The Other Canon: The History of the Immaterial and Production-Based Canon of Economic Theory.

Erik S. Reinert, Centre for Development and the Environment, University of Oslo and Norsk Investorforum, Oslo

Arno M. Daastøl, Department of Public Economics, University of Maastricht. arno@daastol.com

4. The Two Canons: Selective Use, Methodological Schizophrenia and Opportunistic Ignorance. 22

Canonical Methodenstreit 2: Anti-physiocracy vs. Physiocracy & Adam Smith (ca. 1770-1830) 31

Canonical Methodenstreit 3: The American System vs. The British System (19^th Century) 32

Canonical Methodenstreit 4: The Historical School vs. Marginalism (1883-1908) 36

1. Typologies of Economic Theory and the Foundation of the Two Canons.

It has been said that economics as a science - or pseudo-science - is unique because parallel competing canons may exist together over long periods of time. In other sciences, periodical and radical gestalt-switches terminate old theoretical trajectories and initiate new ones. In a paradigm shift the scientific world moves from a situation when everybody knows that the world is flat, to a new understanding when everybody knows that the world is round. This happens in a relatively short time. Put sharply: In economics the theory that the world is flat has been living together with the theory that the world is round for Centuries. In this paper we shall argue for the existence of an alternative canon to today’s classical/neo-classical mainstream theory - a canon itself much older than that of the mainstream, and which dominated the world view of the Renaissance. Using a metaphor from Kenneth Arrow, ‘this tradition acts like an underground river, springing to the surface every few decades.’[i]

We shall argue that during the Cold War the ‘underground river’ of Renaissance economics all but disappeared from economic theory, and that its is high time to bring this tradition back into the open again. Traditionally the Renaissance canon has been resurrected in times of crisis: during national emergencies which has put production - not barter - into focus, like when an exclusive focus on barter has caused financial bubbles which at some point burst, when nations are engaged in serious catching-up with the world leader at the time (like the US, Germany and Japan were in the 19th Century, or like Korea today), or when a war economy forces a national political system to focus on production (of materials of war). Today the urgency of a change of focus towards the Renaissance conception of Economics is particularly acute in the Third World and in formerly communist Eastern Europe. Unfortunately this is not where economic theory is produced. Additionally, the present financial bubble and very possible crack makes it obvious that mainstream economics has defaulted.

The two different canons are based on fundamentally different Weltanschauungen. The lines of the two canons can be traced back to the period when the term economics was first used, to ancient Greece. While today’s standard economics is based on a mechanistic, barter-and consumption-centered tradition, Renaissance economics is dynamic and production-centered.

Additionally, it included a “systemic perspective”, an idea of “circular flow" (Keynes), “ecocirc” (Frisch), meaning that there was an understanding of the necessity of mutual dependence and balanced growth in various areas: Agriculture v. industry; finance- v. production; saving v. investment; and consumption v. production. The latter is expressed in the concepts of “social contract”, “underconsumption” and in Says Law.

The first main stream tradition belongs to what Werner Sombart calls ordnende Nationalökonomie, which isconcerned about organising the economic sphere. The second Renaissance tradition is what Sombart calls verstehende Nationalökonomie [ii]- what Nelson and Winter refers to as appreciative economics.[iii]The first explains Man’s economic activities in terms of physics (of dead matter), the second in terms of mind and biology (of living matter and of Man’s wit and will). The first tradition is represented by Malthus’ dismal science, the second by F. List[iv] and Christopher Freeman’s Economics of Hope [v] - by the never-ending frontier of human knowledge.

Present mainstream economic theory places itself solidly in a canonical sequence descending from the Physiocrats, via Adam Smith and Ricardo to the neo-classical tradition beginning with Jevons, Menger, and Marshall. The sequence has been made clear to generations of economists as the ‘Family Tree of Economics’ featured on the inside back cover of many editions of Paul Samuelson’s Economics. The alternative canon in economic theory runs parallel in time with the tradition of Samuelson’s ‘Family Tree’. We have named this alternative canon Renaissance Economics - since never before and never after have the values which this canon represents dominated the world picture as it did during the Renaissance. The mainstream canon is clearly a product of the next philosophical period, which was in opposition to Renaissance values and outlook: The Enlightenment. Rationality and individuality during the Renaissance was based on an image of man as a spiritual being: creative and productive. The Enlightenment had a more materialistic understanding of human rationality and individuality: mechanical and consuming. Today the Renaissance canon tends to disappear in the history of economic thought, as this branch of economics more and more concentrates on the predecessors of neo-classical economics. Ironically, this has happened while the rest of the world increasingly has acknowledged the “new” knowledge economy’s dependence upon our mind’s creativity. Main stream economics is struggling with ad-hoc measures to get out of the trap it has positioned itself inside, that of a materialist conception of the human being and therefore of science and economics. The tradition of Renaisance economics makes these ad-hoc measures unnecessary by immedeate focus on knowledge as the ultimate source of welfare. We would claim that the absence of the History of Economic Policy as a branch of Economics is responsible for bringing the alternative canon into virtual oblivion.

As already mentioned, Renaissance economics is optimistic: the never-ending frontier of knowledge stands in sharp contrast with Malthus’ dismal science and with the production theory of mainstream economics, which still today essentially is a formalisation of a static view of Ricardo’s corn economy. Other main features of the Renaissance Canon of economic theory are the following: The fundamental cause of economic welfare is Man’s productive creativity and morality; the immaterial production factors. In order for these ideas to materialise, capital is needed. Capital per se is in this tradition sterile. The Renaissance tradition can be contrasted with mainstream using Schumpeter’s description of the economics of John Rae - a 19th Century US economist of the Renaissance canon: ‘The essential thing is the conception of the economic process, which soars above the pedestrian view that it is the accumulation of capital per se that propels the capitalist engine’[vi]. Classical economics focused on barter, exchange, and the accumulation of material capital. Even with the “new” focus on knowledge in the “information economy” the matter that dominates is not knowledge or knowledge production but rather commerce, barter. The strength of this trend has even caused “old-fashioned” mainstream economists to revolt. The Renaissance tradition focuses on production based on human creativity, and for this reason Renaissance economics emphasises education, science, incentives, and entrepreneurship.

