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Lost opportunities?

Summary:
From Peter Radford A pile of bricks is not a house.  A group of individuals is not an economy. A lot has to happen between the one and the other.  Which is why writing theories about economies as if it were simply an accumulation of individuals and their associated capital base misses the mark.  Nor is it simply a matter of how those individuals behave —rationally or not — their interactions create novelty that cannot and does not exist at the individual level. Of course economists realize this, which is why they introduce the “market” as a placeholder for all that novelty.  They ignore alternative aggregate centers of novelty and center all their attention on the moment of transaction in the abstraction of their markets.  This is the culmination of the steady narrowing down of the

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from Peter Radford

A pile of bricks is not a house.  A group of individuals is not an economy. A lot has to happen between the one and the other.  Which is why writing theories about economies as if it were simply an accumulation of individuals and their associated capital base misses the mark.  Nor is it simply a matter of how those individuals behave —rationally or not — their interactions create novelty that cannot and does not exist at the individual level.

Of course economists realize this, which is why they introduce the “market” as a placeholder for all that novelty.  They ignore alternative aggregate centers of novelty and center all their attention on the moment of transaction in the abstraction of their markets.  This is the culmination of the steady narrowing down of the focus of economics into the logic of allocation.  Any economic interaction between, or behavior of, individuals prior to or after a transaction is pushed to the sideline or ignored completely.

It was not always thus.  There was a time when economics had more ambition than to be the study solely of allocation.  There were moments of opportunity for economics to encompass the entire economic process from creation or discovery, through production, into the market, and then toward consumption and disposal of waste.  It could have been comprehensive.  But that opportunity was lost.  The 1930s and subsequent decades have a lot to answer for.

Most economists seem to have forgotten how grand economics once was.

A case in point:

“The agents of production are commonly classed as Land, Labour, and Capital.  By Land is meant the material and the forces which Nature gives freely for man’s aid, in land and water, in air and light and heat.  By Labour is meant the economic work of man, whether with the hand or the head.  By Capital is meant all stored-up provision for the production of material goods, and for the attainment of those benefits which are commonly reckoned part of income.  It is the main stock of wealth regarded as an agent of production rather than as direct source of gratification.”

The writer then goes on a heretical diversion …

“Capital consists in great part of knowledge and organization: and of this some part is private property and other part is not.  Knowledge is our most powerful engine of production; it enables us to subdue Nature and force her to satisfy our wants.  Organization aids knowledge; it has many forms e.g. that of a single business, that of various businesses in the same trade, that of various trades relatively to one another, and that of the State providing security for all and help for the many.  The distinction between public and private property in knowledge and organization is of great and growing importance: in some respects of more importance than that between public and private in material things; and partly for that reason it seems best sometimes to reckon Organization apart as a distinct agent of production.”

The writer was encouraging us to explore economics in a much more holistic, or a more encompassing way than would be countenanced today.  Organization?  Knowledge?  Public/private?  All sorts of angles that need both exploration and connection into a grand vision of an economy.

The telling aspect of this is that those paragraphs often disappear in many modern abridged reprints of the work in which they occur.  Modern abridgments of past works allow us to tell what modern economists think are more or less important aspects of older work.  In this case the entire discussion of organizations and knowledge and their role as factors of production disappears.   Modern theorists like to work within a much more narrow conception of economic activity.  And they mostly regard organization and knowledge as subsets of other factors.  Market obsession disallows discussion of organization in such things as “firms” and nowadays knowledge is simply lost or subsumed within the Solow residual.  Indeed the difference between our author and Solow shows the road traveled in the interim.  With markets treated axiomatically as the perfection of economic coordination any discussion of “organization” becomes at best a sideshow and in general a nuisance: it opens up problematic arguments over the perfection of markets which, in turn, leads to talk of failures and other heresies.  And since Solow’s discovery of our ignorance, knowledge has been rebranded as “total factor productivity” which moves it away from problems of Schumpeter and innovation and puts it fully within the marginalist framework that is more easily formalized in the modern method.

But you can’t help feeling that there was a lost opportunity somewhere there.

The writer, as you all know well, is Alfred Marshall.  And those paragraphs are how he opens Book Four of his Principles of Economics.  In most abridged versions of Principles, Books Four and Six are left out because they seem orthogonal to modern economics.  They had within them the seed of a very different vision for the future of economic inquiry.

Going back through Book Four is a refreshing, if sometimes frustrating, exercise.  Marshall suddenly appears to be proposing a much more dynamic and authentic vision of economic activity.  His thinking makes him a natural ally of Schumpeter in his attempt to build economics as the study of an open and ever changing phenomenon.  One of the great ironies of Marshall’s attempt to study the dynamics of industrial organization was that to do so he posited the existence of an abstract “representative firm” against which we could compare the properties of other and real firms, groups of firms, and industries.  This was not the cramped and equally abstract representative firm of modern models, but an attempt to establish a yardstick for discussion.  His idea fell foul of his contemporaries and didn’t have much lasting impact on the way in which economics developed, especially post-Robbins.

Still, the seed for a more relevant and richer economics was there.  It still is.  Marshall was a proto-evolutionary thinker.  He has a lot more to tell us than we are usually taught.

Peter Radford
Peter Radford is publisher of The Radford Free Press, worked as an analyst for banks over fifteen years and has degrees from the London School of Economics and Harvard Business School.

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