BOOK REVIEW

Classical Economics, Marx,

Marginalism, and Keynes
Alex M Thomas

ver the last two decades, several

good books have been written
on the history of economic
thought such as Vaggi and Groenewegens
A Concise History of Economic Thought
(2003), Roncaglias The Wealth of Ideas
(2005), Ernesto and Zamagnis An Outline of the History of Economic Thought
(2005), and Sandelin, Trautwein, and
Wundraks third edition of A Short History of Economic Thought (2015). Heinz
D Kurzs Economic Thought: A Brief History is a welcome addition to this list.
Chapter 1 covers early economic
thought in briefeconomic observations by the ancients, scholastics, and
mercantilists. The ancient clay tablets,
as Kurz notes, are perhaps the first
national income account in human history (p 6). Early economic thought was
Economic & Political Weekly

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OCTOBER 22, 2016

Economic Thought: A Brief History by Heinz D Kurz

translated by Jeremiah Riemer, New York: Columbia
University Press, 2016; pp viii+208, $27.

fairly unsystematic and were oriented

towards prescription (p 5); hence their
focus on topics such as just price and
just taxation (p 10). Thomas Mun, one
of the prominent mercantilists, advocated
running a trade surplus because they
equated the nations wealth with the
stock of precious metals in the treasury
of the crown (p 13).
Classical Economists and Marx
Kurz devotes Chapter 2 to classical economics. The following are some of the
key characteristics of classical economic
thinking: the tendency towards a uniform rate of profit in a competitive
vol lI no 43

economy; social class as the unit of analysis; prices reflect the difficulty of producing the various commodities (p 23);
wages are exogenously determined by
social and historical factors (p 26); and
the theoretical interest in systematic
and permanent forces as opposed to
incidental and temporary factors (p 25).
Kurz rightly points out that Smiths invisible hand metaphor has been fundamentally misunderstood (p 28). With
respect to income distribution, Smith
recognised that employees are more
powerful than workers (p 30). Smith also
highlights the negative consequences
of division of labour: the devaluation
of artisanal skills and the replacement
of adult with child labour and to mitigate such effects, he called for statefinanced elementary school education
(p 33).
Ricardo embarked on his study of economics by reading Smith, and made progress particularly in the theory of income
distribution: the real wage rate and the
profit rate had an inverse relationship with
each other for a given state of technology
(p 35). Smith, Ricardo, and Malthus
35

BOOK REVIEW

assumed that planned saving is one and

the same as planned investment. However, this did not imply a tendency towards the full employment of labour.
Although Mill saw himself as merely
correcting and completing the Ricardian
doctrine, he was really a transitional figure, foreshadowing certain elements of
the later marginalist doctrine (p 40).
Mill advocated the so-called wagesfund theory, which was a primitive anticipation of extending Says law to the
labor market. Mill later admitted that
the wages-fund theory was untenable
and retracted it (p 40).
Chapter 3 presents the economic
thought of Marx and the socialists. For
Marx, the value of a commodity is determined by the amount of labour required
for its production (p 47). Through his
analysis of the reproduction of the economy, the vulnerability of capitalism to
crises was brought to the fore. Marx
identifies four reasons for capitalistic
crises: (i) an excess production of commodities in one sector and a deficient

production in another sector (pp 5051);

(ii) inequality of income distribution
leading to aggregate demand deficiency;
(iii) fall in the general rate of profits;
and (iv) leakage of money from the
system leading to a fall in sales. Kurz
provides very brief and interesting developments within the Marxian framework by Luxemburg, Hilferding, Baran,
Goodwin, and Leontief.
Marginal Economics
The marginal revolution begins with the
contributions by Jevons, Menger, and
Walras. Economic problems, for the
marginalists, are constrained optimisation problems (p 62). With the advent of
marginalism, economic questions moved
away from growth and development to
the allocation of resources. The classical
principle of intensively diminishing returns (to land) was generalised indiscriminately to all factors of production
as well as to the sphere of consumption
(p 61). They also treated reproducible
goods (especially capital goods) in terms

