The rediscovery of classical economics adaptation complexity and growth

The Rediscovery of Classical Economics NEW THINKING IN POLITICAL ECONOMY Series Editor: Peter J Boettke, George Mason University, USA New Thinking in Political Economy aims to encourage scholarship in the intersection of the disciplines of politics, philosophy and economics It has the ambitious purpose of reinvigorating political economy as a progressive force for understanding social and economic change The series is an important forum for the publication of new work analysing the social world from a multidisciplinary perspective With increased specialisation (and professionalisation) within universities, interdisciplinary work has become increasingly uncommon Indeed, during the twentieth century, the process of disciplinary specialisation reduced the intersection between economics, philosophy and politics and impoverished our understanding of society Modern economics in particular has become increasingly mathematical and largely ignores the role of institutions and the contribution of moral philosophy and politics New Thinking in Political Economy will stimulate new work that combines technical knowledge provided by the ‘dismal science’ and the wisdom gleaned from the serious study of the ‘worldly philosophy’ The series will reinvigorate our understanding of the social world by encouraging a multidisciplinary approach to the challenges confronting society in the new century Recent titles in the series include: Socialism, Economic Calculation and Entrepreneurship Jesús Huerta de Soto The Political Economy of Hurricane Katrina and Community Rebound Edited by Emily Chamlee-Wright and Virgil Henry Storr Robust Political Economy Classical Liberalism and the Future of Public Policy Mark Pennington Good Governance in the 21st Century Conflict, Institutional Change, and Development in the Era of Globalization Edited by Joachim Ahrens, Rolf Caspers and Janina Weingarth Institutions in Crisis European Perspectives on the Recession Edited by David Howden Constitutional Economics and Public Institutions Edited by Francisco Cabrillo and Miguel A Puchades-Navarro International Aid and Private Schools for the Poor Smiles, Miracles and Markets Pauline Dixon The Rediscovery of Classical Economics Adaptation, Complexity and Growth David Simpson The Rediscovery of Classical Economics Adaptation, Complexity and Growth David Simpson Formerly Professor of Economics, University of Strathclyde, Scotland, UK NEW THINKING IN POLITICAL ECONOMY In Association with the Institute of Economic Affairs Edward Elgar Cheltenham, UK • Northampton, MA, USA © David Simpson 2013 All rights reserved No part of this publication may be reproduced, stored in a retrieval system or transmitted in any form or by any means, electronic, mechanical or photocopying, recording, or otherwise without the prior permission of the publisher Published by Edward Elgar Publishing Limited The Lypiatts 15 Lansdown Road Cheltenham Glos GL50 2JA UK Edward Elgar Publishing, Inc William Pratt House Dewey Court Northampton Massachusetts 01060 USA A catalogue record for this book is available from the British Library Library of Congress Control Number: 2012952657 This book is available electronically in the ElgarOnline.com Economics Subject Collection, E-ISBN 978 78195 197 ISBN 978 78195 196 (cased) 978 78254 508 (paperback) 03 Typeset by Servis Filmsetting Ltd, Stockport, Cheshire Printed by MPG PRINTGROUP, UK Contents Preface 10 vi Introduction Human behaviour Qualitative change and quantitative growth Adaptation, emergence and evolution Self-organisation and complexity Markets, competition and entrepreneurship Specialisation and growth Prosperity and recession Government The rediscovery of classical economics Bibliography Index 13 28 51 71 86 105 131 160 179 195 206 v Preface A book so long in the making generates many debts of gratitude Among those who have provided me with help and encouragement at various stages of its writing are Fessal Bouaziz, Asa Briggs, Ian Byatt, Phoebe Clapham, Michael Fry, Gavin Kennedy, Brian Loasby, Alan Peacock, Colin Robinson, Jim Stretton and John Thomson, as well as an anonymous researcher at the Royal Economic Society There are many others whom I may have overlooked I thank them all most warmly for their individual contributions, moral as well as intellectual I should also like to