The Pillars of Economic Understanding. Factors and Markets (review)

The Pillars of Economic Understanding: Factors and Markets. By Mark Perlman and Charles R. McCann Jr. Ann Arbor: University of Michigan Press, 2000. xvii; 362 pp. $79.50.

I wrote my review of volume 1 sometime before I saw a copy of volume 2 and concluded that it remained “a very open question” as to what answers the apparatus expounded in volume 1 might elicit when brought to bear in volume 2 on vital fundamental methodological issues confronting economists in the aftermath of the formalist revolution, or what that apparatus might elicit regarding what Perlman and McCann (hereafter PM) described as “the question of the scientific nature of economics” (1:xix). It emerges that the apparatus, or “intellectual baggage,” of volume 1 is very little used in volume 2. “Patristic legacies” and “magisterial interpretations” of the history of economic thought—except for a few pages in chapter 2 on labor economics—are only incidentally or very briefly mentioned. For the most part volume 2 stands firmly on its own feet as an interesting and informative account of ideas and theories about the four principal factors of production.

Volume 2’s wide-ranging, mainly historical, survey consists of seven chapters. A brief introduction is followed by four chapters that make up the main body of the work and discuss various aspects of labor, capital, land, and entrepreneurship. The two long chapters on labor and on capital, about twice as long as those on land and on entrepreneurship, amount to much more than half the book. What PM describe as “the sheer enormity” of their chapter on labor is surpassed in length by the following chapter on modern capital theory, which contains some quite remarkable methodological examples and implications. The first two of its nine sections are concerned with preliminaries and with a “long prologue” that very usefully traces the history of capital theory from François Quesnay to Knut Wicksell. Then comes the main “drama” (as PM describe it), which is divided into four “acts,” of which act 2, concerned with Irving Fisher’s fundamentally useful and clarifying stock-flow framework, stands rather apart, methodologically, as the only calmly constructive or progressive contribution in this whole drama of “modern capital theory.”

Acts 1, 3, and 4, however, present confrontations, or “duels,” about “capital” and are concerned with questions of its essential nature, or of appropriate terminology, or with issues of the acceptability of rival extreme abstractions or oversimplifications. Act 1, dating from the turn of the century (c. 1895–1905), opens with J. B. Clark’s attack on Eugen von Böhm-Bawerk’s leading ideas and the latter’s rejoinder. (Incidentally, Böhm-Bawerk’s theory of capital, although often described as the “Austrian” theory, seems to have been comprehensively rejected by Carl Menger.) Act 3 takes place in the interwar years and opens with Frank Knight’s attack on the “Austrian” (i.e., Böhm-Bawerkian) theory of capital, an attack that was answered in the thirties by Friedrich von Hayek. As PM note, Knight and Hayek “hearken back to the principal players in Act One…. Like Act One, Act Three deals with philosophical comprehension rather than the employment of ‘practical’ definitions” (186). In act 4 the battle of the two Cambridges in the 1950s and 1960s is rehearsed, a battle that erupted with Joan Robinson’s rejection of the measurability of capital and of the marginal productivity theory. Ultimately the issue might be regarded as turning largely on which extreme abstraction—units of “capital” or units of “socially necessary labour”—was the less useless or unacceptable oversimplification.

Thus for some seven decades the leading developments in modern capital theory were, as PM describe them, concerned with confrontational and inconclusive logomachy. PM, indeed, describe their “drama” as ending “more with a sputter than a bang” (196). Certainly, a “sputter,” whatever it exactly signifies, sounds about as inconclusive and incoherent as...