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

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

Of course, we do not imply that the world is a binary one, where all economists belong either to one tradition or the other. On the contrary, a key characteristic of several important economists is their at times schizophrenic allegiance to both sets of theory, or their change of view during the span of their lifetime. One example is the young “deductivist” (“formalist”) John Stuart Mill and the older “inductivist” (empiricist”) after 1869 with more emphasis on historical empiry . The historian of economic ideas, A.W. Coats, writes that Mill "despite a thorough Ricardian training and a destructive attack on positivist philosophy, made notable concessions to Comtist demands.” And in Coats’ footnote we read: “Mill`s comment that "we know not of any thinker who, before M.Comte, had penetrated to the philosophy of the matter, and placed the necessity of historical studies as the foundation of sociological speculation on the true footing", was of the kind calculated to appeal to the advocates of historism. See J.S.Mill, August Comte and Positivism (London, 1865), p.86”.[i] Although Comte is the accepted originator of Positivism, with little respect for immaterial factors, the point here is to indicate a broad rebellion against the Classical School, in Great Britain itself, and even more, among leaders of the established School itself at the end of the 19the Century. This has later conveniently been “forgotten”.

A more grave example of this schizophrenia is the conflict between the Marshall whose ‘Mecca of the economist’ lied in economic biology [ii] and the Marshall of the appendices to his Principles which were deeply steeped in ‘physics-envy’. In order to create the equilibrium which characterises today’s physics-based standard economic theory, Marshall paradoxically had to restore to a biological metaphor. Increasing returns had been an important argument for industrial policy ever since Antonio Serra in 1613 [iii]all through the 19th Century. In order to reconcile the existence of increasing returns with equilibrium, Marshall uses a lengthy metaphor of firms growing and dying like trees in the forests.[iv] This evolutionary growth process supposedly counteracts the tendency towards uneven accumulation caused by increasing returns to scale.[v] The argument which killed all future biological analogies in neo-classical economics, was a biological analogy. This biological analogy was important in making economics into what it is today, a profession where a physics-inspired equilibrium is the central gestalt.

Schumpeter emanated from the Renaissance tradition of the German historical school and spent his life on the hopeless task of formalising the creative essence of Renaissance economics - of entrepreneurship, novelty, and creative destruction - into the framework of dead equilibrium which is at the core of neoclassical economics. Schumpeter was, indeed, ‘a living, breathing contradiction’ as Mirowski puts it [vi]. We would claim that this contradiction was a result of being steeped simultaneously in two inconsolable paradigms.

Seen from this point of view, Marx was also steeped in the same two inconsolable paradigms. In terms of his emphasis on technology and economic dynamics, Marx - like Schumpeter - is a clear member of the Renaissance production-based canon. Marx' and Schumpeter's visions have a common basis in the German economic tradition. In Anglo-Saxon economics these economists come across as extremely original, seen from the German side they are both firmly rooted in that “alternative” canon. As a matter of fact , in the late 19^th and early 20^th Century in USA, Japan and in particular Germany this tradition was the dominant tradition both academically and in practical policy . The one aspect of Marx' theory which decidedly belongs to the Anglo-Saxon canon is his use of Ricardo's labour theory of value, originally put forward by Aristotle. The labour theory of value is out of place in the German tradition where entrepreneurship, ideas, knowledge, leadership, and management necessarily contribute importantly to the value added created by physical labour. The labour theory of value is more usable with what better fine with business economics than with national economics, as Wilhelm Roscher noticed. By basing their method on the erroneous labour theory of value once established by Aristotle, both Smith and Marx confused the problem of value. The fault was to introduce the labour theory of value into the theory of value of exchange instead of keeping it where it would have been appropriate - as Henry Carey did - in the theory of value of use. Besides, Smith and Marx, focused on the manual side of labour. Thereby they came to focus generally exclusively on matter, excluding mind-related factors, concerning wealth promotion. List mocked those who do not differ between the potential productivity of a Kepler vs. that of a donkey.[vii] Wrongfully Smith overdid his focus on exchange (monetary) value. List claimed he ignored the intellectual, moral and religious activity working behind the productive forces and thereby behind what Smith focused on according to List, exchange value. F.List points out in his preface to "Das Nationale System..", that: "There are consequently one cosmopolitical and one Political Economy, one theory of value in exchange and one theory of productive forces, doctrines which, very different from each other, must be developed independently."

The historian of economic ideas, Mark Blaug, notices that although many have seen Smith as an empirically and historically minded scientist, the background is different. Adam Smith’s "Philosophical Enquiries"[viii], describes the Newtonian methode where one establishes “"certain principles, primary or proved, in the beginning, from whence we account for the several phenomena, connecting all together by the same chain." Given the pivotal role of sympathy [ix] for other human beeings in The Theory of Moral Sentiments and that of self-intersted behaviour in The Wealth of Nations, both of these books must be regarded as deliberate attempts to apply this Newtonian method first to ethics and then to economics."[x] Schumpeter writes in a footnote that "This is so important as to justify repetition: Smith`s work looks less "abstract" because it includes so much factual information that the specialized later works on economic theory did not include - but left for other specialized works to provide. But where he does not move within the orbit of economic theory, his reasoning is not less abstract than say, Ricardo`s. With the latter, "abstractness" shows more because he confines himself to topics of an "abstract" nature, and does not provide illustrative foliage, but that is all."[xi] To Smith empiry was not the starting point, but, in the Galiean fashion, an instrument to illuminate the principles established by theory.

Adam Smith himself, was - after John Locke and Bernard de Mandeville - the true founder of the mainstream canon. Even he- suffered from the same canonical mental split. In his discussion of the Navigation Act he was clearly in favour of the protectionist policy, shutting off Dutch ships. His argument was to a large extent based on considerations of national defence. To Adam Smith ‘The art of war... is certainly the noblest of all arts’.[xii]It is of great interest to note that to Adam Smith - the father of free trade - the mercantilist and protectionist Navigation Act was ‘the wisest of all commercial regulations in England.’[xiii] This apparent ‘double standard’ and selective use of the different canons in order to suit English interests was frequently denounced by German and US economists in the 19th Century. Their slogan was ‘Do as the English did, not as they say.’ Today an appropriate strategy for the Third World would be ‘Do as the Americans did, not like the Americans tell you to do.’ Part of this playing of a double standard was, and is, an ‘opportunistic ignorance’[xiv] of the history of one’s own nation’s economic policy.

The early Adam Smith, before his meeting with the French physiocrats, clearly expressed the Renaissance view of a the Common Weal - the synergetic effects of society - as being the motivation force for the establishment of manufactures. These were neither established to assist the producer, not to assist the consumer:

‘The same principle, the same love of system, the same regard to the beauty of order, ...frequently serves to recommend those institutions which tend to promote the public welfare. ...When the legislature establishes premiums and other encouragements to advance the linen or woollen manufactures, its conduct seldom proceeds from pure sympathy with the wearer of cheap or fine cloth, and much less from that with the manufacturer or merchant. The perfection of police (i.e. policy), the extension of trade and manufactures, are noble and magnificent objects. The contemplation of them pleases us, and we are interested in whatever can tend to advance them. They make part of the great system of government, and the wheels of the political machine seem to move with more harmony and ease by means of them. We take pleasure in beholding the perfection of so beautiful and grand a system, and we are uneasy till we remove any obstruction that can in the least disturb or encumber the regularity of its motions.’[xv] Smith later replaced “government” with “market”, regarding a perfect clock mechanism as the goal for both, at different points of his life. The obstruction Smith mentions, pertains to institutions between the individual and the “controller”, be that government or market. There is a certain affiliation in this regard, between the totalitarian communist and the totalitarian libertalist, e.g. relativly speaking the U.K. under M.Thatcher[xvi]. Opposed to this would be the promotion of intermediate institutions of Conservatism and (Labour) Anarchism: Church, guilds, labour unions etc.[xvii] The “irregular” actions of these institutions is constantly a problem for a promotor of a perfect mechanism, be that a central planning comitee or the “auctioneer” of the “perfect market”.