Squarely put, whereas the Renaissance canon focus on culture as the main factor and source of production and welfare, the mainstream canon focus on nature. Mainstream economics defines its origins in the French school of physiocracy [vii] (i.e. ‘the rule of nature’), where value is created by Nature, and harvested by Man. In Renaissance economics value originates through Man’s wit and will (i.e. ‘ideocracy’ - the rule of ideas). During the mechanisation of the world picture which took place during the materialistically oriented Enlightenment, the defenders of the Renaissance tradition were the anti-physiocrats.[viii] The Renaissance tradition is holistic and idealistic - not atomistic and materialistic. Nevertheless, at the core of the system is the individual, set in a complex web of interrelations. The beneficial effects of these interrelations first became evident in Renaissance towns giving birth to the Renaissance expression of the common weal (il bene comune, das Gemeinwohl) - a synergetic understanding of Society as being more than the sum of its parts.[ix]

owns permitted communication which unleashed individual freedom, creativity, and diversification creating unprecedented wealth. Later nation-building in this tradition tried consciously to reproduce these synergetic benefits of towns on a larger, national scale. In order to achieve this, the sciences of law and administration had to be consciously cultivated and promoted. Renaissance economics emphasises the crucial role of nation-states and the duties of ‘the ruler’ - i.e. government - not only to regulate in order to provide incentives for the creation of welfare (in the ancient tradition of law and economics), but also the duty of ‘the ruler’ to initiate projects creating a demand for knowledge-based production.

The strategy of the Renaissance tradition therby included two tightly interrelated parts, 1) promotion of knowledge and 2) promotion of infrastructure – in its broadest sense, thereby permitting communication of knowledge and exchange of goods (markets). Both necessitated public intervention since these two categories both per definition constitute public goods (concentrated costs to the investor and widely dispersed benefits to the community - through time and space). As such they are characterised by suboptimal investment levels when left to an unregulated market.

An integral part of the nation-building strategy was a notion that a national market had to be created - that such a marked did not appear spontaneously. For this reason, communication and state-initiated investments in large scale infrastructure projects holds a very strong position in the Renaissance tradition, from the dams and irrigation canals of the Sumerian kingdoms via Colbert’s canals to Kennedy’s Interstate road projects. Using modern terms, we could say that the strategy of Renaissance economics was to create perfect competition within the national borders and dynamic imperfect competition in the export trade. Contrary to the common preconceptions of economics before Adam Smith, ‘Competition was often artificially fostered (nationally)...in order to organise markets with automatic regulation of supply and demand’[x]. It was commonly agreed that a national competitive advantage had to be created in knowledge-intensive activities before free trade could be established with the most advanced nations.

Although the two types should be seen as ‘Ideal Types’ in the Weberian sense, there are several distinguishing features which clearly separates the two canons through time.

One basic feature which distinguish the two canons is in their different conceptions of the origin of wealth:

Þ In the mainstream canon wealth originates from material sources: from nature, i.e. land, physical labour and capital. The accumulation of these assets takes place through trade and war. This accumulation is static, i.e. more of the same.

Þ In the Renaissance canon wealth originates from immaterial sources: from culture; i.e. Man’s creativity and morality. The accumulation of assets takes place through innovations cumulatively changing Man’s stock of knowledge and of his tools (technology). This accumulation is dynamic, i.e. more of something new and qualitatively different.

Þ In the mainstream canon the focus of analysis is barter, consumption and accumulation (Man the Trader and Consumer).

Þ In the Renaissance canon the focus of analysis is on production and innovation, productivity being the pineal gland bringing together mind and matter (Man the Creative Producer).

Þ The mainstream canon is - since the Aristotelian idea of the complete independence of politics from all other aspects of social life - fundamentally atomistic and mechanical in its analytical approach. The unit of analysis is the atomistic unit (in economics: the individual).

Þ The Renaissance canon - since Plato’s Republic - is fundamentally holistic, organic and synthetical (from synthesis) in its approach (die Ganzheit). The units of analysis includes both individuals and their institutions in time and space. This implies the mentioned systemic perspective of balanced growth in various sectors.

Þ The mainstream canon is – devoted to the idea of spontanous developent – more or less steered by desitiny.

The Renaissance canon – has practiced willed devlopement by means of wwillfuk creation, development and intervention into markets in order to make them grow in certain social beneficial directions.

At a very fundamental level, the two canons of economics are founded on two different views of how Man differs from other animals. We shall let Adam Smith represent the material and barter-based canon, and Abraham Lincoln represent Renaissance economics - the immaterial and production-based canon:

‘The division of labour arises from a propensity in human nature to.. truck, barter and exchange one thing for another..It is common to all men, and to be found in no other race of animals, which seem to know neither this nor any other species of contracts...Nobody ever saw a dog make a fair and deliberate exchange of one bone for another with another dog.’[xi]

‘..Beavers build houses; but they build them in nowise differently, or better, now than they did five thousand years ago..Man is not the only animal who labours; but he is the only one who improves his workmanship. These improvements he effects by Discoveries and Inventions....’[xii]

We shall also attempt to show the continuity of the immaterial and production-based canon through time: 1) that there is a continuity in this immaterial and production-based tradition in economics theory from the 1400’s until today, that the continuity of thought and its geographical movements from nations to nations can be documented, mainly through citations 2) That the roots of this kind of economic theory, both in philosophy and in economic policy, can be traced back through Ptolemy’s Egypt, the Byzantine and Carolingian[xiii] Empires, to Platonic philosophy and to the Sumerian Kingdoms. In other words, our approach is mainly diffusionist. However, we do not exclude ‘independent discoveries’ of the rational principles of Renaissance economics, particularly in times of national crisis and war. We also see a consistent pattern of application of the two canons in catching-up framework:

No nation-state[xiv]has ever gone through a transition from poverty to affluence without practising a long period of the immaterial and production-based canon as the fundamental guide for economic policy. This is true in France (where a modern starting point for policy could be Louis XI, (1461); and Montchrétien, Jean Bodin, and Sully for theory), England (where a logical starting point for policy is the reign of Henry III (who in 1250 invited the Hanseards to establish one of their four “factories”, then attrated Flemish weavers and prohibited use of foreign cloth)[xv], then Henry IV, Henry VII, in 1485), in Germany, the United States (Benjamin Franklin, Alexander Hamilton, Daniel Raymond, Henry Clay, Matthew and Henry Carey, E. Peshine Smith) and Japan (Meiji Restoration). Today we see the production-based economic strategy at work in East Asia. The Third World is essentially as an area which has never experienced the Renaissance or the production-based canon.

