Price

http://www.youtube.com/watch?v=gr57sHfJP3s

Our world is governed by price as it has never been before.

We wake in the morning to news about the price of gold and oil, wonder about the price of what we have produced in the day and talk about the price of homes and holidays over dinner. With a couple of computer key strokes, we can discover the price of travelling to Thailand, taking tea in Tokyo and eating tacos in Tijuana. And instant digital communications makes the sea of prices that envelops us deeper and wider every day.

There is no surer way of becoming rich than correctly forecasting what the price of things, in fact anything, will be.

Get it wrong, and there is no more certain way of becoming poor.

Prices haunt our dreams and dominate our waking hours. Consumers worry about them, companies seek to increase them and governments tax them. We often don’t like them and wish, somehow, that we could make them change. But most of us most of the time don’t doubt that the price of something is the most important piece of information you need to make the right decision about practically everything.

It hasn’t always been like that.

Until little more than a century ago, most people who thought about the subject concluded that things had a value that was different to its price. Humanity’s struggle with the difference between what something was bought and sold for and what people thought it was really worth is as old as civilisation and, at times, defined its very character.

The Book of Genesis, the first of the Jewish and Christian bibles, explained that the earth’s wealth was created by God, as were the competences that humans deployed to harvest and enjoy it. What something was really worth, its true value, was divinely-ordained, an unalterable given that would be blasphemous to question.

But this simple idea conflicted with the realities of a world where human beings rearranged the natural order. Things were exchanged, and not just consumed, and wealth was accumulated and not just inherited. Why was the price of a cow higher than of a goat and a minority rich while the majority weren’t? Was this an acceptable expression of God’s will or evidence of sinful greed?

Early thinkers attempted to provide answers. Aristotle argued that a just price should have a reasonable relationship to its intrinsic worth¹. Price was a camouflage and an artifice. The wise and the righteous, therefore, had to look beyond the superficialities of the market price to discover fundamental values. But what did that mean in practice? It was a question that was to be asked again and again for more than 2,000 years.

The Romans incorporated Aristotle’s concept of a just price (pretium iustum)² into their legal code but failed to explain the difference between transient market prices and true value. The problem of reconciling the ideal with the practical was inherited by Christianity, which was adopted as the official religion of the Roman Empire in the 4th century of the Christian era. Christian teaching was uncomfortable with the idea of private wealth, but radical calls for the faithful to abandon all material possessions were rejected. Christian thinkers, nevertheless, questioned excess attachment to wealth and argued that ownership was only temporary stewardship of God’s property. Prices obscured God’s plan for the world.

Islam, which emerged in the early 7th century, also addressed the issue but was more permissive than Christianity. The Prophet Mohammed, a merchant before he became a missionary, was familiar with the process of haggling about price.

Arabia in his time had no single currency: there were gold Greek solidus coins minted by the Byzantine Empire, silver Ghadiya, the coinage of Persia’s Sassanian Empire, and a host of other types of money produced by other states. Deciding what a fair price was represented a moral as well as economic challenge. The Prophet Mohammed made few specific rulings. Muslims were prohibited from trading certain goods and interest on loans was forbidden (haram). A merchant was allowed to sell a good or property for more than he or she paid for it, but excessive profiteering and capitalising on scarcity to push up prices were both wrong. Several centuries were to pass before a Muslim thinker attempted to define what constituted a just price. In the Al-Muqadimmah (known as Prolegomenon, or preliminary discussion, in the West), the North African Arab historian Abdelrahman Ibn Khaldun suggested it was due to the costs of production and, in large part, due to labour³.

“A portion of the value, whether large or small, comes from (the labour). The share of labour may be concealed. This is the case, for instance, with the prices of food-stuffs. The labour and expenditures that have gone into them show themselves in the price of grain, as we have stated before…It has thus become clear that gains and profits, in their entirety or for the most part, are value realised from human labour.”

(Chapter V, Al-Muqadimmah, Abdelrahman Ibn Khaldun, 1377)

The implication was that market prices should not be accepted without question and a buyer should acknowledge the contribution made by a producer. Islam echoed the pragmatic attitude to trade and wealth accumulation found in Jewish traditions.

The approach of Judaism is perhaps best described as reasonableness, an attitude that took into account both idealism and practicality. The price charged should be enough to compensate the producer for the costs involved but not so high as to be unfairly punitive to the buyer. Ethical constraints, therefore, affected how prices were viewed in Judaism, Christianity and Islam, but there were few injunctions for these to be applied in trade with non-believers⁴.

This conflation of objectivity and subjectivity in thinking about prices and value before the 16th century reflected the way Judaism, Christianity and Islam dealt with the idea of God. For them all, the creator was considered to be indescribable and Judaism didn’t even have a word for the maker of the universe. It was an idea at the very limits of human imagination. And yet everything tangible was the fruit of God’s work. On the one extreme was the transcendent being and at the other was God’s works in the form of mundane, tangible reality. Was God an objective or a subjective category?

Christians resolved the issue through the person of Jesus who was simultaneously both God and man: the subjective and the objective combined. This idea is expressed in the opening lines of the Gospel According to St John.

“In the beginning was the Word, and the Word was with God and the Word was God….

And the Word was made flesh.”

(Lines 1 and 14, Chapter 1, The Holy Gospel According to St John, Douai Version)

This may appear meaningless or incomprehensible to the modern reader. But St John’s Gospel was originally written in Greek which used the Greek word Logos⁵. It has several meanings that overlap. They include hypothesis, thought or grounds for belief or action.

St John, therefore, meant that God was an idea, or a subjective concept. Jesus, in contrast, was a person who simultaneously had two natures: one human and one divine. In other words, Christ was the objective and subjective combined. This was a powerful conception that addressed the tension within Ancient Greek thought which had established a divide between God or Gods and human world.

For the Greeks, Gods could adopt a human form, but remained Gods.

Christianity turned the universe into a coherent whole where heaven and earth were parts of a single system into which the subjective and the objective were subsumed and Jesus was the link between the two. For Christians, God exists in the here and now without losing any transcendent power.

In contrast, Judaism elevated God to a level of abstraction that was so extreme that believing in the existence of the supreme being became, essentially, a matter of opinion. The Messiah who would usher in the end of the material world has not come and may never do. What matters in Judaism is the history of the Jewish people and its divinely-inspired laws which could be traced in The Torah to the moment about which there could be the least possible subjective doubt: the original act of creation which must have occurred or we wouldn’t be here. To maintain contact with God, the best thing that believers could do was diligently adhere to traditions, laws and rituals passed down through the ages from that moment as they sought to perfect God’s creation through work and innovation.

Islam dispelled subjective doubt by focusing on the indisputable fact that the Prophet Mohammed, a man, not God, had lived and that many of the details of his life are recorded. His actions after he received the first divine revelation in 620 were dictated by God. Doubts about the Prophet’s message are dealt with by arguing the Koran and his accurately reported actions and sayings constitute the ultimate and complete objective truth.

The extreme subjectivity of Judaism permits the acceptance of a wide range of objective realities, including the Nazi holocaust, without loss of faith in the possibility of the existence of God. In contrast, the radical objectivity of Islam, which is based on the idea that there can be no arguments about God and the divine message since everything that needs to be known has been revealed, allows no such freedom.

In Islam, faith must have supremacy over science. While Judaism can be seen as being exclusively concentrating on trying to define and understand God, Islam states God’s existence is so obvious and factual that debates of this type are not only unnecessary. They are potentially blasphemous. What are regarded as scientific facts can consequently be rejected and even suppressed if they conflict with the objective truths set out in the Sharia, the rules and conventions guiding the life of every Muslim.

Christianity, which combines objectivity and subjectivity, can satisfy the human need for answers to tangible as well as intangible issues but it simultaneously can fail to do either as the collapse in Christian faith in Europe seems to demonstrate. Facts and science can undermine Christian faith in a way that they can’t challenge Judaism and Islam.

The dichotomy between the objective and the subjective within Christian thought became more troubling following the failure of the Crusades, military campaigns inspired by the Pope in Rome that were launched to recapture Jerusalem and other territories in the Middle East, and increasing challenges to Papal authority from secular rulers. The Christian intellectual system wasn’t working and medieaval theologians set about the task of modernising it. The Scholastics, as they are named, thought deeply about every issue including trade and production. They drew on ancient Greek philosophy about price. They were also influenced by the trading practices of Jewish communities in Europe and contact with Muslim Arab merchants who worked the Silk Road trading network between the India and China and the Mediterranean region.

Christian economic thinking became more pragmatic as a result. The Scholastics defended profit-making by merchants, but called for justice in trade. That implied there was, as Aristotle contended, a just price for what was bought and sold; an underlying true value that was different from what was found in the marketplace.

The Scholastics’ argument was that the intrinsic value of a good, however, was not eternal, but related to its usefulness, or how it could be applied in consumption and production. They also recognised that people’s needs differed and that the price of goods might vary from transaction to transaction because they could be more useful to one person than they were to another. For The Scholastics, goods had both an objective and a subjective value. They drew on the injunction, originally framed by Judaism, that you should “do unto others as you would have them do unto you”. It meant that it was sinful to charge more for a good than that which the seller would be willing to pay for it.

St Thomas Aquinas⁶, a key figure in the Scholastic movement, wrote in Summa Theologica that it was wrong to gain financially without actually creating something. A Christian should ask no more for a good than it cost him or her to make it. Aquinas also believed that it was immoral to raise prices in circumstances in which a buyer had an urgent need for what was being sold and, therefore, could be persuaded to pay a higher price.

“If someone would be greatly helped by something belonging to someone else, and the seller not similarly harmed by losing it, the seller must not sell for a higher price: because the usefulness that goes to the buyer comes not from the seller, but from the buyer’s needy condition…”

(Article 1, Summa Theologica, St Thomas Aquinas)

This suggests that profitable trade – selling something for more than you paid for it – could be wrong. But modern students of Aquinas argue his economic ideas were more nuanced than commonly supposed. He accepted that there were three irreconcilable concepts of value: the price asked by the vendor, the price acceptable to the buyer and a good’s underlying value. This can be interpreted as indicating that the just price could be set by the balance of market forces as long as they were conditioned by Christian ethics⁷. It can also be seen as the first coherent attempt in Western Christianity to disaggregate the objective/intrinsic from the subjective in economic affairs. The consequences were to be profound and still resonate.

A fresh approach to value was developed by scholars at the University of Salamanca, one of Europe’s oldest centres of learning. Francisco de Vitoria⁸, a Spanish Dominican monk, was teaching at the Sorbonne in Paris in 1517 when he was consulted by Spanish merchants based in Antwerp, then part of the Spanish Netherlands, about the morality of trade to increase their personal wealth.

The question prompted De Vitoria to think deeply about the difference between price and value and whether there was any justification for the market price being higher than the just price, which was then conventionally seen as a good’s intrinsic value. He returned to Spain and was elected in 1526 to the prime chair of theology at the University of Salamanca. De Vitoria turned to practical issues of government, providing advice to the Spanish king. He combined Scholastic teaching with a pragmatic understanding of the realities of the times, including the growing importance of commerce. The Salamanca School that De Vitoria founded redefined the idea of a just price as being the one “naturally” established by trade. This suggested that there was in fact no objective way of determining what the just price for a good was. An explicit refutation of the idea that the value of a good was determined by the cost of production was provided by Luis Saravia de la Calle⁹, a member of the Salamanca School. In 1544, he wrote:

“…those who measure the just price by the labour, costs and risk incurred by the person who deals in the merchandise are greatly in error. The just price is found not by counting the cost but by common estimation.”

(Luis Saravia de la Calle, Instruccion de Mercaderes published in 1544)

This is one of the earliest full statements of the subjective theory of value. The Salamanca School’s concept of the essential morality of the “natural order”, however, was some distance from the modern defence of the free market. It saw the free circulation of people, goods and ideas as providing the means by which people could get to know one another and become brothers rather than as a way to increase wealth and incomes. Selling something for more than it was truly worth was acceptable but a good Christian was obliged to share his or her wealth with the poor.

The Salamanca School more clearly broke with Scholasticism by arguing usury was compatible with the concept of a just price. And it argued that the general price level was affected by the quantity of money. This insight, which was inspired by the inflationary trends in the Spanish Empire that followed the capture of Latin American gold mines, presaged the modern quantity theory of money. Some contemporary free market thinkers argue that the intellectual foundations for capitalism were laid by the Jesuits who dominated the University of Salamanca.

