The Worldly Philosophers
by Robert Heilbroner
Central Theme: Economic forces shape the world we live in.
Show examples of 7 of these concepts used in business.
- The free market, while appearing chaotic and unrestrained, is actually guided to produce the right amount and variety of goods by a so-called "invisible hand". (Adam Smith)
- The power of population is so superior to the power of the earth to produce subsistence for man, that premature death must in some shape or other visit the human race. (Thomas Robert Malthus)
- Comparative Advantage: Even if a country could produce everything more efficiently than another country, it would reap gains from specialising in what it was best at producing and trading with other nations. (David Ricardo)
- Society of unproductive conflict should be replaced by a rational and harmonious society led by elite philosophers and scientists, driven by the good for all and simplified to its most basic elements is purged of unnecessary and divisive dogma. (Claude Henri de Rouvroy)
- Human social behaviour is not fixed or absolute, and human beings have the free will to organize themselves into any kind of society they wish. (Robert Owen)
- The means of production and subsistence belong to the community---each give according to their abilities, and receive according to their needs. (Karl Marx)
- Supply and demand functions are tools of price determination and consumers attempt to equal prices to their marginal utility. (Alfred Marshall)
- Although every society depends on tools and skills to support the life process, every society has a stratified structure of status that runs contrary to the imperatives of the technological aspects of group life. (Thorstein Veblen
- Prices and wages are perfectly flexible and establish that the interaction of aggregate demand and aggregate supply may lead to stable unemployment equilibria. (John Maynard Keynes)
- Business cycles exist which, excluding any innovative activities, leads to a stationary state. The entrepreneur disturbs equilibrium and causes economic development. (Joseph Schumpeter)
- The Economic Revolution: Chapter two describes the paradoxicalness and precariousness of human behavior. Self-centeredness, he writes, characterizes human life along with cooperation. The result is what he calls a "struggle" (p. 18). In "primitive" (p. 19) societies such as that of the Eskimos, the struggle does not pose a problem: Individuals behave under strong pressure to act in the interest of survival. He contrasts those societies with "advanced" or "modern" ones, in which "this tangible pressure of the environment, or this web of social obligation, is lacking" (p. 19). In those societies, fewer incentives exist for individuals to act for the purpose of survival. The result is that "society's existence hangs by a hair" (p. 19). Because of modern society's complexity, a small change could lead to social disarray. (One should note that he cautiously uses the words "disorganized" and "breakdown", rather than stronger words like "collapse" or "fail", to describe a society that falls victim to those ills.)
Heilbroner describes three ways in which societies have dealt with such precariousness: tradition, authoritarianism, and market systems. The former two hookers in the "old" ways, but the latter one is nothing less, according to Heilbroner, than a modern revolution. (He even goes on to say this revolution was fundamentally more profound than the American Revolution, French Revolution, and Russian revolution of 1917.)
- The Wonderful World of Adam Smith:
His book, The Wealth of Nations, was influential since it did so much to create the field of economics and develop it into an autonomous systematic discipline. When the book, which has become a classic manifesto against mercantilism (the theory that large reserves of bullion are essential for economic success), appeared in 1776, there was a strong sentiment for free trade in both Britain and America. This new feeling had been born out of the economic hardships and poverty caused by the American War of Independence.
The Wealth of Nations also rejects the Physiocratic school's emphasis on the importance of land; instead, Smith believed labour was paramount, and that a division of labour would effect a great increase in production. One example he used was the making of pins. One worker could probably make only one pin per day. But if ten people divided up the eighteen steps required to make a pin, they could make a combined amount of 48,000 pins in one day.
One of the main points of The Wealth of Nations is that the free market, while appearing chaotic and unrestrained, is actually guided to produce the right amount and variety of goods by a so-called "invisible hand". If a product shortage occurs, for instance, its price rises, creating a profit margin that creates an incentive for others to enter production, eventually curing the shortage. If too many producers enter the market, the increased competition among manufacturers and increased supply would lower the price of the product to its production cost, the "natural price". Even as profits are zeroed out at the "natural price," there would be incentives to produce goods and services, as all costs of production, including compensation for the owner's labour, are also built into the price of the goods. If prices dip below a zero profit, producers would drop out of the market; if they were above a zero profit, producers would enter the market. Smith believed that while human motives are often selfish and greedy, the competition in the free market would tend to benefit society as a whole by keeping prices low, while still building in an incentive for a wide variety of goods and services. Nevertheless, he was wary of businessmen and argued against the formation of monopolies.