On the practical policy-level the two canons produce conflicts. This is due to the fact that whereas in the Renaissance theory different economic activities offer different potentials for achieving national welfare, in the bartered-centred theory (leaving out the different circumstances under which they bartered goods is actually produced) all economic activities become qualitatively ‘alike’. If anything, in the standard canon superiority is awarded to agriculture, which is more ‘natural’ a) because its delivers Nature’s produce, and b) because competition here is more ‘natural’; atomistic and ‘perfect.’

Tracing the Renaissance canon of economic thought presents several problems. First of all, the history of economic thought has to a very large extent developed into a genealogy of neo-classical economics. For this reason the ‘unorthodox’ economists who are not part of the canonical sequence are left out. Secondly, the overwhelming dominance of Anglo-Saxon economists - today generally with very limited skills in languages other than English and mathematics - and of Anglo-Saxon economic policy in the post-Bretton Woods period, has added an ethnocentric dimension to this development. A recent US book raises the issue of ‘The Lack of Vision in Economic Theory’ and becomes itself a study in lacking vision: the book does not at all venture outside Anglo-Saxon orthodox economics in its search for alternative visions. Thirdly, the people who represented the Renaissance canon are often - in spite of their profound impact on economic policy - not classified as ‘economists’. Even Schumpeters History of Economic Analysis, which is unique in this tradition in its geographical and linguistic scope, leaves out people like Leibniz and Wolff. As economists Leibniz and Wolff where not only very important for the economic policy of their time, but they also laid the foundation for the whole German economic tradition, which - during the 19th Century up until WW II - to a large extent coincided with the US and Japanese tradition. Many of these German economists are today conveniantly classified as sociologists, such as Werner Sombart and Max Weber. Schumpeter writes: ‘..the great names of Leibniz and that of his faithful henchman Christian Wolff, are left out advisedly: they were polyhistors, of course, and greatly interested, among other things, in the economic events and policies of their day; but they made no contribution to our subject.’[xvi] In a recent conversation an historian of economics from the University of Chicago conveyed that he did not consider Friedrich List to be an economist. Apparently only the orthodox economists defending the ‘right’ opinion (orthodox: literary those of ‘the true faith’) deserve to be called ‘economist’.

It is really only in the post Bretton Woods era that the economic policies of Smith and Ricardo completely have won the day in economic policy, so the economists of alternative traditions who were crucial to the economic policy are therefore almost completely left out of today’s history of economic thought. The last history of economics to give a good coverage of the theories behind the 19th Century economic policy was Ottmar Spann’s Die Haupttheorien der Volkswirtschaftslehre which, first appeared in 1911. By 1936 this book had reached 24 editions and a total of 120.000 copies printed in German.[xvii] There were translations to several languages, and, interestingly, the UK edition was published under the title Types of Economic Theory, flagging Spann’s awareness of diversity: that there are, indeed, different types of economics, not only one monolithic canon.

2. The Family Tree of The Renaissance Canon of Economics.

Traces of the Renaissance canon of economics can be found already in pre-antiquity. Statecraft and the accumulation of knowledge - exemplified by the famous Library of Alexandria and the scientific academies of Sumeria under Hammurabi (2030-1995 BC) - were important features of the early Middle East Kingdoms of Sumeria and Egypt. These kingdoms also produced extensive literature and documents on economic and legal matters which survive today. As later in Asia and in the Andes, irrigation seems to have been the first technology which created important increasing returns to scale, and consequently required statecraft. Irrigation was therefore instrumental in the establishment of the first States. The cuneiform script of the Sumerians was to remain the standard for the Middle East region for the next 2.000 years, and the Code of Hammurabi tells of an enlightened and humane system of law.

Later, during the Phoenician dominance of the Mediterranean trade (about 1.500- 500 BC), the Renaissance principle that manufacturing was superior to the production of raw materials is clearly recognised.[xviii] Serra (1613) was later to recognise this same principle - the superiority of manufacturing over the production of raw materials - as explaining why the Republic of Venice, with little or no raw materials, was so rich, compared to The Kingdom of Naples with her abundance of God-given natural wealth.

There is a clear continuity in the philosophical foundation of the Renaissance canon: Plato and other Greek philosophers were strongly influenced by Egyptian civilisation. Plato’s Republic and Laws was to be important blueprints for the enlightened Renaissance State. Renaissance philosophers like Leibniz and Wolff were later to rely heavily on Plato. In a previous paper we have elaborated more extensively on the philosophical basis for Renaissance economics.[xix]

Augustine’s De civitate Dei (413-426) was written in the Platonic spirit. Such occasional rediscoveries of Plato as Augustine’s later lead to sporadic ‘renaissances’, e.g. the Carolinian Renaissance under Charlemagne (768-814). Charlemagne was counselled by Thomas of York, a follower of Augustine. Already under Charlemagne the fondness of Renaissance Economics for education, industry and infrastructure is most evident. Charlemagne was actively promoting textile industry e.g. in Friesland, he built roads and worked on a canal linking Europe’s greatest rivers, the Danube and the Rhine and he promoted a standard administrative language in Western Europe, latin.