As we have indicated, the two alternative canons have their ebbs and flows through history. However, quite often we also find the same nation-state applying both canons at the same time - but for different end-users. For example, it is clear that England for Centuries has used used Ricardo’s trade theory (the barter-based classical canon) for export, such as the classic case of the Methuen Treaty of 1703 with Portugal. This broke down the Portugese textile industry, established a British cloth monopoly and reduced Portugal to an agrarian country, in a scale later surpassed by the prohibition of the best and most affluent textile industry in the world, in India, reducing for instance the rich Bangla Desh to a desitute country. The recent Russian experience concerning liberalisation of trade is also illuminating[xviii].
On the other hand, there was for “domestic” purposes the system later termed “Imperial Preference”, in essence nothing but a protectionist system favouring export of English manufacture and import of raw materials from the dominions and the colonies. The domions were to rebel against this in the late 19^th Century.

Furthermore there was Charles Babbage’s works on the importance of machinery and of science (the knowledge- and production-based Renaissance canon) for domestic purposes. This fact was well pointed out at the time by one member of the US House of Representatives, who commented that Ricardo’s economic theory, like so many other British products, was intended for export only. The US itself conveniently followed this same canonical dualism towards Japan in the 19th Century. At a time when the United States was busily protecting her own industries, US Admiral Peary was sent to Japan in 1851 in order to use convince that nation of the benefits of free trade. This resulted in the ‘unfair treaties’ which have such a dominant position in the Japanese perception of their own history. The deeper philosophical background of Ricardian trade theory is its neglect of the dynamic and immaterial production factors, more specifically learning and creation of productive competence. This establishes Ricardian trade theory as a static theory with little room for improvement of a nation’s standing: This means “a shoemaker should stick to his last” and not drive for enhancement in other trades. The motivation behind such a convenient “philosophical ignorance” is geopolitical, the quest for dominance over trading partners.

In this Century the same contradictory policies have continued. A book from the Washington-based Institute for International Economics in 1986 starts the description of US trade policy as follows: ‘With bipartisan regularity, American presidents since Franklin Delano Roosevelt have proclaimed the virtues of free trade. They have inaugurated bold international programs to reduce tariff and non-tariff barriers. But almost in the same breath, most presidents have advocated or accepted special measures to protect problem industries. Together the two strands of policy have produced a contradictory profile.’[xix] On these occasions arguments from the Renaissance-based canon - e.g. under the heading that ‘knowledge-based manufacturing matters’ - are invoked from the industry in order to protect the national manufacturing base. Nearby - also in Washington - the World Bank, following a strategy that ‘manufacturing does not matter’, carry out structural adjustment programs which in many cases lead to the deindustrialisation of whole nations, with a consequent collapse of national welfare. This is the paradigm of organised free trade - an oxymoron if there eves was one - which seems to follow the Golden Rule: ‘the one who has the gold makes the rules’.

An important feature of the opportunistic ignorance on the part of today’s leading industrialised nations, is the fact that the history of their own economic policy - the policy that they themselves used in order to catch up with the rich nations - to a surprising extent has been unlearned. This is very clear in the United States. The economists who laid the foundations for 19th Century US trade policy and industrial policy are hardly mentioned in today’s history of economics, and if they are mentioned at all it is to point out their ‘failures’. It is curious how today’s American economists virtually unanimously declare how both the industrialisation of their own country and the New Deal were carried out by ‘bad economists.’ Economists like E. Peshine Smith[xx] - who later was a key person in bringing the ‘American System of Manufactures’ to Japan - Matthew Carey, Alexander Everett, Calvin Colton, Francis Bowen and Stephen Colwell are unknown today, only Henry Carey is remembered by a few.

This is of course a parallel to the well established - but still intuitively surprising - ‘fact’ of economic science that the Renaissance economists who brought Europe out of the Middle Ages all belonged to the despised category of ‘mercantilists’. We have collectively absorbed Adam Smith’s caricature of all economists before himself: that they mistook gold for real wealth. German economist Eugen Dühring scorns die Karrikierer des Merkantilismus - the caricature makers of mercantilism - who ‘only too often spoke as if the business people and the statesmen of the day almost believed that precious metal could be used as food for the human body’[xxi]. The important systemic aspects of the Renaissance theory - the creation of a national common weal - is left out of today’s accounts.

This strategy of ‘theory juggling’ and ‘assumption juggling’ - condemned by Joan Robinson - is also present in the European Community. The Cecchini Report on the single European market identifies most of the benefits from the single market as coming from economies of scale. On the other hand, the EU policy towards the Third World is based on a theory where economies of scale and increasing returns do not exist. EXAMPLE???
During the 19th Century the existence of increasing returns in industry was an important argument for the protection of industry in all the nations which followed the English path to industrialisation. Today, this argument is only used internally in the European Union, not in their policy towards The Third World. The industrialised nations are - using the 19th Century accusation against the British - today ‘pulling up the ladder’ of development from those who tried to industrialise later. Only in Asia - where the activity-specific Renaissance strategy is copied from Japan - do we see real catching up.

Friedrich List saw very clearly that Adam Smith’s theory was in a clear contradiction to the policy followed by England during her ascent to world power. List’s succinct and accurate resume of the history of English economic policy is as follows: 'The principle sell manufactures, buy raw material was during centuries the English substitute for an (economic) theory.'[xxii]

To List, English classical economic theory ‘conceal(s) the true policy of England under cosmopolitan expressions and arguments which Adam Smith had discovered, in order to induce foreign nations not to imitate that policy. In is a very common clever device that when someone has attained the summit of greatness, he kicks away the ladder by which he had climbed up, in order to deprive others of the means of climbing up after him. On this lies the secret of the cosmopolitical doctrine of Adam Smith, and of the cosmopolitical tendencies of his great contemporary William Pitt, and of all his successors in the British Government administrations. ... William Pitt was the first English statesman who clearly saw in what way the cosmopolitical theory of Adam Smith could properly made use of ...’ [xxiii] Pitt is supposed to have asked Smith to write this book, on a carrigage ride from Edinborough to London, and regarding the situation with the rebellion in the North American colonies.(A.Smith, Letters, Collected Works.)

The actual historical record of free trade confirms that England carried out at home the very same principles which her theoretical economists tried to prevent in t to the rest of the world. Conventional wisdom has it that in the 19th Century France was a fortress of protectionism while England was the bastion of free trade. When the actual trade data are consulted, however, the surprising conclusion is that ‘French average tariffs were...consistently below those of Britain throughout most of the Nineteenth Century, even after the abolition of the Corn Laws.’[xxiv] The double standard is not new. Paul Bairoch shows how markets did not arise as a "natural development" emerging from interaction of uncoordinated individual agents, but rather was the result of planned development.[xxv] Great Britain was a modern pioneer in this policy, outside the Mediterranean, starting with Henry III in the 13th Century, gradually gaining power first from the Norse Commonwealth, and then from the Hansards and Dutch

[i]This pertains to Mill’s recantation of the wage fund theory and more protectionist attitude to “the Irish Question”, Coats, A.W, The Historist Reaction in English Political Economy 1870-90, Economica XXI (May 1954), p.143-53, p. 143

[ii] Marshall, Alfred, Principles of Economics, London, Macmillan, 1890, p. iv.

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

[iv] Marshall, op.cit., pp. 315-316.

[v] This problem is discussed in Hart, Neil, ‘Increasing returns and economic theory: Marshall’s reconciliation problem’ , University of Western Sydney, Discussion Paper Series, No. E9004, 1990.

[vi] Mirowski, Philip, ‘Doing what comes naturally: four metanarratives on what metaphors are for’, in Mirowski (Ed.), Natural Images in Economic Thought, Cambridge, Cambridge University Press, 1994, p. 5.

[vii] List, Friedrich, 1841, op.cit., p.142ff. and cf. p.159

[viii]Adam Smith: The Priciples which Lead and Direct Philosophical Enquiries; Illustrated by the History of Astronomy, 1750, printed 1799. Blaug’s note, Mark Blaug, Methodology of Economics, Cambridge U.P., 1980

[ix]Note the similarity to Smith’s closeod friend David Hume, also a scot and an empiricist, the present author’s comment

[x]Mark Blaug: The Methodology of Economics, Cambridge University Press 1980, s.58

[xi] Schumpeter, Joseph A.: History of Economic Analysis, Oxford U.P., New York 1976. (1954) s 538n

[xii] Smith, Adam, Wealth of Nations (1776), Chicago, University of Chicago Press, 1976, Vol. 2, p. 219. (Book V, Ch. I, Pt. I)

[xiii] Smith, Adam, Wealth of Nations (1776), Chicago, University of Chicago Press, 1976, Vol. 1, p. 487. (Book IV, Chapter II).