thank my editors, Matt Pitman, Jo Betteridge, Sarah Cook and Jane Bayliss, as well as the staff of the Reading Room at the National Library of Scotland A special word of thanks must go to Neil Menzies who read some early drafts and tirelessly prodded me whenever my concentration wavered I am particularly grateful to Jim Walker, once my student, now my teacher He is living evidence that classical economics really works Above all, I am deeply indebted to my wife Judy for her forbearance during so many absences of mind and for her active support at critical times Without that support, this book could not have been written Tyninghame, East Lothian January 2013 vi This book is for Judy, who made it possible Two roads diverged in a wood, and I, I took the one less traveled by, And that has made all the difference Robert Frost The Road Not Taken Introduction The main concern of economics is thus with human beings who are impelled, for good and evil, to change and progress [T]he central idea of economics  must be that of living force and movement Alfred Marshall1 The purpose of this book is to put forward an alternative to equilibrium economics, the paradigm that has dominated the mainstream of economic thought for the best part of a century.2 That alternative is what may be called classical economics, namely the intellectual tradition that began with Adam Smith, evolved in the nineteenth century, was continued in the twentieth century by Marshall and the Austrians amongst others, and is today represented by theorists of complexity The hallmarks of the 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 Many people might suppose from the similarity of the terms ‘classical’ and ‘neoclassical’ that the one school of economic thought is closely related to the other In fact, as this book will try to show, they are more nearly exact opposites.3 We need an alternative to conventional equilibrium economics because it does not provide us with a good understanding of how the economy works Equilibrium theory is essentially a mechanistic metaphor.4 The progressive refinement of the theory during the twentieth century was intended to deliver determinacy of solutions together with simplicity of structural form This has been achieved in principle, but at the cost of such drastic simplification of assumptions and the exclusion of so many important elements of economic activity that the resulting theory has little correspondence with reality It is not surprising therefore that it has been useful neither for prediction nor for explanation This is particularly harmful for policy makers The importance of real world phenomena that cannot be accommodated within the structure of 202 The rediscovery of classical economics Complexity, Cheltenham, UK and Northampton, MA, USA: Edward Elgar Publishing, pp 213‒58 Maddison, A (2007), Contours of the World Economy 1–2030 AD, Oxford: Oxford University Press Mandeville, B ([1732] 1988), Fable of The Bees, Indianapolis: Liberty Fund Manski, C.F (2006), ‘Social learning and the adoption of knowledge’,  in  L.E Blume and S.N Durlauf (eds), The Economy as an  Evolving  Complex System, Oxford: Oxford University Press, pp. 31‒48 Marchionatti, R (2006), ‘The “increasing returns and competition” dilemma: from Marshall to Pigou’, in T Raffaelli, G Becattini and M Dardi (eds), The Elgar Companion to Alfred Marshall, Cheltenham, UK and Northampton, MA, USA: Edward Elgar Publishing Marshall, A (1919), Industry and Trade, London: Macmillan Marshall, A ([1920] 1962), Principles of Economics, Eighth Edition, London: Macmillan Marshall, A and M.P Marshall (1879), The Economics of Industry, London: Macmillan Marx, K and F Engels ([1848] 1955), The Communist Manifesto, New York: Appleton-Century-Crofts Means, H (2001), Money and Power, New York: John Wiley Menger, C ([1871] 1976), Principles of Economics, New York: New York University Press Menger, C ([1883] 1963), Problems of Economics and Sociology, Urbana, IL: University of Illinois Press Messerlin, P (2001), Measuring the Costs of Protection in Europe, Washington, DC: Institute for International Economics Metcalfe, J.S (2006), ‘Evolutionary economics’, in T Raffaelli, G Becattini and M Dardi (eds), The Elgar Companion to Alfred Marshall, Cheltenham, UK and Northampton, MA, USA: Edward Elgar Publishing Milgate, M (2008), ‘Equilibrium (development of the concept)’, in S.N Durlauf