France - under Louis XI (1423-83) - experienced an early mini-renaissance. Louis XI established a pattern which came to be typical of Renaissance economics: He allied himself with the middle class against the noblemen, establishing a tax system favouring middle class values of industriousness against the land-owning upper class. Louis established a pattern which later came to be typical of Renaissance economics: Urban values (industry) were favoured against feudalism (agriculture and trade per se). It was Renaissance economics - creating centralised nation-states - which brought down feudalism. In Spain the Revolt of the Comuneros (1521) represents an occasion where the urban modernising faction loses out to the old feudal order.

The Italian born Renaissance was a rebirth of knowledge as the central engine of human change. The rediscovery of Plato, the re-interpretations of Aristotle, and the influences from the refugees from the crumbling Byzantine Empire all led to a re-interpretation of Man’s place in the Divine Scheme. Innovations had previously been tantamount to heresy - all man was supposed to know was already there in the Holy Bible and in Aristotle. Knowledge production was confined to the interpretation of these scriptures. Roger Bacon was e.g. arrested in Oxford for ‘suspicious innovations’ in 1271. With the influence from the Eastern church, Man’s perception of his role in the creation was completely reversed - sometimes to the edge of hybris. Man was created in the image of God, and the most salient feature of God had to be his rational creativity. Consequently innovations were no longer heretic - on the contrary, Man’s essential and pleasurably duty was to innovate. The next page shows the main inputs into the Renaissance and the philosophers who helped promulgate Renaissance economic thinking in Europe.

1) In the box of Leibniz, add Nicholas (von) Cusa(nus) (actually Nikolai Krebbs) as the crucial Neo-Platonist parttaker in Florence of 1453 besides Plethon (establishing the great concordat between the East and West churches).

3) Box for France? – Richelieu’s (language) and Colbert’s Academy of Science

This new world view released en enormous creativity in all sciences and arts - this freedom gave us Leonardo da Vinci, Michelangelo, Rafaello, Kepler and Copernicus. In all arts and sciences the people of the Renaissance still stand out in a heroic light in history, all but the statesmen and economists of the Renaissance, who today come across as the caricatures which Adam Smith created. In the spirit of the Renaissance Francis Bacon - Queen Elizabeth’s Lord High Chancellor - wrote, around 1605, An Essay of Innovations. Bacon became the ‘scientific leader of the new industrialist’[xx] - urging the use of science to produce manufactured goods and profits. This fundamental conviction that a society based on manufacturing has fundamentally different and superior qualities than societies without a manufacturing base, is an essential feature of what we label Renaissance economics. Emphasis on the ‘intrinsic value of manufacturing’ has been an integral part of the economic policy of all nations which have ever successfully embarked on a strategy of catching up with the leading nations. Only when the catching up has been achieved, have the presently industrialised nations - one by one, starting with England - embraced the classical/neo-classical tradition. In other words, no nation has ever achieved general welfare without going through a period of Renaissance economics. In England this period lasted for more than 400 years, starting in the late 15th Century, Korea has achieved very much in only 40 years, until “anglo-saxon financial interests” caught up with her around 1995.

Bacon’s emphasis of scientific knowledge was very similar to that of Friedrich List more than 200 years later: ‘Industry is the mother and father of science, literature, the art, enlightenment, useful institutions and national power... The greater the advance in scientific knowledge, the more numerous will be the new inventions which save labour and raw materials and lead to new products and processes.’[xxi]In this sense, there is a continuity of argument from the Renaissance, through Francis Bacon and Friedrich List to today’s evolutionary economics which emphasises the role of Research and Development and of innovations for economic welfare. As to natural resources, List says that ‘industrialisation will greatly increase the value of a country’s natural resources.’[xxii] This thinking was the basis for economic policy in the resource-rich nations which have achieved general welfare: USA, Canada, Australia, and New Zealand. A manufacturing sector - although one which was not seen as being competitive with that of England - was needed in order to transform the natural resources of a nation into national wealth.

The view of industry which prevailed nations catching up with England during the 19th Century is expressed by Friedrich List in 1841:

‘Let us compare Poland with England: both nations at one time were in the same stage of culture; and now what a difference. Manufactories and manufactures are the mothers and children of municipal liberty, of intelligence, of the arts and sciences, of internal and external commerce, of navigation and improvements in transport, of civilisation and of political power. They are the chief way of liberating agriculture from its chains.... The popular school (i.e. Adam Smith and J. B. Say, authors’ note) has attributed this civilising effect to foreign trade, but in that it has confounded the mere exchanger with the originator.[xxiii]

De-industrialisation, on the other hand, has been a corollary to economic disasters and massive reductions in human welfare, from the de-industrialisation of Holland after 1650, of France following the Napoleonic Wars, of Eastern Europe after the fall of the Berlin Wall, and of several Third World countries after the ‘adjustment policies’ of the post-McNamara World Bank. List, who originally had been a free trader and continued to believe this to be the goal of development , woke up to the crucial role of manufacturing by seeing the devastating effect of the de-industrialisation of France after the Napoleonic wars on the welfare of the nation.

In List we find again the synergy-based arguments of Renaissance economists like Giovanni Botero and Antonio Serra. As we said in the introductory chapter, the goal of the economic policy of the State was to increase the common weal, i.e. the prosperity of the community. This is the starting point of virtually all economic writing of the period. To the Renaissance economists systemic effects seems first to have arisen from the observation that widespread wealth seemed to accumulate in the cities - not in the countryside. This was the fundamental observation of one of the earliest best-selling books in economics, Delle Cause della Grandezza delle Cittá [xxiv]written by Giovanni Botero (1543-1617). The English translation, published in London in 1606, is entitled The Cause of the Greatnesse of Cities. This argument was to be discussed at great length by Antonio Serra in 1613.

In the best theoretical works of the time, the difference between the wealth and poverty of cities and countryside, and between cities, is explained in terms of the following main factors: 1. The size and density of population. 2. The different ‘qualities’ of economic activities. Manufacturing being ‘good’ and agriculture being ‘bad’ 3. The presence or absence of diversity of economic occupations4. the different capacities of economic activities to initiate ‘virtuous circles’ or positive feed-back mechanisms. 5. Steady, orderly and liberal government[xxv] 6. The rulers dutyful devotion to police / promote all the above.

