Economic development

Issue: 127

Joseph Choonara

Dimitris Milonakis and Ben Fine, From Political Economy to Economics: Method, the Social and the Historical in the Evolution of Economic Theory (Routledge, 2009), £33.99

Dimitris Milonakis and Ben Fine, From Economics Imperialism to Freakonomics: The Shifting Boundaries between Economics and other Social Sciences (Routledge, 2009), £31.99

These two books are a genuine achievement in Marxist scholarship. The second deservedly won the authors the 2009 Isaac and Tamara Deutscher Prize. Together they form a timely examination of the history of economic thought and its relationship to wider social theory.

From Political Economy to Economics charts the process through which the social and historical dimensions of political economy were eroded and excised. This led to the creation of a new discipline—economics—developing in isolation from any wider understanding of society. Anyone who doubts the book’s main thesis need only observe one especially grotesque consequence: the tendency for City firms to recruit mathematics and physics graduates to develop complex financial models in near total ignorance of the economic framework within which those models are supposed to function. This left financial companies particularly ill-prepared when, in 2008, economic crisis erupted and the mathematical wizardry no longer explained much of anything.

The same obsession with formalistic modelling today runs right through the academic discipline, leading Milton Friedman to remark in 1999: “Economics has become increasingly an arcane branch of mathematics rather than dealing with real economic problems.”

The founders of classical political economy, in particular Adam Smith and David Ricardo, had more profound ambitions. Whatever the limitations of their theories, they were forced to grapple with the reality of the emerging capitalist system.1 But as capitalism secured its dominion over the globe the insights of the founders of political economy were buried. Now the priority was to provide justifications for the exploitation upon which the system was built and to focus on the day to day movement of prices, rather than asking where value originated or how the system developed over time.

Ben Fine and Dimitris Milonakis chart the rise of this neoclassical economics via the “marginalist revolution” associated with figures such as William Stanley Jevons, Léon Walras and Carl Menger. Their nuanced account sees this as a process rather than a single rupture.

They also consider another intertwined division in economic methodology, the “schism between the abstract/deductive and the inductive/historical methods”. The former sought to explain economic developments based on a set of simple axioms; the latter attempted a more descriptive understanding. This divide runs from the classical period right up to the Second World War. The earliest clash between the two methods set Ricardo, who pioneered the deductive method, against the more practically and historically minded Thomas Malthus. Ultimately the real content of Ricardo’s economics was rejected out of hand by mainstream economics and his “greatest influence in economic science was in terms of his method”.

But the deductive method did not win out immediately. The argument re-emerged particularly sharply in the Methodenstreit (“struggle over methods”) of the 1880s. This pitted the marginalist Carl Menger against Gustav Schmoller, the leading figure in the now almost forgotten German Historical School. The debate hinged on whether the correct method was to put forward a set of abstract principles or to generalise from empirical evidence derived from historical studies of particular national economies.

Both the historical school and marginalism were rival attempts to respond to Ricardo’s political economy by breaking from it. A third response, that of Karl Marx, instead took the form of a “critical reconstruction of Ricardian economics”. Marx both built on and criticised his predecessors. His account of capitalism stressed the origins of value in the labour of workers, and the dynamism and destructiveness resulting from attempts by rival capitalists to engage in competitive accumulation.

Marx’s method was also unique and the authors’ discussions of this form the finest sections of this work. Although preferring Ricardo’s approach to Malthus’s, “in the deductive/inductive dichotomy, Marx is a case apart because of his deployment of the method of materialist dialectics. In this approach, the traditional distinction between deduction and induction is

Fine and Milonakis go on to unpick the mainstream and dissident strands of economics that emerged in the 20th century. They provide useful methodological accounts of institutionalism, a once influential school of thought that saw economic behaviour as shaped by particular institutions that develop in a society; the Austrian school associated with Friedrich von Hayek; and the Keynesian tradition, both in its original form and the much tamer version that came to dominate in the decades following the Second World War. Each, however flawed, makes contemporary economic theory seem like barren number crunching by comparison. The authors also successfully push back the boundaries of what can be considered economic theory—including, for instance, a section on Max Weber.

