The four gigantic volumes of The New Palgrave—nearly 2,000 entries, more than 700 biographies, over 4 million words—may be said to represent more or less everything that is known about what is called economics. The subject is far more sprawling than most people think. We would expect a dictionary of economics to contain such entries as Consumption and Production, Investment, Business Cycles, and the like, but The New Palgrave also has entries on sports, lemons (not the fruit), and performing arts. Yet there is none on power, although power would seem to be inextricable from economics.1

The dictionary itself is named after R.H. Inglis Palgrave, the son of an English banker and scholar, who entered his father’s banking business in the 1840s, then began to write on financial matters, and ended up as editor of The Economist on the death of Walter Bagehot in 1877. Palgrave conceived the idea of a “dictionary” of political economy during the next decade, publishing the first of three volumes in 1894. The work itself was uneven, ranging from brilliant short articles by Francis Ysidro Edgeworth, perhaps England’s greatest economic theorist at the time, to pieces on obscure currencies of exchange and obscure French economics by equally obscure contributors. With all its faults, the undertaking was soon recognized as the first real compendium of economic knowledge. Palgrave himself was knighted and elected a Fellow of the Royal Society, and his name became attached to the title of the third volume, issued after his death.2

All this information comes from the present Palgrave, which carries on the intent of the founder on a vaster scale than he could have imagined. The original work contained entries by some two hundred-odd economists, only a handful of whom are remembered today. The New Palgrave has entries by 927 contributors from more than thirty countries, including the Soviet Union and Eastern Europe. Most of the profession’s Nobel Prize–winning economists, such as Milton Friedman and Paul Samuelson, have contributed, as have household names like John Kenneth Galbraith and Lester Thurow. The entire undertaking has been carried out in only five years by John Eatwell (Cambridge and The New School for Social Research), Murray Milgate (Harvard), Peter Newman (Johns Hopkins), and the Macmillan (England) editor Margot Levy.

The result is an unparalleled store of information. For the college freshman prepared to spend an hour or more on a subject there are lucid, although occasionally demanding, expositions of such matters as rent (by Armen Alchian) and philosophy and economics (by Vivian Walsh), as well as magisterial essays on Adam Smith and Karl Marx and John Maynard Keynes. For the graduate student there are superb, sometimes very advanced, articles under such headings as General Equilibrium, and Growth and Cycles. The specialist can consult articles on Lyapunov functions, Pontryagin’s principle, fuzzy sets, martingales (mathematical models of fair games, not a part of a horse’s harness), and an entry on impatience, written in mathematics and somewhat beyond me.

And what of the layman? He or she must be prepared to turn many pages in search of enlightenment. The lay reader hoping to gain insight into our present situation will find no entries for crash or recession, acquisitions or leveraged buyouts, only a cursory treatment of mergers, nothing on stocks, and very little on bonds. One can find entries dealing with some of these subjects, if one knows where to look—“depressions” rather than recession, “financial crisis” rather than crash—so that the nonprofessional reader who perseveres and uses the extensive index will be rewarded. Occasionally the reader will be rewarded beyond his expectations—by, for example, a stunning short essay on the open field system of peasant agriculture by Donald McCloskey, another on utopias by Gregory Claeys, Peter Newman’s delightful biography of Francis Edgeworth, and Benoit Mandelbrot’s miniature portrait of the mathematical economist Bachelier. There are imaginative essays such as Thomas Schelling’s on the value of life—“not identified lives,” he notes, “but statistical lives—the reduction of some mortal hazard to some part of the population.” In general, however, Palgrave is austere and formal. Indispensable though it will be to all students in the field, I suspect that most of The New Palgrave will remain incomprehensible to nearly everyone outside it.

That again raises the question of how to describe the subject explored in these four thousand pages. There is no single entry for “economics” in The New Palgrave. Sixteen entries contain the word (Economic Anthropology, Economic History, Economic Laws, Economic Man) but none attempts an all-embracing definition. Yet anyone who turns these pages may soon become aware that a particular sense of economics comes through, in the way that cell structures appear when tissue specimens are stained with a powerful dye.

What emerges, however, is not so much a tangible structure as a set of psychological assumptions—a cast of mind discoverable in people and organizations engaged in the most varied tasks and activities. In ordinary talk this cast of mind might be described as thinking very hard about the consequences for one’s well-being—usually one’s well-being measured in money—before taking action. This is the common element that enables us to discover “economics” not just in the business section of The New York Times but also on its front page, sports pages, social pages, and for that matter on nearly every other page. The New Palgrave is a dictionary of economics because this cast of mind can be seen in, or behind, all the activities covered by its entries.


Adam Smith called this telltale propensity “the desire of bettering our condition,” and went on to say that the manner in which “the greater part of men propose and wish to better their condition” is by “an augmentation of fortune,” which is to say by making money. In modern mainstream economics, bettering our condition is described as “rationally maximizing our utilities.” As with Smith, this by no means translates into making as much money as possible, but, as I have said, into taking personal consequences into account before taking action—usually the consequences of gaining or losing money. This is the common denominator that brings such matters as marriage and divorce, crime and punishment, or for that matter production and distribution within a dictionary of economics.