The systemic effects in the economy are described by Renaissance economists at three levels of sophistication:[xxvi]

1. Observations of higher welfare in some economic activities rather than in others, a static and non-systemic observation of welfare being activity specific.(As if today: lawyers make more money than people picking lettuce; therefore a nation of lettuce pickers will be poorer than a nation of lawyers).

2. Some economic activities as core of systemic synergies which produce and spread welfare locally or nation-wide (‘where there are many people working with machines, also the shopkeepers are wealthier than in other places where machines are not used’)

3. There are degrees of understanding how these systemic synergies develop into positive feedback systems, but the top performance is that of Antonio Serra in 1613, who has a descriptions of Venice as a true autocatalytic system where increasing returns and diversity - the latter expressed as the number of different professions in a nation (i.e. degree of division of labour) - are identified as being at the core of virtuous circles which generate wealth. Naples is the example of the opposite effect in Serra’s system, because the production of raw materials is not subject to increasing returns.(We also find Adam Smith in The Wealth of Nations asking himself: Why is there so little division of labour in agriculture? On the other hand agriculture is to him the only ‘natural’ activity. Smith fails, however, to make the connection that the ‘unnatural’ imperfect competition is a product of a sophisticated division of labour)

These synergy-based arguments are found today in the works on increasing return by authors like Paul David, W. Brian Arthur[xxvii], and James Buchanan. [xxviii] In our opinion these present-day authors are re-inventing the role of knowledge, synergies and path-dependence which are main characteristics of Renaissance economics throughout history. List’s view on the role of manufacturing in this context is made clear in the following quote:

‘The productive powers of agriculture are scattered over a wide area. But the productive powers of industry are brought together and are centralised in one place. This process eventually creates an expansion of productive powers which grow in geometric rather than in arithmetic proportion.

This is why the population of an industrialised society is brought together in a few conurbations in which are concentrated a great variety of skills, productive powers, applied science, art and literature. Here are to be found great public and private institutions and associations in which theoretical knowledge is applied to the practical affairs of industry and commerce. Only in such conurbations can a public opinion develop which is strong enough to vanquish the brute force, to maintain freedom for all, and to insist that the public authorities should adopt administrative policies that will promote and safeguard national prosperity. ...

In addition the manufacturers are the focus of a large, lucrative, and world wide trade with peoples of varied standards of culture who live in many distant countries. Industry turns cheap bulk raw materials, which cannot be sent long distances, into goods of low weight and high value which are in universal demand’. [xxix]

List was in many ways the main propagandist of the Renaissance canon: he emphasised the immaterial foundations of wealth (morality, knowledge and Man’s ‘wit and will’), the superiority of manufacturing over agriculture and raw materials, the crucial role of infrastructure, and a trade policy specifically suited to each nation’s individual stage of development. These are all typical traits in pre WW I theories of economic policy both in Germany, Russia, United States and Japan. Later these thought were to spread to Korea and Taiwan, now changingChina and thereby reviving the ideas of the pupils of F.List, Sun yat Sen and Chang kai Shek.

However, List’s analysis of why these policies were so efficient were so beneficial to economic growth are somewhat lacking. No doubt his observations were accurate, but one is left with the feeling that List fails to explain to the reader why his polices work. His theoretical concepts are vague and his explanation of the economic mechanisms at work are imprecise, or, as Werner Sombart says about List: ‘His concepts levitate like undelivered souls on the banks of Hades’[xxx] However, his holistic vision of the fundamentals of economic development creating national wealth and/or poverty are almost unprecedented.

Schumpeter comments a similar trait with an American follower of List, Henry C. Carey,

… Carey’s was a great vision and that, in most respects, this vision expressed adequately both the situation and the spirit of the country. Moreover, we cannot excuse ourselves from recognizing that this vision ws independent of its deplorable analytic implementation and capable of being implemanted more satisfactorily. This, however, is precisely what Carey’s critics refused to recognize. … the essentials of this message were beyond the range of theoretical analysis.

A comparison of Carey with the English free traders, on the one hand and with List on the other, wil bring this out still more clearly. The English free traders and List also argued from a comprehensive social and political visions that we may or may not accept; both, moreover, argued from their resepctive national standpoints; both finally, advocated policies that suited some group interests better than others.”[xxxi]It is necessary to be aware that what Schumpeter means with the term "theoretical" is formal deductive analysis. This naturally points to the fact that -as we showed that Schumpeter and Roll observed above- the economics of List showed the same trait -of being unformalisable.

This point, theoretical analysis is connected to the question of value. Theoretical formal deductive analysis, is well suited to monetary analysis which is based on value in exchange, but is less suited to an analysis based on value in use which has to be both more physically and more immaterially oriented.

The Renaissance theory often works through abduction - the kind of intuitive knowledge that precedes induction and deduction. Lemons helped sailors in the Mediterranean prevent scurvy 800 years before the exact mechanisms through which these lemons work were established (i.e. Vitamin C). In the same way economic growth was successfully promoted in the Renaissance tradition of economics using ‘new knowledge’ and ‘use of machinery’ as proxies for the underlying factors causing systemic economic growth. The German cameralist tradition in economics recognised the superior potential of manufacturing over any other activity as a basis for collecting taxes. For this reason manufacturing was favoured in the German states, and increased economic wealth and technical change were by-products of this policy.

[i] Arrow uses this metaphor to describe the place of increasing returns in economic theory. Increasing returns has, explicitly or implicitly, been at the core of the economic analysis of the Renaissance canon ever since Antonio Serra described this phenomenon in 1613. Serra explicitly associated increasing returns with manufacturing industry. The quote from Arrow is in his foreword to Arthur, W. Brian, Increasing Returns and Path Dependency in the Economy, Ann Arbor, University of Michigan Press, 1994.

[ii] Sombart, Werner, Die Drei Nationalökonomien, München & Leipzig, Duncker und Humblot, 1930.

[iii] Nelson, Richard and Sidney Winter, An Evolutionary Theory of Economic Change, Cambridge, Mass, Harvard University Press, 1982.