Having shown how each rival form of economic thinking was “set aside” by the mainstream, Fine and Milonakis go on, in From Economics Imperialism to Freakonomics, to show how the models of the discipline have now colonised other areas of social science. Paradoxically, the very emptiness of economics, focussed on the rational choices of hypothetical individuals severed from society and history (even eminently economic categories such as “the firm” and “money” are excluded), means that its laws can in principle be applied to any sphere of human activity—or indeed, in some accounts, animal activity.

The first phase of “economics imperialism”, associated in particular with the Chicago economist Gary Becker, seeks to “treat non-market phenomena as if they were governed by a market and, thereby, imposes economic rationality upon them in the form of atomised and optimising individuals”.

Eventually, this crude form of economics imperialism, which understandably met with some resistance, gave way to a new one founded upon the work of economists such as Joseph Stiglitz who placed market imperfections at the centre of their theories. This was more palatable to both non-economists and to economists concerned with reality. But its most important consequence was to protect the neoclassical core of “methodological individualism, instrumental rationality, equilibrium price theory, marginalism and stable preferences”. The acknowledgement of the non-economic, in the most shallow of terms, allowed economics to preserve the semblance of universality even more effectively than the original economics imperialism.

However, another especially crude version of economics imperialism has emerged in recent years, dubbed “freakonomics”. The popular book of the same name which launched this trend seeks to analyse everything from sumo wrestling to crack cocaine dealing based on the study of incentives. The authors expose the weakness of this current of thought, its shallow assumptions and its lack of theoretical reference points even within the mainstream of economics—Steven Levitt, coauthor of Freakonomics, boasts of his ignorance of economic theory.

Throughout their two books, Fine and Milonakis construct their case meticulously. But their focus on the debates within economic theory and the subject’s interface with broader social theory leaves a question unanswered: to what extent was the trajectory of the discipline inevitable and to what extent it was contingent upon the outcome of particular skirmishes?

The Hungarian Marxist Georg Lukács provided one possible way of situating these debates. In his essay “Reification and the Consciousness of the Proletariat” he wrote: “The capitalist process of rationalisation based on private economic calculation requires that every manifestation of life shall exhibit [an] interaction between details which are subject to laws and a totality ruled by chance. It presupposes a society so structured”.2

Individual capitalists are forced by the logic of competition to drive forward their own narrow interests. But their advances are pursued without examining the logic of the system as a whole, which is founded on exploitation and suffers an unavoidable tendency towards crisis. The theory appropriate to such a system takes on an equally fragmentary and partial quality, reflecting the division of labour built into capitalism. This suggests that capitalism tends to develop the kind of economic theory it deserves. It also implies that social theory beyond economics, being similarly distorted, might be inherently susceptible to the advances of economics imperialism.

Although leaving such issues largely unexplored, Fine and Milonakis’s work provides an excellent starting point to explore changes in economic theory, and the shifting boundaries of the discipline. The scope of the books is vast, as is the number of theorists considered and the range of works cited. On occasion the weight of the authors’ scholarship threatens to crush the reader under an accumulation of references.3 The prose is of uneven quality, and the first book is certainly more gripping than the second, at least for the reader outside academia.

Because of their style and the amount they take for granted, these works are not the best starting point for those unfamiliar with economic theory. But those who already have some grounding in this field will learn a great deal by reading them and will wish to keep them on their bookshelf as an essential reference for many years to come.


1: Isaak Rubin provides a readable and succinct account of the development of political economy-Rubin, II, 1989 [1929], A History of Economic Thought (Pluto),

2: Lukács, Georg, 1990 [1923], History and Class Consciousness (Merlin), p102.

3: An example of the impenetrability of parts of the text: “Whilst, at least in part an unwilling protégé to Marshall, Maloney (1985, p60) and Groenewegen (1995), Marshall read (if not vetted) Keynes’ text that is adjudged by Hutchison (2000, pp4-5) to have been the only book on the methodology of economics to be published before 1970.”