The Wealth of Nations (WN) is not a book from which we expect much enlightenment about class conflict. In spite of well-known passages referring to the diverging interests of workers, landlords and capitalists, the impression most have of WN is one of relative harmony among the classes. Nevertheless, Book III, “Of the different Progress of Opulence in different Nations,” which is the briefest and also the least studied of the five books comprising WN, provides considerable insight into the historical origin of conflict among social classes that derive from economic causes, and the circumstances under which conflict promises to become a characteristic feature of the economic process in any society.1 A re-examination of Adam Smith's theory of natural price in the context of the “stages of social history” developed in Book III, leads to interpreting the prospect for class conflict as a more integral and substantive part of WN than is generally recognized by historians of economic thought.

It is understood that Charles Cobb and Paul Douglas (1928) were not the first to use the production function named after them. Joseph Schumpeter (1954, p. 1042), Carl-Axel Olsson (1971), and Henry Spiegel (1991, p. 816) all note that the production function Y = AKαL1-α had been used by Knut Wicksell (1901, 1906) more than twenty years before Cobb and Douglas published their study. While it is quite possible that Wicksell was the first to use the Cobb-Douglas functional form to study production, he was not the first to apply it to economic analysis in general. Vilfredo Pareto had worked out several implications of a specific version of the Cobb-Douglas utility function as early as 1892. Later, he repeated and extended this analysis in the mathematical appendix to the French translation of his Manual of Political Economy (1909).

The loan fund theory of capital was developed by the unheralded American economist, Herbert J. Davenport (1861-1931). Davenport's name has virtually disappeared from writings on the history of economic thought. Today, he seems best known as a teacher of Frank Knight at Cornell around 1915. Davenport wrote three major books during an 18-year period between 1896 and 1914. The first (1896) was a treatise based on what he called the “principle of sacrifice,” or subjective opportunity cost. His second book, Value and Distribution (1908), covered much of the same ground but also presented some original contributions. It marked his emergence as a professional economist, since he presented his ideas within the context of an appraisal of classical and neoclassical economic doctrine. Among other things, the book contained a penetrating, subjectivist critique of four ideas in the history of subjectivist economics: marginal utility, Eugen von Bohm-Bawerk's theory of capital, Friedrich Wieser's theory of cost, and Frank Fetter's theory of market interest. It also introduced the loan fund theory of capital, which is the topic of this paper.

In the current era of quantity theorists and inconvertible currencies, the real bills doctrine has received a surprising amount of recent attention (e.g., Sargent and Wallace, 1982; Smith, 1988; Selgin, 1989; Cunningham, 1992). While the real bills doctrine has a long history, the doctrine underwent considerable evolution during the period from the Bullionist debates of the Restriction Period, 1797–1819, to the Banking School versus Currency School debates surrounding the introduction of Peel's Act in 1844. The debates of the Restriction period are significant for being directly concerned with the workings of an inconvertible, real-bills-based paper currency while the later debates involved the real bills doctrine under convertibility. A primary objective of this paper is to explore the views that Robert Torrens held concerning the inconvertible and convertible versions of the real bills doctrine as a rule for central bank policy. Torrens's contributions as an anti-bullionist and, later, as a leading member of the Currency School reflect the importance that both convertibility and bank lending practices have for interpreting the real bills doctrine and the related law of reflux. The apparently paradoxical evolution of Torrens's monetary thought identified by Lionel Robbins (1958) is attributed primarily to the evolution of his views on bank lending practices.

Among my happiest memories is a 1948 lecture on Adam Smith by a teacher who often read from and commented on primary texts. On the day in question, he arrived with a stack of books, from which he proceeded to read, one after another, for some 40 minutes. Finally he came to the last book in the stack, Smith's Wealth of Nations, from which he read the following:

In a recent article in this Journal, Robert Ekelund (1997) has renewed his criticism of the discussion of price formation in William Thornton's On Labour (1869) and criticized the work of “modern supporters” of Thornton, such as Kenneth Dennis, Philip Mirowski, Takashi Negishi and myself. While that work differs in the precise significance attributed to On Labour, there is agreement that Thornton's critique of contemporary explanations of “the laws of supply and demand” and/or his discussion of price formation do not warrant the negative and dismissive treatment they have often received from historians of economics. Ekelund disagrees. Based on “preposterous notions,” Thornton's work was “worse than nonsense” and, as he did not understand contemporary explanations of supply and demand, he should “receive a grade of ‘F’; (with strongly worded advice to return to the pursuit of poetry and sociology)” (Ekelund, 1997, pp. 11, 20, 21). Five examples are given below showing that this evaluation of On Labour depends on misinterpretation of the meaning, context and significance of Thornton's analysis.

