History of Political Economy
Setting the Table
Steven G. Medema
The analysis of the appropriate role for government within the economic
system has been a centerpiece of economic thinking from its inception.
No area of economic analysis has been untouched by this issue: public
finance, money, labor, development and growth, industrial organization,
international economics . . . all have wrapped up within them, through-
out the history of economic thought, issues regarding the role that gov-
ernment plays or ought to play, the analysis of the impacts of policy or
potential policies, and other, related, concerns. It is also, of course, the
most controversial area of economic analysis. Yes, economists debate
things like models of price determination, the appropriate role for dy-
namics in economic modeling, the potential limitations of certain forms
of econometric analysis. But nothing charges the debates like issues that
reach into the policy arena. Positive theories and descriptions, and
normative prescriptions alike, all take on a strong normative cast—as
We would like to thank Duke University Press and the Mercatus Center at George Mason
University for their generous financial support of the conference, the papers from which are
published in the present volume. Craufurd Goodwin, HOPE’s editor, and Paul Dudenhefer,
HOPE’s managing editor, were incredibly helpful to us in putting together the conference, par-
ticularly when the original conference hotel informed us just weeks before the conference that
they had accidentally overbooked the hotel and could not host us for the weekend. We would
also like to thank the scholars whose work is published here for contributing to what was both
an excellent and spirited conference and what we believe is a volume that makes an important
contribution to the literature in the history of economic thought. We are particularly grateful to
Warren Samuels for his willingness to serve as a general discussant and to present the assess-
ment that concludes this volume.
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History of Political Economy
2 Steven G. Medema
Warren Samuels both points out and illustrates in the essay that con-
cludes this volume. Indeed, it is often difficult, if not impossible, to dis-
cern among them.
It would not be exaggerating the case to say that the theory and anal-
ysis of the economic role of government is the most broad-based, nu-
anced, and heterogeneous stream of economic thinking. In part because
of this, there are countless entrées into the study of this subject: the
view of the appropriate role for government espoused by individuals
or schools and comparative studies of the same; the evolution of views
over time and the underlying reasons for it; varieties of approaches to
the subject within particular schools of thought; the evolution of partic-
ular aspects of the theory (e.g., regulation, taxation); the role of inter-
nal (e.g., tools) and external (e.g., contemporary events) factors in the
development of ideas; the role of ideology; positive versus normative
analysis; the determination of the role ascribed to government within
the economic system (e.g., apriorist versus “theoretically derived”); the
impact of service in government on attitudes toward this question; the
effect of the general gestalt in which economists live; the modeling of
governmental behavior; the efficacy of markets versus government; pol-
icy instruments (e.g., law, direct regulation, taxation); the role of implicit
assumptions in models of the economic role of government; sophisti-
cated versus naive formulations of particular approaches. A number of
these themes are evidenced in the present volume, and the reader can
doubtless think of many more.
As such, it comes as no surprise that the evolution of economists’
views of the policy process, the economic role of government, and re-
lated ideas has been the focus of a not insignificant body of scholar-
ship by those working in the history of economics. Yet there has been
no broad-based integrated study, no magisterial treatment (to use Mark
Perlman’s term) of this subject. We have the treatises on the classical
theory of economic policy by Lionel Robbins (1952) and by Warren
Samuels (1966), articles and bits in textbooks examining the stances of
individual authors or perhaps juxtaposing the views of two or three au-
thors or attempting to make sense of a particular “school,” but practi-
cally nothing has been done by way of pulling out and juxtaposing larger
themes in the evolution of thought and attempting to trace the forces that
account for the development of ideas across schools and epochs.1
1. Medema forthcoming examines certain facets of the evolution of the theory of the eco-
nomic role of government from the mid-nineteenth century through the end of the twentieth.