and L.E Blume (eds), The New Palgrave Dictionary of Economics, Second Edition, London: Palgrave Macmillan, vol 3, pp 21‒25 Miller, J.H and S.E Page (2007), Complex Adaptive Systems, Princeton, NJ: Princeton University Press Mirowski, P (1989), More Heat Than Light, Cambridge: Cambridge University Press Mises, L von ([1934] 1981), The Theory of Money and Credit, Indianapolis: Liberty Classics Bibliography 203 Mises, L von ([1949] 1963), Human Action, Chicago, IL: Contemporary Books Mises, L von (1978), The Ultimate Foundation of Economic Science, Kansas City: Sheed, Andrews and McMeel Mokyr, J (2006), ‘Useful knowledge as an evolving system’, in L.E Blume and S.N Durlauf (eds), The Economy as an Evolving Complex System, Oxford: Oxford University Press, pp 309‒36 Morris, C.R 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Franklin D. Roosevelt, vol 1, 1928‒32, New York: Random House Rosenberg, N and L.E Birdzell (1986), How The West Grew Rich, London: I.B Tauris & Co Rosser Jr, J.B (2009), ‘Computational and dynamic complexity in economics’, in J Barkley Rosser Jr (ed.), Handbook of Research on Complexity, Cheltenham, UK and Northampton, MA, USA: Edward Elgar Publishing, pp 22‒35 Samuelson, L (2006), ‘Perspectives on the economy as an evolving complex system’, in L.E Blume and S.N Durlauf (eds), The Economy as an Evolving Complex System, Oxford: Oxford University Press, pp. 243‒66 Samuelson, P.A (1939), ‘Interactions between the multiplier analysis and the principle of acceleration’, Review of Economic Statistics, 21, 75‒78 Samuelson, P.A (1947), Foundations of Economic Analysis, Cambridge MA: Harvard University Press Scherer, F.M (1989), Industrial Market Structure and Economic Performance, Boston, MA: Houghton Mifflin Schumpeter, J.A ([1912] 1934), The Theory of Economic Development, Cambridge, MA: Harvard University Press Schumpeter, J.A (1939), Business Cycles, New York: McGraw-Hill Schumpeter, J.A ([1942] 1976), Capitalism, Socialism and Democracy, London: George Allen and Unwin Schumpeter, J.A (1954), History of Economic Analysis, New York: Oxford University Press Shackle, G.L.S (1992), Epistemics and Economics, London: Transaction Publishers Short, C (2000), Eliminating World Poverty, London: HMSO Seabright, P (2004), The Company of Strangers, Princeton, NJ: Princeton University Press Singh, S (1997), Fermat’s Last Theorem, London: Fourth Estate Skousen, M (2008), Econopower, Hoboken, NJ: John Wiley Smith, A ([1776] 1937), An Inquiry into the Nature and Causes of the Wealth of Nations, New York: Random House Smith, A ([1759] 1976), The Theory of Moral Sentiments, edited by D.D. Raphael and A.L Macfie, Oxford: Oxford University Press Smith, C (2006), Adam Smith’s Political Philosophy, London: Routledge Smith, D (2010), The Age of Instability, London: Profile Books Sorkin, A.R 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CT: Yale University Press Young, A (1928), ‘Increasing returns and economic progress’, Economic Journal, 38 (152), 527‒42 Yudkowsky, E (2008), ‘Cognitive biases potentially affecting judgment of global risks’, in N Bostrom and M Circovic (eds), Global Catastrophic Risks, Oxford: Oxford University Press, pp 91‒119 Index ability, over-estimation of 20 Abramowitz, M 185 adaptability 51, 64, 65, 106, 169 adaptation 8, 38, 45–6, 51–9, 64–5, 75, 96–7, 166 adaptive learning 51 adaptive systems, complex 23–4, 79, 155, 156, 189 adjustment 4, 47, 77, 137, 147, 156, 174 advanced economies 15, 30, 31, 112, 114, 121, 125, 163, 164 Africa 32, 41, 105, 113, 161–2 agent-based reasoning 23, 190 agents 5–6, 23, 24, 51–2, 72, 82, 190 aggregate behaviour 72, 74 aggregate demand 81, 132, 141, 145, 146, 152, 172, 183, 184 aggregate numbers 31 aggregation 81–3 agriculture 35, 39–40, 115, 162 airline industry 54–5, 98 Akerlof, G 131 algorithmic information theory 190 ambition 14–15, 180 amplification 64, 72, 93 anti-competitive behaviour 97 Arrow, K.J 82, 189 Arthur, W.B 21–2, 73, 189 Asia 41, 105, 114, 118, 140 asset prices 88, 102, 138, 140, 141, 145, 146, 148 Austrian School 1, 7, 23, 133–5, 187, 188, 189–90, 193 Axtell, R 61 Babbage, C 110 balance of trade 121 Bank of England 147, 148, 151, 172 banking sector 16, 133–4, 139, 142, 143, 145, 153–4 see also central banks; commercial banks; investment banks Barro, R.J 137 Bayesian estimation 24 behaviour patterns 8, 59, 72, 73–4 Beinhocker, E.D 43, 65, 67 Bernanke, B 