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CH A P T E R 1

A Science and Its History

his is a book about the history of economic thought and the

thinkers behind it. It is natural to begin such a history with some
reflections on the nature of economics as a scientific discipline:
What is the essential nature of economics as a field of research
and study? Over the years several attempts have been made to
formulate a definition of the subject that would capture its essence in a single sentence, at once striking and deep. Possibly
the most famous example of such a definition was proposed by
the English economist Lionel Robbins in the 1930s according to
which economics was the study of human behavior as a relationship between given ends and scarce means that have alternative
uses. The formulation is a perceptive one that clearly goes to the
core of a set of problems that economists are interested in. Sixty
years earlier, Alfred Marshall had written that economics was
the study of men in the ordinary business of life, another interesting definition that communicates something of the special nature of the field. Nevertheless, most economists would probably
feel that if a noneconomist were to ask them the question What
is economics? both Robbinss and Marshalls definitions would
be much too abstract and obscure to provide the outsider with a
helpful answer. A more informative response would be to reply
that economics is the study of the functioning of economic life
in society, adding some illustrations of central issues that economists are concerned with: What determines the prices of goods
and services? What are the causes of unemployment? Which factors decide the distribution of income between individuals and
families in society? Why are some countries rich and some poor?
What are the effects of public policy such as taxes and public
expenditure on prices and the distribution of income? What are
the determinants of trade flows between countries? An answer of
this kind, although longer and less elegant than the definitions
of Robbins and Marshall, is certain to give the outsider a much
better idea of what economics is all about.
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The list of specialized areas could obvious be made much

longer and more detailed, and if we compare such a list with
the set of topics that have engaged economists over the last two
and a half centuries we will quickly discover that over time a
number of interesting changes have occurred regarding the focus of economic research. On the one hand, the list of topics has
expanded: with the development of analytical tools, economists
discovered that their discipline could be applied to a wider set of
issues than before, so that a number of specializations emerged
within the field. Health economics, energy economics, and financial economics are examples of specializations that have grown
up during the last decades of the twentieth century. On the other
hand, with the passage of time, economics has been more sharply
delimited toward other fields of science, with the result that in
some respects it has become narrower. Thus the economists of
the eighteenth and early nineteenth centuries did not draw any
clear borderlines between economics and the field that is presently known as political science, and in general expositions of
the subject they also took up many problems that we now think
of as belonging to philosophy, sociology, or psychology. It is
also worth noting that the relative importance of subfields has
varied substantially over time. The conviction of the classical
economists that the study of population movements belonged
to the core of economics has left few traces in modern textbooks
of economics. John Maynard Keyness analysis of the problem
of unemployment in the 1930s became so influential that it led
to a change in the research agenda of economics that lasted for
decades. The current interest in the economic aspects of environmental problems has no counterpart in the economics literature
of the nineteenth century.
A book on the history of economic thought that was written
with the ambition to cover all of the special fields within the subject could hardly be written, and certainly not as a one-man undertaking; it also seems doubtful whether it would attract many
readers. A more modest and reader-friendly ambition is to give
an impression of the history of ideas within the most central areas of economic theory. One such central area is the functioning
of the market mechanism. The problem of price determination
for goods and services and the question of whether the market
mechanism can be said to work for the common good have been
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at the core of the subject throughout its existence. Another central area is the role of the public sector in the economy, its interactions with the private sector, and the determination of a rational
balance between the market and the state. A third important area
of research is the study of the time path of economic development: economic fluctuations between good and bad times, unemployment, inflation, and growth of productivity and the standard of living. Broad problems of this kind will be at the center
of attention in the chapters that follow.

Economics as a Social Science

The view of economics on which this book is based is that economics is one of the social sciences that study how society works.
It is possible, however, to take a broader view of the subject by
considering all applications of the methods of economic theory
and method. In that case it would also be necessary to cover the
history of applications of economics to problems that are internal to the individual business firm, but this large and important
field will be left out here. The same holds true for the discipline
of accounting, which is also in the nature of a tool for better decision making within firms and organizations. Although the basic
theory and analytical methods of these areas have much in common with economics as usually understood, the objective of the
analysis is different: in business applications the role of economic
methods is to provide a more solid foundation for decisions that
further the objectives of the firm, not to lead us to better understanding of the economic life of society as a whole. Of course, the
borderlines between the areas are not entirely fixed. To understand the functioning of the market mechanism, it is sometimes
important for economists to try to understand the internal workings of the firm. Similarly, for business economists who study the
strategic decisions in firms, it is often essential to understand the
properties of the markets in which the firms operate.
The term economics has been used in English as a name for the
subject since the 1890s. Before then, the name commonly used for
it was political economy. The older name indicated the connections
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litical sciencebut it also served as a reminder that many writers

on economics believed that one of its central tasks was to provide
governments with a better foundation for the design of economic
policy. Today, political economy survives partly in the name of
one of the leading economic journals (Journal of Political Economy)
and partly as a term denoting a particular approach to the study
of economic policy. In several other languages there has been a
similar movement away from terms that gave the impression
of economics as mainly a line of inquiry in the direct service of
the government.