The teachings in Salamanca found echoes in Italian city states benefitting from long-distance trade with the Middle East, India and China. The idea of the subjective theory of value was colourfully expressed by the 16th century Florentine economist and historian Bernardo Davantzani¹⁰.

“Water is excellent…and we could not well live without it: But because every one may have enough of it for nothing. …A mole is a vile and despicable animal, but in the Siege of Casilino the famine was so great, that one was sold for 200 florins; and yet it was not dear, for he that parted with it died of hunger, and he that bought it out-lived the Siege.”

(From A Discourse Upon Coins, by Bernardo Davanzati, 1588)

Capitalising on breakthrough developments in long-distance sea navigation, merchants from Italian city states, Spain, Portugal, the Netherlands, Britain and Sweden created a global trade economy. But it failed to produce the free interchange of goods and people that the Salamanca School wanted.

Benefitting from South America’s gold, plantations and slave-labour, strong, centralised states emerged to dominate Western Europe. Rulers spent freely to curry domestic favour and deter neighbours with large armies. They decided that the best way to become wealthier was through the control and protection of trade. Mercantilism¹¹, as the system that emerged is now known, was based on the idea that a nation’s prosperity depended upon acquiring money, preferably gold, which was essentially in fixed supply.

Economics was seen as a zero sum game, though some historians say mercantilism was not a single body of thought and that the elasticity of wealth and production was recognised. Mercantilist thinking encouraged European governments to ban the export of gold and other precious metals, introduce protectionist tariffs to discourage imports and promote domestic farming and industry. A by-product of this thinking were predatory policies including officially-sanctioned piracy and expeditions to seize territories believed to be capable of producing mineral wealth.

Mercantilist thought stimulated a more scientific approach to economic ideas. Part of the impetus came from the need to understand how territories acquired by European states could be made to pay.

In 1649, the English parliament dispatched an army led by Oliver Cromwell to conquer Ireland which had been in rebellion for eight years. To pay for it, parliament drew on the provisions of the Adventurers’ Act, which had been passed in 1642. This promised Irish land to members of the public who contributed to the cost of the campaign. William Petty¹², an English physician and musician, was in Cromwell’s army.

After Ireland was subdued, Petty won the mandate to map the island so that the English government could reward those that had financed its conquest. This was completed in 1656. Petty’s own reward was about 50 square miles of south-west Ireland around Kenmare which covered most of what is now County Kerry.

He had a double preoccupation. One was to ensure that English rule in Ireland could be financed at a time when the British government was in persistently financial difficulties¹³.The other was to increase the value of his new estates. In his Treatise of Taxes and Contributions (1662) and Verbum Sapienti (A Word to the Wise) (1664), Petty made an unambiguous statement in favour of the idea that the value of a thing was equal to its cost of production:

“But that which I would say upon this matter is, that all things ought to be valued by two natural denominations, which is land and labour; that is, we ought to say, a ship or garment is worth such a measure of land, with such another measure of labour; forasmuch as both ships and garments were the creatures of lands and men’s labours thereupon; This being true, we should be glad to finde out a natural par between land and labour, so as we might express the value by either of them alone as well or better then by both, and reduce pence into pounds.”

(Chapter 4, Treatise on Taxes & Contributions, by William Petty, 1662)

A similar view was expressed by the philosopher John Locke¹⁴, another supporter of Cromwell and a mercantilist, in his Second Treatise on Government which was published in 1689. Laying some of the foundations for the liberal enlightenment of the 18th century, he argued that a farmer deserved to enjoy the full production of his or her land and should be free from arbitrary taxation or other government impositions by asserting that value was created by mixing labour and land.

“…for it is labour indeed that puts the difference of value on every thing; and let any one consider what the difference is between an acre of land planted with tobacco or sugar, sown with wheat or barley, and an acre of the same land lying in common, without any husbandry upon it, and he will find, that the improvement of labour makes the far greater part of the value.”

(Chapter V, Second Treatise of Government, John Locke, 1689 (1690))

Both Petty and Locke were militantly anti-Catholic. Some historians of economic thought argue that the emergence of objective theories of value reflected the impact of the European Reformation. Protestant writers applied rationality to the Bible and sought to identify its essential truths. They rejected what they described as the fantasies and falsehoods of Catholic teaching¹⁵ which were often regarded by Protestants as superstition at best and, at its worst, the work of the devil.

The second half of the 17th century was a turning point for economic thought. The works of Renee Descartes, often called the father of modern philosophy, were circulating Sir Isaac Newton’s Principia was published in 1687. The writings of Gottfried Leibniz, who rivals Newton as the founder of modern science, were read and debated. Rationality and scientific modes of thought were on the rise and they were applied to economics and philosophy¹⁶. A scientifically-measurable way of quantifying economic activity was demanded. Objective factors rather than subjective sentiments, including religious faith, were to be the cornerstones of economic thought in the new era. The cost of production was the obvious counterpart to Newton’s laws of motion. But the scientist had to discover the origin of those costs. The answer for the majority of economists for almost two centuries, at least in the protestant Anglo-Saxon world, was clear.

It was labour.

Economic historians argue that Petty and Locke were the first to present the case for the labour theory of value, that the true worth of things was explained exclusively or essentially by the amount of labour involved in producing it. It is said that Locke eventually resiled from a pure cost of production theory of value and was prepared to accept that subjective factors were also relevant. But a debate about the value of things framed in modern terms had begun. It was to produce some of the most memorable statements about economic principles ever made.

The subjective theory of value, which emphasised perceived scarcity not production costs, found its own champions. It was definitively expressed in 1705 by John Law¹⁷, a Scottish adventurer, businessman and journalist. The opening sentences of his Money & Trade Considered with a Proposal for Supplying the Nation with Money ring through the centuries.

“Goods have a value from the uses they are apply’d to; And their value is greater or lesser, not so much from their more or less valuable, or necessary uses: As from the greater or lesser quantity of them in proportion to the demand for them. Example. Water is of great use, yet of little value; Because the quantity of water is much greater than the demand for it. Diamonds are of little use, yet of great value, because the demand for diamonds is much greater, than the quantity of them.”

(Chapter I, Money and Trade Considered. With a Proposal for Supplying the Nation with Money by John Law, 1705)

Law’s was the voice of the minority. Most economists regarded diamonds and works of art as exceptions. In general, and in the long-run, the value of something was essentially attributable to the amount of labour involved in producing it.

Petty and Law delivered the first salvoes in the debate between objective and subjective theories of value which was to last almost two centuries. What made it so compelling was the implications for government.

If value was determined by tangibles, then it was something that government could control. If it was due to an intangible factor, or what people believed something was worth, then the case for government action was diminished if not entirely demolished. And we shall hear more about the mystery of why the price of diamonds is higher than the price of water.

Elsewhere in Europe, writers were prepared to accept that prices should take into account both production costs and subjective factors. What is accepted as the first attempt to reconcile them is contained in a book written in France by an exiled Irishman named Richard Cantillon¹⁸. He argued that there is an intrinsic value of things which is equal to the value of land and labour used in its production but there can be short-term variations in the price due to subjective valuations.

“By these examples and inductions it will, I think, be understood that the price or intrinsic value of a thing is the measure of the quantity of land and of labour entering into its production, having regard to the fertility or produce of the land and to the quality of labour. But it often happens that many things which have actually this intrinsic value are not sold in the market according to that value: that will depend on the humours and fancies of men and on their consumption.

There is never a variation in intrinsic values, but the impossibility of proportioning the production of merchandise and produces in a state to their consumption causes a daily variation and a perpetual ebb and flow in market prices. However, in well-organised societies, the market prices of articles whose consumption is tolerably constant and uniform do not vary much from the intrinsic value; and when there are no years of too scanty or too abundant production, the magistrates of the city are able to fix the market prices of many things, like bread and meat, without anyone having cause to complain.”

(Chapter 10, Essai sur la nature du commerce en general, Richard Cantillon, 1755)

Cantillon’s essay suggests that there was an increasing degree of sophistication in the understanding of economics in France, the dominant European superpower for most of the 18th century. This expressed itself in the work of a group of thinkers we know as the Physiocrats (a Greek word meaning government by nature) who advised King Louis XV (1710-74) at a time of growing financial difficulties for the French government. Their work can also be seen as a reaction to the mercantilist policies pursued by King Louis XIV, “The Sun King” (1638-1715).

The Physiocrats were inspired by Francois Quesnay¹⁹, who was appointed the king’s personal physician in 1749. Quesnay took an interest in economics and, in 1759, wrote the Tableau Economique to explain how France’s economy would operate more productively if it was allowed to function more “naturally”. The tableau is generally seen to be an argument for laissez-faire economics, but it also expressed support for the cost of production theory of value by showing all wealth originating in the farming sector.

A similar view about what value was and how it was created was penned by Baron Anne-Robert-Jacques Turgot²⁰, a French minister and economic thinker. His Reflections on the Formation and Distribution of Wealth, written in 1766, suggested that the only source or wealth was the land, which determined the “natural price” but also incorporated a subjective value theory to explain why the market price might well be different.

“In a word, so long as we consider each exchange independent of any other, the value of each thing exchanged has no other measure than the wants or desires of one party weighed with those of the other, and is fixed only by their agreement.”

(Reflections on the Formation and Distribution of Wealth by M. Turgot, Comptroller General of the Finances of France, 1766)

Turgot’s reflections on the natural way economies worked are best remembered because they are deemed to have had an influence on the thinking of Adam Smith²¹, who had interrupted his career as a teacher at Glasgow University in 1763 to tutor, and travel with, John Scott, the 3rd Duke of Buccleuh, who subsequently became governor of the Royal Bank of Scotland. This took him to Paris where he met Benjamin Franklin, Quesnay and Turgot before returning to Scotland in 1766. Smith’s revolutionary contribution to economic thought was to be made 10 years later. While he was thinking and lecturing, others in Europe were turning their mind to the difference between value and price.

A similar line of argument to Turgot’s had already been developed by Ferdinando Galiani²², an abbot and official serving the Kingdom of Naples who had worked in his country’s embassy in Paris in 1759-69. This brought him into contact with Quesnay and the Physiocrats, but he rejected their thinking about value. Galiani set out a radical version of subjective value theory in his book On Money, which was published in 1751. Galiani is regarded as the inspiration for the Italian tradition in economics which was based on a utility-based theory of natural value.

Momentum was building behind the subjective theory of value. Etienne Bonnot de Condillac²³, a French logician and philosopher, published Commerce & Government in 1776. It was one of the first books on political economy that used the idea of utility — which was defined as a subjective concept which declined as the quantity of a thing that someone possessed rose — to measure of value.

“Value is not an attribute of matter, but represents our sense of its usefulness and this utility is relative to our need. It grows or diminishes according as our need expands or contracts. But since the value of things is based upon need, it is natural that a more keenly felt need should endow things with a greater value, while a less urgent need endows them with less. Value increases with scarcity and diminishes with plenty.”

“..a thing does not have value because of its cost, as some suppose, but it costs because it has value.”

(Commerce & Government considered in relation to each other, Etienne Bonnot de Condillac, 1776)

De Condillac’s misfortune was to publish in the year that what is accepted as the first comprehensive statement of economic ideas went into print.

The debate about how wealth was created and distributed was of particular relevance to Scotland which had been constitutionally conjoined with England in the Act of Union of 1707. Scottish thinkers were concerned that Scotland’s economy would be overwhelmed by England’s. They were also heavily influenced by intellectual developments in France, Scotland’s longstanding ally.

This was reflected in the writings of leading figures in what is now known as the Scottish enlightenment. Its towering figure was David Hume²⁴, who championed economic freedom and international trade against the mercantilist idea that governments should control commerce in order to increase national wealth. A mercantilist counterattack associated with Robert Wallace²⁵ and Sir James Steuart²⁶, prominent figures in the Scottish enlightenment, set the scene for Adam Smith’s An Inquiry into the Nature and Causes of the Wealth of Nations, which was published in March 1776. Wealth of Nations sprawls over five books and covers a huge range of topics. But the question of how value was created was dealt with in its first sentences.

“The annual labour of every nation is the fund which originally supplies it with all the necessaries and conveniences of life which it annually consumes, and which consist always either in the immediate produce of that labour, or in what is purchased with that produce from other nations.

According therefore as this produce, or what is purchased with it, bears a greater or smaller proportion to the number of those who are to consume it, the nation will be better or worse supplied with all the necessaries and conveniences for which it has occasion.

