Liberty Matters

The Long Shadow of Classical Economics

I'd like to conclude my portion of this discussion by reflecting on Frank Fetter's place in the history of economic thought and especially on what I consider to be a crucial underlying theme of his contributions: the paradigm shift from classical political economy to modern subjectivist economics.
Fetter firmly believed that the promise of the "new economics" was never fully realized because it failed to emerge from the shadow of the British classical school. The Ricardian tradition in particular was continued by Marshall and many others who embraced key aspects of classical theory—including vital ideas about capital, rent, and distribution—and merely presented them in fresh garb. The resulting hybrid theory (or perhaps, Frankenstein's monster) suffered from many failings of the earlier doctrines and has already been justly criticized by the American psychological school, the Austrians, and the early institutionalists, among others. Throughout the present conversation, the discussants have returned several times to these critiques, particularly of the Smithian definition of capital that has so long dominated the literature. Yet despite decades of criticism, the classical economists retain an aura of prestige and their writings are treated almost with reverence.
Yet given the critical record, shouldn't we expect economists, especially Austrians, to adopt a more skeptical attitude toward the classicals? My final, provocative claim is that economists tend to overestimate the theoretical achievements of the British classicals and underestimate the originality and significance of the subjectivist revolution (including Fetter's contributions to it). The reason for the continued prestige of the classical economists is not that their theories emerged unscathed from criticism, but that economists have ceased to ask the kind of fundamental questions that would reveal their flaws. Attention has shifted away from the "mundane" topics at the heart of economics, such as price theory, capital theory, monetary theory, business-cycle theory, and the theory of interventionism (Klein 2008), toward more-interdisciplinary and applied topics.
Quite often this move takes economists far afield. For example, contemporary literature studying the British classical economists tends to focus on their philosophical and methodological views or on their policy relevance. We often remember Smith, Ricardo, and Mill more as wide-ranging moral philosophers, free-trade advocates, or laissez-faire liberals than, say, as price theorists. We tend to overlook their writings on specific points of economic theory and focus instead on their systems.
Yet if we examine British classical economics as a body of doctrines about the "mundane" problems we've been discussing—prices, markets, equilibrium, capital, interest, rent, etc.—it's hard not to think that much of its legacy has been confusion or outright error. This was also Fetter's conclusion. Naturally, he never hesitated to praise the classical economists for their genuine achievements (and neither should we), but he also didn't shrink from strongly criticizing their failings. It is my view that the best way forward for subjectivist economics is a return to the same critical attitude and search for answers to fundamental questions that captured the interest of Fetter and his contemporaries.
It only remains for me to thank Joseph Salerno, Geoffrey Hodgson, and Peter Lewin for their contributions to this discussion. I could not wish for better discussants, and I am extremely grateful for their time and effort in exploring this neglected but vital corner of economics.