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Adam's Fallacy Adam’s Fallacy DUNCAN K. FOLEY A Guide to Economic Theology ADAM’S FALLACY A GUIDE TO ECONOMIC THEOLOGY Duncan K. Foley THE BELKNAP PRESS OF HARVARD UNIVERSITY PRESS Cambridge, Massachusetts / London, England 2006 Contents Preface xi 1 ADAM’S VISION 1 The Division of Labor / The Theory of Value / Capital Accumulation The Invisible Hand and the State / Smith’s Theory of Money Adam’s Fallacy Revisited 2 GLOOMY SCIENCE 45 Second Thoughts / Malthus and Population The Context of Malthus’s Essay / Malthus’s Postulates Malthusian Logic / Population and Food since Malthus’s Time Ricardo and the Limits to Growth / Ricardo’s Labor Theory of Value Accumulation and the Stationary State Ricardo’s Views on Machinery / The Political Economy of Poverty 3 THE SEVEREST CRITIC 86 Historical Materialism / The Commodity and the Theory of Value Capitalist Exploitation / Accumulation and the Falling Rate of Profit Primitive Accumulation / The Transition to Socialism Marx and Proletarian Revolution / Marxist Theory and Social Change 4 ON THE MARGINS 155 Adam’s Fallacy Needs New Shoes / Marginalism Where Do Prices Come From? / Marginalism and Social Welfare Marginalism and Time / Veblen and Conspicuous Consumption 5 VOICES IN THE AIR 179 John Maynard Keynes / World Capitalism in Keynes’s Time Say’s Law and Laissez-Faire / Labor Markets and Unemployment Expectations and Money / The Fate of Capitalism Complexity vs. Collectivism / The Prophet of Technology 6 GRAND ILLUSIONS 213 Looking in the Mirror / Two-Armed Economists Escaping Adam’s Fallacy / Face to Face with Adam’s Curse Reading Further 231 Appendix 237 Demographic Equilibrium / Theories of Money and Prices Ricardo’s Theory of Rent and Accumulation Decomposition of the Value of Commodities / The Working Day Index 251 x / Contents Preface eople ask me from time to time to recommend a good book on economics for educated but nonspecialist readers. I tend to be Pstumped by this question. There are innumerable fat introduc- tory textbooks, crammed (now) with graphics and pop-up boxes, which trudge through the standard Economics 101 curriculum but in my view are unreadable as books. I usually wind up pointing to the classic book The Worldly Philosophers by my late colleague at the New School for Social Research, Robert Heilbroner. It might be a better idea to leave this problem in Heilbroner’s capable hands, but the book you hold is an attempt to explain the core ideas of econom- ics from my own point of view. Obedient to the dictum that each equation in an economics book loses half the readership, I have rele- gated both equations and graphs to an appendix which the reader is positively invited, if not instructed, to skip over, unless uncontrolla- ble curiosity takes over. For many years I taught a course, “Theoretical Foundations of Po- litical Economy,” at Barnard College of Columbia University. The xi subject matter of this course had evolved in discussions in the Eco- nomics Department drawing from Sylvia Hewlett’s original ideas, and in my version the students were asked to read original excerpts from Adam Smith, Thomas Malthus, David Ricardo, Karl Marx, Wil- liam Stanley Jevons, Carl Menger, John Bates Clark, and John Maynard Keynes. This course filled a gap for most students, who came out of it understanding economics not just as a collection of graphs and facts, but as a coherent dialogue; the course provided a kind of map on which students could locate the landmarks of eco- nomic language and ideas. After a while I put my lectures into writ- ten form, and they became the core of the present book. I later taught a version of this course at Lang, the New School for Liberal Arts, broadening it to include works by Thorstein Veblen, Friedrich von Hayek, and Joseph Schumpeter. The reactions of my students convinced me that these were worthwhile and compelling additions to the original reading list. This is not, however, a book on the history of economic thought proper. It uses a historical perspective as a happy way to organize a complex set of ideas into a coherent and understandable story. It re- flects much reading and teaching of particular texts in the history of economic thought, but I am far from an expert or a deep scholar of this extensive and demanding subject. In places I have ventured be- yond the texts of the authors in question and pursued my own imag- inative reconstruction of debates behind the debates, and the some- times unconscious ground from which political economic knowledge arose. This is my own take on economics, and exploits the great figures in the history of political economy shamelessly for my own ends. Be warned. Three questions are bound to be asked, given the title of this book. First of all, what do I mean by “Adam’s Fallacy”? Adam Smith says many things in The Wealth of Nations that are not fallacious. For ex- ample, it is undoubtedly true that