The genesis of modern economics as a historical splitting process

Although economic thinking existed already in antiquity, and there were schools like the physiocrats and mercantilism whose economic doctrines had been influential in explaining the wealth of European nations, modern economics traces its origins to the classical political economy of the late eighteenth and early nineteenth centuries. Adam Smith towers above all as the founding father of modern economic scholarship, with David Ricardo, John Stuart Mill and Malthus also belonging to this crucial period that laid the foundation of modern economics. Marx could also be seen to be firmly rooted in Ricardian political

economy, although he saw himself as expanding and overcoming the limitations of that paradigm. Despite internal differences, the classics all shared a general harmony-orientation, with the view that market forces would provide relatively harmonious solutions to social problems rooted in scarcity, and a focus on long-term economic growth and macro-distribution (Landreth and Colander 2002:72).

The core problem at hand in the classical political economy period was to understand the production and distribution of material wealth. In doing so, the concept of a national economy with broad classes (landowners, capitalists and workers) defined by their roles in the production process and respective sources of income (land rents, profits and wages) was a given starting point, and market harmony was coupled with insights in the often conflictual and dismal long-term developments. Still, they were fundamentally supportive of political and economic freedom. Ricardo, and later Marx, worked with different forms of labour theories of value, that is, value in the market of a commodity is determined objectively by the cost of producing it. However, the relative prices of commodities or optimal resource allocation was not their primary interest. Rather, the labour theory of value was a way to understand long-term structural changes in resource distribution, and for Marx, how exploitation of the surplus product of labour was embedded into a system of exchange based on exchange value (Landreth and Colander 2002:75; Marx 1976).

The classical political economy predates the modern academic disciplines.

Political economy was a broad area of inquiry that included a multiplicity of aspects that later split into separate social sciences. Consider for example the elements of moral philosophy in Adam Smith, or the analysis of power relations in Marx, whose work only became canonised as a sociological classic much later (Levine 1995). Similarly, Landreth and Colander (2002:73) emphasise that the classical political economy contained the seeds of both modern orthodox and heterodox economics, with its simultaneous belief in the harmony of the market and insights into its dismal tendencies. The scientific revolution and beginning of the long splitting process that led to modern mainstream economics occurred in the so-called marginal revolution of the 1870s.

At this time, four authors independently brought about a new understanding of value, initiating a long process that would eventually bring about the emergence of neoclassical economics that more or less still forms the core of the modern discipline. The three central figures in this marginal revolution were Stanley Jevons, Leon Walras and Carl Menger. The fourth contributor and great synthesiser of the new marginal utility theory of value was Alfred Marshall in Cambridge, England. From then on, the discipline divorced the moral-political,

social and historical aspects of the economy, and strove to become a pure science modelled after the natural sciences, building upon abstract deductive methodology and searching for general and universal principles of economic phenomena. The neoclassical economics of 1870–1930 neglected macroeconomic questions about growth and distribution, and focused instead on the microeconomic issue of how markets under competition function to allocate scarce resources with alternative uses (Landreth and Colander 2002:219).

Marginalist economics adopted a fundamentally deductive approach, most pronounced in Walras’s general-equilibrium approach where the formal logic of a system analysed simultaneously in its interrelations was the focus. An offshoot of the marginal revolution that illustrates the tensions it generated was the great German Methodenstreit of the 1880s, where the marginalist conception came into conflict with the historicist, empirical and inductive approach of the so-called historical school in Germany. The German tradition of multifaceted and descriptive particularistic economic history had already clashed earlier in the century when prior generations of the historical school dismissed the universalist and deductive pretentions of Ricardian economics and British utilitarianism.

In their extensive historical account of how the economics discipline became divorced from the social and historical aspects of economic processes, Dimitris Milonakis and Ben Fine (2009) devote considerable attention to the effects of the marginal revolution and the Methodenstreit. I will devote some attention to their account, since it sheds light on the contemporary mainstream-heterodoxy divide, and puts it in historical relief.

The main combatants in the methodological battle were Carl Menger, who had published his major contribution to marginalism in 1871, and Gustav Schmoller, the leading proponent of the historical school at the time. Their main exchanges took place in 1883–1884 when Menger launched a frontal attack on the historical school and what he felt was its lack of a proper conception of economic analysis.

According to Milonakis and Fine (2009), marginalists and the historical school were in agreement that classical political economy was in need of reinvigoration or replacement. However, opinions differed greatly on what the problem was. The marginalists shared a basic conception of economic analysis as an abstract and deductive undertaking with Ricardo and the classics, to which the historicists had been principally opposed since the early years of the century when Ricardo was active. However, the marginalists were highly critical of the cost of production theory of value, and other aspects of the Ricardo-Mill economics they considered defunct. Furthermore, the marginalists emphasised a positivist conception of economics that had also been inherent in some of the classics (like Mill) that economics should strive to become a pure theoretical and positive science, strictly

separated from a notion of economics as an art, or the sort of moral-political questions inherent in earlier political economy conceptions, like Adam Smith.