The rational, “utility-maximizing” cast of mind thus becomes the identifying characteristic of the “neoclassical” school of economics, which is the predominant view of the profession today.3 But there is more to the subject of economics than rational maximizing. On the basis of its behavioral assumptions the discipline constructs an elaborate architecture of social prognostication. Adam Smith used his assumption about the ubiquity of self-betterment to show how this motive led to the accumulation of capital and to the internal coherence of its market system. The meaning of his famous metaphor of the “invisible hand” was that individuals who attended to their own betterment would also find themselves unwittingly guided by their competitive striving to the fulfillment of a larger task, namely economic growth and orderly social provisioning. Modern economics spells out the necessary conditions for Smith’s invisible hand in great detail, enlarging his rather simple requirement of the removal of all “hindrances” to competition into a daunting set of necessary conditions for rational maximizing, including the possession of “complete” information and the existence of markets for every conceivable disposition of individual income, such as a market in which one could rent umbrellas for the next rainy day. Short of such conditions, theorists ask, how can one declare that a person is acting “rationally”?

This leads to peculiar and paradoxical problems. In his entry on economics and rationality, the Nobel Prize winner Kenneth Arrow points out that trade is impossible between two “fully rational” people, for if two such should meet on the floor of a stock exchange and one offered to buy the stock of the other this very act would imply that the buyer had some information that the seller did not. Therefore his offer to buy would increase the value of the security to the seller. As a result, no sale would ever be transacted between two ideal traders, since the more the one bid the less willing would be the other to sell. As Arrow points out, this absurd impasse leads to such propositions as that there cannot be any money lying in the street, because someone would have already picked it up.

I look very critically on some of the premises of economic theory, but it would be wrong not to begin by recognizing their power. The New Palgrave is a testimony to the capacity of economics to illuminate the world—for example, in the marvelous article by Vernon Smith on hunting and gathering societies. In reading it I thought myself at first in the hands of a master economic anthropologist, as Smith describes the culture of paleolithic hunting society, organized around the formidable predatory capacity of the human species. But by the end I realized I was in the hands of a master anthropological economist, for Smith’s article does not so much explore the cultural systems of early man as reveal their economic properties—that is, the presence of the rational maximizing cast of mind at work within the grand evolutionary development of early societies.

Smith’s hypothesis is that these societies overhunted their territories and were forced to make choices with respect to their food-gathering activities. They chose to turn their technical and organizational capacities away from hunting, where diminishing returns were setting in, toward agriculture, where the prospects for material betterment were more promising. Smith does not put forward a crude reductionism in which acquisitive thirst saves the mammoth hunter from extinction. His account of prehistoric “economizing man” is no more—and also no less—than a highly suggestive illustration of the way in which the hypothesis of rational maximizing of utilities can add to our understanding of social history.


In similar fashion, the idea of an economic cast of mind helps to explain why certain human activities take the form or lead to the outcomes they do. We find sports in The New Palgrave because we can better understand the peculiar forms of baseball contracts if we see them as the outcome of the rational maximizing actions of players organized in cartel-like teams and leagues; we find crime in Palgrave because it seems plausible that to some extent men and women who violate the law weigh the gains and losses of unlawful behavior; we find family included because some family behavior—fertility, even parental altruism—can also involve rational maximizing. As Sidney Winter writes in an entry on natural selection and evolution, “The trained eye of the economist penetrates facades of pompous pretence, cunning deceit and impassioned demagoguery, discerning the rational pursuit of self-interest in martyr, merchant, and murderer alike.” Winter’s article is written in a cautionary vein with regard to this assumption, but his phrase sums up very well the unmasking effect of the mainstream approach.

In a way less easy to illustrate, that vision also points toward a social configuration, called general equilibrium, as the social outcome of the rational maximizing process. General equilibrium denotes a position in which the market for each and every good exactly “clears”—that is, the amount buyers want at going prices just equals the quantity that sellers offer at that price. As the terminus toward which the invisible hand steers the economy, general equilibrium is as close to heaven as the participants in a market system can come, given their initial endowments of money and their presumably fixed likes and dislikes. Although a discussion of nonclearing market situations has begun to appear in the journals, the vision of general equilibrium still prevails in neoclassical analysis, and underlies its preference for having the market rather than government in charge of the production and distribution of wealth and income.

I should make clear that The New Palgrave does not advocate these views. On the contrary, its editors have gone out of their way to give space to non-neoclassical perspectives, such as various branches of Marxian and post-Keynesian theory, analyses of workings of institutions, and the work of critics, such as myself, whose point of departure is hard to classify.4 Indeed, one of the most useful and interesting aspects of The New Palgrave is the tension that exists between the conventional view and these different approaches. For example, in successive entries on competition the reader can find the term discussed as a disciplinary pressure exerted by the market process (a neoclassical perspective); as a disruptive force unsettling the market and giving it dynamic force (a view deriving from the work of Joseph Schumpeter); as a system-regulating force (the classical approach); and as an aspect of the expansive nature of capitalism itself (the Marxian interpretation). Readers who are discontented with the conventional approach will therefore find others to consider. If they find that such ideas as rational maximizing and general equilibrium dominate the dictionary, it is because these ideas still dominate economics.

