Book Review: The Origin of Economic Ideas - Paul Mattick, Jr.

Paul Mattick, Jr. reviews The Origin of Economic Ideas by Guy Routh for Root & Branch issue #6 published in 1978.
Root & Branch was a libertarian socialist journal in the U.S.

Submitted by UseValueNotExc… on February 13, 2022


In writing this book Guy Routh has done a service to those who feel they ought to study economics but never got around to it, and to those who have looked into the dismal science, only to find it stupefyingly confusing and unilluminating. It is the desire to find out how the world works--or at least that part of it dominated by economic principles--which leads people to economics; what is so bewildering is not so much the technical apparatus of the field as its apparent irrelevance to any understanding of reality. Routh demonstrates that this is not an appearance: it’s not the student's fault, but that of the “science.” Clearly and entertainingly written, The Origin of Economic Ideas continues and develops the charge brought against economics in 1815 by Sismondi, who warned humanity to “be on guard against all generalization of ideas that causes us to lose sight of the facts, and above all against the error of identifying the public good with wealth, abstracted from the sufferings of the human beings who created it.”

The title of the book is misleading, for Routh tells the whole history of economics, from the 17th century to the present day. He situates this history in its context of the development of capitalist society, which helps both to explain why the theory developed as it did and to demonstrate its irrelevance to understanding reality. Routh’s indictment of economics falls under two main headings: the use of a method based on over-abstraction from the complexities of real life, and a content determined by apologetic rather than scientific ends. Throughout its history, Routh claims, from its origins in Petty (1623-87) through classical economics, the marginal revolution of the nineteenth century, and the Keynesian-neo-classical synthesis of the present day--the method of economics has been the deduction of consequences from highly abstract a Priori principles. This method, and these principles cannot be defended on scientific grounds.

It is, after all, highly implausible that the whole sweaty, hardworking, money-grubbing capitalist world would have revealed its secrets to anyone sitting snugly in his study with no more equipment than a few preconceived axioms. And equally implausible that, if we were viewing that world for the first time we should exclaim, “What a miracle! There must surely be an invisible hand manipulating demand, supply and price to achieve the optimum allocation of resources for the maximization of profits and utility!” (p.297)

In order to maintain this vision, in which the capitalist economy, if only left alone, will automatically regulate production and income in such a way that the self-interest of each promotes the good of all, elements of experience conflicting with it had to be ignored. Both Adam Smith, in the eighteenth century, and Keynes, in our day, included in their studies material which contradicted their own theoretical pronouncements. What is typical of economics is that only the latter lived on in the tradition of the “science.”

A very interesting feature of Routh’s book, not shared by most other histories of economics, is its treatment of nineteenth-century popularizers. Translating theoretical formulations into moralistic tales, they make unmistakably clear the ideological content of the abstractions of the time. This content is admirably summed up in “The Rich and the Poor. A Fairy Tale” by Mrs. Marcet, who was praised by J.B Say as “the only woman who had written on Political Economy and shown herself superior even to men.” Her exemplary tale leads inescapably to the conclusion “that the comforts of the poor are derived from the riches of the rich.”

The discussion of neo-classical economics is particularly well done. Routh begins by inquiring why the idea of the determination of value by marginal utility gained popularity when it did, and answers by agreeing with Marx’s proposition that it was the need to abandon the radical implications of the labor theory of value. He then explains how the combination of utilitarian psychology with the differential calculus enabled economists to prove that the market, if left to itself, operates so as to maximize consumer satisfaction. With this conceptual apparatus, Jevons (1835-1882) could prove the absurdity of the very idea of a “general glut” (i.e., depression) and Clark (1847-1938) could show that wages and interest measure exactly the contributions made to society by workers and by capitalists: as he put it, “we are to get what we produce--such is the dominant rule of life.”

But no sooner had Walras (1834-1910), with his theory of general equilibrium, turned economics into a heavily mathematicized “exact science,” than the basic concepts and assumptions of marginalism began to disintegrate. The idea of “utility” as a psychological datum explaining market behavior gave way to the “preferences” revealed in the market. The crucial principle of diminishing returns had to be given up. In the 1930’s, Chamberlin and Joan Robinson discovered (!) that the pure competition on which the theory rested did not exist. In the face of this discovery, however, the economic “tool-box” of ideas was not abandoned: instead, “the apparatus of marginal analysis . . . was made to blossom with diagrams.” The neo-classical model was preserved--at a certain cost. It had been supposed to constitute an exact, predictive science, like physics; its relations were deterministic and maximizing. The spirit of the science as reformed, however, is that of Joan Robinson’s conclusion, in one context, that “as the amount demanded increases, the supply price may rise, remain constant, or fall.” But such results are of little moment to the economics professors--and, as Routh says, economics is predominantly a teaching order. They have after all only increased their stock “of theorems that lend themselves admirably to teaching and examination. So, as with utility and revealed preference, the modern textbooks blandly incorporate both the discredited theory of perfect competitive equilibrium and the theory of monopolistic competition that had been designed expressly to supersede it.” (pp. 256-7)

