You should begin by reading the introduction to Heilbronner, which deals with the rise of capitalism, of society shaped as economy. Heilbronner's introduction is largely based on the ideas of Karl Polanyi whose work (especially his book The Great Transformation) is, in turn, based to a considerable degree on the ideas of Karl Marx. Here, for this course, you only need to read Chapter 4 of The Great Transformation. [pdf version] All three, Heilbronner, Polanyi and Marx, see the economy as a capitalist phenomenon, but Polanyi and Heilbronner tend to call it a "market economy" whereas Marx calls it "capitalism." The basic point is that you didn't have economists and "economic theory" until you had a full fledged "economy" and you didn't have that until the capitalists usurped land and tools forcing most people to become wage laborers. Henceforth, you had not only a labor market, but all kinds of other markets - for once most people could no longer produce things for themselves, it was only through spending the wage that they could obtain goods and services.
For an example of the graphic history to which Heilbronner alludes and for a taste of how he is drawing on Marx, read chapter 27 of volume I of Marx's book Capital on the expropriation of the agricultural population from the land [pdf version] and chapter 28 on the bloody means by which the expropriated were forced to sell themselves in the labor market. [pdf version] [If you are interested in a brief summary of these two chapters and my commentaries on them you can find both on the web.]
In Polanyi's chapter there are two interwoven issues: 1) how things like money, markets, profits, wealth and exploitation were managed and 2) how people thought about those things and that management in pre-capitalist societies. This course is focused on the latter: the history of thought. Understanding the history of thought is best done by grasping it within the wider history of which it is but a part. Unfortunately, given how little history is taught to most folks these days such a project would require far more time than is available in a survey course like this one. Therefore, virtually all the readings in this course are those of well-known figures in the history of the development of economic thought. The two chapters by Marx provide a bit of wider history but for the most part we just won't have time to study such material alongside writings about economics per se. All I can do is provide a little background during lectures and suggest that you seek out, on your own, whatever historical knowledge you need to situate the various readings historically.
Polanyi draws on a wide variety of historical and anthopological studies to argue that in the organization of pre-capitalist societies markets were marginal phenomena compared with social mechanisms of reciprocity, redistribution and production for use. "The outstanding discovery of recent historical and anthropological research," he argues, "is that [through most of human history] man's economy, as a rule, is submerged in his social relationships." He continues:
He does not act so as to safeguard his individual interest in the possession of material goods; he acts so as to safeguard his social standing, his social claims, his social assets. He values material goods only in so far as they serve this end. Neither the process of production nor that of distribution is linked to specific economic interests attached to the possession of goods; but every single step in that process is geared to a number of social interests which eventually ensure that the required steps be taken. These interests will be very different in a small hunting or fishing community from those in a vast despotic society, but in either case the economic system will be run on noneconomic motives."
That Polanyi's understanding of such noneconomic motives is neither utopian nor rose-colored can be seen in his comments on both reciprocity and redistribution. In the case of reciprocity he shows how under a wide variety of precapitalist social structures relations of reciprocity, i.e., of mutual obligation, are the surest guarantee of the individual's well-being in both social and material terms. Whether in small tribal communities or larger networks of such communities:
"The premium set on generosity is great when measued in terms of social prestige as to make any other behavior than that of utter self-forgetfulness simply not pay. Personal character has little to do with the matter. Man can be as good or evil, as social or asocial, jealous or generous, in respect to one another. . . . The human passions, good or bad, are merely directed toward noneconomic ends."
"For it is on this one negative point that modern enthographers agree: the absence of the motive of gain; the absence of the principle of labouring for remuneration; the absence of the principle of least effort; and especially, the absence of any separate and distinct institution based on economic motives."
In the case of redistribution, he draws upon evidence from both small communities and large empires to argue how institutional patterns of 1) symmetrical give-and-take combined with 2) centricity (the pooling of products) facilitate both the division of labor and the effective sharing of its results. His examples range from interlinked communities on South Pacific islands to the Egyptian empires.
"In such a community the idea of profit is barred; higgling and haggling is decried; giving freely is acclaimed as a virtue; the supposed propensity to barter, truck and exchange does not disappear. The economic system is, in effect, a mere function of social organization."