This attempt at a very rigid separation between what Walras termed “pure economics” on the one hand, and values and politics on the other hand, was a part of the project to put economics on par with the natural sciences. The marginalists furthermore shifted the focus of analysis from a societal macrolevel to the microlevel, towards the (hypothetical) economising behaviour of individuals. This was something that lay at the very heart of Menger’s approach, and he promoted what he called “atomism”, the methodological imperative to always reduce economic processes to the interactions of individuals, a principle that Schumpeter would later rename “methodological individualism” (Milonakis and Fine 2009:106). Menger criticised the historical school for falsely analysing collectives or institutions other than as the sum of their parts, the results of individual action.

The historicist Schmoller criticised Menger for falsely attributing universal laws to particular social phenomena, and asked in his 1873 critical review of Menger’s attempts at abstraction: “Is the author not herewith reviving the old, slanted English fiction, namely that economic life could be properly derived from the constant basic driving force of the abstract average man?” (Quoted in Milonakis and Fine 2009:104). However, despite the recurrent historical interest attributed to the battle, it did not last for very long, and both sides seemingly entered into a spirit of reconciliation a decade later. The often-narrated story of how one purely deductive and universal theoretical side (Menger) stood against another purely inductive, historical and antitheoretical side (Schmoller) seems unwarranted, given the explicit testimonies on either side afterwards that both are needed in economic analysis. However, Milonakis and Fine also point to the fact that perhaps more than purely methodological issues, this battle was about both substantial and epistemological problems. First, it seems that Schmoller stood for a descriptive and Humean view of causality (with an interest in whether events actually seem to follow in regular sequences as grounds for attributing causality), whereas Menger stood for an Aristotelian essentialism, striving to abstract the essences of phenomena in isolation.

Furthermore, a second and important aspect is the relation between the emerging Bismarckian social policy, with its interventionist and regulatory approach, against the laissez-faire critique of the same from the followers of pure economic theory. In a telling account, Menger’s student Ludwig von Mises, the founder of modern Austrian economics, gave his view of the controversy:

The government of Bismarck began to inaugurate its Sozialpolitic, the system of interventionist measures such as labor legislation, social security, pro-union

attitudes, progressive taxation, protective tariffs, cartels, and dumping. If one tries to refute the devastating criticism leveled by economics against the suitability of all these interventionist schemes, one is forced to deny the very existence—not to mention the epistemological claims—of a science of economics [. . .]. This is what all the champions of authoritarianism, government omnipotence, and “welfare”

policies have always done. They blame economics for being “abstract” and advocate a “visualising” mode of dealing with the problems involved. They emphasize that matters in this field are too complicated to be described in formulas and theorems. (von Mises quoted in Milonakis and Fine 2009:114)

The reverse view of the situation is similarly telling—that theoretical economics represents a Panglossian liberalism and political free market advocacy that masquerades as positive economics. From a sociological and naturalistic vantage point, we can conclude that when contemporary struggles rage over the soul of economics and its relation to social and political issues, the basic themes and the positions seem to have been rehearsed before.

If the Methodenstreit functioned to clarify two opposing positions on what economic analysis ought to be, it is clear that in hindsight, the marginalists won, even if this debate in itself played a minor role. If there was a single conception that proved important for the new pure economics, it was the notion of marginal utility. In the words of Joseph Schumpeter, “the concept of marginal utility was the new ferment which has changed the inner structure of modern theory into something quite different from that of the classical economists” (quoted in Milonakis and Fine 2009:98). Milonakis and Fine (2009:110) identify the central effects of the marginalist victory as three forms of reductionism that narrows the scope of economic research. First, an anti-historicist reduction, squarely placing economic analysis outside all attempts at historicising economic analysis, that is, considering the historical evolution and transformation of economic phenomena.

Second, an individualist reduction, the framing of analysis in methodological individualist terms, connected to a third asocial reductionism, whereby economic processes become abstracted from all other social relations, including the concept of class. These reductions imply two further things: first, that focus is not only shifted toward the individual, but to a very specific type of economically optimising behaviour. Second, “the economy” and “the economic” become identical to the market, while broader social relations in which real economic processes are embedded fade into the background of exogenously given variables.

The void that this implies was soon to be filled with the new academic disciplines of sociology and economic history, consolidating the disciplinary rift between the economic and the historical and social, according to Milonakis and Fine. The consolidation of neoclassical economics by the 1930s is heuristically

illustrated by the work of Lionel Robbins in giving economics its best-known modern definition, in an act of strategic boundary work. This is not to say that a phrasing of the task of economics influenced the development of the discipline, more than it is an emblem of a process that had already taken place, and as an example it offers great insight into the process. Simultaneously, this story also offers a window into the consolidation of modern sociology as the other side of this splitting process where new disciplinary boundaries are drawn.