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History of Political Economy
Setting the Table 3
Nor does the present volume fill this gap. The goal that Peter Boettke
and I had in putting together this conference was more simple: to bring
together a group of scholars with substantial interest and expertise in this
subject who would take on the subject from a variety of perspectives—
bringing to the table new ideas, perspectives, and topics in a way that
would add both breadth and depth to this literature. Of course, the chal-
lenge here was to do so in a way that resulted in a conference that would
be useful for the participants and a conference volume that was suffi-
ciently thematic. These concerns led us to emphasize the period from the
mid-nineteenth century onward—not because we had a particular inter-
est in that period over others but because that is the period dealt with by
the bulk of the best proposals we received. But then, given that the post-
classical period is relatively underanalyzed in the literature as compared
with the classical one, and as much of the most innovative work in our
subject at present is being done on this period, perhaps this should not
come as a surprise.
Political Economy, Old and New
The volume leads off with an article by Peter Boettke and Steven Horwitz
that offers an overarching framework for thinking about the evolution of
economists’ views on the economic role of government. In Boettke and
Horwitz’s schema, economists can be thought of as students or saviors
of society, while economics as a discipline can be characterized as evi-
dencing epistemic modesty or hubris in its scientific knowledge claims.
Boettke and Horwitz then apply this framework to the analysis of the
history of development economics from the eighteenth century onward.
This framework, while only one of several possible means for naming
and framing issues related to the economic role of government, offers
an interesting lens through which to view the essays in this volume.
The detailed analysis of the economic role of government really be-
gins with the classical period. And, while much has been written on this
subject, contemporary scholarship is causing us to view both the clas-
sical literature and its relationship to modern economic analysis in new
and interesting ways. The essays by Alain Marciano, Andrew Farrant and
Maria Pia Paganelli, Jeffrey Young, and David Levy and Sandra Peart
are emblematic of this new scholarship. Marciano and Farrant and Pa-
ganelli take on the question of modeling government behavior by taking
us back to the work of David Hume. Both essays treat Hume’s theory of
Published by Duke University Press
History of Political Economy
4 Steven G. Medema
human nature, its relationship to the modern economic theory of human
behavior, and the implications of this for modeling government behavior
in modern political economy. One of the interesting things that emerge
from these two articles is a good sense for the contingency of the view
of government on the underlying assumptions about agent behavior.
The problem of multiple interpretations is evidenced in Jeff Young’s
examination of the tension in Smith’s theory of the state, a tension re-
flected in his “only three duties” assertions about the role of the sover-
eign when juxtaposed against the lengthy list of action functions that
Smith thought the government should perform. This has led some to
characterize Smith as a die-hard advocate of laissez-faire, others to see
him as promoting wide-ranging government “interference,” and no less
a scholar than Lionel Robbins to suggest that Smith’s “invisible hand”
is actually the state. Young offers a reconciliation of these seemingly
inconsistent aspects of Smith’s theory of the state, drawing on Smith’s
discussion in The Theory of Moral Sentiments to suggest an overarch-
ing framework grounded in commutative justice, distributive equity, and
public utility.
While Marciano and Farrant and Paganelli look forward from the clas-
sical tradition to modern political economy, Levy and Peart reverse the
lens, applying the notion of “politics as exchange”—the catallactic pro-
cess at the heart of important strands of modern public choice theory2—
to the nineteenth-century classical period. Here, though, the political ex-
change process is grounded in then current notions of sympathy, which
have a tempering effect on self-interest and play a prominent role in its
translation to the general interest.
New World Economics
The analysis of the American view is almost altogether absent from the
extant literature on the economic role of government. Apart from some
work on the institutionalists and the more contemporary happenings at
Chicago and Virginia, the underanalyzed history of American economics
has perhaps its greatest deficit in this area.3 Yet, as the articles by Stephen
2. This notion actually dates to Richard Whately, despite its really only coming to the fore
within economics in the last half century.
3. On aspects of the history of American economics in the twentieth century, see the volume
from the 1998 HOPE conference on this topic, From Interwar Pluralism to Postwar Neoclassi-
cism (Morgan and Rutherford 1998). On institutional economics, see both Rutherford 1994 and
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History of Political Economy
Setting the Table 5
Meardon, Bradley Bateman, Thomas Leonard, and Malcolm Rutherford
demonstrate, there is a rich and underappreciated literature that tells a
story very distinct from the British and Continental experiences during
this period.
A great deal of the American literature in the eighteenth and nine-
teenth centuries focused on trade-related issues, and Steve Meardon’s
essay hones in on one particular facet of that discussion—the protection
of intellectual property and its relation to international trading practices.