But this proportion must in every nation be regulated by two different circumstances; first, by the skill, dexterity, and judgment with which its labour is generally applied; and, secondly, by the proportion between the number of those who are employed in useful labour, and that of those who are not so employed. Whatever be the soil, climate, or extent of territory of any particular nation, the abundance or scantiness of its annual supply must, in that particular situation, depend upon those two circumstances.”

(Chapter 1, Book 1, An Inquiry into the Nature and Causes of the Wealth of Nations, by Adam Smith, 9 March 1776)

It was a ringing endorsement of the cost of production theory of value, though the scale of Wealth of Nations obscures a proper understanding of Smith’s appreciation of the role of demand in setting price. The book famously described the power of the division of labour and also set out the economic case against the leisured class, those who lived off unearned income, be it rent, profits or dividends. Adam Smith is deemed to be the father of the classical theory of economics, the first systematic arrangement of economic ideas, though Wealth of Nations covers philosophy and politics as well.

France’s influence on economic thinking was soon to go into sharp decline. The revolution that deposed the monarchy in 1789 led to a global conflict between France and a shifting alliance of enemies which consistently involved Britain. It also created an intellectual iron curtain that cut off thinkers in the English speaking world from the ideas being developed in France, where Napoleon Bonaparte crowned himself emperor in 1805. Napoleon mobilised the French economy and people for total war by controls and restrictions. This drew strong criticisms from French economists influenced by the Physiocratic idea of allowing markets to work naturally.

Destutt de Tracy²⁷ published a series of works during the Napoleonic era. He focused on a utility-based approach to value and rejected the cost of production theory championed by Smith. His support of free market policies brought him into conflict with Napoleon and he was marginalised. De Tracy is regarded as the founder of the French liberal school of economics which dominated French official thinking from the fall of Napoleon until after the collapse of the Third Republic in 1870.

The key figure in the school was Jean-Baptiste Say²⁸, whose Treatise on Political Economy is a ground-breaking expression of the idea that an economy is a self-regulating entity where surplus production can never persist. Say departed from the subjective value theory by arguing that value was created by an interaction between subjective utility and objective costs. There are numerous references to what value is and how it is created in the Treatise. Here are two which express Say’s rejection of Smith’s pure labour theory of value and his sympathy for the utility-based theory developed by Galiani.

“To the labour of man alone he (Adam Smith) ascribes the power of producing values. This is an error. A more exact analysis demonstrates, as will be seen in the course of this work, that all values are derived from the operation of labour, or rather from the industry of man, combined with the operation of those agents which nature and capital furnish him.”

(Chapter 1, Treatise on Political Economy, Jean-Baptiste Say, 1803)

“The value that mankind attach to objects originates in the use it can make of them. … it is universally true, that, when men attribute value to any thing, it is in consideration of its useful properties; what is good for nothing they set no price upon. To this inherent fitness or capability of certain things to satisfy the various wants of mankind, I shall take leave to affix the name of utility. And I will go on to say, that, to create objects which have any kind of utility, is to create wealth; for the utility of things is the ground-work of their value, and their value constitutes wealth.”

(Chapter 2, Treatise on Political Economy, Jean-Baptiste Say, 1803)

One of Say’s insights was that price was irrelevant. Everything produced would always be bought. There could be no lasting surpluses. Say’s radical laissez-faire perspective was unpopular with the French government at a time when it was conscripting labour and capital for war with its neighbours. Say fell out with Napoleon but gained distinction and high office following the restoration of the French monarchy in 1814. He is a seminal figure in the history of economic thought.

In Britain, ideas were developing. The social philosopher Jeremy Bentham²⁹ took the logic of the arguments in favour of the rights of individuals to their ultimate conclusion. In his view, a happy society depended upon the happiness of individuals. By disaggregating the mass, Bentham opened the door for economists to examine the role of individual behaviour in production and income distribution. Bentham’s writings between 1776 and his death in 1832 covered a wide range of topics, but his main achievement in economics was to direct attention to the effect of the actions of the pleasure-seeking and pain-avoiding individual on economic outcomes.

Bentham was essentially an optimist. Thomas Robert Malthus³⁰, on the other hand, was not. An ordained Church of England minister, Malthus was nevertheless a rationalist who was influenced by the liberal writings of Jean Jacques Rousseau³¹ and David Hume, who he knew personally. Malthus served a rural parish in Surrey in southern England and observed the crushing poverty in which the majority of farm labourers lived. His conclusion was that humanity – driven by original sin, which Malthus saw as an objective fact of the human condition – would never be able to achieve a perfect society. He set out his views in Essay on Population, which was published in 1798, when Malthus was 32. It was enormously influential in the first half of the 19th century and was in part the inspiration for Charles Darwin’s explanation of human evolution as the result of the survival of the fittest³².

Malthus was a cost of production theorist who argued that the value of a product was equal to the amount of labour that could be purchased by selling it. The debate about the nature of value and how it was produced, however, was not the main point of Malthus’ writing. That was to warn liberal reformers that population growth, if unchecked, would always exceed the growth in the production of food. Any attempt to improve the life of the poor by raising their wages or increasing farm output would fail because it would automatically lead to an increase in population. There appears to have been an evolution in his thinking about the sources of value later in his life. In his Principles of Economics (1820), Malthus introduced the idea of a demand curve which defined the relationship between the price of a good and how much of it people will want to buy. But he remained convinced that value was due to the amount of labour expended in the production of a good, though there could be short-term price variations.

The conviction that value was exclusively due to the cost of production is seen as the defining doctrine of classical economic theory. Its greatest exponent was David Ricardo³³, an English stockbroker and member of parliament. He published Principles of Political Economy and Taxation two years after the end of the Napoleonic wars that led to the British government acquiring its first great burden of long-term debt.

Ricardo argued that wages and the earnings from trade and industry would inevitably be compressed to the benefit of landowners because of the limited amounts of land for farming. It was a conclusion that suited Ricardo’s political outlook. He was a radical, a prototype of the type of reforming politician behind the formation of Britain’s Liberal Party in 1859. His political opponents were the Tories, forerunners of the Conservative Party, who essentially represented the interests of landowners.

By arguing that rents were excessive and damaging to the good health of the other parts of the British economy, particularly manufacturing and trade, Ricardo laid the intellectual foundations for the assault against the Corn Laws – customs duties on food imports introduced by parliament in 1815 which benefitted landowners – and a campaign for the taxation of rents. A by-product of this thinking was that pressure on British farmland could be relieved by increasing the emigration of the surplus population, initially to America but subsequently to other British colonies, and by developing farmland in far-flung parts of the British Empire.

Ricardo’s book is perhaps best remembered for setting out the theory of international comparative advantage. This is the idea that nations would be better off if they specialised in producing specific products and traded with each other. Ricardo was a resolute supporter of the cost of production theory of value with labour as the key factor. As with Smith’s Wealth of Nations, the first sentence of Ricardo’s Principles of Political Economy and Taxation is unambiguous.

“The value of a commodity, or the quantity of any other commodity for which it will exchange, depends on the relative quantity of labour which is necessary for its production, and not on the greater or less compensation which is paid for that labour.”

(Chapter 1, Principles of Political Economy & Taxation, David Ricardo, 1817)

It is conventionally argued that Ricardo was not fully convinced by the labour theory of value, but it is difficult to interpret the foregoing sentence in that way³⁴. But, like Smith, Ricardo was mystified by the way what was paid for goods and services was volatile and often seemed to have no relationship with what might be deemed to be the amount of labour used in their production. He was unable to resolve the issue and seems to have qualified his view in later editions of his book.

Ricardo had differences with Smith who championed the “labour-commanded” theory of value which argued that the value of a product was equal to the amount of labour that it could purchase. Ricardo adopted the more sophisticated “labour embodied” theory of value, which was based on the idea that the relative “natural” prices of goods are due to the relative hours of labour used in producing them.

Ricardo, unlike Smith and Malthus, was a politician and his writings were directed at shaping public opinion and government policy.

Principles of Political Economy & Taxation was published at a sensitive moment in British history. With the French monarchy restored, the need for the repressive measures used to counter republican agitation in Britain was less compelling. There was also a post-war economic slump that led to increased unemployment and pay cuts. Labour-saving equipment was being introduced in British farms and destroying jobs. Manufacturing was booming in the cities of the north and the Midlands leading to the development for the first time of an urban working class. The living standards of the poor were also affected by Corn Laws which imposed tariffs on imported grain.

The result was a series of political explosions across the UK that appeared to set the scene for violent revolution. That it didn’t can perhaps be explained, at least in part, by the influence of reforming parliamentarians like Ricardo. A government committed to political and social reforms was formed in 1830, setting the scene for radical changes in the conduct of government policy. This entailed increasing by about 80 per cent the number of people entitled to vote in elections in 1832. The franchise was expanded further in 1868 and 1884 and finally encompassed all adult males in 1918 and everyone aged over 21 in 1928. These changes had a permanent impact on the political debate within the UK. Arguments about economics were reframed to be comprehensible to the growing numbers with the right to vote.

The emphasis of the classical economists on labour as the sole or prime source of value consequently had political implications. If the value of a good was exclusively or mainly due to labour, why should workers get paid less than the value of what they were producing? I

n 1805, the English physician Charles Hall³⁵ published The Effects of Civilization on the People in European States. Influenced by the condition of the rural poor in Devon where he practised, Hall argued that the wages of farm labourers were neither natural nor fair. They came about principally from the exploitation of the landless poor by the landed rich. His political conclusions were shaped by the conviction that workers were the source of value. Hall is counted as an early English socialist. This was before the term was coined, probably two years later, by Robert Owen³⁶.

Socialism was initially seen as a form of religious utopianism associated with Christian sects rather than a political movement that challenged the status quo. Communism, an outlook that called for revolutionary action, was not. The principal reason why the labour theory of value, an entirely respectable idea in the first half of the 19th century, became intensely contentious in the second was because of its adoption by Karl Marx³⁷. A philosopher and journalist living in exile after he was forced to leave Prussian Rhineland, Marx wrote The Communist Manifesto just before the French revolution of February 1848 which led to the abdication of King Louis Phillipe and inspired rebellions in Vienna, Budapest, Berlin and elsewhere in Europe.

The manifesto is a generalised statement of principles and action. Marx developed his political and economic thinking in Outlines of the Critique of Political Economy (Grundrisse—1859), in the first volume of Capital (1867) and in its subsequent two volumes which were published after his death in 1883. There is no need to explore all aspects of his writings. But Marx took the labour theory to a new level of sophistication, though it is difficult to escape the conclusion that the result was confusing even to his more ardent admirers.

Marx was a rationalist who rejected religious or metaphysical arguments. He was, therefore, drawn to the scientific approach to economics that the cost of production theory of value expressed. Chapter 1 of Capital’s first volume lays the conceptual foundations for Marx’s analysis. He starts by focusing on the dominance of commodities in capitalism.

“The wealth of those societies in which the capitalist mode of production prevails, presents itself as an immense accumulation of commodities…”

The commodity, therefore, is the starting point of Marx’s analysis; not capital, labour, value, price or exploitation.

But the word itself has created more than 150 years of confusion particularly in the English-speaking world.

What are commodities precisely?

Capital was written in German and Marx’s word was Waere, which can be translated as wares, manufactured goods. The first foreign language translation of Capital in 1873 which was approved by Marx, a fluent French speaker having lived in Paris and Brussels for almost a decade, uses the French word Marchandises. This may have influenced those who translated Capital into English in 1887, four years after Marx’s death.

There is no way of definitively knowing what Marx actually meant, but viewing commodities as manufactured goods makes sense. And it also conforms with Marx’s observational approach to his work. He lived in London and travelled daily from his home in Kentish Town to the British Library, undoubtedly passing along Tottenham Court Road, then – as now – one of London’s busiest shopping streets. He would have seen the amazing increase in the number of range of manufactured goods, products of Britain’s industrial revolution. They would have included factory-made kitchen utensils and clothing, including boots. For Marx, these were the defining characteristics of a new age.

To understand Marx’s conception of these and other categories, the reader must have a proper understanding of the commodity which Marx defines in stages:

“The commodity is at first an exterior object, a thing, which by its properties satisfies human wants of one sort or another.”