[xiv] This is Gunnar Myrdal’s term.

[xv] Smith, Adam, The Theory of Moral Sentiments (1759), in Collected Works, London, Cadell and Davies, 1812, Vol. 1, p. 320 (our emphasis).

[xvi] Sampson, Anthony, The Essential Anatony of Britain. Democracy in Crisis, rev.ed., Sevenoaks, Kent: Coronet Books, Hodder and Stoughton, 1992 (1 ed.: 1962), p.204

[xvii] R.A. Nisbet, The Sociological Tradition, London, Basil Books, 1966, e.g. p. 25

[xviii] Sergei Glazyev, Genocide (October 1993-August 1998). Russia and the New World Order. A Strategy for Economic Growth on the Threshold of the 21st Century. Washington D.C.: EIR News Service, 1999

[xix] Hufbauer, Gary C., Diane T. Berliner and Kimberly A. Elliot, Trade Protection in the United States: 31 Case Studies, Washington D.C., Institute for International Economics, 1986, p. 1.

[xx] On E. Peshine Smith see Michael Hudson’s 1969 Ph.D. thesis: E. Peshine Smith: A Study in Protectionist Growth Theory and American Sectionalism, Ann Arbor, University Microfilm. In the 1970’s Hudson edited a series of reprints of 19th Century US economists.

[xxi] Dühring, Eugen, Kritische Geschichte der Nationalökonomie, 1879, quoted in Sombart, op. cit., p. 913.

[xxii] List, Friedrich, Das Nationale System der politischen Oekonomie (1841), Basel, Kyklos, 1959, p. 12. Our translation. This is part of List’s own foreword to the work, which has been drastically reduced in the English edition.

[xxiii] List, Friedrich, 1841, op.cit., p. 368-369.

[xxiv] Nye, John Vincent, ‘The Myth of Free-Trade Britain and Fortress France: Tariffs and Trade in the Nineteenth Century’, in The Journal of Economic History, Vol. 51, No. 1, March 1991, p. 23.

[xxv] Bairoch, Paul, Economy and World History: Myths and Paradoxes, Chicago: University of Chicago Press, 1983, se also Harper, L, The English Navigation Acts: A Seventeenth Century Experiment in Social Enginering, New York: Columbia University Press, 1939, Hudson, Michael, Trade, Development and Foreign Debt. A History of Theories of Polarization and Convergence in the International Economy. Volume I: International Trade. Volume II: International Finance, London: Pluto Press, 1992, Israel, J.I, England's mercantilist response to Dutch world trade primacy, 1647-1674, in S.Groenveld and M.Wintle (eds.), State and Trade: Government and the Economy in Britain and the Netherlands Since the Middle Ages, Zupthen: Walburg Press, 1992

5. Communication, Infrastructure and Finance

Even from a narrow economic perspective the role of infrastructure, again narrowly defined, is core base: Investments into transport are a productivity-enhancing and price-reducing (deflationary) prime driver, a locomotive, for general investment. This induces other investment into production of heavy goods and consumption goods, thereby increasing employment, wages, and widening the tax revenue base. the crucial role of infrastructure for various core purposes: As the productivity enhancing prime driver (“locomotive”) of development in the direction of a virtuous circle, as the enabling “carpet” for all social and economic communication and activities including the creation of markets.

In the Renaissance tradition the basis for human existence and for human economics, in the first place, is knowledge and infrastructure, broadly defined. First, knowledge concerns Man’s ability to think and to generate hypothesis. Secondly, economics is dependent upon Man’s ability to communicate. This communication is dependent on the phenomenon of consensus gentium, which we elaborated upon in our article on Leibniz and Wolff.[i] Leibniz - in particular - argued in his 1695 attack on the materialist empiricism of Locke and on the dominant British philosophical school, that only Man’s rational spirituality could explain this phenomenon of interpersonal understanding and communication in the idealist tradition. This is the basics of communcation and therefore of social knowledge. Upon this basis systems of morality, of oral and later written language were erected (alphabet etc.), thereafter refined into religion, science, jurisprudence, administration, economics and accompanying institutions. As List is the classic champion of promoting transport, Serra as mentioned above and Adam Müller are perhaps the clearest promoters of the idea that good administration is a national asset and part of the nation’s capital.[ii]

In fact, Adam Smith explicitly also advised this kind of policy, later forgotten by his followers. “THE third and last duty of the sovereign or commonwealth is that of erecting and maintaining those public institutions and those public works, which, though they may be in the highest degree advantageous to a great society, are, however, of such a nature that the profit could never repay the expense to any individual or small number of individuals, and which it therefore cannot be expected that any individual or small number of individuals should erect or maintain. The performance of this duty requires, too, very different degrees of expense in the different periods of society.

After the public institutions and public works necessary for the defence of the society, and for the administration of justice, both of which have already been mentioned, the other works and institutions of this kind are chiefly those for facilitating the commerce of the society, and those for promoting the instruction of the people. The institutions for instruction are of two kinds: those for the education of youth, and those for the instruction of people of all ages. The consideration of the manner in which the expense of those different sorts of public, works and institutions may be most properly defrayed will divide this third part of the present chapter into three different articles.[iii]

One example of an early enlightended ruler is the general of Alexander the Great (whose teaxcher was Plato’s student Aristotle), and later Macedonian king Ptolemy I of Egypt. Ptolemy built the Museum and Library of Alexandria and is known for his state mercantilist trade policy. Another and even better example of a relativly enlightened ruler with a strong focus on infrastructure, including defence (giving internal order), is the first Chinese Emperor of the Chi’n or Qin dynasty: “in 247 BC, the boy king Chao Cheng came to the throne. He, together with his minister Li Ssu, completed the Ch'in conquests and in 221 created the Ch'in empire; Chao Cheng proclaimed himself Ch'in Shih huang-ti ("First Sovereign Emperor of Ch'in"). To rule this vast territory, the Ch'in instituted a rigid, authoritarian government; they standardized the writing system, standardized the measurements of length and weight and the width of highways, abolished all feudal privileges, built the Great Wall, and in 213, to halt subversive thought, ordered all books burned, except those on such utilitarian subjects as medicine.[iv] He died in 210 BC. “Qin Shihuangdi centralized the bureaucracy and government to control rival states within the empire. His innovations (travelling inspectors, bureaucrats reporting in a hierarchy, and the unification of the country through roads and canals) laid the foundation for future dynasties. Only by bypassing local control and providing services through the central power could you not only conquer neighboring states, but successfully govern and unite them. Centralization was particularly important in the Yellow and Yangtze regions. Flooding periodically wiped out years of work and required coordinated planning to build canals across territories to control it. …(following) the Confucian principle of governing for the welfare of the people.”[v]

An early invention that brought considerable wealth, was the institution of the well ordered city, with its tight communication, division of labour, markets, legal and poltical administration as well as ordered comminication with the outside world. This at least dates back to the Indus Civilisation 2300 B.C., with Mohenjodaro probably being the first planned city in the world, with a highly developed division of labour with many “modern” inventions like the wheel, the plough, intense irrigation, organised sewer, local markets and enriched by a vast “international” trading net.

As already mentioned, the important concept of the common weal was a synergetic one. Serra (1613) specifically relates the wealth of a city to the number of different professions in a city. Adam Smith’s ‘division of labour’ - known to the ancients and later elaborated by numerous[vi] - clearly also implies similar increasing returns to scale. This is probably the reason why ‘the division of labour’ - although heralded as Adam Smith’s greatest achievement - has never been integrated into any classical or neoclassical economic model. The division of labour is in some very fundamental sense not compatible with constant returns to scale. The division of labour is a result of fixed costs - either in knowledge or in other tools - which automatically cause increasing returns to some degree. However, taking away the diminishing returns of Malthus’ and Ricardo’s corn economy would remove any clear cut market solution in today’s models: The lines of the demand functions and the supply function would never cross, and no equilibrium would be found. Price and quantity would remain undetermined within the model. Exogenous factors would be left with the task of solving this basic problem - voiding standard economic theory of its central postulate of an equilibrium as well as of any practical use. List agreed with Smith that division of labour was an important reason for productivity of labour, but severely criticised Smith for dealing to too shortly with the latter side to the that competitive side of the coin that Smith himself noticed, namely the confederation of labour, or in modern vocabulary co-operation – between individuals, trades, sectors and nations.[vii] This side of economics is even further apart from being integrated into any classical or neoclassical economic model, no matter the fundamental importance of such basic institutions as trust and agreements.

