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The theory of the division of labor is at least two and a half millennia old. The practice of the division of labor undoubtedly has a much longer history. Both the theory and the practice stress that joint activity is more productive compared with individual or isolated activity, and both apply to different spheres of work: work within a factory or group and work among firms (e.g., between factories). The division of labor is therefore a principal mode of coordination for all such disparate but connected activity. The theory of the division of labor has different facets to it, in that it applies to both physical labor and intellectual labor. As an object of study and a tool of analysis, it is at the foundation of substantially all of economics. Moreover, the practice of economics itself makes use of, and thus reflects, the division of labor. This, perhaps more than any other factor, explains the importance of economics.
The combination of human psychology and the division of labor also help explain two major features of human behavior: selective perception and status emulation. Each of the major skill groups (or crafts or trades) that work more or less together to produce a pin, a truck, or a house tends to think that its contribution is the most valuable. Individuals acquire their status based on how they perform in their own domain of work, and they seek to emulate those already successful in that domain. The same is true in economics insofar as it too is erected upon the principle of the division of labor. It is no accident that the division of labor, selective perception, and status emulation were also among the major themes of Adam Smith’s Wealth of Nations (1776).
Division of Labor in Economics
The division of labor within economics takes place along a number of axes, with their respective spheres interacting in a recursive manner. The existence of a multiplicity of practices on each axis is due both to the multifaceted nature of the economy and its study (economics) and to the different positions or standpoints that economists can take. Each such standpoint, and its correlative body of practice, is accompanied by selective perception and status emulation, for the practitioner of each type laud its attributes and pursues success defined in its terms.
One axis is that of the criteria by which economists produce knowledge. One of these criteria is deduction, which, when correctly practiced, produces conclusions that are valid, given the premises and the system of logic, but necessarily true. Another is induction, which produces conclusions that may or may not be true, depending on the entirety of practice. This is the field of epistemology, or methodology, which is also practiced along twin axes in another respect. Given the variety of credentials that a proposition may have, two uses of those credentials may be made: The prescriptive use postulates that one and only one set of credentials produces acceptable knowledge, while the credentialist use affirms that every proposition has its own set of credentials and that the individual is free to accept or reject it. These modes of use tend to be at the heart of competing practices, each yielding status emulation.
A second axis has to do with the fundamental substantive paradigms that tend to govern all work in economics. This axis constitutes the ontology of economics. Among the different paradigmatic possibilities are the fundamental theories of a surplus; constrained maximization (maximization subject to constraints, such as cost or legal prohibitions or requirements); productivity or exploitation; culture; and the attainment of a level of welfare and the structure of its distribution. Paradigms are among the most important elements in the social construction of economics.
A third axis concerns the fundamental problem of economics. Among the multiplicity of contenders for this designation are: the organization and control of the economic system, the efficient (or optimum) allocation of resources, economic growth, maximization of welfare, distribution of income (and wealth), and the ordinary business of life in terms of earning a living.
A fourth axis, somewhat related to the third, concerns the organization and control of the economic system itself. A central focus here is the institution of private property, while institutions such as the market, the development of the division of labor itself, and the system of social control are also relevant. One composite approach is that of the “market plus framework,” in which markets exist on the basis of the framework of social controls. The identity of the framework tends to be reduced to legal and moral rules, inclusive of custom, education, religion, and various forms or sources of law. In this model, markets are not given, they are socially constructed by the interactions of the institutions that form and operate through them. At the very least, markets—and indeed the economic system itself—depend upon the legal foundations of those in control of the state (or those who create the laws of property, contract, tort, etc.) and the strategic behavior of firms and other economic agents.
The conventional assumptions of economic theory, in its static form, have tended to include (1) perfect competition and perfect knowledge (and therefore perfect foresight); (2) given and unchanging technology, resources, tastes, population, and structure of rights; and (3) individual agents that operate independent of each other, that are mobile, and that calculate rationally in order to maximize the satisfaction (or utility) derivable from their real incomes. One or more of these assumptions can be modified, thereby engendering an array of further possibilities, such as a variety of noncompetitive conditions, imperfect information, asymmetrical information, interdependent tastes, changes in the distribution and content of rights, behavior that is less than maximizing, and changes in technology, resources, tastes, and population. Such modifications may or may not add realism, but they do tend to introduce dynamic elements.