Why Study the History of Economic Thought?

In many countries, the study of the history of economic ideas
was previously considered to be an indispensable part of the
training of an economist.1 This point of view, however, has been
losing ground for a number of years. Many contemporary economists take no interest in the history of their subject, and some
are decidedly doubtful about the value of acquiring historical
knowledge. There may be several explanations for this, but a
main reason is probably that modern economists more than their
predecessors regard economics as a cumulative science in which
new research and new insights are based on existing knowledge
that is constantly being extended and improved. In a cumulative science, therefore, new insights will always tend to make the
views of earlier scientists dated and erroneous. The science as it
appears today is, according to this view, the result of a systematic
process of sorting whereby the valid elements of earlier thinking have been preserved, while the parts of it that were wrong
or uninteresting have been discarded. If we go back fifty or a
hundred years in time, however, it would have been more difficult to argue in this way. This is because, first, economic theories
1
A British economist who got his first university position at the end of the
1940s told me that during his first interview with the department chairman he
was asked, What is your period? In this department the position of the history
of economic thought was apparently so strong that it was expected of every
member of the staff that he had some kind of expertise on a particular period.
However, this young economist thought that the question reflected an obsolete
view of the subject and answered with great self-confidence, It is the future!

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were formulated with a much lower degree of logical precision

than is presently the case and, second, that the opportunities for
systematic empirical testing of the theories were considerably
poorer. It was accordingly a much more complicated issue that
it now is to decide on the exact assumptions on which a theory
was based, whether its construction was logically rigorous, and
if it was consistent with our knowledge of empirical reality. The
old views therefore tended to live on beside the new, and a welleducated economist ought therefore to have some knowledge of
the economic thought of earlier times.
The adherents of the cumulative science view of economics
regard this question in a different light. They see themselves primarily as problem solvers, either because they wish to contribute
to the advancement of academic research or because they have
a desire to contribute to practical problems of economic policy.
Whichever line of problem solving they wish to pursue, it may
seem clear that what they need in the form of scientific training
is knowledge of the present contents of economics. That knowledge can be obtained by reading the best modern textbooks and
getting acquainted with the research literature of the last twenty
to thirty years. But a study of the older literature is only likely to
convince one that what is valid in it has been restated later in a
better, clearer, and more general way. The American economist
Kenneth Boulding (1971) has told the story of an economist who
said that he had no interest in the history of thought because it
was only about the wrong opinions of dead men.
It is clearly undeniable that economics has many of the features of a cumulative science, so that it may be worth reflecting
on the question of why it should be worthwhile to spend time on
the study of its intellectual history. Here are some reasons why it
might reasonable to use some time and effort getting to know the
history of economics.
1. It is fun. Anyone with some familiarity with modern economics
should find it interesting to read about the thinkers and theories of the past, and some will no doubt feel that time spent on
the history of economic ideas does not need any further justification. The opinions of dead men may be fascinating to study
even if one believes them to be wrong. Einsteins discoveries
did not turn Newton into an irrelevant character in history; in a
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similar vein, Paul Samuelson and other twentieth-century economists did not make the life and work of Adam Smith a subject
of no relevance and interest.
2. Some knowledge of the history of thought should form part of
the liberal education of an economist. In books and articles
sometimes even in the popular pressone comes across terms
like Adam Smiths invisible hand, Walrasian equilibrium,
Pareto optimality, Pigouvian taxes, and Keynesian policies. A well-educated economist clearly ought to know something about the persons that the terms refer to.
3. Some familiarity with the history of thought contributes to a
better understanding of the fact that the discipline of economics
is in a permanent process of change and development, thereby
leading to a better understanding of the nature of economic research. The common nonhistorical way of teaching economics
may easily give a false impression of the subject as one that has
found its final form. The history of thought makes one realize
that economic science has always progressed through the efforts
of people who have seen that it contains deficiencies and errors.

