What makes a market economy? Schumpeter, Smith and Walras on the coordination problem

New Political Economy

Volumn 10, Issue 2, 2005, Pages 143-161

  Watson, Matthew ^a  

^a UNIVERSITY OF BIRMINGHAM   (United Kingdom)

Author keywords

[No Author keywords available]

Indexed keywords

ECONOMIC THEORY; MARKET CONDITIONS; THEORETICAL STUDY;

EID: 22544485672     PISSN: 13563467     EISSN: None     Source Type: Journal    
DOI: 10.1080/13563460500144710     Document Type: Article

References (74)

1. I am grateful to one of my anonymous referees for pointing out that I should add the following qualification. Austrian process analysis, it could be said, provides an economic justification for the introduction of market institutions even if it is shown that there is no purely economic solution to the coordination problem. However, Austrian theory has always remained very much on the margins of mainstream twentieth century economics, for which the coordination problem is key. For this reason, I am confident that my underlying claim holds, although it is given extra weight by the addition of this qualification.
2. Joseph Schumpeter, History of Economic Analysis (Oxford University Press, 1994 [1954]).
3. Jacob Viner, 'Adam Smith and laissez-faire', in: John Maurice Clark et al., Adam Smith, 1776-1926: Lectures to Commemorate the Sesquicentennial of the Publication of the 'Wealth of Nations' (Augustus M. Kelley Publishers, 1989 [1928]), p. 126.
4. Adam Smith, An Inquiry into the Nature and Causes of the Wealth of Nations, edited, abridged and with an introduction by Andrew Skinner (Pelican, 1970 [1776]), p. 160.
5. Schumpeter, History of Economic Analysis, p. 189.
6. Emma Rothschild, Economic Sentiments: Adam Smith, Condorcet, and the Enlightenment (Harvard University Press, 2001), p. 144.
7. Léon Walras, Elements of Pure Economics: Or the Theory of Social Wealth, translated by William Jaffé from the fourth edition of Les Eléments d'Économie Politique Pure (Orion Editions, 1984 [1954]), pp. 201-7.
8. Donald Winch, 'Adam Smith's Problems and Ours', Scottish Journal of Political Economy, Vol. 44, No. 4 (1997), p. 387.
9. Nicholas Kaldor, 'The Irrelevance of Equilibrium Economics', Economic Journal, Vol. 82, No. 6 (1972), pp. 1237-8.
10. Schumpeter, History of Economic Analysis, p. 31.
11. On this point, see, for instance, Andrew Skinner, A System of Social Science: Papers Relating to Adam Smith (Clarendon Press, 1979);
12. Robert Heilbroner, The Essential Adam Smith (W.W. Norton & Company, 1986);
13. and Samuel Hollander, Classical Economics (Blackwell, 1987).
14. Smith, Wealth of Nations, pp. 160-1.
15. See Adam Smith, The Theory of Moral Sentiments, sixth edn, the Glasgow Edition of the Works and Correspondence of Adam Smith, edited by D.D. Raphael & A.L. Macfie, (Liberty Fund, 1982 [1790]), Li.
16. Of course, there are those who adhere to the so-called 'Adam Smith Problem', who claim that Smith's two major texts are incompatible, and that Smith changed his mind on many of the core aspects of his analytical system between writing The Theory of Moral Sentiments (1759) and The Wealth of Nations (1776). From this perspective, it could be said that there is no need to read The Theory of Moral Sentiments, because this represents the 'old' Smith, who the 'new' Smith laid to rest. However, I do not subscribe to the existence of an 'Adam Smith Problem'. The sixth edition of The Theory of Moral Sentiments was the last that Smith allowed to be published in his lifetime and; whilst it contains many changes to the previous edition, the underlying philosophical themes on which he constructs his view of society remain very much intact. There is no sense in which Smith recants in the sixth edition on any of the major claims about the nature of social existence to be found in the second edition, which was published in 1761, and which itself was a revised version of the original. The sixth edition appeared in 1790, fully fourteen years after he wrote The Wealth of Nations. If the process of writing The Wealth of Nations had caused him to change his mind about the concept of society which appeared in the earlier versions of The Theory of Moral Sentiments, then surely this would have been reflected in the 1790 version of The Theory of Moral Sentiments.
