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JOHN RAE on ECONOMIC DEVELOPMENT: a NOTE Downloaded from by Guest on 27 September 2021 by JOSEPH J JOHN RAE ON ECONOMIC DEVELOPMENT: A NOTE Downloaded from https://academic.oup.com/qje/article/73/3/393/1873379 by guest on 27 September 2021 By JOSEPH J. SPENGLER Introduction, 393. — I. Rae's theory, 395. — II. Application of Rae's theory, 402. — III. Conclusion, 405. "He formulated the economic theory of new countries. ." —R. Warren James' What the historian of thought discovers in a work is determined largely by the questions he brings to its study. Similarly, what the analyst of a treatise notices is governed principally by his interests of the moment. It is not surprising, therefore, that assessments and interpretations of the writings of economists of an earlier era undergo modification as the Weltanschauung and the concerns of economists change with the ascent of new problems and the recession of old ones. A case in point is the work of that remarkable Scotch-Canadian, John Rae. Possibly as brilliant an economist as nineteenth century North America was to produce, his ideas, conceived and formulated in "the solitude . of the Canadian backwoods" and supported by homely illustrations drawn from the frontier, have continued to influence economists for more than a century.' Thus Nassau Senior, impressed by Rae's account of "the accumulation of capital," recom- mended his book to Mill who, greatly influenced by it, cited it in his discussions of the division of labor, the disposition to save, indirect taxation, and protectionism.' American commentators drew on 1. See R. Warren James, "The Life and Work of John Rae," Canadian Journal of Economics and Political Science, XVII (1951), 142. 2. This work, Statement of Some New Principles on the Subject of Political Economy, Exposing the Fallacies of the System of Free Trade and of Some Other Doctrines Maintained in the "Wealth of Nations" (Boston, 1834), was edited and reissued by Charles W. Mixter as The Sociological Theory of Capital (New York, 1905). Mixter included an acconut of Rae's life which has been supplemented by James (see op. cit.) who is preparing an edition of Rae's writings, together with a full account of his life and intellectual achievements. James mentions a doctoral dissertation on Rae's work (Helmut Lehmann's John Raes Werk, seine philosophischen and methodologischen Grundlagen, Dresden, 1937), in which Rae's inductive approach and F. Bacon's influence on Rae are treated. Rae was born in Aberdeen, Scotland, in 1796, studied medicine and social and other sciences, came to Canada in 1822, went to California in 1849, lived in Hawaii 1850-70, and then returned to New York where he died in 1872. 3. See J. S. Mill, Principles of Political Economy, Ashley ed., pp. 97, 129 n., 165-72, 870 n., 922; James, op. cit., pp. 155-56; unsigned, "John Rae and John Stuart Mill: A Correspondence," Economica, X (1943), 254. See also Mixter, 393 394 QUARTERLY JOURNAL OF ECONOMICS Rae's protectionism and his view of cost-reducing invention; 4 W. E. Hearn seems to have been inspired by his general approach ; 5 Thor- stein Veblen, by his analysis of consumption ;6 and various interest theorists, by his treatment of capital.? F. W. Taussig must have Downloaded from https://academic.oup.com/qje/article/73/3/393/1873379 by guest on 27 September 2021 been influenced by Rae's theory of invention. 8 This note has to do solely with a branch of economic theory that forms the core of Rae's work just as it forms the core of the very work that Rae believed himself to be criticizing, namely, Smith's Wealth of Nations. The branch of theory in question is that relating to economic development. Rae's theory will be summarized in Section I; his application of this theory will be examined in Section II. "Letters of Rae . to Mill on the Malthusian Doctrine of Population," Economic Journal, XII (1902), 111-20, and Sociological Theory of Capital, p. xxxii. Mill's praise of Rae's work led to its translation into Italian by F. Ferrara and its inclu- sion in his Biblioteca dell Economisti, 1st series, XI (Turin, 1856). W. Roscher referred to Rae's views on saving and economizing on tools. See Principles of Political Economy, trans. J. J. Lalor (New York, 1878), Book I, secs. 45, 59. 