These are three good reasons for studying the history of economic thought. Regarding the last of the three, there can be little
doubt that economics in general and economic theory in particular have never been as well developed as they now are. Students
who read modern textbooks in macro- and microeconomics,
public finance, and international trade clearly acquire more solid
knowledge and better analytical skills than those who read the
textbooks of fifty or one hundred years ago.2 One of the benefits
to be gained by getting acquainted with the older literature is a
better understanding of the internal dynamics of the subject. The
concepts and theories that todays students encounter during
their first year are the results of the work of earlier generations of
economists on the frontiers of research.
2
A small reservation may be in order at this point: they get a better insight
in the problems that are taken up in todays textbooks. But if one goes back to a
book like Marshalls Principles of Economics from 1890, one will find that this
book considers a number of issues that do not receive much attention in modern expositions. A comparison of then and now that focuses exclusively on the
treatment of modern topics in the older literature will therefore be systematically biased in favor of the present.

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Consider the following example: one of the first theoretical

concepts that one encounters in the study of economic theory
is the demand curve, that is, the graphical representation of the
connection between the quantity demanded and the price of a
commodity. But the demand curve is not something that actually
exists out there; it is a theoretical construction created by economists to understand how markets function. When in 1838 the
demand curve was drawn (or at least appeared in print) for the
first time it was a great scientific breakthrough! The realization
that concepts and theories that today are regarded as elementary and obvious were once major intellectual challenges for the
sharpest minds among economists gives us an important insight
into the nature of the research process. It also shows that what
presently appears to be simple elements in the theory may not
in fact be quite as self-evident as we tend to believe, and this recognition may in turn come to deepen our insights in the modern
version of economic theory.
The understanding that economics has developed as a continuous process which continues today is in itself an inspiration
for those who wish to attempt to gain a better knowledge of the
subject and perhaps even contribute to its further development.
In addition, it could even be the case that the study of the older
literature may encourage new research by the discovery and reconsideration of problems and fruitful insights that have been
neglected in contemporary work.

Styles in the History of Economic Thought

There are several ways to present the history of economic thought.
One possibility is to analyze the changing nature of economic
theory in conjunction with the social and economic development
of society, while another is to emphasize economic thinking as
part of the main currents of philosophical and political ideas. Yet
another alternative is to emphasize the internal dynamics of the
science where new insights and results emerge as a consequence
of economists awareness of the shortcomings of the present state
of the subject. The main emphasis in the following will be on the
third of these perspectives, but in a number of cases it is also necessary to draw on other approaches to reach a clear understand7

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ing of why a particular theoretical reorientation took place. When

in the 1930s John Maynard Keynes worked out his new analysis
of the causes of unemployment it was in part motivated by what
he saw as the weaknesses of existing theory but to a large extent
also by the mass unemployment that he observed both in Britain and other countries. If in addition we are to understand the
background of some of his policy proposals for a way out of the
crisis it is also useful to have some knowledge of the attitudes to
social engineering and expert rule that were so influential in the
intellectual and political climate of the interwar period.
In earlier times it was common to judge the thought of previous generations of economists from what one considered to be
their own preconditions without relating them to modern theory.
This approach easily leads to what one may call scientific relativism: all theories become correct and valuable relative to the context in which the authors lived and worked. This point of view
may come to imply a complete denial of the cumulative nature of
economics and consequently of the possibility of progress in economics, a point of view that most people today would consider
to be an unreasonable position to hold. However, as late as 1931
the historian of thought Alexander Gray was able to write that
economic science, if it be a science, differs from other sciences
in this, that there is no inevitable advance from less to greater
certainty; there is no ruthless tracking down of truth which, once
unbared, shall be truth to all times to the complete confusion of
any contrary doctrine (Gray 1931; 1980, pp. 23).
Grays meaning may perhaps not be entirely clear. If he simply
means to say that the search for eternal truths is made difficult
or impossible by the fact that the economy and its institutions
are in a process of constant change, it is not difficult to agree
with him in principle. But if he is to be interpreted more generally as saying that there is no scientific progress in economics, it
becomes more problematic to support his view. On the contrary,
the following chapters will present a number of examples of
how economists have been able to achieve a more secure understanding of the assumptions underlying their theories and of the
connections between their assumptions and conclusions. Moreover, there can be no doubt that great progress has occurred in
regard to the production of knowledge about the empirical facts
of economic life.
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Beginning in the 1960s, the common approach to the history of