In the Renaissance conception of economics there were therefore increasing returns to the size of nations. Recreating and extending this urban advantage to the whole nation-state was a central challenge to Renaissance rulers. Both List and Wallerstein point out that while England achieved this national unity, Italy, The Hansa and Holland did not develop beyond a collection of city-states. This was a main reason for their loss of leadership.[viii] . France tried to catch up with what England got relatively easy as a gift from nature by tough and costly centralisation. This background is severely twisted in the mind of modern economists who believe the story that the efficient England deveoloped because of little and regulation whereas France was inefficient because of strict regulation.[ix]

Early municipal (city-state) mercantilists observed the beneficial effects of denser populations clustered in towns giving rise to productive synergetic effects through differentiation, personal and political freedom, as well as economics of scale. Having a large population was therefore regarded as a great benefit to any nation. Roscher writes that “Not many had as much insight as Henry IV.: la force et la richesse des rois consistent dans les nombre et dans l'opulence des sujets.” and Petty “would give up Scotland and Ireland entirely, and have the inhabitants settle in England.”[x] Later, state mercantilists tried to emulate the same positive mechanisms on a national scale by state initiated construction of various means of communication and transportation. Mercantilist politicians and economists tried ‘artificially to reap the observed benefits of the cities’ high population densities - in geographical areas with sparser population densities. It may be an illustration of this that the Dutch author Pieter De La Court in 1645 wrote The Welfare of the City of Leiden. In 1662 his scope had widened to The Interest of Holland.

Law and order, industrial quality control, labour codes, labour discipline, standardisation of language, measurements, coins and education, the construction of roads, canals, diligence and postal routes as well as ‘refuelling stations’ along transport routes were all a part of this strategy. These measures were intended to create national welfare as opposed to the municipal mercantilist strategy which flourished, in the main, in coastal city-states. These city-states mostly functioned as enclave economies which were relatively isolated from the hinterland, “the Hanse deliberately cut off the hinterland from trade. The trade of Antwerp or Hamburg, Venice or Lyons, was in no way Dutch or German, Italian or French. London was no exception: It was as little "English" as Luebeck was German. ...”.[xi] State mercantilism or ‘statism’changed this early merchant mercantilism.. In its pursuit of public power and wealth, state mercantilism fused the monarchic and municipal mercantilist traditions. “It is obvious that Wallerstein points out in the introduction of chapter three of his The Modern World System, called Absolute monbarchy and Statism, that the development of a European world economy is correlated with the emergence of absolute monarchism. This alliance between the King and the middle class - opposed to the feudal aristocracy - created a powerful instrument: The Nation-State, an instrument that unified formerly separate towns and regions. (QUOTE STARTS HERE)“The first volume of Heckscher’s[xii] Mercantilism is appropriately entitled ‘Mercantilism as a Unifying System.’ ... The first modern author to recognize the liberalizing tendencies of the mercantile system was Schmoller (1884)."[xiii] - As well as the unifying tendencies: “It was not only a question of state armies, fleets, and civil services; it was a question rather of unifying systems of finance and economy which should encompass the forces of millions and whole countries, and give unity to their social life. There had always been great states; but they had been bound together neither by traffic nor by the organisation of labour nor by any other like forces. ... as civilisation advances, the state and the national economy diverge more and more the one from the other, each a separate circle with its own organs; and yet that this separation must again constantly make way for a unifying guidance, a growing interaction, a harmonious joint-movement.“ [xiv] In its pursuit of power and wealth, state mercantilism fused the monarchic and municipal mercantilist traditions.

In sparsely populated areas a policy of corridor development was pursued, similar to the old silk-road caravan tracks between the Roman and Chinese empires established by the first Han (206 B.C.-220 A.D.) or the Emperor’s Grand Canal between Shanghai and Beijing (1,795 Km), still the single largest infrastructure project to date, and still the world’s longest such, built between 486 B.C. to 610 AD. By artificially creating dense populations in areas along the transport routes, the construction of these arteries was made economically more worthwhile. Additionally, this strategy opened up marginal areas for development. The purpose of the huge investments in infrastructure were in some ways similar to the purpose of the city states itself. As List notices, the infrastructure allowed for greater communication between citizens. This made political control of the individual more difficult, and therefore created a greater political freedom, and thereby creativity and innovation. Only in densely populated areas, a critical mass of public opinion could acquire enough strength to develop into democracy and generally promote human rights.[xv] At the same time the expansion of markets through improved communication allowed for greater possibility of economies of scale, higher diversification and production for niche markets and higher production for a monetary market - as opposed to the barter market. The economies of scale allowed for improved technology, and made it possible for a higher percentage of the population to engage in new activities, again contributing to diversity, division of labour and economics of scale in a positive feed back circle. The mercantilists’ promotion of manufacturing also intended to emulate these positive effects of the city modelled as a huge productive machinery: the factory.

A major problem with promotion of infrastructure is how to initiate and finance it. In modern terms, the problem is the following. What characterises these core factors of the Renaissance policy: Knowledge, innovation, infrastructure and machine tools production is that they all have a character of public goods: Concentrated costs for the investor and widely dispersed benefits for a wide society, as Smith clearly understood as shown above. This results in systematic underinvestment if left to an unregulated market. This is suboptimal from a public point of view, although perfectly reasonable and therefore necessary from the point of view of the individual investor. The public, including the individual investors, therefore needs a coordinator to initiate and direct credit to these sectors, such as a municipality, a regional authority (e.g. German Länder or the states in the US), the nation or an international body (e.g. EU, UN). The credit directing may be done more directly through a central planning agency, such as GOSPLAN in the former USSR, or more indirectly by ordering banks to offer favourable conditions to industrialists investing in these sectors as in the French dirigisme system up to the reign of de Gaulle. P.J.D. Wiles points out that from the school of the state mercantilist Colbert, then Napoleon, St.Simon and the Grandes Ecoles system[xvi] came the dirigist system with "qualitative bank control" in various softer and harder versions . He writes:"We remark here again the flexibility, speed and secrecy of such arrangements, compared with the constitutional obstacles to continual changes in taxes by the government, let alone a command economy" [xvii](p.322). There is a strong tradition, among the cathing-up-nations mentioned, in using this kind of policy, e.g. France, USA, Japan, Germany. There are eqally many ways of solving the problem of “credit directing” in practice. It calls for co-operation between authorities, industrialists and bankers: Knowledge of the physical (re)production process and the credit system; imaginative accounting. Such collaboration and public encroachment into then private sphere is of course against the main stream tradition of “free” markets, where the short term interest of the major individual investors is king, as against that of the public- even surpassing the intentions of Smith.[xviii]

There are many implications of a productive credit policy. The main point is to use credit for productive purposes, “productive consumption”; productive credit implying qualitative credit control. Decentralising the control to local banks may be efficient. In order to create effective demand (bying power) for the products created there must be some degree of income eqalisation. This may ensure that the regulative idea called Say’s Law will be effective, making production create its own demand without causing economic depressions due to “overproduction”, “underconsumption” or “oversaving”. This idea is also called “circular flow” equalisation (J.M.Keynes) or “ecocirc” (Ragnar Frisch). The practical implicationis that the working population must have a decent living standard relative to the country’s wealth, in other owrds a “social contract”. Does this not occur, accumulation of capital cannot be inveted in production (little demand) and will instead find its way into the financial markets, resulting in asset price inflation, i.e. “financial bubbles”.

