approach 167–69 procedural theory of decision-making 139–40 progress, of civilisation and society 63 prosocial behaviour 101 prospect theory 53, 139–40 psychology: and economics 50–53, 139–42; as metaphor for credit and financial activities 120–22 public happiness 56, 63 pure mathematics 75 quasi-decomposability 24, 27, 29 Rabin, Matthew 142 railway stations 178 Ranchetti, Fabio 35 rank-dependent models 140–41 ‘Rational choice and the framing of decisions’ 53 rational choice model 107 rationality 14, 52; and hatred 272–76 Ratzel, Friedrich 240 recycling, architecture 188 redistribution, and envy 270–71 reference-dependence 54 reflecting faculty 59, 63 Reid, Thomas 84–85 relative fitness 104–5 relative income 267 Renaissance Neoplatonism 73 rhetoric 23 Ricerche intorno alla natura dello stile 50 Richardson, George B. 27 rigour: axiomatic 136–37; change in notion 142; meaning of term 130–31; as penalty 144–45; scientific 4 Rising Sun 33 risk, calculation of 16 Robbins, Lionel 27, 52 Robinson Crusoe 35–36 Robinson Crusoe (character) 53 Romanticism 248 Roos, Charles F. 160–62 Rostow, Walt W. 191 Rothbarth, Erwin 158–60 rules of behaviour 25 Ryle, Gilbert 18, 21 Sachlichkeit 180 Samuelson, Paul 184

328

Index

satisfaction treadmill 66 Schmoller, Gustav 6–7, 245–46; on economic progress 254; evaluation of work 257–58, 259; on money 253–54; social differentiation 250–54 Scholes, Myron S. 15–16 Schumpeter, Joseph A. 25 scientific rigour 4 Scitovsky, Tibor 54, 65 Scottish Enlightenment 3 Scottish moral Newtonianism 77–85 selection 96 selectionist cultural evolution 98 selectionist evolution 98 Selten, Reinhard 19 sensationalism and materialism 57 Sent, Esther-Mirjam 64 serendipity 55 Sert, José L. 190, 192–96, 198, 199, 203–4, 205 Shackle, George 15, 16–17 Shakespeare, William 35 Sherman, Sandra 121–22 Simmel, Georg, social differentiation 250 Simon, Herbert 14, 19, 24, 25, 27–28, 52 Skinner, Andrew 13 skyscrapers 178–79 Smelser, Neil J. 245 Smith, Adam 13–14, 17, 20, 26, 39, 55, 57–58, 59–60, 73, 240; on architecture 177; basis of exchange 26–27; moral Newtonianism 86–88; moral Newtonianism applied to political economy 88–93; theory of mind 20–24 Smith, Vernon 138 social body, threats to 123 social cohesion 251–52, 255 social differentiation: background to German reception of idea 246–48; Durkheim, Emile 249–50; Karl Marx 248–49; Schmoller, Gustav 250–54; Simmel, Georg 250; and social evolution 247; Sombart, Werner 254–57; Tönnies, Ferdinand 249; and totalitarianism 246 social esteem 102–3, 105 social evolution 98 social organisation, of economic activity 14–15 social relationships, vertical dimension 7 social sciences, and evolutionary theory 95 Socialismus und sociale Bewegung 255

societal laws 90–92 society 74–75, 88–90, 123 socio-economic phenomena, markets as 26–27 Sombart, Werner 6–7, 245–46; evaluation of work 258–59; social differentiation 254–57 South Sea Company 121–22 space, theories of: as articulation of mode of production 221; and behaviour 224–25; comparison of approaches 223–25; conceptualisation 212, 213; debates in literature 227; and economic theories 226; Marshallian approaches 216–20, 223, 224–25, 226; Marxian-based approaches 220–23, 224, 225, 226; technology and innovation 218–19; views of labour 225; Walrasian approaches 213–16, 223, 224, 225, 226, 227 spatial agglomeration 216, 237 spatial dispersion 216 spatial-economic analysis: conceptual abstraction 235–36; von Thünen 234–36; William Petty 228–34 spatial measurement, units of 231–32 spatiality 5–6 Specimen theoriae novae de mensura sortis 51 Spencer, Herbert 98, 247 Spinoza, Baruch 275–76 states, natural and artificial 110–11 statistical Testing of Business Cycle Theories 149 statisticians, role of 149 status, in literature 45 Stein–Hardenbergschen reforms 248 Stendhal 40 stereotypes, in literature 41 Stevenson, Robert Louis 43 Stewart, Dugald 85 Storper, Michael 222 storytelling, as source of wisdom 31 structure-conduct-performance 14 subject matter 8 Sullivan, Louis 179 Supreme Court, acceptance of expert evidence 144–45 Swedberg, Richard 245 sympathy 23, 31, 101, 103–4 systems of forces 143–44 systems of relations 143–44 Szeliski, Victor 160–62