17. See, for instance, Paul Samuelson, 'The overdue recovery of Adam Smith's reputation as an economic theorist', in: Michael Fry (ed.), Adam Smith's Legacy: His Place in the Development of Modern Economics (Routledge, 1992), pp. 1-14.
18. See, for instance, Frank Hahn, 'Reflections on the Invisible Hand', Lloyd's Bank Review, No. 144 (1981), pp. 1-21.
19. Winch, 'Adam Smith's Problems and Ours', p. 388, p. 386.
20. The concept of imagination plays a pivotal role in much of Smith's earliest work, which was unpublished during his lifetime. See, for instance, Adam Smith, Lectures on Rhetoric and Belles Lettres, the Glasgow Edition of the Works and Correspondence of Adam Smith, edited by J.C. Bryce (Liberty Fund, 1985);
21. and Adam Smith, Essays on Philosophical Subjects, the Glasgow Edition of the Works and Correspondence of Adam Smith, edited by W.P.D. Wightman (Liberty Fund, 1982), in particular, 'The History of Astronomy', pp. 33-105.
22. Smith, Theory of Moral Sentiments, II.iii.2.1;
23. see also Daniel Fusfeld, The Age of the Economist, ninth edn (Addison Wesley, 2002), p. 24.
24. Smith, Wealth of Nations, p. 109.
25. Alan Kirman, 'The Intrinsic Limits of Modern Economic Theory: The Emperor Has No Clothes', Economic Journal, Vol. 99, Conference Proceedings (1989), p. 138.
26. On modern interpretations of Smith, see Pierre Force, Self-interest before Adam Smith: A Genealogy of Economic Science (Cambridge University Press, 2003).
27. Smith, Theory of Moral Sentiments, III. 1.3, IV.2.12.
28. Ibid., IV.1.10.
29. Ibid., II.ii.
30. See, for instance, Kenneth Arrow, 'The division of labor in the economy, the polity, and society', in: Gerald O'Driscoll (ed.), Adam Smith and Modern Political Economy: Bicentennial Essays on the Wealth of Nations (Iowa State University Press, 1979), p. 158.
31. Hollander, Classical Economics, p. 64.
32. Hyun-Ho Song, 'Adam Smith's Conception of the Social Relations of Production', European Journal of the History of Economic Thought, Vol. 4, No. 1 (1997), pp. 23-42.
33. Smith, Theory of Moral Sentiments, II.ii.3.4.
34. Ibid., I.i.3.
35. Ibid., III.1.4-6.
36. D.D. Raphael & A.L. Macfie, 'Introduction', in: Adam Smith, The Theory of Moral Sentiments, the Glasgow Edition of the Works and Correspondence of Adam Smith, edited by D.D. Raphael & A.L. Macfie (Liberty Fund, 1982), p. 16.
37. John Davis, 'Collective intentionality and individual behavior', in: Edward Fullbrook (ed.), Intersubjectivity in Economics: Agents and Structures (Routledge, 2002), pp. 11-27.
38. See, for instance, William Jaffé, 'The Normative Bias of the Walrasian Model: Walras Versus Gossen', Quarterly Journal of Economics, Vol. 91, No. 2 (1977), pp. 371-87;
39. and Jan Van Daal & Albert Jolink, The Equilibrium Economics of Léon Walras (Routledge, 1993).
40. Walras, Elements of Pure Economics, pp. 73-80;
41. for a discussion, see Pascal Bridel & Elisabeth Huck, 'Yet Another Look at Léon Walras's Theory of Tâtonnement', European Journal of the History of Economic Thought, Vol. 9, No. 4 (2002), pp. 513-40.
42. Walras, Elements of Pure Economics, p. 47.
43. Van Daal & Jolink, The Equilibrium Economics of Léon Walrus.