Commons once wrote that, “Definition is analysis, and nothing is more important in economics today than analysis.”[xix] This is our staring point here: The leading historian and theoretician of economics Germany in the middle of the 19^th Century was Wilhelm Roscher. His Principles… Book IV is devoted to consumption (Roscher, 1877, Book IV). Sections CCXI and CCXII are devoted to the two types of consumption: Productive and unproductive. Roscher says that this classification originally is Plato's.[xx] Keynes later refers to this typology.[xxi] For several reasons, this classification is more enlightening than the classification consumption and investment. First it makes more obvious that the difference is only a matter of degree, and secondly it makes more obvious that certain actions classified as investment today has little to do with consumption, namely financial investments. The latter difference, of productive consumption vs. financial investments, is today categorised as being more or less the same, "investments". By removing this veiling mode of classification, we may reveal some new or rather old and forgotten insights. As noted by Roscher, financial investments are a kind of sterile storage until channelled, and if, into consumption of kinds. This is a potential disturber of the peaceful balance and equilibrium - in the perfect model of the classical school. The money heretics later pointed out that this disturbance was due to the different roles of money; as exchange medium; as value measurer; and as wealth storage medium, and that there was a need to separate these. Roscher asserts that, “There is no production possible without consumption. … There are different degrees of productiveness in consumption also. …”.[xxii]

One of Roscher's chapters has the telling heading Necessity of the Proper Simultaneous Development of Production and Consumption. After a discussion of the two areas he writes, “Hence, one of the most essential of a prosperous national economy is that the development of consumption should keep equal pace with that of production, and supply with demand.” In footnote 8 he declares that, “The necessity of an equilibrium between production and consumption was pretty clear to many of the older political economists. Thus, for instance, Petty … Temple … North … Becher … Boiguillebert … Berkeley … Hume … Forbonnais … Quesnay … Letrosne … Mirabeau … Verri … Büsch… The moderns have frequently inequitably neglected the doctrine of consumption. Thus it appears to be a very characteristic fact that in Adam Smith's great book, ~~there is no division bearing the title "consumption" and in the Basel edition of 1801, that word does not occur in the index. Droz says that in reading the works of certain of his followers,~~ one might think that products were not made for the sake of man but for their own sake. But on the other hand there came a strong reaction with Lauderdale … Sismondi … Ganilh … but especially, and with important scientific discoveries, Malthus …St. Chamans … And so according to Carey, Principles, ch.35, § 6, the real difficulty does not lie in production but in finding a purchaser for the products. But he overlooks the fact here that only the possessor of other products can appear as a purchaser. From another side, most socialists think almost exclusively of the wants of men, and scarcely consider it worth their while to pay any attention to the means of satisfying them.”[xxiii] (This author’s use of bold format.)

As pointed out above, the core motive of Steuart. List and the American protectionists was to promote production in order to elevate wages and consumption, thereby the tax base and production of public goods, promoting more production and consumptioon in a virtuous circle. They were also explicit about the alternative: As against the classics, H.C. Carey points to the potential disturbing causes to consumption when claiming about cotton production that, “Overproduction cannot exist, but underconsumption may and does exist. The more that is produced, the more there is to be consumed; and as every man is a consumer in the exact ratio of his production, the more he can produce the better it will be for him and his neighbour, unless there is some disturbing cause, preventing the various persons desiring to consume from producing what is needed to enable them to effect their exchanges with the planter, to the extent that is necessary to their comfort.”[xxiv] On commercial crisis Roscher has the following to say, “The growth of a nation's economy depends on this: that production should always be, so to speak, one step in advance of production, … Now, the politico-economic disease which is produced by the lagging behind of consumption, and by the supply being much in advance of the demand, is called a commercial (market) crisis.” [xxv] “Most theorists deny the possibility of a general glut, although many practitioners stubbornly maintain it. J.B.Say … J.S.Mill …” [xxvi] (This author’s use of bold format.)

“All these allegations are undoubtedly true, in so far as the whole world is considered one great economic system, and the aggregate of all goods, including the medium of circulation, is borne in mind. The consolation which might otherwise lie herein is made indeed to some extent unrealizable by these conditions. It must not be forgotten in practice that men are actuated by other motives than that of consuming as much as possible. …

There are, everywhere, certain consumption-customs corresponding with the distribution of the national income. Every great and sudden change in the latter is therefore wont to produce a great glut of the market. [ Footnote: If all the rich were suddenly to become misers ... a multitude of former consumers, having no employment, would be obliged to discontinue their demand. Over-production would be greater yet if a great and general improvement in the industrial arts or in the art of agriculture has gone before. Compare, Lauderdale, Inquiry, 88. …][xxvii] The latter point of general improvement in the industrial arts is reminiscent of today's so-called paradigm shift in the IT sector.

The circulation problem therefore concerns not only directing credit to production, but, according to Roscher even more to channel buying power to consumers. Numerous monetary heretics later addressed this, especially after commercials crises like 1929: e.g. Kitson, Gesell, Soddy, Steiner, Douglas and Brochmann.[xxviii] These heretics made a very substantial impression on several established economists such as J.M. Keynes, Schumpeter (and R. Frisch) who set out to reform financial theory but “surprisingly” never quite managed to. Their attacks were especially directed against interest bearing debt and even more so compound interest. The reason was the same as in the background for Sumeria’ s and Judaism’s debt forgiveness, the salvation of the Jubilee years. The accumulated debt burden soon crippled investment into productive activities thereby undermining, not only the ability to feed a population, but also interest payment itself. Not only did the financial community fail in directing credit to productive purposes, it also gradually became the owner of empires and people. For this reason, such different authors as Marx, List and XXXX: MORE EXAMPLES have seen the financial community as the great culprit of twisted development, quite opposite to the positive catalyst it might have been, and actually have been in some instances like early industrialist Germany and Japan. Today this situation has been made worse e.g. by privatisation of the pension system. Managing pensions with the PAYG / PAYS principle is far better than creating funds. Pay As You Go / Spend will focus society on the need to promote future production that can feed future population and create no funds that will blow up asset prices. Credit must and will be used productively. The credit card system may seem to have changed this problem today, channeling buying power to consumers, but may actually have added to the problem, by creating even more interest bearing debt and thereby serving the short term interest of bankers rather than consumers.

[i] Reinert and Daastøl, 1997, op.cit.

[ii]Müller, Adam, Die Elemente der Staatskunst. Sechsunddreizig Vorlesungen, (1808-1809), Berlin: Haude & Spenersche Verlangsbuchhandlung, reprints 1936 and 1968 by the same publisher.

[iii] Adam Smith, Wealth of Nations, Chicago, University of Chicago Press, 1976, BOOK V, Ch. I, part 3 (Of the Expense of Public Works and Public Institutions), p.724

[iv] http://www,eb.com:180/bol/topic?eu=24493&sctn=1 i.e. Encyclopedia Britannica, referring to works on Shih huang-ti: Cotterell, Arthur, The First Emperor of China, 1981; Guisso, R.W.L. et al., The First Emperor of China (1989), a well-illustrated work. Capon, Edmund Qin Shihuang, 1982

[v]http://hua.umf.maine.edu/China/xian.html

[vi] Roscher refers to the works of Xenophon, Plato, Aristotle, Aquinas, Luther, Petty, Mandeville, Berkeley, Harris, Rousseau, Turgot, Diderot, Tucker, Boccaria and above all to Smith.. Roscher, Wilhelm, Principles of Political Economy, Chicago, Callaghan and Company, 1882 (from the 13th German ed. 1877) I, p.189 § 58

[vii] F,. List, 1841, op.cit. pp.149-151

[viii] F,. List, 1841, op.cit. Ch. I, II, III, Wallerstein, Immanuel. (1978). Det moderne verdenssystem, 2 vols,. Oslo: Gyldendal. (translation of The Modern World System, Academic Press 1974), vol.2, pp.90-93.

[ix] As laid out by the above mentioned works of Bairoch, Harper, Hudson, and Israel

[x] Roscher, Wilhelm, 1882 op.cit. p.343 § 254

[xi] Karl Polyani, The Great Transformation, the political and economic origins of our time, 1944, Beacon Press, Boston 1957, p.63

[xii] Heckscher, Eli, Mercantilism, London, Allan and Unwin, 1935, 1st Swedish edition; Merkantilismen. Ett led i den ekonomiska politikens historia, Stockholm, Norstedt, 1931.