140, 147 Beveridge, W 167, 168, 169, 170 Bevin, E 168 biological evolution 63, 64, 66, 83, 84 biological organisms 40 biological self-organising systems 75 biology 25, 65, 79 Blaug, M 131–2, 179–80, 187 booms 133, 134, 135, 136, 137, 138, 139, 141, 142, 144, 145 Borio, C 148 borrowing 142, 143, 147, 152 bottom-up approach 56, 58, 174 Boulding, K.E 8, 64, 65, 68, 187, 193 Boulton, M 54 bounded rationality 23, 190 Bowles, S 16 Brown, G 142 bubbles (financial) 22, 88, 102, 131, 143, 144, 147–8, 149, 150 Budget (1909) 168 Buffet, W 142 bureaucracies 175 business(es) 35, 46, 53, 54–6, 57, 67 business cycle 2, 128, 131–9, 184 business plans 65, 67 Cable, V 148 Caldwell, B 188 Callaghan, J 151 capital 34, 36, 37, 46, 78, 109, 118, 122, 126, 132, 135 Capital 109 capitalism 28, 29, 31, 44, 95, 100, 109, 131, 155 206 Index Capitalism, Socialism and Democracy 100, 164–5 censorship 37 central banks 2, 134, 138, 140, 141, 142, 145, 147, 148, 150, 153, 172 see also Bank of England; European Central Bank; Federal Reserve centrally planned economies 5, 92, 93, 133 chance events 65, 76, 80, 84 change costs of 46–8 cultural norms 16 in demand 137 drivers of 14, 90 entrepreneurship and 99 as a feature of market economies 3, 8, 28–9, 30, 35 and growth see economic growth long-run equilibrium as a partial concession to 94–5 openness to 34, 35, 36 in prices 90–91, 102 rate of 43, 126, 127 resistance to 47–8 self-propagation of 126 and uncertainty 101 see also adaptation; evolution; innovation China 32, 34, 37, 41, 108, 121, 127, 140, 173 choice(s) 3, 18, 19, 21 Citigroup 142 civilised society 162–4 classical economics as an alternative to equilibrium economics 1, business cycle 136–7 competition in 95–6 development in the twentieth century 186–7 differences between equilibrium theory and 8–9, 180 economic growth 1, 8, 78, 106–9 government intervention 156 hallmarks of 1, 179 market economies in 1, 8, 28 on monopolies 98–9 climate change, policy formation 173 clothing industry 115–16 207 coalition Governments 155, 167, 168–9, 170 cobweb model 77 cognitive biases 19–21 cognitive theory 24 Colander, D 190–91 collateralised debt obligations 142, 143 collective decision-making 89, 161 collective learning 89, 161 collectivism 113, 163, 164–5, 168 collusion 97–8 commercial banks 151 commercial revolution 35 commodity reserve currency 153 competition as an incentive to adaptation 96–7 attempts to restrain 98 change and growth 43–4, 90 in classical theory 95–6 in European publishing 37 mediaeval suppression of 34 monopolistic 98, 99 selection of better routines 67 see also imperfect competition; perfect competition competitive advantage 45–6, 51, 80, 94 competitive capitalism 95 competitive equilibrium 82, 182 competitive industry 96–7 competitive pressures 57–8, 144–5, 175 complex behaviour, specialisation and 112–13 complex systems 23–4, 72, 137 evolution of 40 see also adaptive systems; selforganising systems complexity theory 7, 25, 80, 188–93 computable economics 190 computer languages 125 confidence 20, 136, 139, 140, 141–2, 145, 152, 154–5 Conservative governments 140, 155, 167, 170 consumer debt/expenditure 143, 146, 149 consumption 40, 107, 114, 132, 135, 146, 163 contingency 65, 66, 67 continuous change 78, 94–5 convexity assumption 208 The rediscovery of classical economics cooperation 13–14 coordination 4, 92–3, 103, 113, 125, 128, 133 Cournot, A.A 94 crashes (financial) 22, 102, 134, 138, 149 creative destruction 43–5 creativity 25–6, 43, 84, 93 credit contraction 139 credit default swaps 143, 144 credit expansion/creation 133, 134–5, 138, 143, 144, 145, 147, 148, 151 credit rating agencies 143 cultural evolution 40, 63, 64, 66 cultural norms 16 cyclicality 60, 77 see also business cycles Darwinian evolution 63, 64, 67, 83 databased reasoning 188 Day, R.H 82 de-leveraging 145 Debreu, G 82, 182 debt 136, 143, 148 decision-making 9, 24, 65, 82, 89, 161 deductive calculation 9, 191 demand management 81, 172 deregulation 122, 140 derivatives 87–8, 141, 142, 143, 144 destructive change 30 differentiation 40, 64, 78–9, 93 diminishing returns 66, 77, 185 disaggregation 183 discovery 26, 36, 58, 68, 71, 96 disequilibrium 52, 135, 137, 180, 182 disinflation 140 dispersed knowledge 4, 5, 92, 93, 128 distribution, evolutionary perspective 69 divergent beliefs 22 division of labour 105, 106, 107, 108, 113, 116, 187 Dow Jones Industrial Average 145 