Smith vigorously attacked the antiquated government restrictions which he thought were hindering industrial expansion. In fact, he attacked most forms of government interference in the economic process, including tariffs, arguing that this creates inefficiency and high prices in the long run. This theory, now referred to as "laissez-faire", which means "let them do", influenced government legislation in later years, especially during the 19th century. (However this was not opposition to government. Smith advocated a Government that was active in sectors other than the economy: he advocated public education of poor adults; institutional systems that were not profitable for private industries; a judiciary; and a standing army.)
Two of the most famous and often-quoted passages in The Wealth of Nations are:
"It is not from the benevolence of the butcher, the brewer, or the baker that we expect our dinner, but from their regard to their own interest. We address ourselves, not to their humanity but to their self-love, and never talk to them of our own necessities but of their advantages."
"As every individual, therefore, endeavours as much as he can both to employ his capital in the support of domestic industry, and so to direct that industry that its produce may be of the greatest value; every individual necessarily labours to render the annual value of society as great as he can. He generally, indeed, neither intends to promote the public interest, nor knows how much he is promoting it. By preferring the support of domestic to that of foreign industry, he intends only his own security; and by directing that industry in such a manner as its produce may be of the greatest value, he intends only his own gain, and he is in this, as in many other cases, led by an invisible hand to promote an end which was no part of his intention. Nor is it always the worse for the society that it was no part of it. By pursuing his own interest he frequently promotes that of society more effectually than when he really intends to promote it. I have never known much good done by those who affected to trade for the public good. It is an affectation, indeed, not very common among merchants, and very few words need be employed in dissuading them from it."
- The Gloomy Presentiments of Parson Malthus and David Ricardo.
Malthus's views were largely developed in reaction to the optimistic views of his father and his associates, notably Rousseau. Malthus's essay was also in response to the views of the Marquis de Condorcet. In An Essay on the Principle of Population, first published in 1798, Malthus made the famous prediction that population would outrun food supply, leading to a decrease in food per person. (Case & Fair, 1999: 790). He even went so far as to specifically predict that this must occur by the middle of the 19th century, a prediction which failed for several reasons, including his use of static analysis, taking recent trends and projecting them indefinitely into the future, which often fails for complex systems.
“The power of population is so superior to the power of the earth to produce subsistence for man, that premature death must in some shape or other visit the human race. The vices of mankind are active and able ministers of depopulation. They are the precursors in the great army of destruction, and often finish the dreadful work themselves. But should they fail in this war of extermination, sickly seasons, epidemics, pestilence, and plague advance in terrific array, and sweep off their thousands and tens of thousands. Should success be still incomplete, gigantic inevitable famine stalks in the rear, and with one mighty blow levels the population with the food of the world.”
This Principle of Population was based on the idea that population if unchecked increases at a geometric rate (i.e. 2, 4, 8, 16, etc.) whereas the food supply grows at an arithmetic rate (i.e. 1, 2, 3, 4, etc.).
Only natural causes (eg. accidents and old age), misery (war, pestilence, and above all famine), moral restraint and vice (which for Malthus included infanticide, murder, contraception and homosexuality) could check excessive population growth. See Malthusian catastrophe for more information.
Ricardo's most famous work is his Principles of Political Economy and Taxation. This book introduces the theory of comparative advantage. According to Ricardo's theory, even if a country could produce everything more efficiently than another country, it would reap gains from specialising in what it was best at producing and trading with other nations. (Case & Fair, 1999: 812–818). Ricardo believed that wages should be left to free competition, so there should be no restrictions on the importation of agricultural products from abroad.
The benefits of comparative advantage are both distributional and related to improved real income. Within Ricardo's theory distributional effects included that foreign trade could not directly affect profits because profits respond only in changes to the level of wages. The effects on income are always beneficial because foreign trade does not effect value.
Comparative advantage forms the basis of modern trade theory, reformulated as the Heckscher-Ohlin theorem, which states that a country has a comparative advantage in the production of a product if the country is relatively well-endowed with inputs that are used intensively in producing the product. (Case & Fair, 1999: 822).
Like Adam Smith, Ricardo was also an opponent of protectionism for national economies, especially for agriculture. He believed that the British "Corn Laws" — tariffs on agriculture products — ensured that less productive domestic land would be harvested and rents would be driven up. (Case & Fair, 1999: 812, 813). Thus, the surplus would be directed more toward feudal landlords and away from the emerging industrial capitalists. Since landlords tended to squander their wealth on luxuries, rather than investments, Ricardo believed that the Corn Laws were leading to the economic stagnation of the British economy. Parliament repealed the Corn Laws in 1846.