The Great Depression swept away the marginalists’ equilibrium dreamworld. (Routh gives wonderful examples of the economists’ response to the reality that disproved their theories, rangin from claims that it wasn't really happening to the thought that all would be well if the workers would only eat less.) Enter Keynes, supposedly to create a new, realistic theory, on which an effective anti-crisis policy could be built. Routh shows, however, that Keynes’ theory exhibits the same divergence between theory and facts as those of other economists, as he takes us on a brief tour of its faulty logic, dubious assumptions, sell-contradictions, and factual errors. Aside from details, Keynes’ theory fails because it is an attempt to save the neo-classical theory of the economy as an equilibrating mechanism.

How then, as Routh asks, could Keynesianism have succeeded in “saving capitalism,” as it has claimed to have done? As a matter of fact, the “Keynesian” methods were set to work by the New Deal and the Hitler regime long before the General Theory was published. Keynes merely developed the economic ideology into a form which could account for what was happening in the world with a minimum of basic changes. The final proof of the scientific irrelevance of Keynesian theory, as Routh says, is the state of affairs in acadalia, in the curriculum where Keynesianism “coexists happily with the fallacies it purported to refute.” (p. 293)

Routh's history, as I have hoped to communicate, is convincing as well as informative. He gives the original texts enough space to more than justify his condemnation of them as delusionary and apologetic. As he says, his book comes at a time when the economists’ failure to control or even explain the turbulence of the world economy has produced a crisis in theory; in the tradition of Sismondi, Cliff Leslie, W.C. Mitchell, and other critics of economic orthodoxy, Routh offers the outlines of a new way of thinking about the economy.

His recommendations, however, are disappointing. First of all, he suggests looking at the economy not as an "optimising," well-ordered system, but as one in which “almost anything can happen.” (p. 302) Economic decisions are made--by sellers, buyers, investors, etc.--not on the basis of rational knowledge, but on hunches, feelings of confidence or the lack thereof, especially on guesses as to what others will do. It is such self-fulfilling prophecies, Routh suggests, which explain the cyclical character of economic life.

Secondly, offsetting this, there are stabilizing influences at work, due chiefly to “non-economic” institutions: custom, morality, law. There are “socio-psychological drives'' such as the desire for power, as well as “ideas of what is right and proper” (p. 308) which, for instance, Routh thinks are responsible for setting and maintaining wage rates (!). Finally, the economy as a whole is to be visualized not as a system dominated by some great principle (such as optimization or profitability) but as a congeries of systems and institutions, each with heterogeneous constituents and flexible modes of interaction. Particular corporations, for example, have their own characteristics, and must be studied as such if the economy as a whole is to be understood.

The most striking feature of Routh's “alternative paradigm” for economics is the way in which it maintains, under yet another disguise, basic features of the economic idelogy he so well criticizes in the bulk of his book. Despite his picture of the system as involving “different forms of behavior at different times,” he views capitalism in a fundamentally ahistorical, non-developmental way. Some basics are permanent: “the herd characteristics of consumers and producers“ (p.310) which act as “protective devices and stabilizing influences” (p. 302) holding the system on its course. There is no discussion of the fact that these “herd characteristics,” however rooted in “socio-psychological drives,” have reference to historically particular structures of social relationship: in particular to the relation of capital and wage-labor, which forms a basis for all the others. Custom, competitiveness, and morality all define themselves in reference to these relations which set the possibilities of social action. It is striking that these givens make no appearance in Routh’s “alternative.” Instead we have only the usual list of “economic structures,” such as “the market,” plus the “non-economic” ones of the sociologists--all of them treated as givens, not in need of further analysis. The question of the nature of the system, in contrast to other systems before it (and possibly after it) is not raised; a fortiori it is not asked whether this system is changing over time and if so in what direction. Historical change can be due only to “sociological” or “political” factors outside “the economy.” The “economy” per se is permanent; though its tendency is to disequilibrium, the business cycle itself is “in fact a formula for survival. If (the system) is to be changed, it is no use waiting for it to collapse by its own irrevocable inner laws; whatever changes take place will have to be by design.” (p. 310) So, after all, there is an Invisible Hand. Only it doesn't work as the economists have thought, cleanly, efficiently, guided by rational motives. Instead it is through custom, morality, and individual quirks moderated by “herd” behavior that the market system is maintained, in principle forever.