Given the brevity of Polanyi's discussion, I have excerpted some more material from several important and well-known, pre-capitalist thinkers. One of those, Aristotle, writing in the days of Ancient Greece, is discussed by Polanyi, but the others are not. They include writings from Ancient China and the Ancient Middle East. The objectives in reading this material are first, simply to grasp the attitudes of these pre-capitalist thinkers towards market relationships of buying and selling, profit making and exploitation, and second, as your reading progresses, to see how attitudes changed, evolving toward those typical of the current period of "modern economics."
For most of you the writings of Confucius and Mencius (a follower of Confucius) will be the least familiar. Not only are these texts from far away and long ago (about 2500 years ago), but they are from a time and place with, it seems, approaches to the world quite different from those in the Western Tradition. This is, of course, precisely what makes them of interest in trying to grasp attitudes toward life that are quite different from our own. There was plenty of merchandise trade in Confucius' time and there were many governments (often warring) that taxed and spent money on public works, palaces and armies. But for Confucius - the most important intellectual influence in China for two millenium - and his followers all of those kinds of activities that we associate with the "economy" should be subordinate to the cultivation of one's social roles in society, and that cultivation required, above all, the development of an educated understanding of social interrelatedness and responsibility.
The individual, for Confucius, was no utility or profit-maximizing individual, but a member of a social order who acquired status and respect by acting in ways that benefited the other members of society. In the Analects , Confucius is quoted as saying, "Exemplary persons understand what is appropriate; petty persons understand what is of personal advantage." [pdf version]
In a similar vein Mencius wrote:
"He who gets up with the crowing of the cock and never tires of doing good is the same kind of man as Shun; he who gets up with the crowing of the cock and never tires of working for profit is the same kind of man as Chih [translators note: a byword for robbers]. If you wish to understand the difference between Shun and Chih, you need look no further than the gap separating the good and the profitable." [pdf version]
The individual goal of becoming an "exemplary" or "authoritative person" was achieved by becoming a responsable and creative contributor to the well-being of first, one's family, second, one's community and third, one's larger society. Finding and adhering to such a path, or "way" (Dao) was a life-long process. This was true for everyone, but especially important for those in positions of power. Both Confucius and Mencius were distainful of preoccupations with wealth at the expense of the well-being of the population as a whole. As other intellectuals of their time, they quite actively tried to have their ideas become influencial in the formation of policy and sought out various noblemen and kings with this goal. They did not challenge the existence of a social hierarchy per se but did argue that the only authentic and legitimate hierarchy was one based on the degree to which people successfully pursued the "way". Of some interest in modern capitalism - whose spokespersons claim to be a society "based on laws, not on men" - was their attitude that the very existence of laws was a measure of the failure of society to develop in ways that made it possible for all to pursue the "way" - paths in which interpersonal caring and respect would obviate any need for laws.
Polanyi brings Aristotle (384BCE - 322BCE) - writing around 300 years after Hesiod - into his discussion of pre-capitalist social orders when he takes up what he calls the "principle of housekeeping" or the organization of activities designed to meet the needs of one's immediate family or community. In as much as the term "economy", and thus economics, derives from the Greek oeconomia, Aristotle's ideas are often taken as as the starting point of "economics". But, as Polanyi points out, for Aristotle the legitmate terrain of economic activity, or "wealth getting" was the household and, much like Confucius and Mencius, he was highly critical of the pursuit of money through market activity that went beyond a mere supplementary activity to support the household. He comments:
Hence we may infer that retail trade is not a natural part of the art of getting wealth; had it been so, men would have ceased to exchange when they had enough. [pdf version]
As Polanyi indicates Aristotle found the endless, limitless pursuit of money and profits "unnatural", at variance with the natural limits of the needs of individuals, households and ultimately, even society in general. Wealth produced to meet those limited needs are "true riches", its production is "necessary and honorable"; this he opposes to the endless piling up of money, for, as he writes in a tone somewhat reminiscent of Confucius and Mencius, "the amount of property which is needed for a good life is not unlimited". The problem with those who endlessly seek more money, he argues, is that they forget that the object of life is to "live well" and money should only be an means to that end. So, he concludes:
There are two sorts of wealth-getting, as I have said; one is a part of household management, the other is retail trade: the former necessary and honorable, while that which consists in exchange is justly censured; for it is unnatural, and a mode by which men gain from one another." [pdf version]That "unnatural" mode, of course, is precisely the one Polanyi saw becoming dominant in the modern age and that domination for both Polanyi and Marx was only achieved via the violence discussed above.