economic thought changed as many authors began to describe
the theories of past economists in a modern theoretical framework so as to make them more easily comprehensible to modern readers.3 This makes it in a sense easier to understand the
relationship between new and old economic theories and to use
ones insights from the study of the history of thought to understand the modern version of the subject. At the same time, this
may easily foster an attitude of scientific absolutism: one reads the
work of the older authors as if they were exam papers written
by students who have had no opportunity of getting acquainted
with the contents of the reading list.
It is not practically feasible to judge the work of past economists entirely on the basis of the state of the subject in their own
time; it is simply not possible for us as moderns to disregard our
knowledge of all that has happened during the period between
their own time and ours. A pure relativist attitude is therefore impossible. However, scientific absolutism is an approach with its
own difficulties. One may to an excessive degree come to regard
the past through the lenses of the present, although this might result in an incomplete understanding of the historical foundations
of economic thought. It may be argued that this does not matter
as long as the interpretations are interesting. But in taking this
line one runs the risk of overlooking other contributions by these
authors that are as interesting as the ones that can be translated into modern scientific language and that might possibly
provide more valuable suggestions for future research. A more
fruitful attitude consists of combining elements of relativism and
absolutism and approaching the older literature in the same way
that one ought to approach the new: understanding but critical.

Theories and Facts

An economic theory is a set of hypotheses about the functioning of parts or the whole of the economic system. A particular
3
A textbook that did much to change the literature on the history of thought
in this direction is Mark Blaugs Economic Theory in Retrospect that appeared in
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theory may concern a limited set of questions, like the reactions

of consumer demand to changes in prices and income, or it may
be a more comprehensive analysis of how prices are determined
in an economy with many producers, consumers, and markets.
Theoretical research aims to improve current theories in terms
of generality and logical standards and to develop new theories
that either concern novel aspects of economic life or types of economic activity that have so far escaped the attention of theorists.
Empirical research can simply take the form of producing data or
have the more ambitious aim of testing economic theoriesdeciding whether or not the theories fit the facts.
The history of economic thought has traditionally been a history of economic theories. This is not because economics is nothing
but theory. Anyone who has turned the pages of Adam Smiths
Wealth of Nations (1776) will have discovered that his arguments
are based on an impressive array of historical and institutional
facts, and a perusal of the most recent volumes of a selection of
academic journals will show clearly that empirical analysis occupies a prominent place in modern economic research. Nevertheless, a historical review of the empirical findings of economists
through the ages would easily become both excessively long and
probably not very interesting. The main reason for this is that
the results of empirical research are time specific and heavily
dependent on the political and institutional setting of the time.
Still, there is a good deal of empirical research that is of more
general interest and some of this will be covered in the chapters
to follow. Moreover, there is a significant degree of interaction
between theory and empirical findings. Although some economic
theorists have received most of their inspiration simply from
reading the works of other theorists, in the last resort all theories
derive from empirical observations that economists feel that they
have a need to explain and understand. The theories that emerge
from this process will in turn suggest new hypotheses about the
functioning of the economy, which can be tested against new observations. Indirectly, therefore, empirical facts and judgments
do enter into the development of economic theories, although we
will not always be able to account in detail for the specific facts
that have inspired the theorists.
It was not until the twentieth century that some economists
began to interest themselves more systematically in the statisti10

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cal problems that arise when one tries to put economic theories
to the test. Their efforts led to the recognition that the interpretation of empirical relationships involved a series of methodological problems that needed to be solved before one could draw
firm conclusions from the study of the statistical material. Some
of the work that was done on these problems will be reviewed in
chapter 16.

A Special Field
From one point of view, the history of economic thought is a field
of specialization within economics in the same way as are international economics, public finance, or labor economics. The
literature is written partly by specialists in the field, partly by
economists who primarily work in other areas but who take an
interest in the history of the subject (as when a public finance
specialist writes about some nineteenth-century contribution to
the theory of taxation). But most of the contributors to the literature are specialists on the history of economic thought who have
their own specialized journals, research conferences, and scientific organizations. There is a steady flow of new publications in
the form of articles and books that contribute to new insights in
the history of economics as a science.
However, the history of economic thought is a special special
field. It encourages one to reflect on the contents and development of the subject, while a review of its historical development may serve as an introduction to economics that is different
from that of the standard introductory textbook. This introduction must necessarily be organized in a particular way: instead
of presenting a first view of economics in terms of the inherent
logic of the subject matter, it proceeds in terms of the chronology of theoretical innovations. The chronology of course has its
own internal logic by the fact that each generation of researchers
relate to the body of knowledge that already exists. The study of
the history of economic ideas is therefore a natural supplement
to the standard program of study, while at the same time it can
function as an introduction to economics for noneconomists.
Any account of the history of economic thought must be selective, not only in terms of topics but also in terms of persons: the
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number of individuals who have made significant contributions

