Formerly True Theories (Wonkish and Self-Indulgent)

Taking a break from health care, treason, and all that to read David Glasner on the price-specie-flow mechanism. The exposition of this mechanism by David Hume in his 1752 “Of the balance of trade“, was a landmark in the development of economics — arguably the first real economic model, making sense of the real world (and giving important policy guidance) via a simplified thought experiment, basically a model despite the absence of explicit math. Glasner argues, however, that it had ceased to be a good model by the 19th century due to the rise of fractional reserve banking and central bank discretion.

I think this critique may go both too far and not far enough. In systems where bank reserves still took the form of specie — and bank notes were backed by specie, as in the United States — a lot of the specie-flow mechanism remained in place for most of the 19th century. On the other hand, the simple link between trade balances and specie flows was broken by the rise of widespread capital mobility: when British investors were buying lots of US railroad bonds, we were no longer in Hume’s world.

But that doesn’t mean that Hume was wrong about *his* world. And reading Glasner made me think of a category of economic ideas that’s crucial, I’d argue, in making sense of part of the history of economic thought — the category of “formerly true” ideas. That is, ideas that were either good descriptions of the world the classical economists lived in, or had been good descriptions of the world just before the classicals wrote.

Pride of place here surely goes to Malthusian economics. You still see people saying flatly that Malthus was wrong. But over the roughly 60 centuries that have passed since civilization emerged in Mesopotamia, the Malthusian proposition — population pressure swallows up any gains in productivity, so that most people live on the edge of subsistence — was true for 58. It just so happens that the two centuries for which the…

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