This sentence says two things. The first is that a commodity is “a thing”. But the commodity can’t just be any thing; it has to be one that meets human “wants” (the word used by Marx is Beduerfnisse, which can be translated as “needs”, “essentials” etc). The idea of the “exterior object” expressed by Marx can be interpreted in more than one way. It can be inferred that the object has material characteristics and must be, therefore, always tangible. Another interpretation is that the object could also be something which is objectively perceptible at the level of the individual but lacks physical characteristics. This could include music and teaching, which are intangibles.

Marx’s ideas of wants, however, can be more definitely interpreted as encompassing intangibles as the following sentence suggests.

“The nature of such wants, whether they arise, for instance, from the stomach of from imagination makes no difference.”

Here, Marx acknowledges that wants can be those emerging from the mind and not just those derived from physical needs such as hunger and the need for warm clothing, though the modern reader will see a connection between the two. The logical conclusion is that use-value can be simultaneously objectively and subjectively perceptible. The dichotomy is more clearly explored as the chapter proceeds. Marx wrote (the author will cite the relevant sentence in German):

“Die Nuetzlichkeit eines Dings macht es zum Gebrauchswert.”

This is accurately translated as:

“The usefulness of a thing makes it a value in use (use-value).”

Marx then wrote this:

“Durch die Eigenschaften des Warenkoerpers bedingt, existiert sie nach ohne denselben.”

This sentence is conventionally translated as: “Conditioned by the physical properties of the body of the commodity, it has no existence apart from the latter.” But this seems to be wrong.

A more accurate translation is: “Conditioned by the quality/nature of the body of the commodity, it does not exist without the same (the latter).”

This suggests that Marx meant that what conditioned the commodity was something that could be intuitively perceptible: its nature and quality.

The intangible characteristic of a use-value is further implied in the following sentence: “A use-value or good only has value because labour is objectified or materialised in it.”

But how can labour be chemically or physically incorporated into a thing? There is no scientific explanation. Logically, this sentence can only mean that use value has an intangible component and one that is only intuitively obvious, though it is objectively perceptible. The logic of this statement suggests that the labour power embedded in a use value must be intangible.

Finally, the word “Nuetzlichkeit (usefulness)” implies intangibility because it begs the question: useful to whom?

One person’s answer will be different to another’s because it will depend upon each individual’s perception of the usefulness of each useful object. This will change over time as well. For example, a flint sharpened so it can be used as a knife has no use value in today’s world (though people might keep it as a curiosity). But the same object more than 10,000 years ago would have been deemed to be very useful. It’s physically the same object but its use value has changed over time. Use value therefore implies intangibility, a characteristic that can only be subjectively perceived.

The second nature is exchange value or value. Marx is unambiguous about its key characteristic. It is an abstraction and an intangible.

“The value of commodities is the very opposite of the coarse materiality of their substance, not an atom of matter enters into its composition.”

The following passage explains at greater length how the exchange-value characteristic of a commodity is purely subjective and hence intangible even though it uses the words “substance”, “reality”, “objects of use” and “corporeally”, all of which imply tangibility.

“The fact that the substance of the exchange-value (of a commodity) is something utterly different from and independent of the physical-sensual existence of the commodity or its reality as a use-value is revealed immediately by its exchange relationship. For this is characterised precisely by the abstraction from use-value. As far as the exchange-value is concerned…commodities are first of all simply to be considered as values, independent of their exchange relationship or from the form, in which they appear as exchange-values. Commodities as objects of use or commodities are corporeally different things. Their reality as values forms, on the other hand, their unity.”

Marx was grappling with the dichotomous (tangible/intangible) character of commodities and he refers throughout Capital to the ‘dual nature’ of commodities. They are perceptible as material and immaterial, at the same time, a conception that echoes St John’s idea of Jesus as both God and man at the same time.

At no point did Marx define the dividing line between a commodity’s dual natures because this is impossible. Intangibility is indefinable by definition. The conclusion is that Marx conceived a commodity as an objectively perceptible item – and one that might, or might not, have physical characteristics – the value of which is intuitively or subjectively perceptible, both in use and in exchange. A commodity, therefore, can have value in use and in exchange without physical characteristics. In other words, Marx’s conception of a commodity is that it can be simultaneously objectively and subjectively evaluated by an individual who wants to use it and by a group of individuals that might want to acquire it.

In Marx’s model, therefore, the commodity is the vector through which physical things and human desires are mediated and that its production and exchange are, in effect, the twin engines of the capitalist system. The commodity (or manufactured good), seen this way, is both the source and the outcome of everything the capitalism does.

For Marx, price, in contrast, is a derivative. It is the means by which capitalism measures what is produced and exchanged and it has no necessary equivalence to use value, exchange value and value. These are all intangibles perceptible at the level of the individual and consequently objectively unquantifiable. But Marx’s analysis of the commodity requires buyers and sellers to see through the disguise every commodity wears to perceive the value at its core.

The conflict at the level of society between contrasting individual perceptions of the value of a commodity – whether it is in a tangible or intangible form and particularly between the price of labour power and its value – is the dialectic that drives the Marxist system.

The neoclassical system, as we shall see below, views price (market-clearing or otherwise) as the key vector through which physical resources and human needs are reconciled. Price in neoclassical thinking replaces Marx’s idea of the commodity as the origin and the product of the system. Its theoretical model shows that value only matters at the margin for marginal buyers and sellers and the less that market participants worry about value and the more they focus on price, the better.

Marx and his followers tried to prove that prices are on average, and over the long-term, connected to embodied labour values. The main objective was to provide a scientific basis for the claim that workers were exploited and in support of Marx’s assertion that the profit rate in the capitalist mode of production would inevitably decline, causing the system to collapse. Given that value, as has been explained, is a subjective concept, this seems to be a pointless exercise.

The futility becomes total once it is recognised that the capitalist system abandoned commodity money forms – gold and silver – more than 100 years ago. Through the printing press and electronic payment systems, the cost of producing money has been reduced to close to zero. Marx accepted that the quantity of commodity money had to affect its price relative to labour power as a commodity. Changes in the money supply caused by government action, therefore, would create volatility in the price of money compared with the price of all other commodities, including labour power as a commodity. If there is evidence of a relationship between the value of aggregate labour power and the price of all other commodities in an environment in which governments can manufacture money, it is a coincidence.

Marx’s writings constituted a huge challenge to the intellectual status quo. There was bound to be a reaction and it came in the form of a series of books that are among history’s most brilliant pieces of abstract thought. In total, they have formed what is now named neoclassical economic theory, the essential underpinning of most modern economic thought. They were the result of many minds working in parallel in the second half of the 19th century.

As has been explained, the idea that value depends upon human perceptions had been accepted for centuries. The problem for economists who accepted a subjective theory of value was that there was no way of quantifying such sentiments. Prices could in principle vary unpredictably according to the fear and greed of consumers. The challenge was to clarify how demand for goods could be coherently understood. Was there a consistent way for human desire for a good to be reconciled with its price?

Attention shifted to utility. Classical economists and Marx tended to understand it to mean usefulness. But the meaning of utility accepted by the Salamanca School, and passed down to generations who thought in a similar way, was the extent to which a thing was desired, not its usefulness. So diamonds are expensive not because they are more useful than water but because they are desired more, compared with their supply, than water.

The assault on intrinsic and objective value theories unfolded in phases. In 1832, the Anglican churchman Richard Whately³⁸, who was then archbishop of Dublin, published a summary of some of his lectures at Oxford University where he had been previously professor of political economy. It contained a concise statement of support for the subjective theory of value:

“It is not that pearls fetch a high price because men have dived for them; but on the contrary, men dive for them because they fetch a high price.”

(Introductory Lectures on Political Economy, being part of a course delivered in the Easter term, Richard Whately, 1832)

The subjective value theory was articulated in similar terms by William Forster Lloyd Drummond³⁹, Chair of Political Economy at Oxford in the in 1832-37.

“The term value, therefore, does not express a quality inherent in a commodity. It expresses, as I stated before, a feeling of the mind, and is variable with the variations of the external circumstances which can influence that feeling, without any variation of the intrinsic qualities of the commodity which is the object of it.”

(Lecture on the notion of value as distinguished not only from utility, but also from value in exchange, delivered before the University of Oxford, in Michaelmas term, 1833, by William Foster Lloyd, Professor of Political Economy)

Nassau William Senior⁴⁰, who was Whately’s predecessor as professor of political economy at Oxford, criticised the classical notion of value in An Outline of the Science of Political Economy three years later. The following passage establishes the idea that prices result from the interplay of demand and supply.

“The causes which determine the reciprocal values of commodities, or, in other words, which determine that a given quantity of one shall exchange for a given quantity of another, must be divided into two sets; those which occasion the one to be limited in supply and useful, (using that word to express the power of occasioning pleasure and preventing pain,) and those which occasion those attributes to belong to the other. In ordinary language, the force of the causes which give utility to a commodity is generally indicated by the word demand; and the weakness of the obstacles which limit the quantity of a commodity by the word supply.”

(Chapter 2, An Outline of the Science of Political Economy, Nassau William Senior, 1836)

The debate became heated. John Stuart Mill⁴¹, regarded as the greatest English political philosopher of the era, delivered a partial defence of the cost of production theory in his Principles of Political Economy.

“That a thing may have any value in exchange, two conditions are necessary. It must be of some use…But secondly, the thing must not only have some utility, there must also be some difficulty in its attainment.”

(Paragraph 1, Of Demand and Supply in the relation of value, Chapter II, Book III, Principles of Political Economy, John Stuart Mill, 1848)

Mill is often wrongly reported to be a resolute supporter of the Ricardian cost of production theory. This sentence suggests that he had formed a synthetic view that involved taking into account subjective (use) and objective factors. Mill was anticipating conceptual breakthroughs made later in the 19th century.

By the middle of the 19th century, the intellectual tide was flowing against the fundamentalist cost of production theory of value, and not just in England. The leaders of this intellectual movement were nearly all trained in the natural and physical sciences.

They brought mathematical rigour to a discipline that had up to that point been dominated by philosophers and theologians. Economics continues to be dominated by this approach.

Credit for defining the concept of utility in scientific terms and deriving from it a usable idea of a demand curve has been attributed to Jules Dupuit⁴², an engineer working in France who was among the first to attempt a scientific cost-benefit analysis of public works including bridges. In his On the Measurement of the Utility of Public Works (1844), Dupuit explained that a toll for using a bridge should take into account the fact that the more people used it, the less they would be prepared to pay. His conclusion was that public welfare (or total utility) would be maximised when the toll was set at zero. This fell short of a complete explanation of the concept of diminishing marginal utility since it did not deal with individual behaviour, but it implied that a chart plotting the relationship between price on the vertical axis and quantity on the horizontal axis would fall predictably from left to right. Subjective human desires could be translated into a geometric concept that provided useful insights. They weren’t volatile and beyond measurement. They could be charted scientifically. Dupuit probably didn’t realise it, but he had turned economics upside down.

Historians regard Hermann Gossen⁴³ as the true discoverer of diminishing marginal utility, the idea that people derive smaller increases in total enjoyment when they consume additional units of a good. His book Die entwicklung der gesetze des menschlichen kerkehrs und der daraus fließenden regeln für menschliches handeln (The Development of the laws of human intercourse and the consequent rules of human action) was published in Braunschweig in 1854. In it, Gossen argued that the value of something was determined subjectively by a consumer. He also suggested that the more a person consumed of a good or service, the less utility was enjoyed and, critically, that a consumer would organise spending over various goods in such a way as to ensure the utility derived from the consumption of the final unit of each would be equalised. This was the allocation of goods (for a given amount of disposable income) which delivered the maximum amount of enjoyment. Gossen’s book was a conceptual breakthrough, but it failed to reach a large audience.

It took more than 15 years for Gossen’s ideas to be comprehensively developed. The two best known books that brought about what is known as the marginalist revolution were published in 1871, the year of the failed Paris Commune. They came from economists working separately in the UK and Austria. In 1866, Stanley William Jevons⁴ , who originally trained as a botanist, chemist and metallurgist, had been appointed, aged 31, as professor of logic and philosophy at Owen’s College, the original part of what is now the University of Manchester. In 1871, he completed The Theory of Political Economy. It opened with a ringing refutation of the cost of production theory of value in general and the labour theory of value in particular.

“Repeated reflection and inquiry have led me to the somewhat novel opinion that value depends entirely upon utility. Prevailing opinions make labour rather than utility the origin of value; and there are even those who distinctly assert that labour is the cause of value. I show, on the contrary, that we have only to trace out carefully the natural laws of the variation of utility, as depending upon the quantity of commodity in our possession, in order to arrive at a satisfactory theory of exchange, of which the ordinary laws of supply and demand are a necessary consequence.”