Meardon looks at the relationship between William Cullen Bryant’s and
Henry C. Carey’s respective positions on international copyright and
their views of trade policy generally, and their larger perspectives on the
role of government in the economy. In the process, Meardon is also able
to show that intellectual history sheds a somewhat different light than
does economic history on the relationship between intellectual copy-
right, trade policy, and economic welfare.
Brad Bateman’s essay examines the evolution of the doctrine of lais-
sez-faire as the dominant credo in nineteenth-century American popular
and economic discourse. Bateman traces the discussion through views
of trade, slavery, and labor issues in the first part of the century, to the
rise of industrialization and the challenges it posed in the latter part of
the century. With this came the beginnings of a challenge to laissez-faire.
Specifically, arguments for an increasingly activist role for government
developed through what we now call the Social Gospel movement within
American Protestantism, informed by the German historical tradition of
economic thinking—a process that set the stage for, among other things,
the reformist aspects of the Progressive and institutionalist movements
on the popular and academic fronts in the late nineteenth and early twen-
tieth centuries.
Tim Leonard picks up the story at the point of the Progressive ascen-
dancy to examine the influence of eugenic ideas on the theory of eco-
nomic policy during this period. The role of race, eugenics, and related
issues in the development of economic ideas has been almost totally un-
explored until recently. The work of David Levy and Sandra Peart has
confronted this head-on in its British classical and postclassical man-
ifestations,4 and Leonard’s essay here shows how many of these same
issues played a role in the American experience as well by informing
Rutherford’s numerous recent articles on interwar institutionalism in HOPE and the Journal of
the History of Economic Thought.
4. See Levy 2001 and Levy and Peart 2005.
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History of Political Economy
6 Steven G. Medema
thought and policy on social reform, particularly issues related to wages
and employment that were at the heart of the Progressive agenda.
Malcolm Rutherford’s piece on Walton Hamilton is very much a case
study in the analysis of the economic role of government during the in-
terwar institutionalist ascendancy. Hamilton was an early proponent of
the study of law and economics—defined as the interrelations between
legal and economic processes—and a pragmatist with a reformist bent.
He was neither an unabashed supporter of business nor a proponent of
heavy-handed control of business operations. Nor was he of the mind
that the answers to the questions of economic policy are likely to be re-
vealed through a priori reasoning. Rather, Hamilton took a case-by-case
approach to these issues and, with this, promoted legal-political decision
making with the broadest possible range of interests directly represented
at the table. Rutherford’s discussion also illustrates how Hamilton’s anal-
ysis both informed and was informed by his extensive participation in
governmental affairs, including the New Deal—an activism that was not
unique among American economists of that period but which, in degree
at least, does distinguish the American economists from their British
counterparts.
Applying Doctrine to the Policy Arena
The discussion of the theory of economic policy has for several decades
now included references to the virtues and vices of “blackboard eco-
nomics,” a term that Ronald Coase applied to theories that he consid-
ered glorious in the world of the blackboard but wholly inapplicable to
the world in which we live, and which has subsequently been popular-
ized by Deirdre McCloskey. David Colander puts this debate in histori-
cal context by analyzing the views on the theory-policy linkage reflected
in John Neville Keynes’s distinction between the science and the art of
economics, Alfred Marshall and A. C. Pigou’s quest for a realistic eco-
nomic theory, and Abba Lerner’s pure theory of economic policy. Colan-
der probes the implications of this for the extent to which one can draw
policy conclusions from theory and examines how our teaching of eco-
nomics reflects these ideas.
Certain of the issues touched on in Colander’s discussion bear on the
question asked by Yakir Plessner and Warren Young—that of the link be-
tween academic economics and economists, and the role of economist as
policy adviser and the willingness and ability of economists to translate
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History of Political Economy
Setting the Table 7
the theories they teach into the policy arena. The theoretical difficulties
pointed to by Colander are amply evidenced by Plessner and Young’s
examination of the role of economists as policy advisers in Israel from
the early 1970s through the mid-1980s and their attempts to deal with
the substantial inflationary pressures of the day. The story is not one of
success for the market, government, or economists.