As in the case of Ancient China, the books of the Old Testament were composed in a time in which society was hierarchically organized with some rich and many poor, some kings and many commoners. There was also money and considerable merchandise trade. (Most of the cuneiform tablets discovered in the Middle East are not "Epics of Gilgamesh" but commerical accounts.) Although the hierarchies of those times are no more challenged in these texts than in the Chinese ones discussed above, there is a common condemnation of self-centered greed and exploitation. This condemnation can be found in book after book of the Old Testament [pdf version].
The New Testament, of course, recounts how Jesus constantly referred his followers back to the teachings of the Old Testament and among those older teachings which he refreshed and taught anew were the many admonitions against the worship of riches or wealth. As he said "No man can serve two masters . . . Ye cannot serve God and Mammon." (Mathew, 6:24). Similarly, few stories of Jesus are better known than those of his driving the money-lenders from the Temple (John, 2:15) and his promise that "It is easier for a camel to go through the eye of a needle than for a rich man to enter into the Kingdom of God." (Mark,10:25)
Similar sentiments were expressed by the early prophets of Islam. The 114 chapters, or suras, of the Qur'an are said to have been revealed to the prophet Mohammed (570-632 CE) over a period of 23 years. Being illiterate, it is said, he recited them to his followers who, in turn, wrote them down and later compiled them. There is disagreement among Islamic scholars over dating the original compilation but it is certain that during the caliphate of Uthman ibn Affan a careful compilation was completed between 650 and 656 CE, not that long after Mohammed died in 632.
As Jesus drove the money-lenders from the Temple, so too did Mohammed rail against both churchmen and laypeople who strive after money:
[9:34] O you who believe, many religious leaders and preachers take the people's money illicitly, and repel from the path of GOD. Those who hoard the gold and silver, and do not spend them in the cause of GOD, promise them a painful retribution.
Again, as with the authors of the Old and New Testaments, Mohammed warned his followers against a preoccupation with material wealth:
[9:69] Some of those before you were stronger than you, and possessed more money and children. They became preoccupied with their material possessions. Similarly, you have become preoccupied with your material possessions, just like those before you have become preoccupied. You have become totally heedless, just as they were heedless. Such are the people who nullify their works, both in this world and in the Hereafter; they are the losers.
Passages from Qur'an also show how Mohammed also shared the Old and New Testament's authors' concern with social responsibility, especially of those better off, for those worse off:
[90:10] Did we not show him the two paths?
[90:11] He should choose the difficult path.
[90:12] Which one is the difficult path?
[90:13] The freeing of slaves.
[90:14] Feeding, during the time of hardship.
[90:15] Orphans who are related.
[90:16] Or the poor who is in need.
[90:17] And being one of those who believe, and exhorting one another to be steadfast, and exhorting one another to be kind.
[90:18] These have deserved happiness.
Again, as a religious teacher, Mohammed's depredation of wealth getting was not justified only by the greater worth of other attitudes but by a sense of the ephemerality of corporeal life:
[57:20] Know that this worldly life is no more than play and games, and boasting among you, and hoarding of money and children. It is like abundant rain that produces plants and pleases the disbelievers. But then the plants turn into useless hay, and are blown away by the wind. In the Hereafter there is either severe retribution, or forgiveness from GOD and approval. This worldly life is no more than a temporary illusion.