Despite its central position, it must already be clear that the neoclassical vision has serious problems. One of them lies in the arcane and overstrained quality of its theoretical elaborations. As Frank Hahn, the most sophisticated expositor of the general equilibrium view, has written elsewhere,

The achievements of economic theory in the last two decades are both impressive and in many ways beautiful. But it cannot be denied that there is something scandalous in the spectacle of so many people refining the analysis of economic states which they have no reason to suppose will ever, or have ever, come about.5

Yet I would not say that this difficulty vitiates neoclassical economics. I am at least as depressed by the tendency to dilute the analytical effectiveness of neoclassical theory by locating the economizing cast of mind in all behavior. “Homo economicus turns into a universal homo sapiens,” write Shaun Hargreaves-Heap and Martin Hollis in an entry on economic man. The arresting insights that follow from the selective application of the economic perspective no longer command our interest if they apply to every item in The New York Times, just as the discovery of divine intent at every turn becomes less surprising once one assumes the universal presence of a deity. Indeed, as economics loses all possibility of falsifiability it not only becomes a tautology but takes on some of the attributes of a theology.6

To my mind, however, the gravest problem of neoclassical economics lies in the narrowness of what neoclassical economists take as their subject. It is here, of course, that we encounter the matter I noted at the beginning—the absence of any economic concept of power. The reason for this absence is very simple. In depicting “the economy” as the interaction of rational maximizers there is no place for conceiving it as a process that creates and distributes privilege and the capacity for domination as well as commodities. This is because the crucial social relationship of exchange takes place in a political vacuum. In this vacuum some offer “work” and others offer “employment.” Both sides come together for the same rational, maximizing reasons, and the equality of their respective situations seems guaranteed by the fact that each side is free to reject the offer of the other. This view, however, overlooks a central asymmetry in the relationship of labor and capital. It is that sole title to the output—including the all-important element of profit that is normally realized from its sale—is lodged with the capitalist, not with the worker, even though the output is the product of the work of the one and the equipment of the other. Thus behind the seemingly equal legal footing of labor and capital lies an overlooked inequality in their contractual prerogatives.7

It is not only its blindness to power that undermines the penetration of the neoclassical view. The same inability to perceive the inextricably social nature of their subject also blinds economists to the ideological—I mean value-impregnated—character of much of their thought. One curious aspect of this ideological naiveté is the self-contradiction in the very idea of the “rational maximizing individual” on which neoclassical theory builds its theoretical edifice. Never mind the problems with “rational” and “maximizing.” What of the “individual” himself or herself? The first action that neoclassical theory demands of its central actor is that he rationally dispose of his income in the marketplace. Income! Does this not logically imply another person from whom the income has been received? Does this not in turn require that the irreducible unit of analysis consist of at least two persons, which is to say a miniature society? What does this tell us about the selection of “the individual” as the starting point for social analysis?

Of course not all economics is blatantly ideology-ridden. Most economic research consists of empirical studies related to current problems of trade, unemployment, the workings of the banking system, and the like, conceived and conducted with as much objectivity as is possible in any social inquiry. Yet even here we can find the influence of deep-seated, often unconsciously held beliefs that affect the outcome of research by influencing the choice of questions to be researched and the angle of one’s approach. Are tastes, for example, “given” or learned? Can market exchange be depicted as an encounter from which domination and subordination are absent? Unexamined beliefs on questions such as these enter more deeply into workaday economics than most economists themselves commonly realize.

I have already noted my substantial reservations about the usefulness of the concepts at the core of the neoclassical ideology. What may be the most serious of these is that the prevailing neoclassical conception seems to discourage interest in investigation itself. In The Journal of Economic Perspectives (Fall 1987) David Colander and Arjo Klamer report on a questionnaire submitted to graduate students in six top-ranking graduate economics programs. Asked what attainments contributed most to success in the profession, 65 percent of the 212 respondents answered “problem solving” and 58 percent “excellence in mathematics.” Only 3.4 percent thought that “having a thorough knowledge of the economy” was “important”; 68 percent thought it “unimportant.”

Thus the enlargement of our knowledge, to which the pages of The New Palgrave testify brilliantly, has come without a corresponding enhancement of its social and historical coherence. The capitalist system to which conventional economics directs the greater part of its attention remains a wraith in these pages—a web of social entanglements likened to “games”; a period of history located in a timeless present; a regime without rulers and ruled. The great central fact of economic thought in our time is that no one has advanced us beyond the perceptions of Smith and Marx, of Keynes and Schumpeter—perceptions that brilliantly placed economics within the historic setting of their times. Balancing the knowledge that modern economics possesses against the wisdom it lacks, I would say that humility would be the intellectual attitude most becoming for the profession—not, I fear, an attitude that comes easily to it.

This Issue

March 3, 1988