(Chapter 1, The Theory of Political Economy, W Stanley Jevons, 1871)

Jevons, using mathematical notation, set out the equimarginal concept of consumer choice and what is known as the Law of Indifference (you can define different arrangements of spending among goods for an individual consumer that delivered an equal amount of utility. The rational consumer would therefore be indifferent between the different bundles because each of them would make him or her equally happy). He also presented the idea of the disutility theory of labour supply which suggested that labour was a negative pleasure and would follow the trends seen in positive pleasures or utility. Jevons showed that the price of labour, therefore, was also subjectively derived.

Carl Menger⁴⁵, then a journalist working in Vienna, published Gruensatze (Principles of Economics) in the same year. This too was based on the subjective theory of value and elaborated diminishing marginal utility without using the word marginal. In Menger’s phraseology, the value of a good would be equal to the least urgent use to which it was put. Like Jevons, Menger dismissed the idea of a single valuation. Menger was appointed lecturer at the University of Vienna in 1873, the year that the father of psychoanalysis Sigmund Freud entered the university. He is now seen as one of the founders of the Austrian School or Psychological School of economics. Menger is regarded by some as the first true exponent of the idea of the market-clearing price as the ultimate indicator of, and stimulus for, economic behaviour. Nobel Memorial Prize in Economic Sciences-winning economist Joseph Schumpeter⁴⁶, expressed his admiration for Menger’s conclusions in a panegyric published towards the end of his life.

“As soon as (Menger) succeeded in basing the solution of the pricing problem, in both its `demand’ and `supply’ aspects, on an analysis of human needs and on what (was) called the principle of `marginal utility,’ the whole complex mechanism of economic life suddenly appeared to be unexpectedly and transparently simple.”

(Page 86, Ten Great Economists: From Marx to Keynes, Joseph Schumpeter)

What is considered to be the most complete expression of marginalist ideas came three years later from Leon Walras⁴⁷, a French socialist who originally trained to be an engineer but was then a professor at the Lausanne Academy, now the University of Lausanne. His Elements of Economics, published in 1874, presented an exposition of the subjective value theory using mathematical methodology. Walras explored the dynamics of an economy with several markets involving buyers and sellers (not producers). He wrote down one equation for demand and one for supply for all the markets he was considering. He proved by the simple method of counting the number of equations and showing this was equal to the number or prices to be determined that there was a unique set of prices that established equilibrium in demand and supply in the whole system. The conclusion was that the price system was both efficient and stable: that it automatically cleared without the requirement for external intervention.

By describing how multiple markets would behave, Walras established himself as the founder of the general equilibrium theory of economics. This was designed to show how markets for different products could all reach a stable price simultaneously and spontaneously. Walras is also the father of mathematical economics.

The marginal revolution is regarded as the moment when neoclassical school of economics was born. It was completed in the next decade and a half by applying the marginal theories used to explain consumer behaviour to production. This led to the development of the idea of the supply curve which showed quantities of a good supplied rising with prices.

The Austrian economist Eugene Boehm Bawerk⁴⁸ explained how the concept of diminishing marginal utility of time (time preference), which is the idea that people attach less value to consumption in the future than they do to consumption now, could be applied to explain the existence of interest rates, or the price of money.

The thinking was synthesised by Alfred Marshall⁴⁹, a highly-skilled mathematician who became professor of economics at Cambridge University, in his book Principles of Economics. It was published in 1890 and is regarded as the first complete economics text book. Its centrepiece was a chart showing the downward sloping demand curve and the upward sloping supply curve with a price that would ensure everything produced would be consumed where the two lines crossed.

But it wasn’t just any price.

It was the final solution: the market-clearing price.

Marshall coined a memorable phrase which aimed to end the argument between advocates of the subjective and objective theory of value.

“In particular the notion of equilibrium, which has been treated rather slightly in this chapter, will be studied more carefully in chapters V and XII of this Book: and some account of the controversy whether “cost of production” or “utility” governs value will be given in Appendix I. But it may be well to say a word or two here on this last point. We might as reasonably dispute whether it is the upper or the under blade of a pair of scissors that cuts a piece of paper, as whether value is governed by utility or cost of production. It is true that when one blade is held still, and the cutting is effected by moving the other, we may say with careless brevity that the cutting is done by the second; but the statement is not strictly accurate, and is to be excused only so long as it claims to be merely a popular and not a strictly scientific account of what happens.”

(Chapter 3, Book 5, Principles of Economics, Alfred Marshall, 1890).

Principles of Economics was hugely influential and widely read. It contained, however, few original ideas. Marshall’s book drew on the conceptual breakthroughs made by others in the previous 20 years.

Nevertheless, it can be said that 1890 marked the moment when the two value theories were sublimated and a debate that can be traced back to the Scholastics of Salamanca in the 16th century, and perhaps before, was brought to a close.

It was absolutely right that nothing would be bought or sold if it didn’t satisfy the subjective requirements of the consumer.

But it was also obviously true that nothing would be supplied if the price paid did not correspond with what was acceptable to producers, or in some way covered the costs of production.

Consumer preferences ruled in neoclassical economics as defined by Marshall, but they were conditioned by the cost of production. The tension between buyers and sellers was resolved through competition among consumers and producers that generated a market-clearing price. That simultaneously showed the subjective worth of a good and properly set the amount producers should receive for what they made. The objective and subjective factors driving consumers and producers were reconciled.

In Marshall’s system, price was both the product and the origin of all economic activity.

The idea of the dominance of price over all elements of the economy and the powerlessness of humanity to do anything but react to it was described by Vilfredo Pareto⁵⁰, an Italian economist based at the University of Lausanne, in his book Manual of Political Economy (1906).

“A farmer can easily calculate, at the market prices, whether it is more advantageous for him to use the power of a horse or that of a steam engine to run a pump; but neither he, nor anyone in the world, is capable of knowing either the effect the substitution of a steam engine for a horse will have on the prices of horses and steam engines, or the greater quantity of vegetables which will be consumed when consumers enjoy the savings resulting from that substitution.”

(Manual of Political Economy, Vilfredo Pareto, 1906)

Pareto’s main task was to show the circumstances in which general equilibrium, delivered through price competition, would produce a result that was fair as well as efficient and stable in many markets. His conclusion was that it was likely.

The concept of Pareto efficiency, an arrangement of price and quantity supplied and bought that could not be changed without making at least one person worse off, opened the door to what is known as welfare economics, or economic arguments that justified government intervention to reduce inequality and poverty. But for Pareto, this was a variation from his overarching argument.

Price, obvious yet unknowable, was the benign new ruler in a secular age that acted as the neutral cipher facilitating instant understanding among everyone, everywhere. The rational individual, working within a system of property rights and tending solely to his or her psychological and material needs, was sufficient to produce an ordered and fair world so long as the market-clearing price was there to help.

Science has transformed the way we live. Minds have been opened to the infinite possibilities the universe suggests. But the grip that the market-clearing price has had in the century since Pareto penned that paragraph remains unchallenged.

And the question “what is something worth?” has not just been answered. It has been made redundant.

The Marshallian sublimation, refined by Pareto and his followers, also resolved the tension between the tangible and intangible elements of an economy. It expressed every human desire and dream as well as everything labour, machines and technology could achieve. The market-clearing price encompassed human aspirations as well as human competences.

Nature and science, instinct and rationality, fact and forecast everywhere and always could be distilled precisely and expressed numerically in the form of a price. All that people had to do was respond to the message it automatically delivered⁵¹. The point was made by Friederich Hayek⁵², one of the 20th century’s most prominent defenders of the improving power of the market-clearing price, in an essay published in 1945.

“The price system is just one of those formations which man has learned to use… after he had stumbled upon it without understanding it. Through it not only a division of labour but also a coordinated utilization of resources based on an equally divided knowledge has become possible…(N)obody has yet succeeded in designing an alternative system in which certain features of the existing one can be preserved which are dear even to those who most violently assail it such as particularly the extent to which the individual can choose his pursuits and consequently freely use his own knowledge and skill.”

(Pages 519-30, The use of knowledge in society, by Friederich Hayek, American Economic Review, volume. 35, 1945)

Hayek is seen as one of the founders of the neoliberal school of economic and social thought which developed original liberal ideas to meet the challenge posed by collectivist, state-based and authoritatian forms of economic management that emerged during and after the First World War. It is most famously associated with the Mont Pelerin Society, which was founded in 1947, though there is dispute about whether the society and the ideas it promotes constitutes a coherent set of ideas.

Hayek’s modern heirs are often breathless admirers of the function of price, though their prose is more tempered. In Price Theory — his great exposition of microeconomics — Milton Friedman, who is better known for his work on macroeconomics, has no doubts that price plays a critical role in assisting entire societies to make decisions.

“The problem solved by a price system is an extremely complicated on, involving the coordination of the activities of tens and hundreds of millions of people all over the globe and their prompt adjustment to ever-changing conditions. The price system is an extremely subtle and complex device for solving this problem. Casual observation of the world leads to an underestimation of the complexity of both the problem and the devices used to solve it, because insofar as the price system works we are hardly conscious of its workings.”

(Page 10, Price Theory, by Milton Friedman, published by AldineTransaction Publishers, New Brunswick, USA and London, third printing, 2008)

There have been many similar expressions of awe at the role price plays. This deference continues.

Economists since Marshall have pondered how the market-clearing price was produced, but not what purpose it served.

Some saw it as made by a machine that efficiently processed motivations and matter. If the price was wrong, it was because the machine needed to be fixed or replaced.

Others have concluded that the price was like the temperature of a living organism, the result of complex biological processes that should be treated with circumspection and perhaps left to their own devices.

Models derived from physics have been applied and there is even an emerging concept of price being something inherited, rather like DNA.

And for those sceptical of the power of science to explain price’s mysteries, there is the option of viewing it with uncomprehending wonder as if it were the work of God.

Even the most violent critics of free market economics accept that price is essential for the efficient organisation of a good society. Their objection is that the right price doesn’t always (or often) emerge spontaneously and intervention is necessary to ensure it reaches its proper level.

The idea of the market-clearing price has permeated our political dialogue to an extent that it often goes unnoticed. For libertarians, price is a magnificent expression of human freedom at its most complete. For anti-capitalists, it is a tyrant that has ended more lives and done more damage to nature than history’s most brutal dictators.

No one attempting to win votes can avoid talking about price – for food, houses, health and education and defence – however allusively. But no one now argues that price should be shunned. It inescapably exists. It is a permanent fact of life of the modern era and, perhaps, the only one.

From the time Marshall conceptualised economics as essentially being about the balance between demand and supply, economists stopped arguing about what value was and how to create it and focused on understanding the institutional arrangements that governed how prices were produced; the way separate markets interacted with each other; the role of uncertainty in demand and supply; the impact of mass behaviour on individual choice and the role time played on economic choices.

Unbridgeable differences in opinion appeared. At one extreme were those who argued that it was impossible for human beings to improve on the way the market, however imperfect it might be, addressed simultaneously the subjective needs of millions of consumers and the money-seeking activities of business people and workers. On the other, generations of economists have advocated the opposite. The divide was invariably about politics as much as technicalities and it usually expressed itself in a debate about the extent to which ideal market prices could be produced spontaneously.

Much of the running was initially made by those who believed the free market was both inefficient and unfair and should be reformed. In 1908, Italian economist Enrico Barone⁵³ argued in an article entitled “The Ministry of Production in the Collectivist State” used a system of equations, as Walras did in his model, to show how government direction of production could mimic the workings of the market.

This approach was refined in the 1920s by Abba Lerner⁵⁴ and Oskar Lange⁵⁵. Lerner showed that monopolies could behave in a way that led to inefficiency and unfairness in one of the first rigorous examinations of what is now known as market failure. Lange, a seminal figure in the development of the idea of market socialism (or government planning in a market economy), used the ideas of Walras, Pareto and Barone to show how government agencies could replace the functions of the market to produce greater efficiency and fairness by eliminating the natural deficiencies of unregulated competition. But the goal was always delivering the market-clearing price ideal.