These materials, some familiar, some less so, provide, I think, useful points of reference when we turn from pre-capitalist epochs to examine the emergence of capitalism and economics in more recent times. It is impossible not to see how the attitudes of influential writers began to change from the depredation of wealth-seeking as secondary to more ethical or religious concerns to its celebration. As capitalist-imposed work, money, labor markets and markets more generally became ever more dominant in society, the ideas of those favorable to them also become more dominant. One domain in which this transition can be traced is, of course, that of religious doctrine. Just as there have long been different interpretations of religious texts such as the Old and New Testaments and the Qur'an, so have such interpretations evolved within the larger, evolving society. Both Max Weber in his The Protestant Ethic and the Spirit of Capitalism (1905) and Richard Henery Tawney in his Religion and the Rise of Capitalism (1926) dealt extensively with this evolution and while both are highly recommended, their study requires more time than we have available.
There are, however, two schools of thought about such things as the production and and circulation of wealth which arose during the period of the transition to capitalism, that are fundamental, and unavoidable, for grasping the newness of the subsequent classical economics that was developed as a better understanding and tool for a more fully developed capitalism. The first of these was mercantilism, a set of ideas that valorized the expanding trade and preoccupation with money that charactrized the late feudal and early capitalist period. The second school was that of the physiocrats who critiqued the mercantilists and valorized land as the only true source of wealth --land that had always been the foundation of feudal wealth and power.
Most of those who contributed to mercantilist ideas were themselves either merchants or government bureaucrats and their writings reflected both the desire to raise merchant profits and to help finance governments that could protect those profits and benefit from taxes on the wealth merchants "produced." This was the age of emerging nationstates and national governments were the only ones available for businessmen to mobilize in their own interests. This was true not only of their local interests (where they needed governments to create and maintain conditions conducive to profit making) but of their international ones as well.
In the early capitalist period when the effective demand of most people was limited by low wages, merchants urgently sought markets and treasure abroad and they needed government ships and troops to open those markets and supporting trade and monetary policies to keep them profitable. There were no multinational institutions, such as the World Trade Organization or the International Monetary Fund, to look after their interests as there are today. They sought, instead, a symbiotic relationship with the nation state and the result was modern imperialism.
At the heart of mercantile ideas was a general view that money is the key to wealth and the growth of wealth and that international trade brings money (gold) into countries that cannot produce it. The general objective was to achieve an excess of exports over imports in order to bring more money into a country. In the words of Thomas Mun (see below): "The ordinary means therefore to encrease our wealth and treasure is by Forraign Trade, wherein wee must ever observe this rule; to sell more to strangers yearly than wee consume of theirs in value." Mun, of course, was writing in England, in the shadow of the 16th Century successes of Spain and Portugal in directly apropriating gold and silver through their conquests of indigenous peoples in the Western Hemisphere. England had its own colonies in North America, Asia and Africa but Mun understood that the possibilities of getting precious metals from those colonies was limited and therefore trade would have to substitute. He wrote: "we have no other means to get Treasure but by forraign trade, for Mines wee have none which do afford it." (NB: a minor source of gold and silver plunder for the British was state-backed privateering against the Spanish and Portuguese.)
The domestic dimension of mercantile preoccupations included not only measures to favor the growth of local trade, but also those which would favor local industry. That industry was only slowly becoming capitalist in the modern sense of being based on factory-organized, waged labor but it was the prime source of what merchants exported and thus of their profits and wealth. The mercantilists, therefore, propounded policies supportive of industrial growth: plentiful, cheap money to finance investment and fast population growth without welfare to keep the supply of labor high and wages low.
There is on the web a very useful overview of merchantilism and those who promulgated it that includes a wealth of links to related writers and their writings. Of these I would like you to read the English mercantilist Thomas Mun (1571-1641) whose essay on "Englands Treasure by Forraign Trade" is nicely representative of the school as a whole. [pdf version of entire text], [pdf version of edited text]
Mun was himself an official with the East India Company --a business chartered by the English government to exploit its colonies in the Indian subcontinent. He was, in other words, a manager of the business side of British imperialism and his arguments calling on the government to support exports from England while restricting imports from abroad justified the destruction of Indian textile industry while creating a market that would allow British industry to flourish. At the same time, his arguments moved beyond the pure money fetishism of the "bullionists" that failed to see how use(export) of money by firms such as the East India Company could result in more money, and more wealth flowing back into England and into the coffers of the British state, whose troops had conquered the subcontinent and made merchant profits possible.