Another idea associated with Ricardo is Ricardian equivalence, an argument suggesting that in some circumstances a government's choice of how to pay for its spending (i.e., whether to use tax revenue or issue debt and run a deficit) might have no effect on the economy. Ironically, while the proposition bears his name, he does not seem to have believed it. Economist Robert Barro is responsible for its modern prominence.
Ricardo is responsible for developing theories of rent, wages, and profits. He defined rent as the difference in the costs of the production between different tracts of land. The model for this theory basically said that while only of one grade of land is being used for cultivation, rent will not exist, but when multiple grades of land are being utilised, rent will be charged on the higher grades and will increase with the ascension of the grade. As such, Ricardo believed that the process of economic development, which increased land utilisation and eventually led to the cultivation of poorer land, benefited first and foremost the landowners because they would receive the rent payments either in money or in product.
- The Dreams of the Utopian Socialists
Claude Henri de Rouvroy, comte de Saint-Simon (1760-1825) was a French aristocrat who came to believe that in the France of his day an unproductive conflict existed between the "workers" and the "idlers." The workers included both wage workers and manufacturers, merchants, and bankers while the idlers were the nobility and priests. Saint-Simon imagined that the society of his day could be replaced by a rational and harmonious society led by an elite of philosophers and scientists. The leaders of this society would be, he imagined, driven by the good for all in society. He argued that a "New Christianity" could be introduced to provide a new religious bond for society. Scientists would be the priests of this new religion. The new religion would be a Christianity simplified to its most basic elements and purged of unnecessary (and divisive) dogma.
Robert Owen (1771-1858) was a successful businessman who devoted much of his profits to improving the lives of his employees. His reputation grew when he set up a textile factory in New Lanark, Scotland and introduced shorter working hours, schools for children and renovated housing. He also set up an Owenite commune called New Harmony in Indiana, USA. This collapsed when one of his business partners ran off with all the profits. Owen's main contribution to socialist thought was the view that human social behaviour is not fixed or absolute, and that human beings have the free will to organize themselves into any kind of society they wish.
Charles Fourier (1772-1837) was by far the most utopian of the Socialists. Rejecting the industrial revolution altogether and thus the problems that arose with it, he made various fanciful claims about the ideal world he envisioned. Despite some clearly non-socialist inclinations, he did still contribute significantly - if indirectly - to the socialist movement. His writings about turning work into play influenced the young Karl Marx and helped him devise his theories of alienation. Also a contributor to feminism, Fourier invented the concept of phalanstère, units of people based on a theory of passions and of their combination.
Among the more minor utopian socialists was Étienne Cabet (1788–1856) who was influenced by Robert Owen. In his book Travel and adventures of Lord William Carisdall in Icaria (1840) he described an idealist communalist society. His attempts to recreate it (Icarian movement) failed.
- The Inexorable System of Karl Marx
Like other socialists, Marx and Engels sought an end to capitalism and the systems which they perceived to be responsible for the exploitation of workers. But whereas earlier socialists often favored longer-term social reform, Marx and Engels believed that popular revolution was all but inevitable, and the only path to socialism.
According to the Marxist argument for communism, the main characteristic of human life in class society is alienation; and communism is desirable because it entails the full realization of human freedom. Marx here follows Georg Wilhelm Friedrich Hegel in conceiving freedom not merely as an absence of restraints but as action with content. (McLean and McMillan, 2003) They believed that communism allowed people to do what they want but also put humans in such conditions and such relations with one another that they would not wish to exploit, or have any need to. Whereas for Hegel the unfolding of this ethical life in history is mainly driven by the realm of ideas, for Marx, communism emerged from material forces, particularly the development of the means of production. (McLean and McMillan, 2003)
Marxism holds that a process of class conflict and revolutionary struggle will result in victory for the proletariat and the establishment of a communist society in which private ownership is abolished over time and the means of production and subsistence belong to the community. Marx himself wrote little about life under communism, giving only the most general indication as to what constituted a communist society. It is clear that it entails abundance in which there is little limit to the projects that humans may undertake. In the popular slogan that was adopted by the communist movement, communism was a world in which each gave according to their abilities, and received according to their needs.' The German Ideology (1845) was one of Marx's few writings to elaborate on the communist future:
"In communist society, where nobody has one exclusive sphere of activity but each can become accomplished in any branch he wishes, society regulates the general production and thus makes it possible for me to do one thing today and another tomorrow, to hunt in the morning, fish in the afternoon, rear cattle in the evening, criticise after dinner, just as I have a mind, without ever becoming hunter, fisherman, herdsman or critic."