dynamic processes 48, 79, 80, 94, 96, 135, 189, 193 dynamic systems 8, 72, 76, 77, 84, 92 economic growth ambition as a driving force of 14 causal factors 38 classical economics 1, 8, 78, 106–9 cultural norms 16 economists’ definition of 31 equilibrium economics 185–6 evolutionary perspective 69 linking of increasing returns to 111–12 markets and facilitation of 61 modern 66 specialisation and 124–5, 125–8 Western countries 30, 32–48, 163 economies of scale 111 Economist 148–9 education 33, 163, 164 Eltis, W 109 emergence 59–62, 156 emotions 6, 16, 17 employment 30, 40, 47, 172 see also full employment; unemployment energy sector 173 Enlightenment 37 enterprise 35 entrenched monopoly 99 entrepreneurship 6, 26, 99–101, 125, 135 Epstein, J.M 61 equilibrium economics 1–2 classical economics as an alternative to 1, competition 96 costs of change 46, 47 critical assumptions and limitations 3–6 development in the twentieth century 181–6 differences between classical economics and 8–9, 180 differences between complexity theory and 191–2 disappearance of increasing returns from 111, 181 disjunction between macro and microeconomics 82 feedbacks in a market economy 79 growth models 185, 186 human beings in 17, 24 instantaneous adjustment to change 77 knowledge in 4–5, 23, 93 Index policy failures standard defence of 6–7 theory of value 111 Europe 34, 35, 36, 37, 55, 59, 98, 119, 120 European Central Bank 149 evolution 63–4 adaptation and 64–5 of business practices 67 of complex systems 40 of financial markets 87–8 of government functions 161–7 of knowledge 65–7 of the modern welfare state 167–70 of social rules 67–9 evolutionary economics 63, 64, 65, 68, 94 evolutionary models 65, 66 evolutionary processes 8, 21, 29, 38–9, 65, 66, 72, 133, 166 exchange see trade ‘expanded reproduction’ model 184–5 expectations 21–3, 135, 139, 183–4 experience 9, 21, 22, 24, 33, 39, 40, 53, 54, 89, 93, 114 experimentation 35, 36, 37, 38, 71, 72 extinction 64 failure 132, 133, 154, 175 fallibility 77 farm subsidies 119–20 Federal Reserve 134, 140, 141, 147, 149, 150, 151 Ferguson, A 160 Ferguson, N 72, 88 financial crises 131, 137–8 see also crashes; Great Depression; recessions financial data 102, 156 financial markets 19, 20, 22, 87–8, 101, 136, 142 financial regulation 149–50, 153–4 financial stability 2, 140, 141, 147 fiscal stimuli 135, 151–2 Five Evil Giants 167, 168, 170 flexibility 35, 125 focus groups 56 Forbes 46 209 Ford, H 54, 123 forecasts 23, 58, 76, 83–4 foresight 21, 24 formal learning 37, 53 Foster, J 79 Foundations of Economic Analysis 181–2 fraud 139, 148, 169 freedom of trade 117, 118 Friedman, M 62, 93–4 full employment 81, 165, 171, 172, 183, 184 futures markets 88 general equilibrium 180, 182, 185, 186, 187, 191, 192 General Theory (Keynes) 81, 180, 181, 183, 184 genotype 65, 66 Germany 33, 35, 105, 134, 146, 152 Gintis, H 16 globalisation 116, 118, 119, 140 globalisers/non-globalisers 120 gold standard 153 goods and services 33, 41–4, 97, 140, 163 government(s) 160–76 contribution to financial crisis 147–50 evolution of the welfare state 167–70 functions 161–7 interventions 48, 58, 80, 97, 118, 156, 171–3 mistakes by 128 policy formation 173–4 response to financial crisis 150–52 spending 151, 152, 163, 164, 171 why they disappoint 174–6 gradualism 39, 41 Grant’s Interest Rate Observer 149 Great Depression 134, 137, 141, 146, 152, 155, 164 Great Moderation, The 140, 172 greed 6, 9, 16, 17, 136, 139 Greenspan, A 140, 147–8, 149, 150 guarantees, to banks 149 guild system (mediaeval) 34 Haberler, G von 133, 134 Hahn, F 185 210 The rediscovery of classical economics Hayek, F.A 5, 8, 23, 24–5, 51, 65, 68, 72, 91, 92, 95, 96, 134, 166, 187, 189, 190, 193 hedge funds 87, 141, 145 Helm, D 173 heritability 66 Hicks, J.R 181, 182, 186 history 19, 66–7, 107 History of Europe 39–40 Hobbes, T 31 Holland, J 29 Hommes, C.H 23 Horesch, R 119–20 housing sector 143–5, 146, 149, 150 human action 9, 25, 28, 79, 133, 180, 190 human behaviour 9, 13–26, 68, 84, 192 see also adaptation; anti-competitive behaviour; complex behaviour; emergence; rational behaviour human factors 6, 156, 192 human mind 20, 23–5, 84, 92 human nature 1, 21, 68, 88, 113, 133 human self-organising systems 71, 72, 73, 75, 113, 128 human systems 60–61, 84 human values 13, 163 Hume, D 61, 72 hunting stage 162 hypothesis-testing 72 ‘image of knowledge’ 188 imitation 35, 66 imperfect