of scarcity unlike in classical economics, where this was only the case with
respect to scarce natural resources
(p 62). They consider the principle of
substitution as one of the most important principles in economics (p 64). In
the same chapter, Kurz briefly discusses
the work of Thnen, Cournot, Gossen,
Bhm-Bawerk, Wicksell, and Pareto.
Austrian economists like Menger and
Mises advanced the thesis that all value
is ultimately subjective. However, this
thesis did not find unanimous support
among the marginalists. Rather, it was
Alfred Marshalls interpretation that
prevailed, which contended that a complete theory of prices and income distribution must take into account both
objective and subjective factors or
forcesthat of supply and that of
demand (p 58). Walrass work in general equilibrium motivated further
developments, most notably by Pareto,
Cassel, Lindahl, Hicks, Hayek, Arrow, and
Debreu. Lindahl and Hicks developed
the concept of temporary equilibrium

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OCTOBER 22, 2016

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BOOK REVIEW

and Lindahl and Hayek that of intertemporal equilibrium (p 80).

Marshalls economics forms the subject matter of Chapter 5. His method of
partial equilibrium is omnipresent even
today and shapes the idea of economics
as the science of supply and demand
(p 81). One reason for its omnipresence,
Kurz notes, is its easy teachability.
Marshalls concept of the long-run normal price bears a strong resemblance to
the classical concept of the production
price, and like the classicists he postulated a uniform rate of return on capital
in competitive conditions (p 83). He
presented his theory as a continuation of
the classical tradition although scrutiny
shows that it involved a fundamental
break with the classical approach
(pp 8182). In two essays published in
1925 and 1926, Marshalls partial equilibrium analysis was subjected to a
thoroughgoing critique by Sraffa
(pp 8687); [b]ecause of the interdependencies between industries, it is
simply not possible in general to change
the price of just one input or output at a
time and analyse the effect of such a
change in a single market as if in a
vacuum (p 87).
Chapter 6 discusses utilitarianism
and welfare theory. Kurz tracks the origin of the law of diminishing marginal
utility of income to the finding of the
German psychologist Gustav Fechner
that the perception of a sensual stimulation increases less than proportionally
as its intensity grows to the connection
between marginal utility and the income an individual receives (p 90).
Kurz also informs us that the popular
Edgeworth box was actually invented by
Pareto (p 93). Unlike other utilitarians,
Pareto was aware of the limited range
covered by the fictional character of
homo economicus and of the theory of
equilibrium based on that artificial
construct (p 98) and therefore later in
life he turned to sociology. The works of
Schumpeter, Mises, Lange, Lerner, Pigou,
and Hayek are also briefly discussed
in the chapter. In the same chapter,
Kurz presents the research findings of
Atkinson and Piketty which undermine
the foundations upon which Western
societies are erectedthe belief that

what matters for an individuals economic and social success is hard work
and high productivity (p 97).

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OCTOBER 22, 2016

Internal Critics
The idea that perfect competition will
yield socially optimal outcomes is still
very much prevalent. This view has been
criticised, and rightly so, for entertaining a sometimes naive gullibility about
the efficiency of markets and for ignoring
the highly restrictive conditions under
which this purported optimality applies
(p 105). The latter has led to work on
imperfect competition, the subject
matter of Chapter 7. Under this subject,
Kurz includes old institutional economics
(Veblen and Clark), monopolistic competition (Hotelling, Chamberlin, and
Joan Robinson), oligopolistic competition
(Bertrand and Stackelberg) and further
developments to this line of enquiry by
Coase (on firms and transactions cost),
Simon (his concept of bounded rationality yielding a huge literature of managerial and behavioural economics), and
Nash (who developed noncooperative
game theory to deal with the strategic
interaction of several agents or firms
(p 112)).
Chapter 8 is devoted to the economics of Schumpeter and the strands of
economic thinking it motivated. For

Schumpeter, the most important feature

of capitalism is its dynamism, a consequence of the role of the entrepreneur
(p 114).
Although he cherished the achievements of
Walrasian theory, he objected that it knows
only static, hedonic, and rationalistic
types who conform to prevailing circumstances. They are boring equilibrium men
as far as Schumpeter is concerned. (p 114)

