A Review of Economic Theory

Edwin Cannan

• Publisher: Routledge
• Year: 2016
• ISBN:
  9781315438351
• Edition: 1
• Topic: Economics
• Subtopic: Comparative Economics
• Index: Economics

Though Cannan, in his early years as an economist, was a critic of classical economics and an ally of interventionists, he moved sharply to the side of classical liberalism in the early 20th century. In this book, originally published in 1929 Edwin Cannan discussed in comparative terms the general problems of economics and in particular the theories of production, value and distribution and the attempts that had been made to solve them. Examining key principles of economics in historical terms, the author draws his own conclusions only after a full discussion of various viewpoints.

REVIEW OF ECONOMIC THEORY

CHAPTER I
THE ORIGINS OF ECONOMIC THEORY

§ 1. Ancient and Mediœval Philosophy.

ECONOMIC matters must have been of great interest to the most primitive man. Even a somewhat unintelligent baboon must have some recognition of the law of diminishing returns from successive accretions of labour, and of the law of diminishing utility from successive additions of any commodity. The story of Adam and Eve is very old, and it suggests the advantage of capital invested in the improvement of land when it pictures Adam as having an easy and pleasant job so long as he was required only to “dress and keep” the “garden” of Eden, and a very hard one when he was thrown out of it and driven to contend with a “cursed” ground all covered with “thorns” and “thistles” or their Eastern equivalents.

The Hebrew scriptures and other ancient records would perhaps repay more economic study than they have yet received. How unintelligently most people read the Old Testament is shown by the fact that few, if any, of us can remember wondering why there is no account in the historical books of an actual year of Jubilee. According to Leviticus, chapter xxv, every fiftieth year should have been marked by an immense reversion of property to owners who had temporarily alienated it up to that date, and yet we hear nothing of forcible evictions or leasehold enfranchisement associations. But though much of economic interest might be found in those old legends and records, I doubt if the most patient research even if combined with a fairly active imagination would find in them much with which to fill a doctoral dissertation on “Ancient Jewish Economic Theory.”

We might suppose that the Greek philosophers, who spent their whole time in thinking and talking, would be sure to drop, from time to time at least, into interesting economic speculation. But we should be disappointed. From the compendious account of the economic ideas of Plato and Aristotle given by D. G. Ritchie under their names in Palgrave’s Dictionary of Political Economy, a reader is likely to get an impression which is more favourable than it should be, because translation into modern language inevitably gives a certain flavour which is absent in the original. But even thus the total looks small. Plato had some idea of the advantage of division of labour which arises from differences of natural talents. “All things are produced in greater abundance and better in quality and more easily when one man does one thing which is natural to him and does it at the right time and leaves other things alone.” In relation to foreign commerce, he says of his citizens, “What they produce at home must be not only enough for themselves, but such both in quantity and quality as to accommodate those from whom their wants are supplied,” which shows appreciation of the fact that the real purpose of exports is to procure imports.

Aristotle classified industries into natural and unnatural; the natural industries are the raising of cattle and sheep, agriculture and hunting, which last includes war as a sort of hunting of “men who, though intended by nature to be governed, will not submit; for war of such a kind is naturally just”; the unnatural industries are those which depend on the existence of exchange, namely, trade, money-lending, and working for wages, while wood-cutting and mining fall between the natural and unnatural. On the origin, value, and use of money Aristotle is more advanced, telling us why gold and silver are commonly used, how they were exchanged by weight before the invention of coins was hit upon, and that money is not, as some said, valueless nor, on the other hand, the only valuable thing.

Engaging in its simplicity is his suggestion that it would be useful to those who value the art of making money if someone—some ancient Greek Samuel Smiles—would write histories of the ways in which individual fortunes have been acquired. For example, he says there was Thaïes the Milesian, who, knowing by meteorology that there would be a great harvest of olives, hired all the olive presses in Chios and Miletus, and then let them out again at high rates. But this does not suggest to him any economic reflections on the power of monopoly—he only remarks that Thaïes “thus showed to the world that philosophers could easily be rich if they like, but that their ambition is of another sort” (Politics, I. 4).

The fact is that these ancient philosophers were not and could not be economists in our sense of persons who are interested in and think and perhaps talk or write about the material welfare of mankind. They professed to be concerned with higher things, and if they were not always so in fact, it was because they thought of themselves rather than because they thought of their fellowmen. Their State, of which they made so much, covered a contemptible little district with one small town in it and a population of which the great majority were not citizens but slaves. It was impossible for economics to develop in such an environment.