With respect to consumption and work within England, Mun typified the mercantilist praise for luxury consumption for the rich (which would create jobs for the poor) and poverty for everyone else in order to hold down wages to a subsistance level that would coerce people to work to survive. The mercantilists, like other capitalists and would-be capitalists of the age, saw the resistance of people to their uprooting from the land and to their subordination to others will's and profits. Poverty was the answer: "Penury and want," he wrote, "doe make a people wise and industrious"
Yet, as is often the case, such policies for the poor were framed within a more general moral injunction against pleasure and for work, whether the work of the poor or the middle class. Contrasting the English with the more industrious Dutch, Mun rails:
On the subject of putting people to work, Petty was every bit as ferocious as Mun in demanding that wages be kept low and poverty prevalent to force people to work. If wages were too high, he argued, people just wouldn't work: "when Corn is extremely plentiful, that the Labour of the poor is proportionably dear: And scarce to be had at all (so licentious are they who labour only to eat, or rather to drink.)" One must be very careful, he said, to avoid the "over-feeding of the People, in quantity or quality; and so indisposing them to their usual Labour."
The mercantilist preoccupation with money was not merely a fetishistic attachment to the glamour of gold. In general they argued that increases in amount of money (due to an excess of exports over imports) stimulated the economy in a variety of ways.
The dominant mercantilist notions of how an increase in the money supply would stimulate the economy was that it's increased availability would facilitate the expansion of trade. More money would make it easier to finance the building and use of ships, the payment of insurance, the buying, storage and re-export of goods, and so on. Against those gold fetishists who could not bear to see gold sent out of the country, Mun tried to teach a basic lesson: you have to spend money to make money: "the said encrease of commodities brought in by the means of our ready mony sent out as is afore written, doth in the end become an exportation unto us of a far greater value than our said moneys were."
One limit to the positive impact of bring more money into the economy was the possibility of its raising prices of exportables thus undermining trade. Mun recognized this, though he did not work through the possible implications. The Whig philosopher John Locke (1632-1704), an English bureaucrat in the Board of Trade and Plantations, on the other hand, observed and theorized this relationship more clearly. He argued that the prices of goods would be proportional to the quantity of money that circulated them. The more money, the higher the prices of a given quantity of goods in circulation. The less money, the lower the prices.
Another mercantilist who recognized this causal relationship between increases in the money supply and rising prices was John Law (1671-1729) who focused on its advantages. Better known in his time for his speculative scams, such as the "Mississippi Scheme" (for a vivid description read the description in Charles Mackay's classic Extradordinary Popular Delusions and the Madness of Crowds) , Law was nevertheless an important contributor to the development of the theory of money. In his Money and Trade Considered (1705), [pdf file] Law emphasized how the increased availability of money for investment would put more people to work, producing more output, the "overplus" (surplus) of which can be exported. The ultimate impact of an increase in the supply of money therefore would depend on the effects on production. If an increase stimulated production enough and output expanded the tendency to raise prices would be offset. This would be true, Law, thought regardless of the way in which credit money was supplanting gold money in his time.[NB:Law's recognition that credit money was rapidly becoming the dominant form of money led him to forumulate what today is known as the "real bills doctrine" that the amount of money/credit in circulation is determined by the needs of trade. In other words, as opposed to the usual view that the money supply was determined exogenously by the supply of gold, Law argued that the money supply was endogenously determined by the needs of those involved in trading.]
Law's awareness of the importance of the concrete uses to which money was put was mirrored, and perhaps clarified, in the writings of Richard Cantillon, 1680?-1734 an Irishman who lived in France and made a fortune there before finally moving to England. Writing in the 1720s an Essay on the Nature of Commerce in General [pdf file of whole book, pdf file of chapters on quantity theory] Cantillon took Locke an important step further by investigating the possible concrete processes through which an expansion of the money supply might have an impact on prices, on investment and on trade. In so doing, he, like Law moved beyond a purely "monetary" analysis to situate money within the real world of economic transactions.