Schumpeter draws on Juglars work on

business cycles and Kondratieffs and
Spiethoffs statistical analysis of prices,
wages, and interest rates. Schumpeter is
considered one of the founding fathers
of evolutionary economics, in which
economic development is understood as
a process of selection whose creative
side increases variety, whereas its destructive side decreases it (p 119); the
seminal work in evolutionary economics
is by Nelson and Winter. Two other legacies of Schumpeter are in new growth
theory (Aghion and Howitts work within a neoclassical framework) and in the
theory of the instability of financial markets (developed by his student, Minsky,
in the 1970s) (p 119).
Keynes and After
Chapters 9 and 10 are devoted to the
economics of Keynes and the reactions
to it respectively. It is important, as Kurz

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BOOK REVIEW

writes, to highlight that Kalecki had

independently arrived at the principle
of effective demand (p 122), the central
message of the principle being that
investment determines saving in a twosector economy via changes in aggregate income. Besides triggering conceptual developments in economic theory,
Keyness economics motivated developments in national income accounting
(via Stone) and public finance (via
Musgrave). While Keyness analysis
assumed productive capacity as given,
Harrod extended the principle of effective demand to the long runwhere
investment adds to both productive
capacity and aggregate demand. Keyness
economics was also interpreted in
general equilibrium terms, the chief responsibility of which lies with Hicks.
Such interpretations trace unemployment
to rigidities in the system (p 138). The
marginalist interpretations of Keynes are
refuted by the post-Keynesians (Joan
Robinson, Kaldor, Pasinetti, Shackle,
Minsky, and Davidson) who reject the
Says law, the neutrality of money, that
saving determines investment, and the
marginal productivity theory of income
distribution (p 141).
Another marginalist interpretation
draws upon the intertemporal equilibrium theory of Fisher to develop what
is known as new classical macroeconomics (p 146), of which Lucas and
Sargent are the pioneers. Yet another
Keynesian line of enquiry was initiated
by Akerlof and Stiglitz who analysed
the behavior of rational actors in light
of price rigidities and asymmetrically
distributed information, especially in
the context of labor and credit markets
with imperfect competition (p 148).
Kurz also discusses monetarismchampioned by Friedmanas a reaction
to Keynes.
Chapter 11 discusses general equilibrium and welfare theory. Walrasian economics moved in favour for short-period
equilibria away from long-period equilibria, although, as Kurz notes, paradoxically, the time horizon of actors in
some new models was posited as infinite (p 153). Notable contributions to
this research programme were made by
Hicks, Samuelson, Arrow, Allais, Debreu,
38

and Malinvaud. Basically, short-period

equilibria were conceived of as a sequence of temporary equilibria which
lacked persistence, typically the hallmark of equilibrium (p 154). General
equilibrium was termed a failed research program by Hellwig because the
system is stable only under very restrictive assumptions (p 160). Sens contributions to welfare economics find a
mention in this chapter.
The final chapter presents a broad
overview of developments in selected
fields: game theory, capital theory,
growth theory (including demand-led
growth theory), spatial and urban
economics, development economics
and new economic geography, public
choice, behavioural economics and
experimental economics, new institutional economics, and financial market
theory.
I end with some observations on the
book in its entirety. Kurzs Economic
Thought is written in an accessible manner for the interested reader and indeed, no prior knowledge [is] needed
(p vii). Additionally, owing to the
breadth of the book and its focus on
classical economics, Marx, marginalism,
and Keynes, it can also be used as a
supplementary text in undergraduate
classes. In the final paragraph of the
book, Kurz warns the reader against
the nave idea that it is the privilege
of living economists to articulate only
correct ideas (p 185). Hence, readers
of this book will come across contemporary research (especially in capital
theory (pp 16870) and demand-led
growth theory (pp 17576) which has its
origins in the ideas of classical
economists and Marx. One minor quibble is that this reviewer hoped to see
a longer reflection on the method,
practice, and usefulness of history of
economic thought in the book given
the authors substantial scholarship in
this area. That said, overall, the book
is remarkably successful in its objective
of providing a brief history of economic
thought.

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