[xiii] Polyani, op.cit. p.278

[xiv] Schmoller, Gustav, The Mercantile System and its Historical Significance, English edition 1897, A chapter from Studien uber die wirthschaftliche Politik Friedrichs des Grossen, published in German, 1884

[xv] List, Friedrich. Die Welt bewegt sich. Uber die Auswirkungen der Dampkraft und der neuen Transportmittel .. . Göttingen: Vandenhoek & Ruprecht. Edited by Eugen Wendler, 1837 (1985), p. 131

[xvi] P.J.D. Wiles, Economic Institutions Compared, Oxford, Basil Blackwell, 1977 (1979), p.215

[xvii] P.J.D. Wiles, op.cit. p.322

[xviii] F.List, 1841, op.cit. .164-165

[xix] Commons, John, The Distribution of Wealth, New York & London: Macmillan, reprint: Fairfield NJ: Kelley, (1893) 1963, p. 21

[xx] Plato, The Republic, (ca. 380 BC), in W.R.M. Lamb (editor): Plato, with an English Translation, The Loeb Classical Library, Vol. VIII, London, Heinemann, 1924 p. 559

[xxi] Keynes, J.M, A Treatise On Money, 2 vols. London: Macmillan, 1930, Vol. II, Ch. 28, Sec. ii, p. 126

[xxii] Roscher, 1878, op.cit. § CCXI

[xxiii] Roscher, 1878, op.cit. Book IV, Ch. I, § CCXV

[xxiv]Carey, Henry Charles. (1851). Harmony of Interests. Agricultural, Manufacturing & Commercial, 1851, Augustus M. Kelley Publishers, New York 1967, p.103

Carey, Henry C, Financial crisis: their causes and effects, Philadelphia: Henry Carey Baird, 1864,

[xxv] Roscher, 1878, op.cit. § CCXV

[xxvi] Roscher, 1878, op.cit. § CCXVI

[xxvii] Roscher, 1878, op.cit. § CCXVII

[xxviii]Kitson, Arthur. (1894). A Scientific Solution of the Money Question, Boston: Arena Publ. 1895, Gesell, Silvio, The natural economic order, transl by Philip Pye, Rev. Engl. ed., London: Owen,1958, , German original 1931, Soddy, Frederick. (1926). Wealth, virtual wealth, and debt: The solution of the economic paradox, New York: Gordon Press, (Studies in money and currency reform) Reprint. Originally published: London: G. Allen & Unwin, 1926, Steiner, Rudolf. (1921). World Economics, Rudolf Steiner Press, London 1977 (1936/1937, 1949, 1972), Douglas, C. H. (1931). The Monopoly of Credit, New York: Gordon Press, reprint: 4.ed. Sudbury: Bloomfield, 1979 (translated from the German original published under the title: Nationalökonomischer Kurs., Brochmann, Bertram Dybvad. (1956). Real økonomi kontra fiktiv øconomi. Sparing i overflodens tidsalder. Hvorfor Norge spiller fallitt (Real Economy Contra Fictive Economy. Saving in the Time of Abundance. Why Norway goes bust), Bergen: Det Nye Samfund.

6. Canonical Battles: The Head-on Confrontations .

Occasionally the two canons meet head-on in what we have labelled Canonical Methodenstreite. Below we describe four of these Methodenstreite:

The theoretical conflict between the forefathers of today’s mainstream canon and the Renaissance canon has existed at least since the 1622-23 ‘English’ debate between Gerard De Malynes [i] and Edward Misselden, [ii] where Malynes represented a static theory rooted in barter and Misselden represented a theory centred around learning and production. Both Misselden and Malynes were Dutchmen from Antwerp working in London. In the history of economic thought, their debate is interpreted as being about exchange controls and the balance of trade.[iii] The controversy between the two was an ‘acrimonious, even abusive’ one, in which ‘ink was shed like water’[iv].

However, by going back to the sources, one finds that the main line of attack by Misselden against Malynes is his ‘mechanical’ view of man - Malynes has left out Man’s ‘art’ and ‘soul’. Misselden quotes at length a paragraph from Malynes, where Malynes reduces trade to three elements, ‘namely, Commodities, Money, and Exchange’[v]. Objecting to this definition, Misselden says: 'It is against Art to dispute with a man that denyeth the Principles of Art'. Misselden scorns Malynes for not seeing the difference between a heap of stones and logs and a house - because Man's productive powers and his soul has, which produce the house, have been left out. A similar criticism can be made of neo-classical economics.

Misselden represents the acute Renaissance awareness of the enormous territory to be covered between Mankind’s present poverty and ignorance, and the enormous potentials. This released enthusiasm and energy. The situation recalls Keynes’ frustration with the suboptimal situation of the world under the Great Depression. We shall attempt to show that both to the Renaissance philosophers/economists as well as to Keynes, the formula needed to ‘free’ society from its suboptimal position was what Keynes called ‘Salvation through Knowledge’[vi].

In the late 18th Century a new type of economic theory came into being, focusing on the ‘natural harmony’ of Nature. Malynes, and later Bernard de Mandeville (also a Dutchman) were predecessors of this view, which culminated with Adam Smith’s work written when the English had caught up with and forged ahead of the Dutch. Mandeville is best known for his work Fable of the Bees (1714, but an early version in 1705). Interestingly Malynes - in 1655 published The Commonwealth of Bees. The use of bees in a harvesting economy as a metaphor for a human economy leaves out the role of creativity, novelty, and intelligence. Still today, a fundamental and unresolved problem of standard economic theory is to how deal with novelty.

Malthus’ used a simlar example derived from the uncreative animal world, in order to show his point of gradual overpopulation.[vii] A scrutiny of Malthus’ book is necessary to find any mention of science and enhancement of productivity, as opposed to the works of for instance F.List and the neglected bu remarkable book by the German philosopher Fichte.[viii] Malthus’ book was reminisant of another book a from 1583 by another “island dweller”, Giovanni Botero in Venice.[ix] This ‘harvest economy’ was central also to the French physiocrats: ‘physiocracy’ = the rule of nature’. As we shall see, the anti-physiocrats were defending the Renaissance tradition. In physiocracy all economic activities other than agriculture were seen as sterile. In Adam Smith we again find an ‘animalistic’ view of Man, as in the dog metaphor already quoted in the introduction to this paper. Within today’s evolutionary economics we find the same schism: part of the evolutionary school tend to substitute ‘biology-envy’ for ‘physics-envy’, leaving out the creative dimension of Man. Today Adam Smith’s ‘invisible hand’ finds its equivalent in Paul Krugman’s view of the economy as a self-organising system: ‘Global weather is a self-organising system; so surely, is the global economy’.[x] The implications are clear: Man is at the mercy of an irrational destiny we cannot influence, particularly not on a collective level.

In his Theory of Moral Sentiment Adam Smith makes it very clear that messing around with destiny is not the business of Man: ‘The care of the universal happiness of all rational and sensible beings, is the business of God and not of man. ... Nature has directed us to the greater part of these (means to bring happiness about) by original and immediate instincts: ... (which) prompts us to apply those means for their own sake, and without any consideration of their tendency to those beneficent ends which the great Director of Nature intended to produce them.’[xi] The parallel with Krugman’s weather metaphor is obvious. Albert Hirschman’s 1991 book, The Rhetoric of Reaction. Perversity, Futility, Jeopardy [xii]traces the history this theoretical school.

