by Vivian Walsh and Harvey Gram
New York: Oxford University Press, 1980, pp. xvi, 426
This intriguing volume on alternative theories of
equilibrium should
be of interest to those working in the Austrian tradition--even though
the book deliberately downplays the contribution of the Austrian
school.
When a book is well written and its arguments are laid out in their
essential
form, the reader can learn much, but sometimes what he learns is not
exactly
what the authors are striving to teach. So it is with Walsh and Gram.
The economic theories dealt
with range from pre-Smith to post-Hahn. The ideas are organized in a
way
suggested by the book's subtitle. The first half of the book presents
ideas
chronologically by author. Tracing the development of the thought from
Sir William Petty to Leon Walras involves identifying the important
developers,
pointing out the relevant biographical considerations, and analyzing
their
contributions to general-equilibrium theory. In the second half the
individual
contributors recede into the background and the material is presented
logically
as opposed to chronologically. The chapters alternate between classical
and neoclassical analysis as the corresponding models increase in
complexity.
The equilibrium conditions are expressed verbally, graphically and
mathematically,
and the basic structures of the classical and neoclassical models are
compared
and contrasted.
The fundamental and
recurring
message in the book is that classical theories and neoclassical
theories
are to be distinguished in terms of their respective themes. Concerns
about
subjectivism, methodological individualism and even marginalism take a
back seat to the underlying thematic difference between the two kinds
of
theories. The classical theme is the accumulation and allocation of
surplus
output; the neoclassical theme is the allocation of given resources
among
alternative uses. As Walsh and Gram sift through the history of
economic
thought, it is this thematic distinction that serves as their sieve.
Clearly, the authors have
an affinity for theories that allow for an economic surplus. Progress
in
the development of economic thought is to be associated with theorists
who increased our understanding of the surplus. The major figures
include
those who have been involved in the current "classical revival" as well
as the classical theorists themselves. More specifically, the
development
of the notion of a surplus is traced through the writings of William
Petty,
Richard Cantillon, Francois Quesnay, Adam Smith, David Ricardo and Karl
Marx. Then, after a long dry spell of over a half century, further
development
occurred with the efforts of Pierro Sraffa, John von Neumann, Joan
Robinson
and a number of lesser contributors. The long dry spell, of course, is
coterminous with the birth and growth of the Austrian school and of
neoclassical
economics in general. The economic theory that dominated in this period
(from 1871 to the 1930s) is described by Walsh and Gram as a "highly
special
new version of allocation theory." It was highly special because it did
not dwell on the allocation of the economic surplus.
Readers who have a special
appreciation for the contributions of the Austrian theorists can gain
many
insights from this particular perspective on classical and neoclassical
theories, but the ultimate assessment of the theories is bound to be
far
different from those of Walsh and Gram. The importance of an adequate
theory
of capital, the meaning of an economic surplus, and the role of
economic
classes and institutions in theoretical constructs are three issues
that
are likely to be on the mind of the Austrian-oriented reader throughout
most of the book. A brief consideration of each of these issues can
convey
much of the substance and flavor of this volume. It can also serve to
contrast
the Austrian resurgence with the classical revival.
From Carl Menger onward
the Austrian authors have been aware of the lack of an adequate theory
of capital in both classical and neoclassical writings. This is
inadvertently
dramatized as Walsh and Gram construct the bare-bones models of these
two
alternative theories. The classical notion of a surplus requires that
both
inputs and outputs be measured in physical terms. But if surplus is to
be reckoned by subtracting the (physical) quantity of inputs from the
(physical)
quantity of outputs, the input good and the output good must be the
same
good. This accounts for the dominance in classical theory of one-good
models.
In the Ricardian corn model, corn constitutes both the input (seed and
subsistence for the workers) and the output. The amount of corn
produced
minus the seed corn and the corn consumed by workers is the surplus.
Walsh
and Gram begin their presentation of the classical vision by showing
(mathematically)
that for an economy to be "viable," the output of corn has to be at
least
as great as the input, and for a surplus to exist, it has to be
greater.