competition 99 income 33, 41, 97, 163 incomes policies 172 incomplete information 9, 17–18, 21 increasing returns 2, 6, 66, 76, 77–81, 109, 110, 111, 112, 181 Increasing Returns and Economic Progress 111 India 32, 33, 41, 115, 127, 173 individualism 93, 163 individuals, adaptation by 53–4 induction 9, 22, 191 industrial revolution 39, 53, 66, 115 industry/industrialisation 39, 40, 57, 136, 146, 165 see also individual industries infant mortality 33 inflation 134, 140, 141, 143, 147, 149, 151, 155, 169, 172 information see incomplete information; knowledge; new information; perfect information innovation(s) 97 capitalist 132 in economic activity 68–9 entrepreneurial 100–101 financial 87–8 and growth 35, 36, 37, 38, 39, 40–41, 53, 61 routinised 100 Inquiry Into The Nature and Causes of the Wealth of Nations, An 62 insolvency 90, 134, 149, 166 instantaneous adjustment 77 institutional factors institutional rules 69 institutions 31, 65, 68, 88–9, 154, 160, 186 integration 79 interaction(s) 1, 8, 9, 51–2, 60, 73, 81, 83, 84 interdependence 4, 74–5, 115, 116, 121 interest groups 48, 59, 173 interest rate swaps 144 international trade 37, 118–19 Internet 37, 39, 43, 53, 125, 128, 140 invention(s) 37, 52–3, 65, 135 investment 18, 20, 46, 81, 121, 135, 136, 138, 139 investment banks 141, 142, 145, 154 invisible hand 62 irrational behaviour 139, 145 Japan 31, 32, 33, 37, 105, 127, 146 Jevons, W.S 94, 186 joint stock companies 87 Kaldor, N 8, 112 Kay, J 17, 173 Kennedy, G 67–8 Keynes, J.M 18, 19, 20–21, 32, 81, 151, 155, 180, 181, 183, 184 Kindleberger, C.P 16, 137 Kirman, A 112–13 Kirzner, I.M 99, 100 Knight, F.H 94 know-how 37, 64–5, 92, 128 Index know-that 37, 65, 128 knowledge accumulation of 37, 42, 72, 128 competitive advantage 94 cumulative 66, 67 diffusion of 128 as the engine of production 78 in equilibrium theory 4–5, 23, 93 evolution of 21, 65–7 inseparable from the individual and the economy 79 scientific 52, 53, 65, 66, 71, 72, 127 survival of 63 see also image of knowledge; stock of knowledge Koch Industries 55 Koppl, R 190 Krugman, P 62 labour 36, 46, 47, 59, 78, 107–8, 109, 118 Labour parties/governments 165, 167, 169, 170 labour productivity 105–6, 110 Landes, D.S 35 Lange, O large business 46, 56–7, 100, 101 large-scale plants/production 48, 110, 111 laws of motion 52, 107 learning 55, 90 see also adaptive learning; collective learning; formal learning; trialand-error learning-by-doing 53–4, 55, 123 left-wing political parties 47 lending 139, 142, 143, 144, 145, 146, 147, 150, 151 Leslie, C 94 Lesseps, F de 100 leveraging 144 Liberal parties/governments 59, 167–8 liberalisation (trade) 118, 120 liberalism 59 life expectancy 33, 42 liquidity/liquidation 133, 139, 142, 148, 149, 150, 151, 153 living organisms 23–4 Lloyd George, D 168 loan finance 155 211 Loasby, B.J 8, 21, 101, 133, 193 lobbyists 48 long-run equilibrium 94–5 long-run normal price 95 Lowe, P 148 Lucas, R 140 McChesney Martin, W 147 machine tool industry 110, 123–4, 146 machinery and equipment, growth in 36–7 macroeconomics 2, 5, 8, 81–2, 83, 133, 140, 146, 182, 183 Maddison, A 36–7 Major, J 167, 170 Malthus, T.R 15, 181 management 124–5 managerial incentives (financial) 154 Manski, C.F 52 manual workers 47 manufacturing 110, 112, 116, 146, 162–3 see also industry/industrialisation marginal revolution 186, 187, 192 marginal utility 186 market economies aggregate patterns 72 change as a feature of 1, 3, 8, 28–9, 30, 35 characteristic features 2–3 in classical economics 1, 8, 28 concerns about survival of 166 confidence in 20 equilibrium economics 79 hostility to 47 outcomes in global 81 restrictive factor in 59 as self-organising systems 1, 29, 30, 74, 75, 76, 174 tendency to increasing returns 78 market testing 38 markets functions 89–94 nature and origin 86–9 power laws within 101–3 Marshall, A 1, 3, 8, 13, 16, 21, 28, 72, 78, 79, 95, 96, 110, 131, 132–3, 180, 181, 187, 192 Marx, K 5, 8, 23, 28, 93, 109, 110, 131–2, 162, 184 212 The rediscovery of classical economics mathematics 135, 181–2, 186, 187–8 Matthews, R.C.O 185 measurement problem, in macroeconomics 81–2 mediaeval Europe 34, 35, 36 Medium Term Financial Strategy 155 Menger, C 8, 23, 88, 161, 186, 187 merchant class 36 Messerlin, P 120 microeconomics 8, 82 Microsoft 98, 100 Mill, J.S 8, 132 Miller, J.H 74 Mirowski, P 186 Mises, L von 5, 23, 24, 28, 92, 96, 133, 134, 137, 190 mistakes 55, 56, 128, 