Another issue foreshadowed by the theory-policy linkage discussed
by Colander and the policy failures analyzed by Plessner and Young is
that of coming to grips with what governments and government agents
actually do when they make economic policy and the implications of
this for understanding and modeling the political element of the policy-
making process. The Anglo-Saxon tradition, in both its classical and its
marginalist-neoclassical variants, lacked a theory of government behav-
ior. The classical pessimism about “interference” with the market and the
neoclassical analysis of efficiency-enhancing government policies were
all predicated on a priori views of the state. As Jürgen Backhaus and
Richard Wagner point out, the Continental tradition of the late nineteenth
and early twentieth centuries was rather different, with distinct German,
Italian, and Swedish approaches to the analysis of public economics and
the political factors that attend it. Backhaus and Wagner bring out both
the foundational elements of these Continental approaches and certain
of their relations to modern public choice theory.
Both theoretical economics and real-world economies evolved away
from laissez-faire ideology over the first half of the twentieth century.
Socialism held certain attractions both in theory and in reality, the
Cambridge tradition espoused a strongly reformist view of the market
process, and, as I have already noted, the American Progressive and in-
stitutionalist movements evidenced a strong belief in the ability of gov-
ernment to modify market performance in socially desirable directions.
The corporatist movement on the Continent during the interwar period
paralleled the increasing calls for a larger role for government manage-
ment in the British and American capitalist systems during that same
period. António Almodovar and José Luís Cardoso look at the rise of
corporatist ideas as a third way between the classical–free market and
socialist alternatives that had dominated the debates, one that would at-
tempt to overcome some of the limitations of the laissez-faire approach
while availing itself of the advantages offered by the market system.
They also show how certain aspects of corporatism were enfolded into
the Keynesian ideas that emerged in the postwar period.
Published by Duke University Press
History of Political Economy
8 Steven G. Medema
If the first two-thirds of the twentieth century were dominated by the
economist as savior-cum-engineer with increasingly sophisticated mod-
els of efficient government policymaking, as Boettke and Horwitz sug-
gest, the last several decades have witnessed something of a reversion
to classicism in the reawakening of what Backhouse calls “free market
economics.” Here, though, we see a more sophisticated modeling of the
market process than evidenced in the classical tradition and a more de-
tailed depiction of government behavior than can be found in either the
pessimism of the classicals or the optimism of the neoclassicals. Back-
house’s essay attempts to address the “why” behind this transformation
by examining forces within the profession and without, and how they
came together to revolutionize the theory of economic policy and its ap-
plication on both the macro and micro sides—first in the United States
and then throughout much of the West.
Conclusion
Given the enduring importance of the analysis of the economic role of
government within the history of economic thought, as well as the still
relatively unsettled, or controversial, nature of this issue within contem-
porary thinking, we believe that this volume is highly topical. In the end,
our hope is that it will contribute to an enhanced understanding of the
evolution of economists’ views about the economic role of government
and stimulate new lines of research that build on the ideas suggested in
the present essays.
References
Levy, David M. 2001. How the Dismal Science Got Its Name: Classical Economics
and the Ur-Text of Racial Politics. Ann Arbor: University of Michigan Press.
Levy, David M., and Sandra J. Peart. 2005. The “Vanity of the Philosopher”: From
Equality to Hierarchy in Post-Classical Economics. Ann Arbor: University of
Michigan Press.
Medema, Steven G. Forthcoming. The Hesitant Hand: Market and State in the His-
tory of Modern Economic Thought. Princeton, N.J.: Princeton University Press.
Morgan, Mary, and Malcolm Rutherford, eds. 1998. From Interwar Pluralism to
Postwar Neoclassicism. HOPE 30 (supplement).
Robbins, Lionel. 1952. The Theory of Economic Policy in English Classical Political
Economy. London: Macmillan.
Published by Duke University Press
History of Political Economy
Setting the Table 9
Rutherford, Malcolm. 1994. Institutions in Economics: The Old and the New Insti-
tutionalism. Cambridge: Cambridge University Press.
Samuels, Warren J. 1966. The Classical Theory of Economic Policy. Cleveland:
World.
Published by Duke University Press