Defining a discipline: Narrowing the boundaries of “the economic”

How should economics be defined? One of the best-known definitions today is Lionel Robbins’s (1932:15) formulation: “Economics is the science which studies human behaviour as a relationship between ends and scarce means which have alternative uses”. But is this not a rather limited view of the nature of the economic? In his history of economic thought, Roger Backhouse (2002:4) argues as much, stating: “It is perhaps ironic that Robbins’s definition dates from 1932, during the depths of the Great Depression, when the world’s major economic problem was that vast resources of capital and labour were lying idle”. Backhouse (2002:4) instead uses a competing conception, borrowed from Alfred Marshall, that economics is “the study of mankind in the ordinary business of life”, or to be more precise, that “economics deals with the production, distribution and consumption of wealth or, even more precisely, is about how production is organised in order to satisfy human wants”. Explicit or implicit definitions of economics have been a contested topic, as they are related to how the subject matter and proper methodology of research is conceived.

Robbins’s definition has played a key role in the consolidation of the modern discipline (Milonakis and Fine 2009). This influential definition was not just introduced out of the blue, as something to be quoted in introductory textbooks almost a century later. Robbins (1932) explicitly crafted his “scarcity” definition against the competing “materialist” definition that he connected to Marshall and, indeed, to Marx. For Robbins, a materialist definition of economics is also connected to the Marxists and their historical materialism, and his redefinition allows him to decisively pull economic science away from any such project. He is quite explicit about this:

The Materialist Interpretation of History has come to be called the Economic Interpretation of History, because it was thought that the subject-matter of Economics was “the causes of material welfare”. Once it is realised that this is not

the case, the Materialist Interpretation must stand or fall by itself. Economic Science lends no support to its doctrines. (Robbins 1932:43–44)

This is not to say that Robbins’s primary goal in redefining economics was its anti-Marxist uses, but it was surely a welcome by-product. These definitional attempts are clearly also a fundamental form of boundary work, where the symbolic boundaries of the discipline are reworked and provided with rational justification.

Robbins’s redefinition of economics in the 1930s is part of the great transformation of economics from a nineteenth century political economy centred on the production and distribution of use-values on a societal scale, to the modern marginalist conception of the economics of economising actors that Robbins represents. In an essay on the fate of the material in economics, Richard Swedberg captures this transition. He notes what seems like the disappearance of the material from economics around the turn of the century, and claims this slow shift

“may be related to the disappearance of the term use-value from the vocabulary of modern economics, and the related attempt to replace it with a more subjective terminology, such as ‘utility’ and ‘preferences’” (Swedberg 2008:78). According to him, the disappearance of anything material in modern economics can be clearly seen in the pioneering formulation of an ideal homo economicus by Frank Knight in his Risk, Uncertainty and Profit in 1921. It is generally agreed that this idea was first formulated by John Stuart Mill in the mid-nineteenth century and then expanded and explicated by Knight. However, while this “heroic abstraction”

makes a range of claims about “complete rationality”, action without restraint, perfect competition and information, the theory is absolutely free from material bodies, technologies, material goods or objects, or for that matter, a physical world with geographical properties (Swedberg 2008:78). Knight’s formulation serves as an illustration of the shift, which can be described in Marx’s classic wording, with a twist: “When Marx famously said that ‘all that is solid melts into air,’ he was thinking of the corrosive impact of bourgeois conditions on feudal values, but his statement also fits the transition from political economy to modern economic theory when it comes to materiality” (Swedberg 2008:79).

A later example of just how entrenched the non-materiality of Robbins and Knight has become is the famous definition of economics by Gary Becker as “the combined assumptions of maximising behaviour, market equilibrium, and stable preferences, used relentlessly and unflinchingly”; simultaneously, in relation to the older definition that Robbins called “materialist”, Becker claims that “the definition of economics in terms of material goods is the narrowest and the least satisfactory’’(Becker quoted in Swedberg 2008:57–58).

This leaves us with two seemingly opposing definitions of the economic. One is the “materialist” conception of the economists of the period of classical political economy like Adam Smith and David Ricardo, but also of Marx and later Alfred Marshall. The materialist conception studies the production, distribution and consumption of use-values. Against this stands what Robbins called the “scarcity”

conception, which sees economics as the science of the logical relation between scarce means and ends. This is the science of rationally choosing and calculating actors, portrayed in the “heroic abstraction” of the homo economicus. But the two definitions do not only map onto the historical shift from political economy to marginal economics, they also seem to map onto the divide between economics and economic sociology represented by Swedberg. But there are very strong affinities with elements in economic sociology and heterodox economics, where both define themselves oppositionally and draw strong boundaries with mainstream neoclassical economics. There are also links between economic sociology and heterodox economics in an emphasis on culture, institutions and historicism.