133, 136 Model T car 54, 123 Mokyr, J 64, 65, 66, 67 monetarism 172 monetary policy 140, 147, 149, 153, 165–6 Money, Credit and Commerce 133 monopoly(ies) 97–9, 165 moral hazard 149 moral rules 68 mortgages 144, 145, 146, 147, 148, 150 multiple equilibria 192 mutations 64, 66 mutual feedback, supply and demand 110–111 national insurance 168, 169 nationalisation 151, 165, 169, 171 natural liberty 109 natural monopolies 98 natural price 95 natural sciences 53, 101, 188 natural systems 59–60 negative feedback 76–7, 79 Nelson, R.R 65, 67 neoclassical economics 1, 47, 179, 180, 181, 183, 184, 186 new information 58 New Labour 167, 170 New Paradigm 140–41, 179–80 Newton, I 82 non-governmental organisations (NGOs) 120 nonlinearity 8, 72, 76, 77, 81, 84, 92 North, D.C 65 novelty 8, 26, 43, 75, 97, 101 opportunity, recognition of 99 options markets 88 organisation, and increasing returns 78–9 organisational specialisation 125–6 organised markets 86–7 Otteson, J.R 68 outcomes 24, 39, 52, 65, 80, 81 outsourcing 125 Overstone, Lord 131 ownership 46, 57, 98, 144, 164, 165, 171 Page, S.E 74 panic 139, 141, 145, 176 partnerships 35, 87, 142, 164 pastoral stage 162 path dependence 66, 76, 84, 192 pattern predictions 84, 190 pattern recognition 101 perfect competition 79, 94–5, 96, 180 perfect knowledge 5, 17, 94, 184 phase transition 66, 77 physical systems 59–60, 83 Pigou, A.C 180, 181 pilot testing 56 planned economies 5, 92, 93, 133 policy formation 173–4 political barriers, to trade 118 political control, relaxation of 36 political objections, wealth accumulation 34 political power 34, 36, 165, 176 population growth 15, 32, 37, 39, 42, 106–7 positive feedback 66, 76, 77 poverty 33, 41, 132, 167 power laws 23, 83, 101–3 pragmatism 172 prediction(s) 1, 22, 66, 82, 83, 84, 190 prescriptive knowledge 65 price(s) change in 90–91, 102 competition 97 coordinating function 4, 92–3, 103, 113 discovered by market process 89–90 Index in equilibrium theory 4–5 guiding function 71–2, 91–2, 117, 128 pattern of 91 see also asset prices; natural price; relative prices price regulation 36 price stability 81, 165, 171, 172 price-fixing 97–8 Prices and Production 134 Prigogine, I 189 primitive economies 43, 107, 113–14, 115, 117, 122, 125, 162 Prince, C 142 Principles of Economics 16, 79, 110, 133 printing industry 37, 126 private sector 164, 165, 170, 171, 175 probability 18, 19, 24 procreation 15 production, specialisation in 122–5 productive labour 107–8, 109 productivity, growth in 3, 39, 102–3, 112, 113, 165 Profits, Interest and Investment 134 property protection 162 propositional knowledge 65, 66 protectionism 119, 120, 121 public goods 163 public sector 16, 18, 47, 163, 164–5, 171, 175 purchasing power 127, 132, 137, 153 qualitative change see change qualities (human) 9, 100 quality, competition on 97 quality of life 32 quantitative easing 151, 172–3 quantitative growth see economic growth radical departures 66, 101 rational behaviour 5–6, 16–17, 82 see also irrational behaviour rational expectations 5, 6, 21, 22, 24, 52 Reagan, R 140 ‘real balance effect’ 183 ‘real business cycle’ theory 184 recessions 134, 137, 138 (2008-09) 2, 16, 140–45 213 effects on real economy 146–7 failure of supervision/regulation 150 government responses to 150–52 governments’ contribution to 147–50 lessons for the future 152–5 recovery remedial function 133, 135, 139 Reinhart, C.M 137 relative prices 33, 135 religion 34, 36, 37 representative agents 51, 82 representative firm 181 research and development (R&D), expenditure 100 resource allocation 2, 3, 4, 164, 179 resources, assumption of perfect mobility of 94 revolutionary episodes 35, 37, 39, 53, 59, 66, 115 Ricardo, D 23, 132, 180 Ridley, M 52–3, 97, 116 risk 18–19, 20, 36, 88, 144 risk aversion 100, 150 risk-taking 101, 139, 142 rivalrous competition 79, 95 Roberts, J 39–40, 59, 109–110 Robinson, J 182 Rogers, J 53 Rogoff, K.S 137 Romer, P.M 112, 185 Roosevelt, F 166 Roubini, N 149 routines/routinisation 41, 65, 67, 100, 125, 160 rules of thumb 9, 21, 48, 72, 160, 190 rules/norms 15–16, 64, 65, 67–9, 89, 160–61, 166 Samuelson, P.A 181, 182 Say’s Law 132, 180 Schumpeter, J.A 8, 13, 28, 29, 95, 96, 100, 109, 134–5, 165, 193 science(s) 25, 37, 53, 71 scientific knowledge 52, 53, 65, 66, 71, 72, 127 securities 140, 144, 145, 146 securitisation 143, 144 security function, of governments 161–2 selection 64, 65, 67, 93–4, 