[iv] “If Malthus' doctrine appears to us in its tendency narrow-minded, it is also in the methods by which it could act an unnatural one, which destroys morality and power, and is simply horrible. It seeks to destroy a desire which nature uses as the most active means for inciting men to exert body and mind, and to awaken and support their nobler feelings -- a desire to which humanity for the greater part owes its progress. It would elevate

the most heartless egotism to the position of a law; it requires us to close our hearts against the starving man, because if we hand him food and drink, another might starve in his place in thirty years' time. It substitutes cold calculation for sympathy. This doctrine tends to convert the hearts of men into stones. But what could be finally expected of a nation whose citizens should carry stones instead of hearts in their bosoms? What else than the total destruction of all morality, and with it of all productive forces, and therefore of all the wealth, civilisation, and power of the nation?” List, Friedrich, 1841, op.cit. p.129

[v] Freeman, Christopher, The Economics of Hope, London, Pinter, 1992.

[vi] Schumpeter, Joseph A., History of Economic Analysis, New York, Oxford University Press, 1954, p. 468.

[vii] Of which Schumpeter says: ‘Its analytical merit is negligible, but all the greater was its success’, Schumpeter, op.cit., p. 175.

[viii] In Germany the main anti-physiocrat was Johann Friedrich von Pfeiffer, in France Abbé Mably, Accarias de Serrionne, Necker, Forbonnais, Jean Graslin, Abbé Galiani - a Neapolitan envoy at the Court of Paris - and, most critical of them all: Simon-Nicolas-Henry Linguet. For a list of works by German anti-physiocrats, see Humpert, Magdalene, Bibliographie der Kameralwissenschaften, Cologne, Kurt Schroeder, 1937, p. 1031-1032.

[ix] The description of these synergetic effects are clear in Giovanni Botero (1589) and even more so in Antonio Serra (1613). To Serra these ‘virtuous circles’ have their origins in the increasing returns found in the manufacturing sector, which are absent in agriculture. Machiavelli is also clear on this point: ‘Il bene comune è quello che fa grandi le città.’

[x] Eli Hecksher quoted in Polanyi, Karl, The Great Transformation (1944), Boston, Beacon Press, 1957, p. 278.

[xi] Adam Smith, Wealth of Nations (1776), Chicago, University of Chicago Press, 1976, p. 17.

[xii] Abraham Lincoln, Speech of the 1860 Presidential Campaign.

[xiii] I.e.: The empire of Charlemagne and the succeeding French and German States.

[xiv] With the possible exception of small city-states, like Hong Kong or San Marino.

[xv] Referring D.Hume, List, Friedrich, 1841, op.cit. pp.15-16

[xvi] Schumpeter, Joseph Alois, History of Economic Analysis, New York, Oxford University Press, 1954, p. 117.

[xvii] The US edition is The History of Economics, New York, Norton, 1930.

[xviii] According to Rawlinson, the Phoenicians - from the 13th century BC. - were pursuing trade policies in precisely the way practiced from the 15 century AD.. Colonies were established in order to supply the mother country with raw materials and markets for manufactured goods. Dumping was used to put competitors out of business. Trading posts were established in order to create monopolies for Phoenician goods - much as the manufacturers of Manchester and Birmingham Rawlinson commented. Goods were imported and resold to gain profit. Interestingly, sale of domestically refined goods were preferred to direct resale of imports (i.e. entrepôt trade). The handicraft, vessels and navy of the Phoenicians were the best of the period 1300-400 BC. Their trade included the Middle East, Arabia, continental North Africa, the Black Sea and the Mediterranean. It extended partly from India, the Red Sea, and the Persian Gulf to England and Holland, and most likely even to the Baltic town Gdansk. George Rawlinson, History of Phoenicia, Longmans, London 1889, ch. XIII-X, and particularly pp.298-300

[xix] Reinert, Erik and Arno Daastøl, ‘Exploring the Genesis of Economic Innovations: The Religious Gestalt-switch and the Duty to Invent as Preconditions for Economic Growth, in European Journal of Law and Economics, Vol. 4 (1997), pp. 233-283.

[xx] Crowther, J.G., Francis Bacon. The First Statesman of Science, London, The Cresset Press, 1960, p. 97.

[xxi] List, Friedrich,1841, op.cit. pp. 66-67.

[xxii] ibid., p. 79.

[xxiii] ibid., p. 142.

[xxiv] Rome, Vicenzio Pellagalo, 1590.

[xxv] F.List: “above all these causes, Serra ranks the form of government, public order, municipal liberty, political guarantees, the stability of the laws. ' No country can prosper,' says he, 'where each successive ruler enacts new laws, hence the States of the Holy Father cannot be so prosperous as those countries whose government and legislation are more stable. In contrast with the former, one may observe in Venice the effect which a system of order and legislation, which has continued for centuries, has on the public welfare.' This is the quintessence of a system of Political Economy which in the main, notwithstanding that its object appears to be only the acquisition of the precious metals, is remarkable for its sound and natural doctrine. … We are far from desiring to maintain the absolute preferableness of any one form of government compared with others. One need only cast a glance at the Southern States of America, to be convinced that democratic forms of government among people who are not ripe for them can become the cause of decided retrogression. in public prosperity. One need only look at Russia, to perceive that people who are yet in a low degree of civilisation are capable of making most remarkable progress in their national well-being under an absolute monarchy. ... For in a state of highly advanced civilisation, it is not so important that the administration should be good for a certain period, but that it should be continuously and conformably good; … Nations have made some progress un der all forms of government. But a high degree of economical development has only been attained in those nations whose form of government has been such as to secure to them a high degree of freedom and power, of steadiness of laws and of policy, and efficient institutions. … Antonio Serra sees the nature of things as it actually exists, and not through the spectacles of previous systems, or of some one principle which he is determined to advocate and carry out.” List, Friedrich, 1841, op.cit. pp.333-335

[xxvi] These arguments are thoroughly discussed in Reinert, Erik ‘The Role of the State in Economic Growth.’ Paper presented at the Conference on ‘The Rise and Fall of Public Enterprises in Western Countries’, Università Bocconi, Milan, October 10-12, 1996. Working Paper No, 5, 1997. Centre for Development and the Environment (SUM), University of Oslo.