The Austrian-oriented reader will have no trouble following this logic,
but those who have studied Böhm-Bawerk's Capital and Interest
and Hayek's Pure Theory of Capital will be left with an empty
feeling.
There are no distinct capital goods, much less a capital structure in
the
classical vision.
As Walsh and Gram
demonstrate,
the classical model can be expanded to represent a two-sector economy
or
even an n-sector economy. In these more complex models the surplus has
to be expressed as a vector of goods. But still, the list of inputs is
identical to the list of outputs. The authors focus on an economy in
which
iron and corn are used to produce iron and corn. This is one member of
a class of models that conform to Pierro Sraffa's vision of the
"production
of commodities by means of commodities." Again, there are no distinct
capital
goods. The sympathetic reader can imagine all sorts of capital-using
production
processes that transform the pile of inputs into a larger pile of
outputs,
but these processes are no part of the classical analysis.
The neoclassical model (as
outlined by Walras) differs markedly from the classical model, but
deserves
no higher mark on the question of capital. Here, the subscripts on the
input quantities have to be altered to indicate that the inputs consist
of land and labor rather than iron and corn. In the neoclassical vision
these distinct factors of production are transformed into an array of
consumption
goods--wheat and rice in the two-commodity model presented in the book.
Whatever capital goods may come into existence during the
transformation
phase are assumed to go out of existence just before the output
emerges.
The authors recognize that the Walrasian model can be generalized to
accommodate
an intertemporal equilibrium. The output variable is double subscripted
with the first subscript representing the particular good and the
second
representing the period in which its production is completed. This
formulation
allows for a variable period of production but constitutes--in the eyes
of one Austrian writer--capital theory without capital. In any case
Walsh
and Gram mention the intertemporalized Walrasian model only to deny
that
it can be found in Walras' own writings.
The issue of capital theory
is not tangential to the understanding of this book. It bears directly
on the validity of the book's central message. For theories that allow
for the production of distinct capital goods (factories, machines, and
tools) there is no sharp distinction between classical accumulation and
neoclassical allocation. The allocation of resources to the production
of a fish net, for example, can be modeled with a neoclassical
construct,
and yet the fish net itself constitutes accumulation in the classical
sense.
The distinct capital good is produced with a given amount of resources
available at a particular point in time; it represents, at the same
time,
an increase in the capital stock and hence an increased capacity to
produce
in the future. The concept of capital goods bridges the gap between the
notion of allocating resources at a point in time and the
notion
of allocating resources over time. It is only with this bridge
out
that Walsh and Gram can draw the sharp distinction that serves as the
thesis
of their book.
If the reader finds too
little discussion about capital goods, he will find more than enough
discussion
about the economic surplus. This concept, which defines the theme of
the
classical writings, is alien to the writings of the Austrian school.
But
a careful reading of Walsh and Gram's treatment of the concept of a
surplus
can help to reconcile the ideas of Quesnay and Smith with those of
Menger
and later Austrians. The issue of whether or not a particular economic
activity yields a surplus is the same as the issue of whether or not
that
activity is productive (in the classical sense). What is it about the
classical
models that causes a particular factor to appear to be productive of a
surplus? An answer to this question, which can be found "between the
lines"
in Walsh and Gram's discussions, can explain much.
In the vision of the
Physiocrats,
agricultural production is productive; industrial production is not.
Only
land yields a surplus. And inspection of the model that yields this
conclusion
reveals that land is the only significant factor of production that is
not explicitly taken into account. Iron and corn (and land) are used to
produce iron and corn. The unaccounted-for input (land) yields an
unaccounted-for
output (a surplus of iron and corn). Since land is dominant in
agricultural
production and trivial in industrial production, the former activity
appears
to be productive while the latter does not.