Rome was an even more unfavourable situation for economic theory. The Roman Empire, in spite of the great work which it did for its subjects, remained outside them, and we might as well expect economic theory to emerge from the offices of the old East India Company as from ancient Rome.

The European Middle Ages show some progress. Economic matters came under the consideration of theologians who had to decide what actions were allowable and praiseworthy in a Christian man. Sometimes they are supposed to have been considerably influenced by Aristotle, as, for example, in following his condemnation of interest, but we must beware of the danger of supposing certain writers to have been influential merely because their views were much discussed and frequently adopted. We always turn those of our predecessors with whom we happen to agree into “the best authorities,” and people have done so in all ages. The mediaeval theologians’ ideas were really the product of their own environment, as the Greek philosophers’ were of theirs.¹

To us it looks as if there was a very close association between discussion of what is permissible to a Christian man and discussion of what is economically desirable. Can we really make up our mind whether we ought as Christians to give money to a beggar without raising the question whether he will buy whisky for himself or food for his alleged starving children? Can we recommend indiscriminate almsgiving in spite of the universal poverty and degradation to which it is certain to give rise? The mediaeval mind, however, was inclined to concentrate its attention on the effects of actions on the soul of the actor, and not to think of the ultimate and general effects likely to follow such action. This was largely the result not of simplicity or childishness, but of the fact that purchases and sales and loans were so much more casual and occasional than they are now, so that it was less obviously necessary to think of the effects of one transaction on future transactions than it is now. This makes an immense difference, as may be illustrated by Ashley’s story,¹ taken from Augustine of Hippo, about the honest book-buyer who gave “the just price” for a book although in his ignorance the seller had asked for less. Ashley says, “this to moderns will seem an extreme example” of honesty. Will it? If a new student at the School of Economics—an old one would know better— offered the professor who teaches economic theory the original edition of Cantillon’s Essai for 7s. 6d., would anyone think the professor “extremely” honest if he told the student what the real value was? On the other hand, if a bookseller near the British Museum, who has bought and sold economic books for more than a generation, did not recognise Cantillon, and put the Essai at 7s. 6d. in his catalogue, would not quite honest buyers telegraph for it without any scruple of conscience? Why this difference? Obviously for the reason obscurely implied in the aphorism, “Business is business.” The first transaction would be a casual one between persons neither of whom is in the business. In the second the bookseller is carrying on the business of bookselling, and must be taken to understand his business. Business simply could not be carried on if buyers had to go about considering whether they were giving enough as well as whether they were giving too much. The theory of the advantages of division of labour suggests that it is the buyer’s duty to look after his side and the seller’s to look after his, just as in a court of law we hope that truth will be arrived at by one counsel speaking for one party and another for the other party.

But though the mediaeval theologians scarcely arrive at economic discussion proper, their writings do indicate the existence of a more favourable atmosphere for the emergence of economics than that in which the ancient philosophers lived. They are more humane in their interests, and their idea of society —the whole Christian Church, if not all mankind—is wider.

They reflected the change, the improvement, I think we may justly say, which had taken place during the “Dark Ages,” as they used to be called.

The extent of the change or improvement will be obvious if we look at Sir Thomas More’s Utopia, 1516, and W. S.’s Discourse of the Commonweal of this Realm of England, 1581. The contrast between More’s Utopia and Plato’s Republic in regard to humanity is great, and there is a very modern ring about the “common greif s” described by W. S., such as rural depopulation and the “dearness of all things, though there be scarceness of nothing” We may perhaps regard modern economics as beginning to emerge about this time, the sixteenth century, though it did not get a name and a recognition of its separate existence till long afterwards.

The principal contributors to the science in the seventeenth century may be classed as the philosophers, ethical and juristic, the mercantilists and the cameralists, including the political arithmeticians.

§ 2. Seventeenth-century Philosophy.

I do not propose to trespass into the province which Dr. James Bonar has occupied in his Philosophy and Political Economy, 1893. I will only say that the discussions of the juristic and political philosophers of the sixteenth century bear much more directly on economic theory than those of the mediaeval theologians. Hugo of Groot, the Dutchman known to the scholarly world as Grotius, in his great treatise De jure belli et pads (On the Laws of War and Peace), 1625, quickened thought about the institution of property, contracts, and other economic subjects. The German, Samuel Pufendorf, though apparently despised as a philosopher and a jurist, put a large quantity of useful economics into his De jure naturce et gentium (On the Law of Nature and Nations), 1672, and De officio hominis et civis (On the Duty of the Man and the Citizen), 1673. Our own John Locke in his Two Treatises on Government, 1689, explained the origin of property in a way which went far towards suggesting the theory of Value which long held the field.