The conduct of economics, like that of any intellectual discipline, inevitably involves some type of abstraction, such as the reduction of the number of variables in a model down to the ones deemed most important. This makes the enterprise more manageable. That being the case, economics involves both the study of actual economies and the analysis of conceptual, abstract economies. Closely related is the research protocol stipulating epistemological credentials. At one end of a spectrum is the capacity to produce unique determinate optimal equilibrium results; at the other, to produce an array of possibilities at the conditions governing their realization.
Approaches to Economics
The history of economics is very much a story of schools of thought. There have been multiple schools of thought, together constituting a heterogeneous discipline, and each school has itself been heterogeneous. This heterogeneity is the result of a combination of a multifaceted economy and different positions or standpoints from which the economy can be studied. There is nothing about the economy or the training of economists that requires that one and only one variable, point of entry, or perspective be used. Accordingly, in every period in the history of the field there has been more than one school of economic thought. A particular school may endeavor to cover the entirety of economics, or it may examine only one or more parts thereof. Economics as a whole is itself further heterogeneous, and because each school typically can be formulated differently, each school is itself heterogeneous. All of this comes under the heading of “theoretical pluralism,” which differs from the ontological or paradigmatic pluralism and the epistemological or methodological pluralism described above. And all of these approaches can be rendered further complex and heterogenous by introducing normative premises of one kind or another, such as accepting existing institutions or the status quo distributions of income and wealth.
Theoretical pluralism also takes another form. Every topic in economics is characterized by particular theories. Consider the following: competition, equilibrium, business cycles, income distribution, consumption, supply of money, commodity demand, capital, investment, the entrepreneur, optimization, money, interest rates, imperialism, economic growth, supply of labor, technology, externalities, incidence of taxation, the origin of the division of labor, and the economic role of government. Each has multiple theories, even multiple groups of theories, that attempt to describe or explain the object of their respective author’s attention.
From Classicalism to Marginalism
Several questions come to mind when considering why a school of economic thought arises and flowers. The rise of marginal utility economics in the 1870s is a suggestive case in point. “Marginal utility” is the change in utility associated with a change in consumption level. The term also refers to a utilitarian-calculus approach to economic analysis and decision-making. “Classical economics” refers to a group of economic thinkers who wrote after Adam Smith. The school commences with Thomas Robert Malthus, and David Ricardo and also consists of John R. McCoulloch, William Nassau Senior, and James Bill. The approach was largely finished with the work of John Stuart Mill and John Elliott Cairnes.
Among the factors that explain its existence are the following: (1) the deficiencies of classical economics, including its neglect of psychological valuation as an important demand-side aspect of value theory, its focus on economic classes and labor theory (including cost-of-production theory), and its perceived weaknesses as a defense of capitalism; (2) the logical continuation of earlier writings on utility analysis; (3) the growth of static and positivistic theory (laws of the coexistence of variables) challenging Hegelian and other historical theory (the laws of the succession of variables)—or of the study of being rather than becoming; (4) a reaction to Marxism’s emphasis on exploitation and the transient character of capitalism as part of an attack on socialist theory in general; and (5) the emergence of academic economics and its tendency to deal with trivia unsuitable for reformers. Academic economics included the use of mathematics, which was attractive insofar as it enabled economics to resemble physics, and because it effectuated a reduction of variables to the neoclassical model of demand and supply.
Among these varied explanations for the rise of the marginal utility approach, one finds ironic incongruities, such as positivism’s emphasis on the objective analysis of confirmable materials rather than metaphysical, unconfirmable general theories of history, and the marginal utility school’s criticism that classicism’s broad conclusions were based on a small structure of knowledge wrapped up in a few theorems. Both of these positions were in conflict with key features of the marginal utility school’s subjectivism.
There has also been a more or less amorphous mainstream of economics, yielding a combination of schools, some more or less orthodox and others more or less heterodox. The mainstream has run from the classical economics of Adam Smith (1723–1790), David Ricardo (1772–1823) and Thomas Robert Malthus (1766–1834), through the early versions of neoclassical economics formulated by Carl Menger (1840–1921) and Alfred Marshall (1842–1924), to the modern formulation by a group led by Paul A. Samuelson (b. 1915). Differences within each school (and between schools) arose along the different axes identified above. These differences were often identified in terms of a school’s central problem or focus. The mainstream changed from a grand macroeconomic story of production, growth, and distribution to an equally imposing story of subjectively acting individual economic units and their interaction in markets, along with the resultant allocation of resources. Under the name of “neoclassical economics,” the mainstream developed a variety of technical identifications of its central problem, many of them mutually reinforcing, such as the mechanics of utility, the operation of the price system, the working of the free enterprise system, the operation of pure markets, the mechanics of the pure theory of choice, constrained maximization decision making, the allocation of resources, and the mechanics of welfare. Schools of economic thought have tended to define themselves in terms of a central problem; the two most common have been explaining how people make their living and explaining how the economy is organized and controlled. Because the assumptions that characterized the core of mainstream neoclassicism could be changed, a further variety of subschools emerged within general neoclassicism. Varieties of theories of noncompetitive conditions, uncertainty, changing tastes, rights, institutions, ideology, technology, and population developed, each offering a more or less distinctively different picture of the economy.