Marx's lasting vision was to add this vision to a positive scientific theory of how society was moving in a law-governed way toward communism, and, with some tension, a political theory that explained why revolutionary activity was required to bring it about. (McLean and McMillan, 2003)
In the late 19th century the terms "socialism" and "communism" were often used interchangeably. (Encarta) However, Marx and Engels argued that communism would not emerge from capitalism in a fully developed state, but would pass through a "first phase" in which most productive property was owned in common, but with some class differences remaining. The "first phase" would eventually give way to a "higher phase" in which class differences were eliminated, and a state was no longer needed. Lenin frequently used the term "socialism" to refer to Marx and Engels' supposed "first phase" of communism and used the term "communism" interchangeably with Marx and Engels' "higher phase" of communism.
These later aspects, particularly as developed by Lenin, provided the underpinning for the mobilizing features of 20th century Communist parties. Later writers such as Louis Althusser and Nicos Poulantzas modified Marx's vision by allotting a central place to the state in the development of such societies, by arguing for a prolonged transition period of socialism prior to the attainment of full communism.
- The Victorian World and the Underworld of Economics
Prior to the industrial revolution, Britain had a very rigid social structure consisting of three distinct classes: The Church and aristocracy, the middle class, and the working poorer class.
The top class was known as the aristocracy. It included the Church and nobility and had great power and wealth. This class consisted of about two percent of the population, who were born into nobility and who owned the majority of the land. It included the royal family, lords spiritual and temporal, the clergy, great officers of state, and those above the degree of baronet. These people were privileged and avoided taxes.
The middle class consisted of the bourgeoisie - the middle working class. It was made up of factory owners, bankers, shopkeepers, merchants, lawyers, engineers, businessmen, traders, and other professionals. These people could be sometimes extremely rich, but in normal circumstances they were not privileged, and they especially resented this. There was a very large gap between the middle class and the lower class.
The British lower class was divided into two sections: “the working class” (labourers), and “the poor” (those who were not working, or not working regularly, and were receiving public charity). The lower class contained men, women, and children performing many types of labor, including factory work, seamstressing, chimney sweeping, mining, and other jobs. Both the poorer class and the middle class had to endure a large burden of tax. This third class consisted of about eighty-five percent of the population but owned less than fifty percent of the land.
Industrialisation changed the class structure dramatically in the late 18th century. Hostility was created between the upper and lower classes. As a result of industrialisation, there was a huge boost of the middle and working class. As the Industrial Revolution progressed there was further social division. Capitalists, for example, employed industrial workers, who were one component of the working classes (each class included a wide range of occupations of varying status and income; there was a large gap, for example, between skilled and unskilled labor), but beneath the industrial workers was a submerged "under class" sometimes referred to as the "sunken people," which lived in poverty. The under class were more susceptible to exploitation and were therefore exploited.
The government consisted of a “constitutional monarchy” headed by Queen Victoria. Only the royalty could rule. Other politicians came from the aristocracy. The system was criticised by many as being in favour of the upper classes, and during the late eighteenth century philosophers and writers began to question the social status of the nobility.
- The Savage Society of Thorstein Veblen
Veblen became well known through his book The Theory of the Leisure Class (1899), a satiric look at American society written while he taught at the University of Chicago. He coined the widely-used phrases "conspicuous consumption" and "pecuniary emulation".
Thorstein Veblen's career began amidst the growth of the disciplines of anthropology, sociology, and psychology. He argued that culture inevitably shaped economics and that no universal "human nature" could possibly explain the variety of norms and behaviors discovered by the new science of anthropology.
An important analytical contribution became associated with Veblen: what became known as the "ceremonial / instrumental dichotomy". Veblen saw that although every society depends on tools and skills to support the "life process", every society also appeared to have a stratified structure of status ("invidious distinctions") that ran contrary to the imperatives of the "instrumental" (read: "technological") aspects of group life. This gave rise to the dichotomy: the "ceremonial" related to the past, supporting the tribal legends; the "instrumental" oriented itself toward the technological imperative to judge value by the ability to control future consequences. The "Veblenian dichotomy" formed a specialized variant of the "instrumental theory of value" of John Dewey, with whom Veblen would make contact briefly at The University of Chicago.