With the focus on price, a debate began about the distribution of income. The price paid for labour, or wages, determined the living standard of the majority of the population. The price paid for goods produced by factories and farms determined the profits earned by their owners. The price paid for loans, or the interest rate, determined the profits of banks and other financial institutions. The price paid for a currency, or the exchange rate, determined how much was earned by exporting and paid for imports. The conclusion was inescapable: if you wanted to affect income distribution, you had to forget about value and focus on price.

Utility-based economics started to fall out of favour almost as soon as Principles of Economics was published. The idea of utility was considered to be metaphysical and the arguments of neoclassical economists seemed to provide few usable policy options for governments increasingly driven by the need to satisfy voters.

In the 1914-18 war, governments turned to central planning and rationing and continued to intervene extensively in economic affairs to deal with the aftermath of the conflict. The apparent success of planning in the Soviet Union and Nazi Germany compared with the failings of capitalist economies during the Great Depression further undermined the appeal of the neoclassical ideal of the free market. In 1936, Cambridge economist John Maynard Keynes⁵⁶ published The General Theory of Employment, Interest & Money, a book that is generally regarded as the basis for macroeconomics, or the study of an economy as a whole.

Repudiating neoclassical ideas, Keynes argued that at certain points in the business cycle, economies could get stuck with high levels of unemployment that would justify government deficit spending. There may be a market-clearing price, but markets did not automatically deliver it. Government spending and taxation would have to help the process along. The General Theory was almost completely deconstructed by supporters of neoclassical orthodoxy, notably by Hayek. Keynes’ old Cambridge colleague Arthur Pigou⁵⁷ destroyed the logic behind Keynes’ key conclusion that, at very low levels of interest, there was no self-correcting mechanism in the economy to stimulate investment.

The most comprehensive demolition of the thinking behind The General Theory came from the US economist Henry Hazlitt⁵⁸ in his The Failure of the New Economics: An Analysis of Keynesian Fallacies, which was published in 1959.

Nevertheless, Keynesianism became the macroeconomic orthodoxy of the post-1945 period and was largely undisputed until the end of the 1960s when accelerating inflation seemed to confirm the warnings of critics of The General Theory. Public policy in the US and Western Europe was largely captured by the followers of Keynes, but neoclassical thinking and Ricardian ideas continued to have adherents.

At the London School of Economics (LSE), a specialised school of social sciences that was the centre for economists unconvinced by Keynes, influential thinkers revived interest in neoclassical economics. The neoclassical revival, which drew on the teaching of Pareto, began in the 1930s and 1940s in the LSE, Chicago University, the University of Harvard and France. The Paretian revival was also behind the rise of welfare economics, a derivative of Pareto’s analytical methods that validated the redistribution of income to deliver a higher level of over all social welfare.

Academics began to devise theories of general equilibrium based on the ideas of Walras. Leading lights in this process included John von Neuman⁵⁹, a mathematician, who presented the most rigorously mathematical proof of the theory of general equilibrium in 1937, Kenneth Arrow⁶⁰, who used mathematics to prove that all competitive equilibria are Pareto-efficient, and Gerard Debreu⁶¹, a French mathematician who worked with Arrow to prove that the Walrasian case for competitive markets was sound.

Neumann, Arrow and Debreu made economics a variant of mathematics and took the subject to an unprecedented level of analytical rigour. They were, however, not particularly bothered about whether their models had any practical application. By proving that free markets could deliver stable and market-clearing prices, general equilibrium theorists were testing concepts rather than seeking to devise practical policy instruments for governments. A similar attitude was manifested by economists who processed masses of price data generated by securities markets. Holbrook Working, a Stanford University agricultural economist who started to study movements in commodity futures in the 1930s, distilled in 1948 what subsequently became known as the efficient market hypothesis (EMH). This was the idea that markets, at least for securities and other derivatives, always captured all the information available at that moment. The apparently “random walk” such prices made was efficient. It was also beyond the capacity of anyone to forecast. Eugen Fama, who is credited with defining the EMH in the late 1960s, was a co-recipient of the 2013 Memorial Prize for economics.

Critics of the idea of that competitive markets delivered efficiency and fairness, meanwhile, continued to dominate the teaching of economics. Paretian and Walrasian economic thinking synthesised to form much of accepted microeconomic theory. This in turn was incorporated into macroeconomic theories to create the neoclassical-Keynesian synthesis. The master of this synthesis was Paul Samuelson⁶², author of Economics: an introductory analysis, which was one of the most popular economics text books of the post-1945 era.

The neoclassical-Keynesian synthesis failed to satisfy critics of government intervention, on the one hand, and those sceptical of the idea that free markets worked, on the other. But there was no challenge to the idea of the beneficial effects of the market-clearing price.

There have been attempts to challenge the grip that the idea of the market-clearing price had on academic economists. In 1960, Pierro Sraffra⁶³, an Italian economist working at Cambridge University, published The Production of Commodities by Means of Commodities: Prelude to a Critique of Political Economy. Using the cost of production theory model favoured by Ricardo, Sraffra showed that the quantity of goods produced and consumed was due to technology not prices. Variations of Sraffra’s ideas were deployed in the policies of centrally-planned economies. There was also a synthesis in the 1960s between Marxian economic thinking and radical Keynesian. But this too is regarded to be at the fringes of the economics profession.

A fresh assault on conventional economics has been launched in the wake of the 2007-09 economic crisis. This is associated with Paul Krugman, winner of the Nobel Memorial Prize in Economic Sciences in 2008, and George Akerlof and Joseph Stiglitz, who shared the Nobel Prize in 2001. They are conventionally classified as behavioural economists since they focus on the consequences of irrational behaviour by market participants when they react to each other’s choices. Their inspiration is generally said to be Keynes⁶⁴.

There has also been a revival in the arguments about market failure. These include the impact of monopolies –particularly in networks such as the internet — public goods (things that can be consumed without reducing the supply to others or are difficult to charge for – use of bridges or a public waterway are examples) and externalities.

Externalities are spillover effects on the consumption or production of one party by the consumption or production of another. Examples include pollution created by a factory that depresses the price of adjacent housing and honey manufacture based on the pollen produced by plants in a field owned by a farmer next to the hives. But these arguments are about the way the market model works, not the vital role of price. No critic of the idea that free markets deliver optimal results believes there is a better way to allocate resources than to rely on the signals delivered by the “right” market price.

The theory of the efficacies of the market-clearing price swept the world inhabited by academic economists. The real one, meanwhile, has stubbornly refused to conform with the models they devised.

By the start of the 1990s, what is known as the Washington Consensus⁶⁵, a set of macroeconomic policies that drew heavily on neoclassical economic thinking, was the conventional wisdom of the era. But the 1998 Asian crisis delivered a huge blow to those arguing for global financial deregulation and tested the new orthodoxy. The dotcom bubble burst in 2000 to create a crisis in global equity markets that raised fresh questions about the implications of capital market deregulation. Governments acted to fend off a possible economic slowdown by cutting the price of money. This in turn set the scene for the biggest global economic crisis since 1945. The 2007/08 credit crunch has stimulated renewed interest in Keynesian macroeconomics. US government policy under President Obama was based on deficit-financing as a way to revive the domestic and global economy. President Trump, though advised by people influenced by neoliberal ideas, has viewed the large deficits incurred by the US government during his time in office with indifference.

The global economy was delivered a further blow in 2020 by the spread of the Covid virus. By the end of 2020, OECD governments had issued a combined $11trn in new debt to finance spending to save jobs and output. And yet, over that same period, their borrowing costs fell. Across the developed world, 80 percent of government bonds issued in 2020 offered a less than 1 per cent yield; the other 20 per cent had negative interest rates.

Central banks acted to minimise macroeconomic harm, but only through mechanisms that inflated property, land and financial asset prices. Covid monetary policy saved the global economy but increased economic inequality.

Once again it seems the settled views of the finest economic thinkers on earth will not be quickly displaced. But even if they are, the essential role of price as master and servant of the global economic system seems to be unchallenged.

This is perverse. Price and value have been at the heart of the sub-prime crisis which began because banks paid too much to buy the debts of people who had paid too much for their homes. The US’ troubled assets recovery programme (TARP), devised by President Bush and implemented by President Obama, was based on the idea that the price paid by the government for the loans and debt instruments they have bought from banks would, in due course, rise to their “proper” level. Governments acted globally to stop securities and land falling to levels the free market demanded during Covid. There is, after all, a true value to things, and not just a price. It is as if the Marshallian sublimation had never occurred.

This, nevertheless, will probably be seen in hindsight as a temporary aberration. Once governments have fixed the mechanism, or organism, which price both expresses and regulates, the world will return properly to the course economic theory has charted. Price, it seems, is being restored to its rightful place as the controlling genius of economic progress.

Or will it?

And, more to the point, should it?

____________________________________________

Notes

1 Aristotle (384-322BC) was a student of Plato and taught Alexander the Great. He is conventionally named as the first person to record an analysis of the relationship between value and price in Nicomachean Ethics. This work has been studied by historians of economic thought and the consensus is that Aristotle’s idea of the just price is difficult to derive. It is clear, nevertheless, that he considered the price paid in the free market was not the same as a good’s true value.

2 Roman law developed in the first three centuries of the Christian era. The four-volume Corpus Juris Civilis, promulgated by the Emperor Justinian in the 530s, says the just price (justum pretium) was any price produced by free and voluntary bargaining. “Whatever price is freely arrived at is just.” (An Austrian Perspective on the History of Economic Thought, 1995, by Murray Rothbard). Rothbard, however, is forced to concede that Roman lawyers qualified this apparently unambiguous vote in confidence of the justice of the market-clearing price. “… in the Corpus, several leading Roman jurists of the 3rd century quoted the early 2nd century jurist Pomponius in a classic expression of the morality of laissez-faire: ‘In buying and selling natural law permits the one party to buy for less and the other to sell for more than the thing is worth; thus each party is allowed to outwit the other’; and ‘it is naturally permitted to parties to circumvent each other in the price of buying and selling.’ The only problem here is the odd phrase, ‘the thing is worth,’ which assumes that there is some value other than free bargaining that expresses some ‘true worth,’ a phrase that would prove to be an unfortunate harbinger of the future.” (Rothbard Ibid).

3 Abdelrahman Ibn Khaldun was born in Tunis in 1332 and died in Cairo in 1406 after a varied career in government throughout North Africa, including a spell as a judge in Cairo during the Mameluke era. After retreating to the North African desert for five years, he wrote Al-Muqadimmah, a treatise on politics and economics which presaged some of the arguments of Thomas Hobbes. Ibn Khaldun was born to a family that had lived in Seville in Andalusia until the fall of the city to King Ferdinand III of Castille in November 1248 when they moved to North Africa. Tunis also had a large Jewish population which was subject, with Muslims, to increasingly intolerant Spanish policies after the expulsion of the remaining Arab Andalusian rulers in 1492. Seville’s cathedral, the second-largest Christian church in the world, was originally a mosque. It contains the tomb of Christopher Columbus who began his journey of discovery to America in the year Granada fell..

4 Abraham was born in Mesopotamia around 4,000 years ago. According to the bible, he journeyed with his family to what is now territory mainly within the borders of Israel. At the command of God, he prepared to kill Isaac, his eldest legitimate son but was stopped at the last minute. Abraham was ordered to slaughter a ram instead. God told him that, in recognition of his obedience, the descendants of Abraham would be “as numerous as sand on the sea shore”. This account is one of the clearest statements in the bible affirming the special status of the Jews as the chosen people of God. The Muslim version of the story is that Abraham’s eldest legitimate son was Ishmael, father of the Arabs. Because Judaism, Christianity and Islam all trace their origins to Abraham, they are known as Abrahamic religions.

5 The debate about the meaning of Logos is one of the oldest unresolved disputes in Christian theology. A telling contribution was made in April 2005 by Cardinal Joseph Ratzinger, who subsequently became Pope Benedict XIV and was then Prefect of the Congregation for the Doctrine of the Faith, formerly known as the Holy Office or the Inquisition. “Christianity must always remember that it is the religion of the Logos. …Today, this should be precisely its philosophical strength, in so far as the problem is whether the world comes from the irrational, and reason is not, therefore, other than a sub-product, on occasion even harmful of its development, or whether the world comes from reason, and is, as a consequence, its criterion and goal. … In the so necessary dialogue between secularists and Catholics, we Christians must be very careful to remain faithful to this fundamental line: to live a faith that comes from the Logos, from creative reason, and that, because of this, is also open to all that is truly rational.” It is unclear what creative reason is. Using the terms of this book, it might be described as subjective objectivity or objective subjectivity. If that is the case, then Ratzinger was merely restating the core philosophic dichotomy in Christian faith between the objective/intrinsic and the subjective.