With these understandings in hand, Cantillon was able to lay out one of the most lucid expositions of the "species-flow mechanism" of his time. He demonstrated how ultimately an net inflow of money would raise prices, undermine exports, stimulate imports and generate a net outflow of money. This analysis set decisive limits on the mercantilist claim as to the desireability, indeed of the possibility, of achieving a continuing net inflow of money. As long as a country could maintain a greater circulation of money it would have an advantage over other countries; but maintainance was difficult and often impossible for any great length of time.
(NB: Cantillon's work was, for a very long time, little known in England with the result that this analysis of the species-flow mechanism was usually associated with the work of David Hume (1711-1776) philosopher and friend of Adam Smith (see next section), both of whom strongly critiqued the mercantilists. Read his essay "Of the Balance of Trade" [pdf file] from his Essays: Moral, political and literary of 1758.)
The analysis of exactly how an increase in the supply of money might lead to increased exports, prices etc. inevitably led the mercantilists to think about the relationship between the money supply and the rate of interest. Any increased availability of money would pass, at least partially, through financial intermediaries who would influence its availability by the interest rate they charged to borrow and loan it. In general the mercantilists held to the common view of their time that the rate of interest varies inversely with the supply of money; if there is more money it is easier to find and cheaper to borrow. Some, however, upon examining the various sources and circuits of money laid out a much more nuanced analysis. Such a one was Cantillon who, in part II, chapter 10 of his Essay made clear that even in the case of an increase in the money supply due to an export surplus any number of circumstances could offset the initial tendency to lower the rate of interest. He dealt with interest like the price of all commodities and saw it determined by everything that influenced the demand as well as the supply.
Quesnay and his followers were critics of the mercantilists and their preoccupation with money as the quintessential form of and means to wealth. More particularly, they were critical of Jean Baptiste Colbert, 1619-1683 the mercantilist finance minister of Louis XIV whose policies in support of his king's extravagance and wars had primarily benefited French industry and trade at the expense of its agriculture. Drawing partly on Cantillon's work (better known in France where it was written than in England), they looked behind the "monetary veil" for a more certain foundation of wealth and its growth. What they found was "land" as the only truly productive factor of production. In Cantillon's Essay the ideas that would come to full bloom with the Physiocrats can be found in Part I, chapter 12 where he argues that the whole society lives at the expense of the agricultural sector, and in Part II, chapter 3 on the circulation if money where he traces the patterns of expenditure of farmers, landlords and city artisans --precisely the classes that Quesnay will use in his Tableau Economique." (See links above for these pieces of text.)
The centerpiece of physiocratic ideas was Quesnay's now famous Tableau Economique that graphically described the circular flows through which a simple economy reproduced itself through and around the productivity of land as managed by farmers. In Quesnay's scheme only the farmer who works the land is productive and others such as artisans who work up the the raw materials produced by farmers (or miners) from the earth or landlords who appropriate rent are unproductive or "sterile." Quenay drew up several versions of the Tableau but his "Analysis" of it provides his most detailed commentary.
[NB: this "tableau" was largely ignored by English economists until Karl Marx (see below) reworked and adapted it in his analysis of fully developed capitalism. Eventually both Quesnay and Marx's work would provide the basis for the development of "input-output" analysis and the multisectoral models of economic development planners in the post-WWII period.]Not surprisingly, with their view of the unproductive nature of rent, the physiocrats called for the state to tax the landlords and redistribute their unearned rents to the productive farmers. This analysis and this policy obviously constituted a program for agricultural development as against Colbert's preoccupation with industry.
As for the international trade which had been the focus of the mercantilist thinking and policies, the physiocrats saw, a la Cantillon, automatic processes (the species-flow mechanism) that would take allow trade to facilitate the growth of the productive economy, (i.e., allow the grain trade to facilitate the expansion of agriculture) much as money facilitated trade. The state, they argued, need only keeps its hands off that trade and let it be, i.e.,laissez faire. They thus became spokespersons for "free trade" to which Adam Smith and other members of the "classical school" would accord admiration.