The vision of Adam Smith
can be analyzed in a similar way. Smith accounted for land in his
formulation,
but believed that both the agricultural sector and the industrial
sector
were productive of a surplus. The thing that allows for this
productivity
is time--the factor that is not explicitly counted as an input in
Smith's
formulation. Smith saw labor as being unproductive if it is aimed at
producing
a service for present consumption and productive if directed at
producing
goods and services for the future. That is, only if labor is combined
with
the unaccounted-for input, time, will it yield an unaccounted-for
output.
Had time been taken into account explicitly, or--what amounts to the
same
thing in this context--had future consumption been appropriately
discounted,
the Smithian surplus would have disappeared.
In Walras' neoclassical
vision there is no unaccounted-for input. This follows from the very
structure
of the model, in which the value of all goods is fully imputed to the
corresponding
factors of production. There is no possibility of a surplus because the
value of the output is always equal to the value of the input. The
contrast
between Smith and Walras is instructive. Smith, in effect, discounted
the
present rather than the future. This caused him to emphasize the
importance
of maximum growth. Consumption deferred is consumption increased.
Walras
constructed a model in which no growth is possible. The total value of
goods is always confined to the value of preexisting resources. The
economy
is forever trapped in what Murray Rothbard has recently called the
"Walrasian
Box."
Focusing on the
unaccounted-for
input can cast Austrian theory in an interesting light. The different
models
(Physiocratic, classical, neoclassical, Austrian) can be identified in
terms of the factor that lies outside the economic calculus. It is land
for the Physiocratic model; time for the classical model. In the
neoclassical
model, nothing lies outside the economic calculus. For Austrian theory
the unmodeled factor is entrepreneurship. The Austrians account for
land,
labor, time and existing capital goods, but they escape from the
Walrasian
Box by allowing for entrepreneurs to combine these factors in new ways,
giving rise to an output which in (potentially) more valuable than the
previous collection of inputs. This perspective is particularly
favorable
to Austrian theory. There is no justification for failing to
incorporate
land or time into the economic calculus, but entrepreneurship is
inherently
unmodelable. This unique aspect of entrepreneurship has been emphasized
by the Austrian school from Menger down to the present-day Austrian
theorists.
A final perspective can
be offered in terms of economic classes and institutions. Most modern
theorists
are critical of classical theory to the extent that it turns on
behavioral
differences between broadly defined economic classes. The assumption,
for
instance, that capitalists save and workers consume just makes for bad
theory. Neoclassical theory is classless theory and, in this respect,
has
to be judged an improvement. But neoclassical theory is also
institutionless.
None of its conclusions depend upon the existence of any particular set
of institutions. As Walsh and Gram explain, neoclassical theory can be
adapted to apply to any economic system and any pattern of resource
ownership.
In principle neoclassical theory can predict how a market economy will
allocate the economy's resources, or, alternatively, it can instruct
the
government how to allocate them. The analytical equivalence of the
decentralized
direction and the centralized direction of resources accounts for the
Lange-Lerner
type endorsement of socialism and for the tendency of some modern
neoclassicals
to be virtually indifferent between market solutions and governmental
solutions
to allocation problems.
The theorists of the
Austrian
school do not conform to either the classical or the neoclassical view.
Austrians theory is classless but not institutionless. The knowledge
about
resource availabilities, production techniques, and consumer
preferences
is, by its very nature, decentralized knowledge. This requires, then,
that
the economic decisions that make use of this knowledge be similarly
decentralized.
The spontaneous order that can arise only from decentralized
decisionmaking
is the central theme in the writings of Hayek and several other
Austrian
theorists. The failure to recognize this institutional requirement can
lead to bad theory and bad policy as is evidenced by the propositions
of
"welfare economics" and the attempt to use government to correct for
so-called
market failures.
The reader of Walsh and
Gram's book will gain many insights. He will gain even more if he keeps
in mind that the authors' thematically defined categories of theories
are
not jointly exhaustive. The very identification of the two themes
requries
that capital theory be suppressed; neither theme recognized the unique
role of the entrepreneur; and the fundamental importance of economic
institutions
is overlooked throughout the book. When these considerations are taken
into account, the reader gains a healthy appreciation for the Austrian
school on the basis of this comparison of classical and neoclassical
theories.