6 Saint Thomas Aquinas (c1225-1274) defined his concept of the just price in Summa Theologica, which was written in 1265-1274 when he was living in Naples, Rome and Paris. Aquinas, whose family originated from the small town of Aquino south of Rome, was born in Roccasecca in the Liri valley and initially went to school at the monastery of Monte Cassino, which was founded in the sixth century by St Benedict. Until the creation of the monastery, a significant Jewish population lived in the town of Cassino at the foot of the mountain upon which the monastery was built. It was expelled from the town and some of Cassino’s Jewish population settled about two miles to the south, creating a village name Sinagoga (Synagogue). The village was the scene of bitter fighting between German and Allied forces during the fourth battle of Cassino in May 1944. In the 18th century, Roccasecca and Aquino were absorbed into what was to become the Kingdom of Naples and subsequently the Kingdom of the Two Sicilies which lasted until Italian unification in 1860.

7 The clearest rejection of the idea that Scholastics only recognised an intrinsic value theory is contained in Mark Blaug’s Economic Theory in Retrospect. Blaug writes in his chapter about Pre-Adamite Economics: “…the distinctive contributions of scholastic economics may be broken down into three elements: (1) an emphasis on utility as the principal source of value; (2) the notion of “the just price”; and (3) the proposition that money capital is sterile.”

8 Francisco de Vitoria (1492-1546) was a Spanish Roman Catholic philosopher and theologian. He became a Dominican in 1504 and studied in Paris where he met Erasmus, a seminal humanist theologian. De Vitoria, Domingo de Soto, Martín de Azpilcueta, Tomás de Mercado, and Francisco Suárez founded a school of theologians and jurists who attempted to reconcile the teachings of Aquinas with contemporary political realities. Salamanca was founded by Celtic tribes, held by the Carthaginians and fell to the Romans in the third century before the Christian era. The city was taken by Muslim Arabs in 712. The Kingdom of Castille captured Salamanca in the 10th century of the Christian era. The University of Salamanca was created in 1134, the first in Europe to be designated as such. Christopher Columbus lobbied for a contract to seek a western route to the spice islands before a council of geographers at the university. The morality of colonising the Americas was regularly debated there. Today, Salamanca is Spain’s most important university city.

9 In Instruccion de Mercaderes published in 1544. A full account of the role of the Salamanca School in establishing the foundations of modern economic thought can be found in Economic Thought Before Adam Smith by Murray Rothbard.

10 Davanzati was born into a noble Florentine family. He was an economist and translator. Casilino is now in the western-central suburbs of Rome.

11 The term mercantilist was coined in the 20th century to encompass a series of writers active between 1500 and 1750. Writers who are now classified as being mercantilist never applied that term to themselves. A sympathetic rendering of mercantilist writings can be found in Chapter 1 of Economic Theory in Retrospect by Mark Baug.

12 William Petty, 1623-87, served briefly in the Royal Navy as a teenager and subsequently became a physician, inventor and musician. After three years in the Netherlands in 1643-46, when he was personal secretary to Thomas Hobbes, Petty returned to England. He moved to Ireland in 1666 and stayed there for most of the rest of his life. Despite his close association with Oliver Cromwell and the English republican cause, Petty suffered few penalties following the restoration of the monarchy in 1660.

13 The British crown defaulted wholly or partially several times in the 17th century: in 1634, 1648, 1661 and 1698. The Exchequer suspended interest payments on its debts from the 1680s until 1705, according to The Cash Nexus by Niall Fergusson (Penguin Books, 2001).

14 John Locke, 1632-1704, was an English physician and philosopher who was a significant figure in the European enlightenment. His Two Treatises of Government, published anonymously in 1689, states the case for a civil society based on natural rights and contract theory. Locke’s theory of private property is seminal for contemporary libertarian thinkers. He is often regarded as the father of classical liberalism and the inspiration for the US declaration of independence of 1776.

15 The difference between Catholic and protestant modes of thought is expressed in the great cathedrals of St Peter’s in Rome and St Paul’s in London. There has been a Christian church on the site of St Peter’s since the early years of the 4th century. Its present incarnation as the world’s definitive baroque building began in 1505 and its dome was completed in 1590. The enormous cost of the basilica was partly financed by the sale of indulgences, one of the abuses criticised by Martin Luther in his 95 Theses (1517) which is generally regarded as the initial Reformation manifesto. St Paul’s, which also occupies the site of an ancient Christian church, was destroyed in the Great Fire of London in 1666. The present St Paul’s, which can be seen as the Church of England’s response to St Peter’s, was completed in 1697 during the reign of Queen Anne, a protestant. Visitors to St Peter’s will see thousands of pilgrims using the physical bulk of the building to deliver a transcendent experience: mass is celebrated practically all the time and faithful Catholics will be seen touching tombs, paintings and icons as they pray. There are practically no pilgrims to St Paul’s. Most are tourists who are visiting to admire the church’s physical characteristics.

16 The connection is examined by Meghnad Desai in his book Marx’s Revenge (Verso, 2002). “The motion of the planets and the phases of the moon all obeyed the simple principles Newton had discovered. To many people, Newton had stumbled upon God’s own subtle plan. He made sense of the universe. But is a simple underlying unity could be discovered in the physical universe, why not in human societies? If God has a secret plan which explained the harmony of the heavens, was there not a plan similar in scope, and perhaps based on equally simple principles, for human history and human society?” Libertarian economists who regard economics to be the product of catallactics, a term coined by Ludwig Von Mises which means a chaotic process of interaction among innumerable human beings, attribute many of the failings of conventional economics to the attempt by economists to discover and apply a Newtonian equivalent.

17 John Law (1671-1729) was born in Fife in Scotland. After leaving the family business and moving to London, Law is reported to have led a life of pleasure which ended when he was tried and convicted after killing an enemy in a sword duel. He escaped from prison and fled to the Netherlands. After 10 years shuttling between the Netherlands and France and making a living in business, Law was appointed France’s Controller General of Finances. He launched the Mississippi Company to develop business in North America and the Caribbean. It collapsed in 1720 and Law was disgraced. He moved back to London and died in Venice.

18 Richard Cantillon (1680-1734) was born in County Kerry, Ireland. He spent most of his life in France but died in London. Cantillon made a fortune speculating in shares in the Mississippi Company.

19 Francoise Quesnay (1694-1774) became surgeon to the king of France in 1737. His understanding of the way blood circulated in the human body is Quesnay’s principal scientific finding. His greatest pupil was Baron Anne-Robert Turgot.

20 Baron Anne-Robert-Jacques Turgot (1727-81) was a minister in the French government in 1774-76. His Reflections on the Formation and Distribution of Wealth, written in 1766, summarised the thinking of the Physiocratic school of economics.

21 Adam Smith (1723-90) was born in Kirkcaldy in Scotland and started lecturing at Glasgow University in 1748. His Inquiry into the Nature & Causes of the Wealth of Nations was published on 9 March 1776. The complete text of its five volumes can be found at the Adam Smith Institute, www.adamsmith.org. As a travelling tutor of the young 3rd Duke of Buccleuch, he was based in Paris in 1764-66.

22 Ferdinando Galiani (1728-87) was born in Chieti and educated in Naples and Rome. After serving as ambassador of the Kingdom of Naples and Sicily in Paris in 1759-68, Galiani returned to Naples where he held high office in the government of the Kingdom of the Two Sicilies.

23 Etienne Bonnot de Condillac (1715-80) was born in Grenoble. He took holy orders and became an abbott. He is best remembered for his work on psychology which inspired his view that people were motivated the desire for utility (usefulness) rather than for the physical properties of goods they bought.

24 David Hume (1711-76) was born in Edinburgh. After studying at the University of Edinburgh, Hume went into business and was based in France for four years. In the following decades, Hume worked as a tutor, writer, historian, philosopher and civil servant. He is often regarded as a seminal figure in the development of empiricism and logical positivism.

25 Robert Wallace (1697-771) was a minister in the Church of Scotland. His writings presaged some of the work of Thomas Malthus (see note 30 below).

26 Sir James Steuart (1712-80) was born in Edinburgh. His Inquiry into the Principles of Political Oeconomy was published in 1767. Steuart supported the Young Pretender in the 1745/6 Jacobite rebellion against the Hanoverian monarchy in the UK and lived in exile after its failure until 1763.

27 Destutt de Tracy (1754-1836) was born in Paris to a family of Scottish descent. He supported the French revolution but fell out of favour with the republican regime and was imprisoned for a year during the Reign of Terror (1793-94). De Tracy was one of the leading proponents of liberalism during and after the revolution.

28 Jean-Baptiste Say (1767-32) was a French economist and businessman. He had classically liberal views and argued in favour of competition, free trade, and lifting restraints on business. His main work, Traité d’économie politique ou simple exposition de la manière dont se forment, se distribuent et se composent les richesses (A Treatise on political economy, or the production, distribution and consumption of wealth), was published in 1803. This formulated what is known as Say’s Law which argues that production of commodities creates a market for the commodities produced. In other words, there can never be a generalised glut of products.

29 Jeremy Bentham (1748-32) can be seen at University College, London where his mummified body is kept.

30 Thomas Robert Malthus (1766-1834) was ordained into the Church of England in 1789. He was an outstanding scholar and one of Cambridge’s top mathematicians. Malthus graduated in 1791 and was elected a fellow of Jesus College Cambridge two years later. Malthus gave up his church ministry in 1805 when he was appointed professor of history and political economy at the East India College at Haileybury. This made him England’s first academic economist.

31 Jean-Jacques Rousseau (1712-78) was a philosopher and composer. The Social Contract, published in 1762, outlines a political order consistent with republicanism and is deemed to have been one of the inspirations for the French revolution of 1789.

32 Charles Darwin (1809-1882) published On the Origin of Species in November 1859. Born in to a wealth family of non-conformist Christians, Darwin originally planned to go into the church and then into medicine, changing course and opting for the study of the natural world when he found he couldn’t stand the sight of blood. He joined the Royal Navy’s expedition around the world on HMS The Beagle in 1831-36. His seminal work on natural selection wasn’t published until 1859, apparently because of his concern that he would be accused of atheism. There is clear evidence his thinking was influenced by the writing of Thomas Malthus.

33 David Ricardo (1772-1823) published Principles of Political Economy and Taxation in 1817.Ricardo was born into a well-to-do family of Sephardic Jewish descent but converted to Unitarianism and married outside his faith. Ricardo worked in his father’s stockbroking firm and became fabulously wealthy. He was a friend of Thomas Malthus and corresponded with him frequently but disagreed with him about the extent to which the government could relieve or reduce poverty. Like Malthus, however, he believed that the responsibility for improving the lives of the poor fell mainly on their own shoulders.

34 Ricardo’s defenders against charges of a naïve view of value include Mark Blaug. “If he (Ricardo) adhered to the labour theory at all, he did so only as a rough empirical approximation and because it served as a convenient device for expounding his model.” The labour theory of value, Chapter 4, Economic Theory in Retrospect (ibid). A further view of Ricardo’s theories is contained in Ricardo and the 93 per cent theory of Value, by George Stigler, The American Economic Review, 1958.

35 Charles Hall (1740-1825) spent most of his career working as a doctor in Tavistock in Devon. In 1816, he was arrested for failing to pay a debt and spent nine years in the Fleet debtors’ prison in London. He died soon after his release.

36 Robert Owen (1771-1858), was born in Newtown, Montgomeryshire, Wales. He was a one of the founders of socialism and the cooperative movement.

37 Karl Marx (1819-83) was born in Trier in what is now Germany. He lived in Paris, Brussels and, after moving back to Paris and living in Cologne during the 1848 revolutions, he and his family in 1849 came to London where he lived until the end of his life.

38 Richard Whately (1787-63) was the son of a clergyman and born in London. He graduated from Oxford University and was elected Fellow of Oriel College in 1811. Whately was ordained as an Anglican minister in 1814. After service in a parish in Suffolk, in 1825 Whately was appointed principal of St Alban Hall, an independent Oxford University college that was taken over by Merton College at the end of the 19th century. He succeeded Nassau William Senior as Drummond Professor of Political Economy at All Souls College. Two years later, he was appointed Archbishop of Dublin, the most senior Anglican clerical position in Ireland at that time which gave him the right to sit in the House of Lords. Whately held the position until his death

39 William Forster Lloyd (1795-52) succeeded Richard Whately as Drummond Professor of Political Economy at All Souls College. In his Two Lectures on the Checks to Population published in 1833, Forster Lloyd introduced the concept of the overuse of a common by its commoners. He outlined the concept of diminishing marginal utility in his Lectures on Population, Value, Poor Laws and Rent published in 1837.