4. See Joseph Dorfman, The Economic Mind in American Civilization, II (New York, 1946), 779-89, 795, 835, 838, 940, and p. xiv of "bibliographic notes." See also ibid., III (New York, 1949), 422, where it is said that as late as 1909 the theory of capital formation had not been advanced much beyond Rae's. 5. Mixter believes Hearn, in his Plutology (1864), indebted to Rae for "method and spirit." See Sociological Theory of Capital, p. xxxii. Hearn wrote this book after removing to Australia; he referred once (op. cit., p. 154) to Rae, but often to Mill. 6. Veblen knew Rae's work but did not cite it. 7. E.g., see E. von BOhm-Bawerk, Geschichte und Kritik der Kapital- zinstheorien (Innsbruck, 1900), pp. 375-428; Irving Fisher, unsigned note, "A Neglected Economist," Yale Review, V (1896-97), 457, and The Theory of Interest (New Ygrk, 1930), passim, which was dedicated to BOhm-Bawerk and Rae; Gustav Akerman, Realkapital und Kapitalzins (Stockholm, 1923), whose views, partly inspired by Rae, were assessed by K. Wicksell (see appendix to Lectures on Political Economy, I (London, 1934), 259-61). Mixter, who had originally looked upon Rae as "A Forerunner of BOhm-Bawerk" (this Journal, XI (1896- 97), 161 ff.), later described Rae's theory of capital as more complete than Bohm-Bawerk's because it took invention into account ("Bohm-Bawerk on Rae," ibid., XVI (1901-2), 385 ff.). 8. See "Capital, Interest, and Diminishing Returns," this Journal, XXII (1907-8), 333-63, esp. 355 ff., 362 ff., also Principles of Economics (New York, 1939), p. 32, where the rate of interest is said to depend "on a race between improvement and accumulation." Taussig does not refer to Rae, but knew the latter's work well, having directed Mixter's attention to it. See Sociological Theory of Capital, p. xvii. Taussig's 1908 paper may be looked upon as a chapter in a long-continued controversy between J. B. Clark, F. H. Knight, and others, on the one hand, and those who, on the other, supposed the marginal productivity of capital to fall rapidly in the absence of invention. See my "Economic Opinion and the Future of the Interest Rate," Southern Economic Journal, III (1936), pp. 19-22. JOHN RAE ON ECONOMIC DEVELOPMENT 395 I Economic development, Rae argues in his main Book II, depends upon capital accumulation and upon the extent to which man aug- ments his store of technological knowledge and transforms this knowl- Downloaded from https://academic.oup.com/qje/article/73/3/393/1873379 by guest on 27 September 2021 edge into improvements and inventions.' It thus depends upon the degree to which man gives expression to the "inventive principle" and to the "accumulative principle" ; for the latter prompts man to avoid waste, save at ever lower rates of interest, and form capital, whereas the former enables man to overcome the tendency of returns to capital to fall as the stock of capital increases.' Rae says little of that division of labor which, in Smith's work, served, along with capital accumulation, to give rise to economic development. Rae looked upon the division of labor as primarily a result or concomitant rather than as a cause of invention and the growth of intelligence, though he noted that it made possible a fuller use of tools and hence a higher return on capital.' Nor did Rae stress population growth which, in Smith's system, became a source of the division of labor.' 9. According to E. Cannan, J. S. Mill was the first to note the importance of accumulation of knowledge and progress in the industrial arts. His predeces- sors had not included technical progress among the highly significant sources of the "productiveness of labour." See Cannan, A Review of Economic Theory (London, 1930), pp. 122-24. Cannan seems not to have known Rae's work at first hand. It is quite possible that Rae's work led Mill to appreciate the impor- tance of a community's "skill and knowledge" and its inventiveness (op.cit., pp. 107-9). Mill's appreciation was not shared by his successors, Cannan reports. Mill himself questioned whether mechanical invention had lightened the worker's toil, or could do so, if numbers remained uncontrolled (ibid., p. 751). How- ever, Hearn (op. cit., Chaps. 4, 10-11) devoted three chapters to invention and education. 1. See summary Chap. 14 in Book II of New Principles. My references, unless otherwise indicated, are to this edition rather than to Mixter's rearrange- ment of chapters in his edition, entitled The Sociological Theory of Capital. For the purposes of the present discussion the organization of the first edition is superior to Mixter's. A guide to the original is provided, however, on pp. 484-85 of Mixter's edition. 2. New Principles, pp. 165, 352 1f., 356-57. Cannan accredits Rae with having been the first to state that the divipion of labor makes for economy in the use of tools; he cites the quotation from Rae's work used by J. S. Mill to make this point. See Cannan, op. cit., p. 97. Mill who, following E. G. Wakefield, wrote of the co-operation rather than of the division of labor, did not attach so much importance to the division of labor as the source of invention as had Smith (op.
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