[xxvii] Arthur, W. Brian, Increasing Returns and Path Dependency in the Economy, Ann Arbor, University of Michigan Press, 1994.

[xxviii] Buchanan, James and Yong J. Yoon (editors), The return to Increasing Returns, Ann Arbor, University of Michigan Press, 1994.

[xxix] List, Friedrich, The Natural System of Political Economy (1837), edited by W. H. Henderson, Totowa, N.J., Frank Cass, 1983.

[xxx] ‘..seine Begriffe ‘schweben’ umher wie die unerlösten Seelen an den Ufern des Hades’, Sombart, Werner, Der Moderne Kapitalismus, Vol. 2, Das Europäische Wirtschaftsleben im Zeitalter des Frühkapitalismus, München und Leipzig, Duncker & Humblot, 1928, p. 929.

[xxxi] Schumpeter, Joseph A., History of Economic Analysis, New York, Oxford University Press, 1954, p. 517.

1) Add arrow from Colbert to a new box with text: L’Ecole Polytechnique and St.Simonians and add arrow from this box to F.List (and further on to a box with: French technology oriented dirigism (de Gaulle)???)

3) Add Steuart under (British) mercantilism and add arrow to F.List (both lectured at Göttingen, first Steuart).

We would argue that there is a strong continuity in this canon. During the 16th Century we find Antonio Serra, whose 1613 [i] providing a theoretical framework to the mercantilist view that some economic activities, rather than others, were carriers of economic growth. Serra also explains the mechanisms creating the synergies which the mercantilists called the common weal. At the core of these mechanisms Serra sees the increasing returns which are found in manufacturing, but not in agriculture. The purpose of Serra’s treatise is to explain the wealth of Venice and the poverty of Naples, in spite of the fact that Venice has virtually no natural resources, and Naples abounds. Serra in many ways provides the theory for why the English strategy - starting with Henry VII was so successful.[ii]

In France, the 17th Century policies of Sully and Colbert are based on the same type of reasoning. Going through the voluminous letters and instructions of Colbert [iii], one is struck by his role as being that of a businessman in charge of a huge empire: As an entrepreneurial input-coordinator for France Inc., in a venture to get into knowledge-based activities, he was faced with what historians of technology call ‘reverse salients’[iv] - ‘dynamic bottlenecks’ - retarding the system and demanding managerial attention. In the German-speaking world an early spokesman for the same principles is Philipp Wilhelm von Hornick, whose 1684 work Österreich über alles wann es nur will was to appear in 16 editions, the last one as late as in 1784.

The bridge between English mercantilist policies and the industrial policy of the United States can be documented by two strong pillars: Benjamin Franklin’s admiring and enthusiastic footnotes to the second edition of Whatley’s late mercantilist tract [v]and Alexander Hamilton. It has been shown that Hamilton knew his Adam Smith, but rejected particularly the free trade conclusion. Excerpts from Malachy Postlethwayt’s Universal Dictionary of Trade and Commerce were scattered through Hamilton’s Army Pay Book[vi]and later clearly provided much inspiration for his 1791 Report on the Manufactures.

When Wilhelm Roscher in the 1850’s again solidly puts increasing returns on the map as a determinant of uneven economic development, he repeatedly quotes Antonio Serra. The German Historical School of economics thoroughly understands and appreciates the wisdom of realökonomisch mercantilism, although Sombart jokingly admits to the risk of defending any economic theory older than Adam Smith’s: ‘Ich sage das auf die Gefahr hin, als Neo-Merkantilist abgestempelt und in das Raritätenkabinett unseres Faches übergeführt zu werden.’[vii]

A crucial feature of 19th Century economic thought, is the mutual influence and theoretical cross-fertilisation which took place between the biggest nations which were attempting to catch up with England: Germany, the United States and Japan. They were united in their opposition to the theories of Smith and Ricardo, particularly as it came to free trade. Michael Hudson traces the ‘institutionalist (historical) school of economists which flourished in America during the final decades of the nineteenth century. The line appears to have run from the protectionist circle around Matthew Carey and Daniel Raymond, through Friedrich List to Germany and from there, via Roscher’s circles, to American students such as Patten and Ely studying at German universities.’[viii] All the founders of the American Economic Association had studied economics in Germany. The transfer of Renaissance economic ideas to Japan after the Meiji Restoration was made by German economists - and by US economists of whome many had studied in Germany - when ‘a stream of German teachers of political economy and related disciplines continually flowed in.’[ix] The Russian catch-up was planned by finance minister Sergei Witte before WW 1. He had translated List into Russian but his work was much aborted by the communist revolution. Russian scholars and politicians are today trying to revive Witte’s strategy. The same aborted development in China was started by Sun Yat-sen. He studied at an American missionary school in Hawaii, studied List and wrote books in the spirit of List[x] and later ws to become leader of the popular front Kuomintang and then “father” of the first Chinese Republic in 1911. His practical ideas are now being poenly implemented by the Communist pary in China, such as the Three Gorges Dam, the development of infrastructure of the interior and revival of the Silk Road to Europe. Other obvious student of List worth mentioning are the formerleaders of Taiwan and Korea, general Chang Kai-shek and general Park Cheung, respectively.