to economics is much too large for a discussion of them to be
contained within a single book. In the present book, the guiding
principle behind the selection of authors has been that the chief
interest of modern economists lies in being informed about the
thinkers that have had the greatest influence on the subject as
we know it today. As an example, one of the reasons why David
Ricardo is a central figure in this context is that he is regarded as
the originator of the theory of comparative advantage, which is
familiar to anyone with an elementary knowledge of the theory
of international trade. All modern treatments of international
economics refer to Ricardo as the father of the theory, although
some historians of thought have argued that the basic elements in Ricardos theory can be found in the works of earlier
authors. It is an interesting research project to clarify the contributions of Ricardos forerunners, but this type of problem will
not receive much attention here. Whatever others may have
thought about comparative advantage, Ricardos name is the
one that is familiar to modern economists; it is therefore the
natural focus of interest for a history of thought. (In addition
there are, as we shall see later, a number of other reasons to pay
attention to Ricardo.)
In this book, therefore, we shall concentrate our attention on
the great names in the development of economicson individuals like Adam Smith, David Ricardo, Lon Walras, and Irving
Fisher. In a more complete coverage one ought also to discuss the
contributions of a series of economists whose work in a historical
context may be of great interest even though they do not have
the same scientific status. The neglect of some important economists becomes more glaring as we get close to our own times,
above all because the number of economists who are active in
research is larger than ever before. But the ambition to include
more names would, in a relatively short exposition, easily lead to
a situation where more elaborate discussions of individuals and
ideas get crowded out in favor of brief mention of names, titles,
and dates. Hopefully, the reader will be encouraged to follow up
some of the references to the literature and go on to further study
of particular authors or periods. In that case, maybe he or she
will discover some of the pleasure in the study of economics that
Keynes expresses when he describes it as, our own most agree12

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able branch of the moral sciences, in which theory and fact, intuitive imagination and practical judgement, are blended in a manner comfortable to the human intellect (Keynes 1933, p. 239).

Further Reading
There are a number of good expositions of the history of economics. The towering classic in the field is the book by Joseph Schumpeter (1954) whose work will be further considered in chapter 14.
It is an impressive book, although many are likely to feel that it
contains too much detail. As a reference, especially as regards the
older (preAdam Smith) literature, it is extremely useful.
A light and entertaining exposition is Heilbroner (1999) where
the emphasis is on economists broader visions of society and
the conduct of economic policy and less on their contributions
to science in a more specific sense. Comprehensive treatments
in modern textbooks are provided by Spiegel (1991) (which has
particularly extensive references to the literature), Ekelund and
Hbert (1997), Backhouse (2002), and Screpanti and Zamagni
(2005). Blaug (1962; 1997) is a more analytic exposition, containing modern mathematical representations of older theories; the
book also includes readers guides to some of the great books of
the past. The volume by Niehans (1990) goes further in the direction of mathematical modeling of past theories; this book has
a particularly good coverage of the period 194080. To proceed
even further along the mathematical road one may consult Negishi (1989), but this book only covers the literature until the beginning of the twentieth century. A highly personal treatment is the
book by Lionel Robbins (1998), which is based on his lectures in
his legendary course at the London School of Economics. The
style is informal and amusing, and the lectures include advice to
students about the purchase of first editions of economics books
from the eighteenth century. Steven G. Medema and Warren J.
Samuels have edited a volume, The History of Economic Thought:
A Reader (2003), that contains selections from the works of a number of writers from Aristotle to Keynes.
Palgraves Dictionary of Political Economy was first published in
the 1890s, and a revised edition came out in the 1920s. A new and
much enlarged edition of this important work of reference was
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published in 1987 as The New Palgrave Dictionary of Economics,

and the second edition of this was published in 2008 under the
editorship of Steven N. Durlauf and Lawrence E. Blume. This
eight-volume work is available both on paper and on the internet
(at www.palgrave.com) and contains numerous excellent articles
on individual economists and special topics, often with a historical perspective. Leading journals in the field include History of
Political Economy, Journal of the History of Economic Thought, and
European Journal of the History of Economic Thought. A comprehensive website for the history of economic thought is operated by
the Center for the History of Political Economy at Duke University; see www.econ.duke.edu/CHOPE. This site also provides
numerous links to related websites.

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