§ 3. Mercantilism.

Though the philosophers had no little importance, Espinas is right when he says in his brief but brilliant Histoire des doctrines économiques, 1892:

“But it was not philosophical interests which prevailed in the realist politics of the sixteenth and seventeenth centuries. Great States were being formed. Uplifted by a new-found consciousness of their unity and their strength, each of them strove for complete independence…. Standing armies provided with artillery were being organised, and demanded pecuniary sacrifices such as no nation had been obliged to make since the time of the Roman Empire. The luxury of their courts gave princes a new field for rivalry and prodigality. These enormous expenses were supported by taxes, and it was industry and commerce, carried to a higher degree of activity than ever before, which paid the bill…. Religion became nothing but an obstacle to be removed or an instrument to be used. The Church became in France an organ of the State. History entered on an age of gold and iron, and Europe appeared like the scene of a tournament in which every kind of covetousness appeared in conflict” (pp. 135–7).

Mediæval Europe had perhaps tried to believe in the saying, “Blessed are the poor” as applied to individuals, and had not thought much about the aggregations of persons living within certain boundaries: the new Europe believed in the blessedness of rich nations. The mercantile theory—” mercantilism “as it has been the fashion to say since English economic historians took to the study of German—professed to tell how nations could be made rich.

Uninstructed public opinion everywhere and in all ages about which we know anything has always been alarmed by money going out of the country and delighted when it comes in; and whenever metallic money is used, both the alarm and the pleasure are felt also when the bullion out of which money is made is exported or imported. Throughout the Middle Ages accordingly we find a perpetual attempt by each country to prevent coin and gold and silver bullion from being exported. But this was not mercantilism, for it has nothing specially to do with merchants. Mercantilism proper arose about the beginning of the seventeenth century as the merchants’ protest against the prohibition of the exportation of coin and bullion. Those who traded with the East were stimulated to protest by self-interest. Silver was a commodity produced in the West and desired in the East, and its continuous export from the West to the East was consequently profitable. The East India merchants, therefore, very naturally argued against this trade being prohibited, pointing out that to increase the stock of precious metals, coined and uncoined, within a country which contains no natural source of those metals, the only plan is to import more of them than is exported—to have, in other words, “a favourable balance” of imports over exports of precious metal. The prohibition of export, they said, would not help to secure this balance, since in the first place it would be evaded, and in the second place it often happened that an export of precious metal was necessary to start a series of exchanges which would eventually bring in more of that metal than went out. All that was wanted was “a favourable balance of trade” that is, exports of goods (other than precious metal) exceeding in value the imports of goods. If the goods exported were worth more than the goods imported, the balance must be imported in precious metal.

Once propounded by interested merchants, this “balance of trade” theory carried conviction to the mind of every merchant, interested or uninterested. To a merchant trade is profitable, not when he pays out nothing, but when he receives more than he pays out; and as he conceives the nation in his own image, it is very natural for him to think that what is true of his trade must be true of the trade of the whole nation.

One of the earliest and quite the finest expositor of this theory was Thomas Mun, born in 1571. He became a director of the East India Company in 1615, and published in 1621 A Discourse of Trade unto the East Indies in defence of the exportation of silver, but his ...

Table of contents

• Cover
• Half Title
• Title Page
• Copyright Page
• Original Title Page
• Original Copyright Page
• Table of Contents
• New Introduction
• Bibliography
• Chapter I The Origins of Economic Theory
• Chapter II The Name of Economic Theory
• Chapter III The Theory of Production
• Chapter IV The Influence of Population on Produce
• Chapter V The Influence of Co-Operation on Produce
• Chapter VI The Influence of Accumulation on Produce
• Chapter VII The Theory of Value in General
• Chapter VIII The Theory of the Value of Land
• Chapter IX The Theory of the Comparative Value of Capital and Income
• Chapter X The Classification and “Distribution” of Income
• Chapter XI Incomes From Labour: Their General Level
• Chapter XII Incomes From Labour: Their Inequalities
• Chapter XIII Incomes From Property
• Chapter XIV Aspirations and Tendencies
• Index