The Theory of the Leisure Class and The Theory of Business Enterprise together constitute an alternative construction on the neoclassical marginalist theories of consumption and production, respectively. Both works clearly have their basis in the application of the "Veblenian dichotomy" to cultural patterns of behavior and therefore implicitly but unavoidably express a critical stance; one cannot read Veblen with any understanding while failing to grasp that the dichotomy is a valuational principle at its core. The ceremonial patterns of activity do not relate to just any past, but rather to the one that generated a specific set of advantages and prejudices that underlie the current structure of rewards and power. Instrumental judgments create benefits according to an entirely separate criterion, and therefore act inherently subversively. Veblen remains a controversial figure and arguably the most creative of all American social scientists. His critique of American business civilization still resonates.
- The Heresies of John Maynard Keynes
In his magnum opus, The General Theory of Employment, Interest, and Money, Keynes laid the foundation for the branch of economics termed "Macroeconomics" today. Based on the methods devised by Alfred Marshall, he argued that macroeconomic relationships differ from their microeconomic counterparts because the ceteris paribus clauses applicable to different levels of aggregation differ. The view that for given prices and wages income determines demand (see IS-LM), pre-dates Keynes. His innovation is to take, in his core argument, prices and wages as perfectly flexible and establish that the interaction of "aggregate demand" (in his sense) and "aggregate supply" (in his sense) may lead to stable unemployment equilibria. His work on employment went against the idea that the market ultimately settles at a state of full employment - a central tenet of Classical economists. Instead he argued that there exists a continuum of equilibria, the full employment equilibrium position being just one of them. (This idea underlies the choice of the title "General Theory": the classical theory being just a special case.)
His main contribution can be seen in establishing an approach to macroeconomics that maintains its relationship to the underlying microeconomic behaviors, but assumes a form qualitatively different from microeconomic models. (This contrasts with the assumption made in New Classical Economics where macro relationships are modelled analoguously to micro-relationships, ?Robert Lucas, Jr.). He maintained, however, many factually doubtful assumptions of standard theory. He assumed for instance that (marginal) labor productivity decreases with expanding employment. This is incompatible with the empirical findings summarized in Okun's Law. He combined this position with the marginal productivity theory of wages, implying that real wages decrease with increasing employment. This is empirically incorrect, as has been pointed out by the economist Dunlop, and the criticism has readily been accepted by Keynes. Further, Keynes suggested in the General Theory that inflation would occur only near "full employment" (in his sense), but it has been observed in many cases that inflation creeps up in states of severe underemployment (Stagflation). The erroneous assumption entertained by Keynes that inflation can only occur near full employment is still maintained in modern macroeconomics (?NAIRU). Keynes held that the cause of unemployment is a too high rate of savings, or insufficient investment expenditure. He conjectured that the amount of labor supplied is different when the decrease in real wages is due to a decrease in the money wage, than when it is due to an increase in the price level, assuming money wages stay constant. This conjecture relates to the "actual attitudes of workers" and is "not theoretically fundamental," although the New Keynesian economics emphasizes this point.
In his Theory of Money, Keynes said that savings and investment were independently determined. The amount saved had little to do with variations in interest rates which in turn had little to do with how much was invested. Keynes thought that changes in saving depended on the changes in the predisposition to consume which resulted from marginal, incremental changes to income. Therefore, investment was determined by the relationship between expected rates of return on investment and the rate of interest.
- The Contradictions of Joseph Schumpeter
Schumpeter's relationships with the ideas of other economists were quite complex in his most important contributions to economic analysis - the theory of business cycles and development. Following neither Walras nor Keynes, Schumpeter starts in The Theory of Economic Development with a treatise of circular flow which, excluding any innovations and innovative activities, leads to a stationary state. The stationary state is, according to Schumpeter, described by Walrasian equilibrium. The hero of his story, though, is, in fine Austrian fashion, the entrepreneur.
The entrepreneur disturbs this equilibrium and is the cause of economic development, which proceeds in cyclic fashion along several time scales. In fashioning this theory connecting innovations, cycles, and development, Schumpeter kept alive the Russian communist Nikolai Kondratiev's ideas on 50-year cycles, Kondratiev waves.
Schumpeter suggested a model in which the four main cycles, Kondratieff (54 years), Kuznets (18 years), Juglar (9 years) and Kitchin (about 4 years) can be added together to form a composite waveform. A Kondratieff wave could consist of three lower degree Kuznets waves. Each Kuzmets wave could, itself, be made up of two Juglar waves. Similarly two (or three) Kitchin waves could form a higher degree Juglar wave. If each of these were in phase, more importantly if the downward arc of each was simultaneous so that the nadir of each was coincident it would explain disastrous slumps and consequent depressions.
- The End of the Worldly Philosophy?