40 A contemporary of Richard Whately at Oxford University, Nassau William Senior (1790-1864) initially worked as a property lawyer in London. In 1825, he was appointed the first Drummond Professor of Political Economy at All Souls College, a position he held for four years. Senior was a Whig, a political grouping that was the forerunner of the British Liberal Party, and a supporter of laissez-faire economics. Whig Home Secretary Lord Melbourne appointed him to work as a government adviser in 1830. Senior was a member of the Poor Law Inquiry Commission of 1832 which introduced a new system of relief for the poor and destitute. The workings of the Poor Law inspired Charles Dickens’ novel Oliver Twist published in 1838/39. Senior sat on the Royal Commission on handloom weavers in 1837. Senior was Drummond Professor of Political Economy for a second time from 1847-52.

41 John Stuart Mill (1806-73) was the son of the Scottish philosopher and economist James Mill, a friend of David Ricardo. Mill was subjected to an intense home education by this father who was assisted by Jeremy Bentham. He did not go to university and worked for the East India Company. The most influential liberal thinker in Britain in the mid-19th century, Mill was a philosopher, political economist and Liberal member of parliament.

42 Jules Dupuit (1804-66) was born in northern Italy when it was under French rule. He trained as an engineer in Paris and was awarded the Legion d’Honeur for his work on the French road system. He later directed work on the Parisian sewage system.

43 Hermann Gossen (1810-58) was born in Dueren in the northern Rhineland which was then under Prussian rule. He studied at the University of Bonn and worked for the Prussian government.

44 Stanley William Jevons (1835-82) was born in Liverpool. After studying at University College, London he migrated to Sydney in Australia. Jevons returned to the UK in 1859 to complete his university education. In 1866, he was elected professor of logic and mental and moral philosophy and Cobden professor of political economy at Owens College, Manchester, an institution of higher education that was open to non-Anglicans. Jevons was appointed professor of political economy at University College London, another non-denominational institution of higher education. He drowned while swimming off Hastings on 13 August 1882.

45 Carl Menger (1840-1921) was born in Neu Sandez (Nowy Sacz) in what was then Austrian Galicia but is now southern Poland. After school and studying at the universities of Prague, Vienna and Krakow, he worked as a writer about business and economic issues on newspapers in Lvov, now in Ukraine, and in Vienna. Menger’s Principles of Economics was published in 1871 while he was still working as a reporter. In 1872, Menger enrolled at the University of Vienna. He was appointed the university’s chair of economic theory in 1873. Menger was a tutor to Austria’s Crown Prince Archduke Rudolf and was associated with the heir to the crown of the Austro-Hungarian empire until Rudolf’s suicide in 1889. Menger was appointed to the chair of political economy at the University of Vienna in 1878 and to the upper house of the empire’s parliament in 1900.

46 Joseph Schumpeter was born in a small town in what is now the Czech Republic in 1883. He moved to Vienna with his mother when Schumpeter’s father died in 1887. His mother married a retired Austrian general and Schumpeter was raised in a privileged household. He studied at the University of Vienna and subsequently embarked on an itinerant career eventually settling in the US, though he was briefly Austria’s Minister of Finance in 1919. Schumpeter’s best known work Capitalism, Socialism & Democracy, published in 1942, adumbrated the idea of capitalism as a creatively destructive system.

47 Marie-Esprit Leon Walras (1834-1910), the son of the French economist Auguste Walras, was born in Normandy. He turned to economics after attempting careers in engineering, journalism, novel-writing and banking.

48 Eugene Boehm Bawerk (1851-1914) was born in Brno in what is now Slovakia. After studying at the University of Vienna, he joined the Austrian Ministry of Finance. He served three times as minister of finance. In this capacity, Boehm Bawerk acquired a reputation for fiscal conservatism and championing the gold standard.

49 Alfred Marshall (1842-1924) was born in London, the son of a banker. He graduated in mathematics from Cambridge University and was elected a fellow of St John’s College in 1865. Three years letter, he was appointed lecturer in moral sciences. Marshall was originally destined to be a clergyman, but turned to economics. He was forced to resign from Cambridge University in 1877 after breaching its condition that its academic staff should be unmarried. After being the first principal of what is now Bristol University, Marshall taught at Oxford University and returned to Cambridge after it dropped its ban on married men in 1884. He was to remain at Cambridge until his death. Marshall’s outlook is that of a paternalistic liberal though he described himself as being a socialist in everything other than the intellect. Early sections of Principles of Economics, which John Maynard-Keynes reviewed, demonstrate a concern for the poor. He also asks a question, which would have been regarded as radical at the time: “…whether it is really impossible that all should start in the world with a fair chance of leading a cultured life, free from the pains of poverty and the stagnating influences of mechanical toil…”, Principles of Economics, Book 1. Marshall’s impulses were reflected in his decision to act as president on the first day of the 1889 Co-operative Congress. Despite marrying, Mary Paley, one of the most outstanding women of her generation, Marshall regarded women as men’s intellectual inferiors and opposed the extension of the franchise to them.

50 Vilfredo Pareto (1848-1923) was born to a family of Genoese descent in Paris. He initially trained and worked as an engineer. Pareto was appointed a lecturer in economics at the University of Lausanne in 1893. He was an early supporter of Benito Mussolini, a renegade Marxist member of the Italian Socialist Party who created the Fascist Party and seized power in 1921.

51 The idea that the market captures all available information has been expressed by economists as the Efficient Market Hypothesis (EMH), a concept that is mainly associated with studies of financial markets. The EMH was developed by professor Eugene Fama in the 1960s, but it origins can be traced back to the work of the French mathematician Louis Bachelier published in 1900. A critical appraisal of the EMH is contained in The Myth of the Rational Market by Justin Fox (Harper Business, 2009). An account of the development of the idea is also contained in How Markets Fail, by John Cassidy (Allen Lane, 2009).

52 Friederich Hayek (1899-1992) was born in Vienna and, after serving in the Austrian army during the First World War, earned doctorates in law and political science. He was employed at the University of Vienna and by the Austrian government before setting up an independent economic research organisation. In 1931, he was appointed to the faculty at the London School of Economics (LSE). Hayek lived in the US in 1950-62 and subsequently mainly in Austria. His most famous work is The Road to Serfdom, which was published in 1942 when Hayek was in London. Anticipating the dystopian nightmare described by George Orwell in 1984 (published in 1948), Hayek forecast that the rise of central planning since the First World War and refined in the Second World War would inexorably lead to the tyranny of the state.

53 Enrico Barone (1859-1924) was born in Naples in the final year of the existence of the Kingdom of the Two Sicilies, an independent state that was absorbed into the Kingdom of Italy in 1860. After university, he served in the Italian army as a teacher of history. Barone resigned his commission in 1906 and subsequently worked as a theoretical economist.

54 Abba Lerner (1903-82) was born in Bessarabia, then part of the Russian Empire and now part of Romania. His family migrated to London three years later. Lerner left school at 16 and worked as a machinist and a teacher in Hebrew schools in east London. After graduating from the LSE, spending time at Cambridge University and returning to the LSE as a teacher, Lerner emigrated to the US in 1937. Lerner taught at several universities including Columbia University, Kansas City, the New School for Social Research and Berkley. He was sometimes known as the “Milton Friedman of the left”.

55 Oskar Lange (1904-65) was born near Lodz in what was then the Russian Empire but is now central Poland. After gaining a bachelor’s and master’s degree from Krakow University, Lange worked in Poland’s labour ministry and then returned to Krakow University. He moved to the UK in 1934 and then to the US in 1936. Lange taught at the universities of Michigan, Stanford and Chicago. His two-part essay On the economic theory of socialism was published in 1936. Lange returned to Poland following the end of the Second World War and was advisor to the Communist Polish government until his death.

56 John Maynard Keynes (1883-1946) was the son of John Neville Keynes who was educated at Amersham Hall School, University College London and Pembroke College, Cambridge, where he became a fellow in 1876. He held a lectureship in Moral Sciences from 1883 to 1911. Keynes went to Eton and studied mathematics at Cambridge University. He was.a lecturer at Cambridge before joining the UK civil service where he worked in the run up to and during the First World War. Keynes resigned from the UK delegation to the Versailles Treaty negotiations and took up a post at Cambridge University where he remained until the end of his life.

57 Arthur Pigou (1877-1959) succeeded Alfred Marshall as professor of political economy at Cambridge University in 1908. His book The Economics of Welfare, published in 1920, was the first thorough investigation of the circumstances in which government action to correct market forces was theoretically justifiable. Pigou developed the idea of the wealth effect which postulated that falls in interest rates automatically increased the perceived market value of physical and financial assets. This would ultimately stimulate increased investment. The Pigou Effect, as it is known, is the most powerful theoretical rejoinder to Keynes’ idea that, in depressions, low interest rates are ineffective in stimulating consumption and investment.

58 The Failure of “The New Economics”: An Analysis of the Keynesian Fallacies, Henry Hazlitt, D Van Nostrand Company, Princeton New Jersey, 1959. Hazlitt’s comprehensive and convincing demolition of everything in Keynes’ General Theory includes one of the best sentences written by an economist about another economist. “Now, though I have analysed Keynes’s General Theory in the following pages theorem by theorem, chapter by chapter, and, sometimes, even sentence by sentence, to what some readers may appear tedious length, I have been unable to find in it a single important doctrine that is both true and original. What is original in the book is not true: and what is true is not original. In fact, as we shall find, even much of that is fallacious in the book is not original but can be found in a score of previous writers.” Chapter 1, The Failure of “The New Economics”.

59 John Von Neumann (1903-57) was born in Hungary and was a mathematics prodigy at school and university. He taught at the University of Berlin in 1962-30. In 1930, Von Neumann moved to the US where he worked at Princeton University’s Institute for Advanced Study.

60 Kenneth Arrow (1921-2017) was born in New York. He completed his PhD in economics at Columbia University and served in the US armed forces during the Second World War before taking a post at Stanford University. Arrow is brother to the economist Anita Summers, uncle to economist Larry Summers, and brother-in-law of the late economists Robert Summers and Paul Samuelson. Five of his students have won Nobel Memorial Prizes in Economics.

61 Gerard Debreu (1921-2004) was born in Calais, served in the French army at the end of the Second World War and moved to the US in 1948. He and Kenneth Arrow presented at a Chicago University conference in 1952 a paper entitled: Existence of an equilibrium for a competitive economy. This was regarded at the time as the most coherent demonstration of the existence of a stable general equilibrium in competitive markets.

62 Paul Samuelson (1915-2009) was born to a family of Polish immigrants in Gary, Indiana. He earned his bachelor’s and master’s degrees from Chicago University and his PhD from Harvard University. In 1970, Samuelson was the third recipient of the Nobel Memorial Prize in Economic Sciences.

63 Pierro Sraffra (1898-1983) was born in Turin and studied in Italy and the UK before taking a lectureship at Cambridge University in 1927. For 20 years from 1931, Sraffra worked for the Royal Economic Society on the collected works of David Ricardo. Using mathematical methods, Sraffra developed a model that satisfies the demands of those pursuing a scientific approach to economics. His ability to demonstrate that price is irrelevant is, however, easily understood. The system he presents eliminates the subjective role it plays in an economy because it is based on objective inputs: corn and steel. That the Marshallian concept of price plays no role, consequently, is unsurprising.

64 Animal Spirits (Princeton University Press, 2009) by George Akerlof and Robert J Shiller, a Yale economics professor, is the latest version of some of the ideas of behavioural economists. The title of the book is inspired by a passage in Chapter 12 of Keynes’ General Theory of Employment, Interest & Money (originally published in 1936). “Even apart from the instability due to speculation, there is the instability due to the characteristic of human nature that a large proportion of our positive activities depend on spontaneous optimism rather than mathematical expectations… Most, probably, of our decisions to do something positive, the full consequences of which will be drawn out over many days to come, can only be taken as the result of animal spirits – a spontaneous urge to action rather than inaction, and not as the outcome of a weighted average of quantitative benefits multiplied by quantitative probabilities.”

65 For details of the Washington Consensus, see Chapter 6.