In our view, both Adam Smith and Krugman fit the traditional moral hedonism, exemplified in this quote from Jeremy Bentham:

‘Nature has placed Man under two sovereign masters, pain and pleasure. It is for them alone to point out what we ought to do, as well as determine what we shall not do ... every effort we make to throw off our subjugation, will serve but to demonstrate and confirm it. In words a man may pretend to abjure their empire: but in reality he will remain subject to it all the while. The principle of utility - the greatest happiness or greatest felicity principle - recognises this subjugation, and assumes it for the foundation. ... Systems which attempt to question it deal .. in caprice instead of reason, in darkness instead of light.[xiii]

Typically, the proponents of the barter-centered mechanical theories of wealth appear in the well established and wealthy nations. At the time of the Misselden/Malynes controversy Holland was the leading nation and England and France were attempting to catch up. The City was at the time to a large extent a Dutch ghetto. Other early ‘English’ free traders were in fact other Dutchmen working in the City, like Vanderlint. Nicolas Barbon, another English free trader, was - just as John Locke - born in England but educated in Leiden, the Netherlands.[xiv]

The shift from an emphasis on Man’s creativity (Misselden) to an emphasis on ‘natural harmony’ (Malynes) was a true paradigm shift in Kuhn’s sense. It must be admitted, however, that the incentives of Renaissance economics to produce knowledge through a process which we have labelled dynamic and knowledge-producing rent-seeking - or Schumpeterian Mercantilism - in many cases degenerated into static rent-seeking. Whereas the optimistic theory of the Renaissance focused on the limitless potential of ‘Man the Producer’, the new economic theory came to focus on ‘Man the Trader and Consumer’. The two theories were steeped in very different realities - the old one in Man’s ability to create and produce, and the new one in a world of barter, based on the mechanics of an ordre naturel - the ‘Natural order’. The old theory was dynamic and organic and centered around ‘thought’ (Logos) and ‘werden’ (becoming), the new theory was mechanical and static, centered around ‘matter’, and ‘sein’ (being). In the old theory the market was present in the role of a servant of active human beings who knew where they were going, in the new theory the market acquired many of the characteristics of ‘Providence’[xv], as the manifestation of the ordre naturel. Later the market assumes the role of a goal by itself, and the market as nothing more than an instrument for more fundamental purposes is forgotten. Werner Sombart fittingly calls the Renaissance economics activistic-idealistic, and the economics from Adam Smith onwards passivistic-materialistic.[xvi]

Just as Renaissance economics sees no limits to progress - they truly see ‘a never ending frontier of human knowledge’ - in Adam Smith’s system, which followed Malynes’, nations reach a stationary state where they can ‘advance no further’, when that ‘full compliment of riches which the nature of its soil and climate...allowed it to require’ had been reached [xvii]. It is only here that we see the practical consequences of Adam Smith sharing the same assumptions as part of today’s ecology movement - no new knowledge enters the system. The only logical consequences of a theory which does not allow for the production of new knowledge is either a stationary state (Adam Smith) or an 'ecological disaster' as with Malthus. This disaster can be predicted by simple extrapolations. However, each level of knowledge carries with it its own level of 'sustainability.' ‘Knowledge’ and 'institutions' are the conspicuously and 'actively absent' factors in Adam Smith’s system, i.e. these factors are not only ignored, but it is actively argued that they have no relevance.[xviii]

Just as the focus of Renaissance economics was on production, the focus of neo-classical economics is on barter and exchange. Leibniz, in 1671, sees the origin of barter as being in production, and quotes Aristotle: ‘Nam Maercaturs transfert tantum, Manufactura gignit’ - Trade can carry only as much as the factories produce’. To Leibniz, the poverty of the producing artisans was an important argument for the establishment of an active State. ‘After all, is not the entire purpose of Society to release the artisan from his misery ? The farmer is not in need, since he is sure of his bread, and the merchant has more than enough’[xix].

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

The second Methodenstreit between the knowledge-based Renaissance school and the predecessor of today’s standard (neo-classical based) economic theory starts in the 1770’s with the rise of the Physiocratic school in France. It may be said that the physiocratic school in some sense was a reaction to the perversion of Colbertism into a policy of indiscriminate taxation - devoid of the central principles of Colbertism. But, it can also be said that it was the reaction of the landowners against Colbert’s policy of systematically diverting resources from agriculture to manufacturing.

The physiocrates continued the animalistic view of Man:...sometimes they regard man as a browsing animal, concerned only with his nourishment, the maximum production of the fruit of the earth as his social ideal.’[xx]

The anti-physiocratic movement has received little attention in the history of economic thought. These authors, however, represented the true continuation of Renaissance economics. Interestingly, two of the main opponents of physiocracy in France were clergymen: Abbé Mably and Abbé Galiani, the Neapolitan envoy to the Court of Paris.[xxi] Galiani was to take a position which in many ways foreshadowed the position of the historical school in late 19th Century Methodenstreit: ‘Abstract principles are no good for commercial policy. Corn laws which are good in one time or place may be bad in another. ... The statesmen who admired Colbert should not imitate him, but ask himself, “What would Colbert do if he were her now ?” ‘[xxii]This criticism of a very abstract and context-free theory was very similar to the reaction of Reverend Jones, against the writings of Ricardo in 1820. Richard Jones was the father of the English historical school of economics, which became very influential during the latter half of the 19th Century.

One of the main opponents of the physiocratic school[xxiii] in France was Forbonnais, who refused to admit that trade and industry are sterile. Also to Forbonnais the main agent creating wealth is Man - not nature itself: without human agency the land itself is doomed to absolute or relative stability. Other contemporary French opponents of physiocracy were Accarias de Serrionne, Graslin, Necker, and Linguet.

Perhaps the most ardent anti-physiocrats were found in Germany. Under the heading ‘Antiphysiokraten’, Humpert’s bibliography of the German cameralist school lists 25 works - published between 1771 and 1832.[xxiv] The best known of these work is Johann Friedrich von Pfeiffer’s Der Antiphysiokrat.[xxv] Pfeiffer was also the author of the most influential economic work in Germany at the time. Other continental opponents of physiocracy were Johann Jakob von Moser, Dohm, and Sonnenfels.

Canonical Methodenstreit 3: The American System vs. The British System (19th Century United States)

The US opposition to English classical economic theory started with Benjamin Franklin and continued with Alexander Hamilton’s 1791 ‘Report on the Manufactures’. This Methodenstreit on the policy level lasted all through the 1930’s, although on the theoretical level English classical economics was to be increasingly taught at the Ivy League universities in the late 19th Century. At one point Cornell University offered parallel courses in the two traditions. Important economists in this tradition were Daniel Raymond, Matthew and Henry Carey, John Rae, E. Peshine Smith and many others. The last great economists of this tradition were Richard Ely and Simon Patten, who - like most US economists who studied abroad in the 19th Century - studied in Germany.

On the policy level, the nations industrialising in the 19th Century were to take up the example which had been set by England - and later abandoned by her when she had reached world hegemony. The great industrial nations in their pre-take-off period share a core theme of the activity-specific nature of growth.[xxvi]Economic growth could only be achieved by including activities with fast technological change and a rapid growth in output in the nation’s portfolio of industrial activities, or in general investment in activities that would enhance the productivity of labour and capital. This theme can be followed in economic writings from the early 1500 in Italy and England and France, a little later in the German cameralists. It is introduced to the United States through Alexander Hamilton and his favourite economist, the English mercantilist Malachy Postlethwayt[xxvii], and from Friedrich List's involuntary exile in the US it is reinforced again in the Germany of the Zollverein. In Meiji Japan the doitsugaku school - favouring the German model - came to be the most influential for the building of society, at least until 1945.[xxviii] The Japanese took over the autarkic views that dominated the German historical school. In Japan, after 1883, 'a stream of German teachers of political economy and related disciplines continually flowed in'[xxix]

A common thread of successful long-distance catching-up through the centuries, is a shared distrust of free trade until the nation is firmly established in what was seen to be the right economic activities - the specific activities which increased the nation’s 'productive powers'. Through the dynamic imperfect competition (i.e. Schumpeter’s ‘historical increasing returns’) in these specific activities, real wages could be raised: first in the ‘engine’ industry and subsequently spreading through the whole national labour market. Higher wages wlud, broaden the tax-base and make further investment in productivity enhancing public goods possible. This would provide the foundation for further private activities and so on, in a viruous circle. In the US tradition, adding skill to the labourer was the logical way of increasing his price or value (= wage) This tradition survived in the United States up until and including the economists who were taught by Ely’s and Patten’s generation. In a letter to one of the authors of this article, dated August 16 1996, Moses Abramowitz comments: ‘I agree in particular that the “residual” and growth in general are industry-specific. That has seemed clear to me since I was a graduate student in the Thirties and read the Kuznets and Burns books...’ This certainly points to a link - if not a necessarily very strong one - between the old American school and present day ‘economics of catching up’. Robert Reich’s ‘high quality jobs’ continues in this tradition without any references to its rich history.

We would argue that in 19th Century US economic policy, the general view was that some economic activities were better than others. Differences in wage levels, both nationally and between nations, seem to result from varying degrees of imperfect competition - caused by both static and dynamic factors. The factors at work have long been identified both by businessmen and in industrial economics, and they are correlated.