Index technology, space and innovation 218–19 territory 218–19 Thaler, Richard 65 The Descent of Man 98–99 The Economics of Welfare 181 The Handbook of Economic Sociology 245 The History of Astronomy 87 The Isolated State 234 The Lord of the Rings 43 The Modern Capitalism 255–56, 257 The Origin of Species 98 The Stages of Economic Growth 191 The Way We Live Now 32–33, 40 The Wealth of Nations 86, 91 theories of the mind 17–24 theories, Supreme Court criteria 144–45 theorising, in practice 8 theory of co-ordination 25 theory of industrial location 213, 214–15 theory of location 213–14 theory of mind 18–21, 99 Theory of Moral Sentiments 23, 55, 91 theory of personal breakdown 28 theory of preferences 106–7 ‘Third Italy’ 217–18 This Saint-Jean, Isabelle 7, 270 three-way interaction 237 Thrift, Nigel 227 Tinbergen, J. See also Keynes-Tinbergen debate: econometric approach 149–50 Tolstoy, Leo 43 Tönnies, Ferdinand 248, 249 totalitarianism 7, 246 trade 115, 118 trade barriers, raising and lowering 212 trade liberalisation, discriminatory 212 training, for economists 2 Trollope, Anthony 33, 35 Turgot, Anne-Robert-Jaques 35, 39 Turnbull, George 78–80 Tversky, Amos 52, 53, 138, 139–42 uncertainty 15, 16–17, 24, 26, 27–28, 52 undersocialisation 26, 27 unemployment 116–17, 118 unhappiness 61 uniformity, assumption of 214 universal rationality, assumption of 14 urban planning 5 usefulness 59 utilitarianism 39, 40, 50, 66 utility 54, 61, 65

329

Value and Money 35 van der Rohe, Mies 184 variety 28 Veblen, Thorstein 3–4, 95; antecedent thinkers 97–100; co-evolutionary model 99; gene-culture co-evolution 97; instinct-and-habit theory 106; instinct of workmanship 97, 100–102; interpersonal rivalry 102–5; lack of testable hypotheses 107; lessons for neoclassical economists 107; and modern evolutionary biology 105–6; relative fitness 104–5; theory of preferences 106 Vergesellschaftung 252, 253–54, 255 verification 149 Verri, Pietro 3, 56–66; analysis of memory 65; analysis of pleasure and pain 57–59; as civil servant 63; commercial society 60–61; Discorsi 56–57; Discorso sull’indole del piacere e del dolore 56, 57, 60, 63; Edizione Nationale delle Opere di Pietro Verri 49; happiness 56, 59–64; Meditazioni sulla economia politica 49, 56, 61, 62; as political economist 48–50, 62; relation to Kahneman 64–66; unhappiness 61 Vertova, Giovanna 6 Vesalius, Andreas 113 Villette 33 Viner, Jacob 86, 90 virtue 61 Volksgeist (national spirit) 252 Volterra, Vito 130 von Neumann, John 133, 135–36 Von Thünen, Johann Heinrich, spatial-economic analysis 234–36 Voyna i mir (War and Peace) 43 Walker, Richard 222 Walras, Léon, general economic equilibrium theory 213 Walrasian model, as metatheory 134 wealth: diverging conceptions 116; in literature 32, 45; as public health 108 Wealth of Nations 22, 55 Weber, Alfred, theory of industrial location 213, 214 Weintraub, Roy 130, 137 welfare 184–85 well-being, and knowledge 17–18 Well-being: the Foundations of Hedonic Psychology 54 Wiener, Paul L. 190, 192–96, 199, 203–4

330

Index

Williamson, Oliver 27 Wolfe, Tom 33 worldview, organic metaphor 112–13 ‘Ye Machine’ 19–20 Young, Allyn 29

Zahavi, Amotz 105 Zahavi Handicap Principle 105 Ziman, John M. 19, 22 Zola, Emile 33, 34, 40 ‘Zona Negra’ 197 Zweynert, Joachim 6