44. Mark Blaug, Economic Theory in Retrospect, fifth edn (Cambridge University Press, 1997).
45. On the notion of two Walrases, corresponding to the two different concepts of tâtonnement to be found in his work, see Donald Walker, 'Walras's Theories of Tatonnement', Journal of Political Economy, Vol. 95, No. 4 (1987), pp. 758-74.
46. On the distinction between Walras's in-time and atemporal tâtonnement models, see William Jaffé, 'Walras's Economics as Others See It', Journal of Economic Literature, Vol. 18, No. 3 (1980), pp. 528-49.
47. This point was originally made as long ago as 1881. See Francis Edgeworth, Mathematical Psychics (Kegan Paul, 1881).
48. For a modern restatement of the same point, see Albert Jolink, The Evolutionist Economics of Léon Walras (Routledge, 1996).
49. William Jaffé, 'Walras' Theory of Tâtonnement: A Critique of Recent Interpretations', Journal of Political Economy, Vol. 75, No. 1 (1967), pp. 1-19.
50. Donald Walker, Walras's Market Models (Cambridge University Press, 1996).
51. Franklin Fisher, 'Adjustment process and stability', in: John Eatwell, Murray Milgate & Peter Newman (eds), The New Palgrave: A Dictionary of Economics, Volume I (Macmillan, 1987), pp. 26-9.
52. Manuel Luís Costa, 'Comment on "Yet Another Look at Léon Walras's Theory of Tâtonnement"', European Journal of the History of Economic Thought, Vol. 9, No. 4 (2002), pp. 552-3.
53. Michel De Vroey, 'Transforming Walras into a Marshallian Economist: A Critical Review of Donald Walker's Walrus's Market Models', Journal of the History of Economic Thought, Vol. 21, No. 4 (1999), p. 427.
54. Bruno Ingrao & Giorgio Israel, The Invisible Hand: Economic Equilibrium in the History of Science, translated by Ian McGilvray (MIT Press, 1990).
55. Roy Weintraub, 'The Microfoundations of Macroeconomics: A Critical Survey', Journal of Economic Literature, Vol. 15, No. 1 (1977), pp. 11-12.
56. Bridel and Huck, 'Yet Another Look at Léon Walras's Theory of Tâtonnement', p. 528.
57. Frank Hahn, 'Some Adjustment Problems', Econometrica, Vol. 38, No. 1 (1970), p. 11.
58. De Vroey, 'Transforming Walras into a Marshallian Economist', p. 426.
59. Walras, Elements of Pure Economics, p. 242.
60. Ibid., p. 37.
61. Walker, 'Walras's Theories of Tatonnement', p. 767.
62. Costa, 'Comment on "Yet Another Look at Léon Walras's Theory of Tâtonnement"', p. 551, emphasis added.
63. Mark Blaug, The Methodology of Economics: Or How Economists Explain, second edn (Cambridge University Press, 1992), p. 240.
64. Alan Coddington, 'The Ṙationale of General Equilibrium Theory', Economic Inquiry, Vol. 13, No. 4 (1975), pp. 539-58.
65. Bridel & Huck, 'Yet Another Look at Léon Walras's Theory of Tâtonnement', p. 521.
66. Jaffé, 'Walras' Theory of Tâtonnement', p. 14.
67. De Vroey, 'Transforming Walras into a Marshallian Economist', p. 416.
68. See, for instance, Weintraub, 'The Microfoundations of Macroeconomics';
69. and Frank Ackerman, 'Still Dead After All These Years: Interpreting the Failure of General Equilibrium Theory', Journal of Economic Methodology, Vol. 9, No. 2 (2002), pp. 119-39.
70. Jolink, The Evolutionist Economics of Léon Walras.
71. Antoine Rebeyrol, '"Yet Another Look"? A Comment', European Journal of the History of Economic Thought, Vol. 9, No. 4 (2002), pp. 545-7.
72. Laurence Harris, 'Will the real IMF please stand up: what does the Fund do and what should it do?, in: Jonathan Michie & John Grieve Smith (eds), Global Instability: The Political Economy of World Economic Governance (Routledge, 1999), pp. 198-211.
73. David Williams, 'Constructing the Economic Space: The World Bank and the Making of Homo Oeconomicus', Millennium: Journal of International Studies, Vol. 28, No. 1 (1999), pp. 79-99.
74. Ackerman, 'Still Dead After All These Years'.