Figure 3 on the next page attempts to create an area from light to dark grey where the ‘quality' of economic activities at any time can be roughly plotted on a scale from white - 'perfect competition' - to black: 'monopoly'. The whole system is constantly moving, as new knowledge enters on top and - with varying gravity and speed - fall towards ‘perfect information’ and perfect competition as they mature. We would claim that the ‘gestalt’ expressed in Figure 3 corresponds to the 19th Century US idea on why some nations were wealthier than others, and why nations had to reach the top of the quality index before free trade would be beneficial to the nations. At the bottom of this hierarchy sit the world’s most efficient producers of baseballs - in Haiti - making US dollars 0,30 per hour. This type of production has not been mechanised anywhere. Higher up sit the world’s most efficient producers of golf balls - in a mechanised production - making 9 dollars an hour. We would claim that no nation of any size has ever reached national welfare without going through a period of this kind of thinking, perhaps withn the possible exclusion of tiny city states. The realökonomisch-oriented mercantilist school clearly had a Weltanschauung comparable to this one. Charles King very influential 1721 volumes is perhaps the work which most clearly expresses this.[xxx]

Figure 3 unites the economic factors which prevent factor-price equalisation ever to take place in the world economy. Within one nation - within the same labour market - the same forces are at work, but the dispersion in the wage level becomes much less pronounced. Within a nation several factors unite to create a tendency towards larger equality in wages: the mobility of labour, the similar education and knowledge levels, the pressure from labour unions, etc. The wage level of the traditional service sector seems - in all nations - to be determined by the existence or not of ‘high quality activities’ in the nation. If no high quality activities are present, real wages in this sector are low. In this traditional service sector - barbers, bus drivers, chambermaids, etc. - productivity levels all over the world tend to be very similar. Their real wages, however, are widely different. The barber or bus driver in Bolivia or Russia - although equally efficient as those of the First World - have real wages which are only a fraction of their Swiss or Norwegian counterparts.

The quality index of economic activities, in our opinion, answers the question as to why ‘the invisible hand’ compensates workers with equal efficiency in different countries so widely differently. We would claim that because of this mechanism what to most people seems like a

globally ‘efficient’ market does not maximise world welfare. By distributing production of knowledge-intensive high quality produce to all labour markets - not by distributing capital - the average standard of living on a world level may be raised considerably. The argument presented here is very close to that of German philosopher Leibniz, and of early US economists, starting with Benjamin Franklin[i], Alexander Hamilton, and Daniel Raymond in the late 18th and early 19th Century.

[i] Malynes, Gerhard, The Maintenance of Free Trade, According to the three essentiall (sic) Parts...Commodities, Moneys and Exchange of Moneys, London William Sheffard, 1622, and The Center of the Circle of Commerce, or, A Refutation of a Treatise,....,lately published by E.M., London, Nicholas Bourne, 1623.

[ii] Misselden, Edward, Free Trade and the Meanes (sic) to Make Trade Flourish, London, Simon Waterson, 1622, and, The Circle of Commerce or the Ballance (sic) of Trade, London, Nicholas Bourne, 1623,

[iii] Schumpeter discusses the controversy between the two men in his History of Economic Analysis, New York, Oxford University Press, 1954, pp. 344-345. See also their respective entries in ‘The New Palgrave’. In all cases these references are purely to the mechanics of money and exchange.

[iv] Buck, Philip, The Politics of Mercantilism, New York, Henry Holt, 1942, p. 23.

[v] Misselden, op. cit., (1623), p. 8.

[vi] Ibid., p. 102.

[vii] Malthus, Thomas Robert, An Essay on the Principle of Population, London 1798, Penguin 1970, p.76

[viii] Johann Gottlieb Fichte, Der geschlossne Handelstaat, 1800, reprint: Hamburg, Felix Meiner Verlag, 1979

[ix] Stangeland, Charles Emil Pre-Malthusian Doctrines of Population, Chicago, University of Chicago Press, 1904, p.105 and Roscher, 1882 op.cit. II, p.288§ 263

[x] Krugman, Paul, The Self-Organizing Economy, Cambridge, Mass. & Oxford, Blackwell, 1996, p. 99.

[xi] Adam Smith: Theory of the Moral Sentiments, 1759 (Liberty Classics 1976), part. VI, section II, Ch. III, p.237: Interestingly, this appears in a book which is said to represent the diametrical opposite of Wealth of Nations, the first based on the axiom of altruism and the second on self-love.

[xii] Hirschman, Albert O., The Rhetoric of Reaction. Perversity, Futility, Jeopardy, Cambridge, Mass., Harvard University Press, 1991.

[xiii]Jeremy Bentham: An Introduction to the Principles of Morals and Legislation, (1780), London, University Paperback, Ch. I, p.11.

[xiv] On this issue, see Raffel, Friedrich, Englische Freihändler vor Adam Smith, Tübingen, Laupp, 1905.

[xv] On this point see Viner, Jacob, The Role of Providence in the Social Order. An Essay in Intellectual History, Philadelphia, American Philosophical Society, 1972.

[xvi] Sombart, Werner, Der Moderne Kapitalismus, Vol. 2, Das Europäische Wirtschaftsleben im Zeitalter des Frühkapitalismus, München und Leipzig, Duncker & Humblot, 1928, p. 919.

[xvii] Smith, Adam, Wealth of Nations (1776), Chicago, University of Chicago Press, 1976, p. 106.

[xviii] This point is discussed in Reinert, Erik S., ‘The Role of the State in Economic Growth’, presented at the Conference on ‘The Rise and Fall of Public Enterprises in Western Countries’, Milan, Bocconi University, October 1996.

[xix] Leibniz, Gottfried Wilhelm, ‘Society and Economy’ (1617), reprinted in Fidelio, Vol. 1, No. 3, Fall 1992, p. 54.

[xx] Higgs, Henry, The Physiocrats, London, Macmillan, 1897.

[xxi] A good description of Galiani and his unique standing in French society at the time is found in Pecchio, Giuseppe, Storia della Economia Pubblica in Italia, Lugano, Tipografia della Svizzera Italiana, 1849, pp. 80-86.

[xxii] Higgs, op. cit., p. 117.

[xxiii] The anti-physiocrats are discussed in Weulersse, Georges, Le mouvement physiocratique en France, Paris, Alcan, 1910, vol.. 2, pp. 256-682, and in Higgs, op.cit., pp. 102-122.

[xxiv] Humpert, Magdalene, Bibliographie der Kameralwissenschaften, Cologne, Kurt Schroeder, 1937, pp. 1031-1032.

[xxv] Pfeiffer, Johann Friedrich von, Der Antiphysiokrat, oder umständliche Untersuchung des sogenannten physiokratischen Systems für eine allgemeine Freyheit und einzige Auflage auf den reinen Ertrag der Grundstücke, Frankfurt am Main, Schäfer, 1780.

[xxvi] This is described in Reinert, Erik, Thoughts before Takeoff. Hva mente økonomene i de nåværende i-land om næringspolitikk og økonomisk vekst før disse landene ble rike?, Parts 1 and 2, Oslo, STEP-Group, mimeo, 1992.

[xxvii] It has been shown that Hamilton knew his Adam Smith, but rejected particularly the free trade conclusion made general. Excerpts from Postlethwayt's Universal Dictionary of Trade and Commerce were scattered through Hamilton's Army pay book, see Morris, Richard B. Alexander Hamilton and the Founding of the Nation, New York, Dial Press, 1957, p. 285. Hamilton's view on the English classical economists was similar to that taken 80 years later by the Japanese, see Morris-Suzuki, Tessa, The History of Japanese Economic Thought, London, Routledge, 1989.

[xxviii] Yagi, Kiichiro, 'German Model in the Modernisation of Japan', in The Kyoto University Economic Review, Vol. 59, No. 1-2, April-October 1989, p. 29.

[xxix] Sugiyama, Chuhei, and Hiroshi Mizuta, Enlightenment and Beyond. Political economy comes to Japan, Tokyo, University of Tokyo Press, 1988, p. 32.

[xxx] King, Charles, The British Merchant: or Commerce preserv’d, London, John Darby, 1721, 3 Vols.

6. Canonical Battles: The Head-on Confrontations .

Occasionally the two canons meet head-on in what we have labelled Canonical Methodenstreite. Below we describe four of these Methodenstreite:

Canonical Methodenstreit 1: Misselden vs. Malynes (1622-23)