I have come across a summary of David Simpson’s The Rediscovery of Classical Economics written by David Simpson himself and published by the Royal Economic Society. Before I quote more extensively, I will note where he wrote:
I refer to an intellectual tradition that began with Adam Smith, was continued by Marx, Menger and Marshall, Schumpeter and Hayek and in the present day is represented by theorists of complexity.
It never surprises me to see the name of John Stuart Mill missing from such lists since Mill is the most difficult of all of the classical economists to access for any one schooled in modern theory. Yet it was Mill who set the standard for the second half of the nineteenth century and was explicitly followed by Marshall and even Hayek even as they turned economics into the more familiar form we find today. I might also mention that what makes Marx interesting even now is found in Mill only with much more common sense as well as a far deeper economic understanding. Mill is the high point of classical thought, and in many ways the high point of economic thought. But who amongst any of you would be able to contradict me, you followers of Keynes and marginal analysis, who barely know Mill’s name never mind have any idea of what he wrote? This is Simpson’s description of the economics that has all but disappeared.
The hallmarks of this classical tradition are principally three. The first is the belief that the growth of the economy, rather than relative prices, should be the principal object of analysis. Coupled with that belief is an understanding of the market economy as a collection of processes of continuing change
rather than as a structure, and that the nature of this change is self-organising and evolutionary. Finally there is a conviction that economic activity is rooted in human nature and the interaction of individual human beings.
The differences between classical theory and equilibrium theory can be summarised in the following terms. Classical theory focuses on change and growth within open, dynamic nonlinear systems that are normally far from equilibrium. Equilibrium theory, on the other hand, analyses the theory of value within closed, static linear systems that are always in equilibrium. As to the essential nature of economic activity, classical economics makes no distinction between micro- and macroeconomics. Patterns of activity at the macro level emerge from interactions at the micro level. Evolutionary processes provide the economy with novelty, and are responsible for its growth in complexity. In equilibrium theory micro-and macroeconomics remain separate disciplines, and there is no endogenous mechanism for the creation of novelty or growth.
The behaviour of human beings in classical theory is analysed individually. People typically have incomplete information that is subject to errors and biases, and they use inductive rules of thumb to make decisions and to adapt over time. Their interactions also change over time as they learn from experience. In equilibrium theory, individual behaviour is assumed to be homogeneous and can be modelled collectively. It is assumed that humans are able to make decisions using difficult deductive calculations, that they have complete information about the present and the future, that they make no mistakes and have no biases, and therefore have no need for adaptation or learning.
Simpson finishes by discussing where economics now needs to go under the heading, “The Implications for Economic Theory”. I think this is both very limited in what is sought but also almost impossible to imagine being taken up within the profession. I’m not so sure about the need for non-linear algebra, but at least with this we have the commencement of a program for change:
First of all, courses in economic history and in the history of economic thought should be a required part of the curriculum for every student of economics. The study of economic history, like the study of complex systems, reveals the importance of context in understanding economic behaviour. The study of the development of economic thought helps us to appreciate the weaknesses as well as the strengths of a theory. Macroeconomics should be downgraded, and give way to the study of business cycles.
Secondly, more space should be found for the analysis of dynamic processes at the expense of static theory. The study of the processes of economic growth should be restored to centre stage. This probably means a greater emphasis on nonlinear algebra.
At the same time, the limitations inherent in applying mathematics to economics need to be acknowledged. The importance of the human factor and of human institutions in economic activity means that more attention needs to be given to non-quantitative methods of analysis.
With the scale of disaster that has befallen us since the GFC, there is something radical that needs to be done. And if you are interested in seeing a twenty-first century update on Mill and classical theory, you can always try this.