As Routh joins the economic tradition in proclaiming the essential stability of the system, he echoes it also in ignoring the one articulated challenge to that tradition, Karl Marx’s critique of political economy. One curious feature of Routh’s book is that, while it cites Marx extensively as an ally in the attack on orthodoxy, it leaves the theory of Capital--seemingly a logical place to look for an alternative approach--entirely undiscussed. We are told that the marginalists, by believing in the self-determining quality of economic variables, “had a great deal more in common with Marx than either they or he would have cared to admit,” (p. 262); but though further discussion of this point is promised for the last chapter of the book, it is not forthcoming.

Routh’s comparison of Marx and the marginalists is quite mistaken. For the latter, economic variables (the prices and quantities of goods) form a mutually determining system, which can be formulated in terms of a “general equilibrium” of supply and demand. For Marx, however, “economic variables” are not determined at all in this sense, but are subject to pressures exercised by general characteristics of the system as a system of class exploitation. It is not the interaction of economic variables but the need of capitalists to accumulate capital through the extraction of surplus value which determines, in Marx's theory, not the ephemeral states of the system, but its long-term trend.

Here again, Routh follows economic orthodoxy in treating Marx as an economist, albeit an underworld one. But this is an error. What it means to say that Marx was not an economist will be clearer if we take a quick look at a matter of detail, the Ricardian labor theory of value. Routh believes that this theory is weakened by the fact that there is no objective measure of skill and intensity of work, as there is for sheer labor-time. Therefore, the idea of labor-content, which is supposed to regulate exchange values, is indeterminate and imprecise, and “it is to sociology rather than to economics that we must turn to explore these mysteries.” (p.121) To begin with, it does not follow from the fact that labor-content cannot be measured that the concept is indeterminate or imprecise, or that commodities cannot be said to contain definite (though immeasurable) quantities of labor. As Marx pointed out, exactly this is the characteristic of labor as value, that social labor, since it is embodied in privately owned commodities, cannot be the subject of calculation except as represented in the prices established by the market. For this reason the (abstract) labor-content of commodities is not measurable at all, even aside from the problems of skill and intensity. The labor theory of value is not so much an explanation of value in terms of labor, as an expression in theoretical terms of the fact that in capitalism human productive activity is represented, organized, and controlled via the market.

Thus Marx--and this is the most important point--takes neither the category of labor nor that of value as “natural,” but treats both as the products of a particular society, as cultural forms, in the anthropological sense of “culture,” for the organization of social life. For Routh, the content of classical economics, and so of the whole tradition which followed on it, is almost an historical accident: it happened to start with Petty, but “if it had been someone else with different ideas, it would have been different.” (p. 295) But for Marx, classical theory, in contrast with the “vulgar” systems that followed it, was of real scientific value because it laid bare, in the form of the economic categories, some basic characteristics of capitalism as a social system. It is no accident that only in capitalism did the discipline of economics develop; the fact that in this society people experience and understand their own social relations as a domain of “economic laws” is an important starting point for the comprehension of the system. Marx's development of the classical economists’ insight, however, involves a decisive break with economics as the science of these “laws.” What is required, if the attempt to understand reality is to be carried forward, is not the injection of sociological observation into economics but the replacement of the latter doctrine with a theory of capitalism that explains the classical theory in terms of the reality to which it was a response.

Marx’s work thus fits one of Routh’s criteria for a new, more scientific theory of economic phenomena: it rejects the view of “ the economy” as a self-regulating world of phenomena, seeing this rather as the appearance of a developing, and changing, set of social relations. The theory in Capital meets Routh’s other criteria as well. Its basic concepts (labor, capital, value, surplus-value), while abstract, are clearly abstracted from reality; they are used not for deduction but with constant reference to empirical phenomena (at least half the bulk of Capital is historical material); they are testable, since they are mater used to formulate a set of historical predictions--the cyclical pattern of capitalist development, a rising productivity of labor, the increasing centralisation and concentration of capital--which have in fact been quite well confirmed.

Whether or not he would agree with such a positive evaluation of Marx’s views, it is a pity that Routh does not deal with them. Routh says “we would not aspect career economists to subscribe to Marxist doctrine,” or, one must add, even to take it seriously enough to study it This is not just because of its subversive content, but also because its method and spirit are alien to those economics, heterodox as well as orthodox. Marxian theory is not a new, improved economics, but a critique of the field, an attempt to do away with it theoretically as a contribution to doing away with the phenomena it deals with practically. Marxian theory stands quite outside of and opposed to the dominant ideology. This is why radical economists, even most of those who call themselves Marxists, tend to abandon the theory of value and capital accumulation that forms the core of Marx’s work; just in as, conversely, so many radicals are ever again drawn to study bourgeois economics. For all his difficulty in stepping beyond the circle of economic thinking, Routh’s book has great value because it demonstrates thoroughly that this pseudo-science must be left behind if we are to understand, and change, the world we live in.

Paul Mattick, Jr.
June, 1978