Jim Cox is one of my favorite living economists. His slim but pregnant book — The Concise Guide To Economics — is a miniature masterpiece. The following comes from Chapter 37:
The Spanish Scholastics of 14th through 17th century Spain had produced a body of thought largely similar to our modern understanding of economics. The work of these scholars was largely lost to the English speaking world we’ve inherited. The French physiocrats carried the discipline forward in the 18th century with prominent economists of the time including A. R. J. Turgot and Richard Cantillon. A strategic error was made by these French advocates of laissez-faire as they attempted to change policy by influencing the King to embrace free markets, only to have the institution of monarchy itself delegitimized. Thus a guilt by association undermined the credibility of the laissez-faire theorists.
In 1776 Scotsman Adam Smith published The Wealth of Nations only to set the discipline back with his cost of production theory of value. (Smith did properly emphasize specialization and the division of labor in his analysis.) The correct subjective theory of value had been understood by both the Spanish Scholastics and the French laissez-faire school. Why Adam Smith chose the faulty cost of production theory over subjectivism is a mighty mystery as it is clear from Smith’s lecture notes that he had endorsed marginal utility analysis prior to the publication of his book. The marginal revolution of the 1870’s–with Carl Menger in Austria, William Stanley Jevons in England, and Leon Walras in Switzerland each writing independently and in differing languages–reestablished the correct marginal approach. As stated by Joseph Schumpeter in The History of Economic Thought:
It is not too much to say that analytic economics took a century to get where it could have got in twenty years after the publication of Turgot’s treatise had its content been properly understood and absorbed by an alert profession. p. 249
Unfortunately, the theory was perverted into a mathematized method with the rush to positivism in the 20th century.
The Austrian tradition of Menger was completed in the theories of Ludwig von Mises with the application of marginal utility analysis applied for the first time to money, which in turn led to the correct business cycle approach during the 1920’s. This approach was gaining headway in the English speaking world with F. A. Hayek’s appearance in England in the early 1930’s. But in the late 30’s the well-named Keynesian Revolution displaced the Austrian theories–not by refutation, but by neglect–taking economic theory to the bizarre point of splitting macro-theory from an underlying micro-emphasis; a point where it still is today.
Jim Cox is an Associate Professor of Economics and Political Science at the Gwinnett Campus of Georgia Perimeter College in Lawrenceville, Georgia and has taught the principles of Economics courses since 1979. Great Ideas for Teaching Economics includes nine of his submissions. As a Fellow of the Institute for Humane Studies his commentaries were published in The Cleveland Plain Dealer, The Wichita Journal, The Orange County Register, The San Diego Business Journal, and The Justice Times as well as other newspapers. His articles have also been published in The Atlanta Journal and Constitution, The Margin Magazine, Creative Loafing, The LP News, The Georgia Libertarian, The Gwinnett Daily News, The Atlanta Business Chronicle, The Gwinnett Post, The Gwinnett Citizen, The Gwinnett Business Journal and APC News. Cox has been a member of the Academic Board of Advisors for the Georgia Public Policy Foundation, and is currently on the Board of Scholars of the Virginia Institute for Public Policy.
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