Among the alternatives to the mainstream has been “institutional economics.” The central problem here is literally the organization and control of the economy, though with several different foci. One focus was the legal foundations of the economic system; another was the system of cultural beliefs by which people organized and instituted their economic relations, and with which they explained those relations to themselves. Common to both foci was power. The key figures of institutional economics have been Thorstein Veblen (1857–1929), Walton Hamilton (1881–1958), John R. Commons (1862– 1945), and John Kenneth Galbraith (1908–2006).
In the middle third of the twentieth century, nurtured in part by reactions to the Great Depression, the focus of macroeconomics changed from growth in classical terms and the allocation of resources to the determination of the level of income. The key figure of the new macroeconomics was John Maynard Keynes (1883–1946), who argued that classical doctrines to the contrary notwithstanding, the level of income, resulting from factors governing the level of aggregate spending, was not necessarily at the full employment level. This was important not just because variations in spending were involved in the business cycle and in unemployment, but also because so many people depended on employment for their livelihood. In time, Samuelson combined neoclassical microeconomic price and resource-allocation theory with Keynesian macroeconomic income-determination theory to produce the “neoclassical synthesis.”
Thus, in combination with the further differentiating sources outlined above, one could practice economics in numerous different ways. Indeed, it could be argued that neoclassicism, or the neoclassical synthesis, was no longer the undifferentiated hegemon atop the mainstream, and today there are countless variations and combinations of treatments of topics that make up economics. This is true of all of the numerous topics that have had different but useful approaches formulated for them. Macroeconomics, for example, has had a variety of interpretations of what Keynes said and what he intended to say, plus a variety of post-Keynesian theories, not to mention new classical, real, new Keynesian, and other business-cycle theories. Microeconomics has a variety of treatments of how prices and resource allocation are determined; macroeconomics has a variety of treatments of the causes of instability; and both have in common a variety of treatments of uncertainty.
The foregoing does not exhaust the variety of ways in which economists do economics. Some economists study the performance of economic agents as if the agents were engaged in some type of cooperative or noncooperative game. That form of economics was instrumental in developing the strategy of mutual assured destruction (MAD) by the United States and the Soviet Union during the cold war, a strategy which worked to prevent World War III despite its seeming barbarous quality, mainly because the two sides thought more alike than not. Economists who do game theory are among the hordes who practice mathematical economics, a research language and mode of analysis that has been increasingly dominant since the 1960s. Other economists (and psychologists working on economic problems), have enriched the meaning of “rationality” and its attendant motivational attributes. Much of the work of economists is devoted to the description, explanation, and interpretation of what the economy is all about—as should be evident from what has been written above. Many economists self-consciously work at constructing or applying the normative, subjective, and ideological justification for market economies; many others work at its critique. Indeed, it has been said that much of the history of economics has been driven by attempts to influence the distributions of income, wealth, and opportunity in society, as well as by the control and use of government as a political means to economic ends. Which brings this discussion to such combined fields as economic sociology, law and economics, economic anthropology, economic psychology, economic history, and the history of economic thought—fields that are rich in and of themselves.
- Colander, David C., Richard P. F. Holt, and J. Barkley Rosser. 2004. The Changing Face of Economics: Conversations with Cutting-Edge Economists. Ann Arbor: University of Michigan Press.
- Ingrao, Bruna, and Giorgio Israel. 1990. The Invisible Hand: Economic Equilibrium in the History of Science. Cambridge, MA: MIT Press.
- Medema, Steven G., and Warren J. Samuels, eds. 1996. Foundations of Research in Economics: How Do Economists Do Economics? Brookfield, VT: Edward Elgar.
- Shackle, George L. S. 1967. The Years of High Theory: Invention and Tradition in Economic Thought 1926–1939. New York: Cambridge University Press.
- Weintraub, E. Roy. 2002. How Economics Became a Mathematical Science. Durham, NC: Duke University Press.
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