self-interest is a powerful motivat- xii / Preface ing force for human beings (though far from being the only one). It is also true that harnessing the pursuit of self-interest through com- petitive capitalist markets can be (though it is not invariably) a pow- erful mechanism for fostering progressive technical change and pro- ducing material wealth. It would be far from correct to claim that all pursuit of self-interest through competitive markets is morally bad. By “Adam’s Fallacy” I mean something a little more subtle than these much-debated claims. For me the fallacy lies in the idea that it is pos- sible to separate an economic sphere of life, in which the pursuit of self-interest is guided by objective laws to a socially beneficent out- come, from the rest of social life, in which the pursuit of self-interest is morally problematic and has to be weighed against other ends. This separation of an economic sphere, with its presumed specific principles of organization, from the much messier, less determinate, and morally more problematic issues of politics, social conflict, and values, is the foundation of political economy and economics as an intellectual discipline. Thus to my mind Adam’s Fallacy is the kernel of political economy and economics. A full understanding of the ar- guments of the great economists requires seeing them in the context of this dubious division. In fact, as I hope this book will demon- strate, political economy and economics is at its heart an attempt to come to terms with this dualistic view of social life. Second, is it true that Adam Smith committed this fallacy? A better qualified scholar of Adam Smith could make this case textu- ally on the basis of The Wealth of Nations more persuasively than I can, starting from Smith’s discussion of self-love as a powerful moti- vator of human action (Book I, chapter 2), continuing with his char- acterization of frugal wealth-owners as public benefactors (Book II, chapter 3), and culminating in his famous invocation of the “invisi- ble hand” (Book IV, chapter 2). But I would argue that it is more to the point that everyone who reads The Wealth of Nations comes away believing that Smith presents the world through the lens of what I Preface / xiii have called his fallacy. Smith is too clever and too wily to present the fallacy in its barest form; his political economic world of self-regulat- ing competitive self-interest actually depends crucially on innumera- ble value-laden political contingencies and institutions. Smith’s qualifications of the principle of laissez-faire, for example, wind up presenting a reasonably balanced view of the interaction of politics and the economy. But the premise of Smith’s book is that it makes sense to start with the examination of purely economic principles that arise from the interaction of self-interested individuals in the context of competitive markets for privately owned commodities. As I try to show in this book, his successors’ investigations and discover- ies are already inherent in Smith’s conception of the political eco- nomic problem. Third, is the “Fallacy” as I conceive of it indeed a fallacy? Here I think the thesis of my book is bound to be controversial. Contempo- rary economics, which has grown into a major intellectual industry, is the direct successor of Adam Smith, and has deeply embedded within it the idea of a division between specifically economic and broader social and political spheres. The teaching of economics con- sistently reinforces the world-view I call Adam’s Fallacy, sometimes explicitly in its treatment of the philosophical foundation of pre- sumed economic laws and principles, and even more pervasively in implicit presumptions built into its models and theorems. Econo- mists often describe this aspect of their work as teaching students to “think like economists.”In this respect my book is a brief for a prose- cution case. Thinking like an economist comes hard to many people, and I personally am grateful for that fact. I hope this book will show that the economic way of thinking is just as value-laden as any other way of thinking about society, and can foster dangerous mistakes of judgment. I call this book a “guide to economic theology” to underline what seems to me the fundamental point that at its most abstract and in- xiv / Preface teresting level, economics is a speculative philosophical discourse, not a deductive or inductive science. I have used the idea of Adam’s Fallacy as an organizing point of view for similar reasons. The most important feature of Adam Smith’s work is not what it tells us con- cretely about how the economy works (although it tells us a great deal about that), but its discussion of how we should feel about cap- italist economic life and what attitude it might be reasonable for us to take toward the complicated and contradictory experience it af- fords us.
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