Seven Tenets of economics

1. Production takes place for consumption (derived from the Scot Adam Smith), not the other way round.

2. Value is measured not as an average but at the margin (the Englishman W. S. Jevons, the Frenchman Leon Walras, and the Austrian Carl Menger).

3. The cost of producing a commodity or service is not the labour required (the German Karl Marx) but the commodity or service thereby lost (the Austrian Friedrich von Wieser).

4. The instinct of man is to “truck and barter” in markets (Adam Smith).

5. He will find ways round, under, over or through restrictions created by government (the Austrian Eugen von Böhm-Bawerk).

6. There is no such thing as absolute demand (for education, medicine or anything else) or supply (of labour or anything else) because both vary with price (the Englishmen Alfred Marshall, Lionel Robbins and many before and since).

7. Not least, without the signalling device of price, man cannot spontaneously and voluntarily co-operate for prosperous co-existence (the Austrian Ludwig von Mises and the Austrian-born but voluntarily-British Friedrich Hayek).

Arthur Seldon, “The IEA, the LSE, and the Influence of Ideas”, Volume 7 of The Collected Works of Arthur Seldon, Edited by Colin Robinson. The tenets have been reformatted into a numbered list here.

Arthur Seldon CBE (1916 –2005) was joint founder president, with Ralph Harris, of the Institute of Economic Affairs, where he directed academic affairs for 30 years. He studied at the London School of Economics where Arnold Plant and Lionel Robbins deepened his interest in classical liberalism and Friedrich Hayek introduced him to Austrian Economics.

These tenets for the most part are standard principles of economics and correspond more or less to the 10 Principles discussed by Greg Mankiw in Chapter 1 of the Principles text used in Regent classes. Once one understands that modern economics is centered on markets and the incentives that surround market-based activity, one has grasped the essentials of economics. The rest of economics is the application of these tenets (or “principles” as Mankiw calls them) to particular questions of analysis and policy.

One can also see from the names and countries associated with these different ideas that the development of economics is mainly a European effort that goes back more than 200 hundred years. It reflects steady intellectual progress from the publication of Smith’s Wealth of Nations in 1776 to what are called The Years of High Theory in the 1920s and 1930s. Since that time there have been refinements in theory and thinking but the foundations of the discipline had been laid and subsequent advances pale in comparison with the insights gained before the nuclear age.

Theory and intellectual advance prosper in those fields where the challenges are great and the needs pressing. In economics there have been three: In the mid-Eighteenth Century when Cantillon, Adam Smith, and the Physiocrats challenged the Mercantilists and the notion that the state should control the economy and the few should dominate the many; In the last third of the Nineteenth Century when the intellectual confusions of the Classical economists (including Marx) were finally overcome by Jevons, Walras, and the others mentioned above, and the question of a theory of value and the existence of economic equilibrium was settled through the application of mathematics; and In the 1920s and 1930s when a worldwide, sustained and deep depression led Robinson, Chamberlin, Myrdal, Hayek and Keynes, among others, to develop new tools to understand the implications of imperfect competition on prices and equilibrium and why an economy could sink and flounder for a decade or more. Demanding times demanded clear answers to great questions, and grand responses were forthcoming that set off what can be best be called a wave of intellectual advances and inventions in many areas of economics.

We are now mired in another difficult time when the economy is in disarray and our theories have been found wanting. One wonders, however, whether there will be a re-awakening of the spirit of intellectual innovation that has characterized our past periods of economic setback and turmoil. Perhaps this period of difficulty will be too transitory to set into motion the deep thinking required for really original and ground-breaking ideas to emerge. Unfortunately, really new thinking requires that problems fester for some time. Or perhaps the (to my mind over-) emphasis today on mathematical rigor will preclude absorbing the insights that history, practical experience and sheer “learnedness” bring to the task of constructing theories that are really relevant to actual economic problems.

We need new tenets in economics. Only time will tell if our problems are bad enough to generate them and whether we have the intellectual capacity to formulate them.

Thanks to Marginal Revolution for the pointer.