161 214 The rediscovery of classical economics self-adjusting systems 58 self-interest 71 self-organising processes 8, 71, 88–9, 109, 127, 128, 137, 147, 186–7 self-organising systems 29, 71–84 see also adaptive systems; complex systems self-regarding materialism 17 self-reinforcing processes 38, 111, 117 self-sufficient households 113–14 Sensory Order 189 services see goods and services Shackle, G.L.S 8, 193 Shiller, R 131, 149 Silverhill Duck Farm 55–6 skills 36, 39, 42 small business 57, 100–101 small countries 118 Smith, A 1, 2, 13, 14–15, 20, 58, 61–2, 68, 72, 95, 97, 105, 106–112, 113, 115, 123, 131, 162, 163 social context 78 social evolution 68, 89, 107, 108, 161, 162–3 social learning 52, 68, 174 social norms/rules 15–16, 64, 65, 67–9, 89, 160–61 social sciences 25, 84, 88, 181, 187 socialism 5, 59 socially advantageous emergent behaviour 61–2 Solow, R.M 185 Soto, Huerta de 134 spatial patterns 60 specialisation classical economics 106–9 complex behaviour 112–13 drawbacks of increasing 121–2 economic growth 79, 125–8 in financial markets 88, 144 function of prices 91–2, 103, 117 globalisation and 118 labour 47 labour productivity 106 organisation of production 122–5 Smith on 109–112 trade and 13, 35, 113–16, 117 transport and advances in 118 specialised capital assets 46 speculation 91, 138, 139, 143, 146 spontaneous markets 86 spontaneous optimism 20 spontaneous order 189 spot markets 88 stagnation 108, 118 standard economics 190, 191 standards of living 31–2, 32–4, 40–41, 47, 59, 105, 115, 170 static equilibrium 2, 3–4, 108, 180, 181, 182, 183, 184 steady-state equilibrium 52, 185–6 Sterman, J.D 77 Stigler, G.J 94–5 stock of knowledge 4, 24, 92, 93, 128, 185 stock market 87, 138 stock-keeping units 43 strategies 24, 75 Streissler, E 179 sub-prime lending 144 subjectivism 23, 101, 190 Sugarscape model 61 supply and demand 61, 77, 82, 90, 110–111, 121–2, 137 survival (business) 46 sustained growth 2, 32, 34, 41, 73, 78, 81, 102, 105, 140, 160, 164, 165, 171, 172 technique(s) 65, 66 technological innovations 35, 36, 39, 40–41, 53, 54, 66, 98 temporal patterns 60 Thatcher, M 140, 167, 170, 171 Theory of Complex Phenomena, The 189 Theory of Economic Development 100 Theory of Money and Credit 133 Theory of Moral Sentiments, The 68 top-down approach 56, 58 trade areas 118–19 trade surpluses 121 trade unions 59, 165 trade/trading 13–14, 86, 89 benefits of 117 costs of restricting 119–21 emergent behaviour 60–61 expansion of 35, 36 international 37, 118–19 Index liberalisation 118, 120 mediaeval Europe 34 restrictions on 117–19 Smith’s analysis of 107–8 specialisation 13, 35, 113–16, 117 standards of living 32 unintended consequences 62 transport 42, 118 trends 58 trial-and-error 38, 48, 52–3, 55, 56, 57, 61, 88, 91, 148, 166, 170, 171–3, 175 unbounded rationality 190 uncertainty 17, 18–19, 24, 36, 88, 101, 132, 173 unemployment 47, 133, 137, 141, 151, 168, 169, 172, 184 United Kingdom 32, 34, 37, 47, 59, 143, 144, 145, 150, 165 United States 16, 29, 32, 33, 37, 54–5, 105, 106, 120, 143, 144, 153, 163, 165 unproductive labour 109 Ursua, J.F 137 utility industries 98, 122, 165 value theory 7, 23, 95, 96, 111, 181, 182, 184, 186, 192 Vanderbilt, C 33, 105 215 variation 78 Veblen, T 68 Verdoorn’s Law 112 verstehen 24, 190 virtual markets 86–7, 90 volatile markets 22, 88, 90, 102 vulnerability 57, 59, 75, 121–2, 136, 139 Walras, L 186 Watt, J 53, 54 weaknesses (human) 16, 19 wealth 33, 34, 41, 109 Wealth of Nations, The 31, 58, 68, 95, 107, 109 Weintraub, E.R 188 welfare state, evolution of 167–70 Western countries 30–48, 163, 164 see also Europe White Papers 120, 168–9, 173 White, W 149 Winter, S.G 65, 67 wishful thinking 20 women 40 Woodruff, R 53–4 working class turbulence 59 World Bank 120 Yeltsin, B 42 Young, A 8, 110–111, 126, 187, 193 ... The Rediscovery of Classical Economics Adaptation, Complexity and Growth David Simpson The Rediscovery of Classical Economics Adaptation, Complexity and Growth David Simpson Formerly Professor of. .. When the results of the first applications of the methods of complexity to economics became available, it was recognised that they represented a rediscovery of classical economics For most of the. .. other in time Once we allow for the The rediscovery of classical economics behavioural interdependence of individual consumers and producers, the inadequacy of the static equilibrium model of