Even later in this Century the mercantilist inspiration to production-based economic can be traced. The main economist behind the Third Reich was Hjalmar Schacht, who was one of the two prisoners who were immediately freed after the Nürenberg trials. The subject of Schacht’s Ph. D. thesis at the University of Kiel in 1900 was: Der theoretische Gehalt der englischen Merkantilismus[xi], i.e. ‘The Theoretical Content of English Mercantilism.’ Schacht’s skilful use of mercantilist production-based war economics, combined with a Keynesian understanding of credit, for a long time worked wonders for Hitler’s Germany. Schacht’s work also proves, though, the fundamental point of Renaissance economics that economics can and must not be separated from morality. The prominent and influential German economist J. F. von Pfeiffer (1715-1787) - the ardent anti-physiocrat - put it this way: ‘You can make of human beings what you want. The way he is governed, commends Man to good, or to evil.’[xii] Nevertheless, Schacht inherited most of his policies as well as the financial legislation neccesary from several German economists in the period 1931-1933.[xiii] Although Schacht, a close friend of the director of Bank of England, Montagu Norman, originally had opposed these plans and characterised them as ‘inflationery’, he later forcefully enlarged the proposed programs probably under the influence of the nazi party itself (cf. The Nazi immedeate program of 1932)and argued for the same policies for the reconstruction of Germany after WW II[xiv]. Of the pre-1933 economists the following stands out: Günther Gereke’s grand infrastructure program with the help of Othmar Spann and Werner Sombart, the proposals from the German trade union circles with Wladimir Wotinsky, Rudolf Hilferding and “the German Keynes”, Wilhelm Lautenbach - for instance with Lautenbach’s memorandum at the closed confererence of the Friedrich List Society, Sept. 16-17, 1931, The Possibilities of Boosting Economic Activity by Means of Investments and Expansion of Credit. Similar methods were used after WW II for the reconstruction of Germany by by Hermann Abs and the Kreditanstalt für Wiederaufbau, and should have been used in Russia post-1989 as well as in Africa, on the Balkans etc.

[i] Serra, Antonio, Breve trattato delle cause che possono far abbondare li regni d’oro e argento dove non sono miniere, Naples, Lazzaro Scoriggio, 1613.

[ii] For a discussion of this strategy, see Reinert, Erik, ‘Catching-Up From Way Behind. A Third World Perspective on First World History’, in: Fagerberg, Jan et. al., The Dynamics of Technology, Trade and Growth, Aldershot, Edward Elgar, 1994.

[iii] Clément, Pierre (Editor), Lettres, Instructiones et Mémoires de Colbert, Paris, Imprimerie Impériale/Imprimerie Nationale, 1861-1872, 7 Vols. in 10 + 1 Volume 'Errata Général et Table Analytique.'

[iv] For a discussion of this concept, see Bijker, Wiebe, Thomas P. Hughes and Trevor Pinch (editors), The Social Construction of Technological Systems, Cambridge, Mass., MIT Press, 1989.

[v] Whatley, G. Principles of Trade. Freedom and Protection are its best suport: (sic) Industry, the only Means to render Manufactures cheap, London, Brotherton and Sewell, 1774.

[vi] See Morris, R.B., Alexander Hamilton and the Founding of the Nation, New York, Dial Press, 1957, p. 285.

[vii]‘I say this in spite of the risk of being branded as a neo-mercantilist, and as such to be transferred into the collection of the oddities of our profession.’ Sombart, Werner, Der moderne Kapitalismus, Vol. 2: Das europäische Wirtschaftsleben im Zeitalter des Frühkapitalismus, p. 925.

[viii] Hudson, Michael, E. Peshine Smith: A study in Protectionist Growth Theory and American Sectionalism, Ph. Thesis, New York University, 1969, p. 45.

[ix] Sugiyama, C. and H. Mizuta, Enlightenment and Beyond. Political Economy Comes to Japan, Tokyo, University of Tokyo Press, 1988, p. 32.

[x] Yat-sen, Sun, The International Development of China, New York/London: Putnam's Sons, 1922

[xi][xi] Berlin, Gebr. Mann, 1900. The author’s full name appears here as Horace Greeley Hjalmar Schacht. Horace Greeley (1811-1872) was - just like the important US protectionist E. Peshine Smith, who we mention in this paper - a protégé of US statesman William Seward, US Secretary of State and one of the founders of the Republican Party. This party was the main proponent of ‘Renaissance economics’ in the United States at the time. Greeley founded the New York Tribune and was its editor for 31 years. One of The Tribune’s European correspondents was Karl Marx, whose dispatches to The Tribune became classics of Marxian socialism. Greeley's book Political Economy… Protection to Home Industry, as a System of National Cooperation for the Elevation of Labor, (1875) is dedicated, "To the memory of Henry Clay, the genial, gallant, high-souled patriot, orator and statesman; the noblest embodiment of American genious, character, and aspirations; the man who most effectively commended the policy of protection to the understanding and hearts of the masses of his countrymen, this work of one among the many who still love, honor, and admire him, is affectionately dedicated by the author."

[xii] ‘Man kann aus den Menschen machen, wass man will; die Art, mit der er regiert wird, entschliesst ihn zum Guten, oder zum Bösen.’ Pfeiffer, J. F. von, Lehrbegrif sämtlicher oeconomischer und Cameralwissenschaften, Mannheim, Schwan, 1777. Volume 3, Tome 1, (Des dritten Bandes erster Theil), p. 2.

[xiii] Barkai, Avraham: Nazi economics ideology, theory, and policy, New Haven: Yale, l990, e.g. p.162 (Das Wirtschaftssystem des Nationalsozialismus, Frankfurt: Fisher, 1990)

[xiv]Horace Schacht, Mehr Geld, Mehr Kapital, Mehr Arbeit, Schloss Bleckede a.d. Elbe: Otto Meisners Verlag, 1949, the title of Section II, Chapter 8, p.59 in the latter reads "Nicht jede Geldschöpfung wirkt inflatorisch" (not every creation of money is inflationary)

3. The Two Canons Contrasted.

AREA OF ORIGIN: NATIONS CATCHING UPDECAYING, MATURE AND / OR UNDEVELOPED NATIONS

of the civil servant: make state work well make state work for a minimum interest

ORIGIN OF RENT: COMPETENCE WEALTH: NATURE, CAPITAL (surplus) CREATION OF VALUE FLUCTUATIONS IN VALUE

The Other Canon: The History of Renaissance Economics.

Its Role as an Immaterial and Production-based Canon in the History of Economic Thought and in the History of Economic Policy.

1. Typologies of Economic Theory and the Foundation of the Two Canons.

2. The Family Tree of The Renaissance Canon of Economics.

3. The Two Canons Contrasted.