In Christian Weber's opinion in the preceding article in this journal, although Vilfredo Pareto never wrote his utility function in the Cobb-Douglas form U = rβbrγc, he did present an early, if incomplete, discussion of a Cobb-Douglas utility function. Weber's sections II and III try to document his opinion.

Weber's section II examines Pareto's “Considerazioni” (1892) on the assumption that the marginal utility πi, of good i depends only on the level ri, of consumption of that good. Section III examines Pareto's Manual (1909) on the assumption of “additive separable” utility functions.

My response to Brems's comment on my paper is, I hope, obvious and straightforward.

First, it should be noted that in his section II, Brems is correct with one important exception. He is correct to note that the particular additive utility function in his equation (1) is not Cobb-Douglas. However, this correct conclusion does not imply, as Brems appears to believe it does, that it is impossible to write down an additive utility function which would generate the same indifference map, first-order conditions, and demand functions as a multiplicative Cobb-Douglas utility function

Some might argue that William T. Thornton, whatever his ultimate place in social history, has received far too much attention from economists. Yet, I welcome Michael White's comments on a recent paper of mine (1997) and even note that, in a small way, his earlier comments on my paper written with Sven Thommesen (1989) led me to reread Thornton's writings in depth. Nevertheless, and after augmented reflection, White's comments do not cause me to alter any of my arguments concerning Thornton's worth as an economic theorist. Indeed, rereading Thornton in light of White's comments strengthens my belief that his analysis was as flawed as I initially thought it to be. While Thornton's critique of supply and demand (read “of economic analysis”) and others like it raise issues far broader and of more critical moment than those suggested by White, I confine my remarks to the issues he raises in his comment on my most recent paper.

Over the past two decades, technology and innovation have become common themes within the economic growth and economic development literatures. This renewed emphasis is highlighted by the developments in endogenous growth theory (Romer, 1986, 1990; Barro and Sala-I-Martin, 1995), but many have noted that its roots can, in part, be traced to the works of Joseph A. Schumpeter (Nelson and Winter, 1982; Blaug, 1986; Rostow, 1990; Cheng and Dinopoulos, 1992; Freeman 1994; Thanawala, 1994). Schumpeter's principal contributions include his theory that the creative response of entrepreneurs and entrepreneurial innovation are the primary determinants of economic change. However, most argue that his vision of entrepreneurs is dichotomous, with one part corresponding to his European period, and the other to his American period (see, for example, Phillips, 1971; Klein, 1977; Nelson, 1977; Freeman, 1982, 1994; Swedberg, 1991; Scherer, 1992; Thanawala, 1994; Malerbaand Orsenigo, 1995). The initial part of his work, it is argued, focuses not on large firms and market structures, but on small firms and individual entrepreneurs. Here Schumpeter presents entrepreneurs as isolated, romanticized individuals who challenge the social system and indirectly propel society to greater economic heights. This period, it is argued, reflects the European half of his life. Schumpeter's American period begins with his stays at Harvard for the academic year of 1927-28, and for a greater part of the year 1930. It is generally argued that in this American period, Schumpeter altered his vision of economic development to accentuate the advantages of monopolistic competition, and to include large established corporations and government agencies as agglomerations capable of fulfilling the entrepreneurial function.

The subject of this essay is best introduced by two statements written many years apart. One is by J. S. Mill:

[Adam Smith] speaks as if labour were intrinsically the most proper measure of value, on the ground that one day's ordinary muscular exertion of one man, may be looked upon as always, to him, the same amount of effort or sacrifice. But this proposition, whether in itself admissible or not, discards the idea of exchange value altogether, substituting a totally different idea, more analogous to value in use. If a day's labour will purchase in America twice as much of ordinary consumable articles as in England, it seems a vain subtlety to insist on saying that labour is of the same value in both countries, and that it is the value of the other things which is different. Labour, in this case, may be correctly said to be twice as valuable, both in the market and to the labourer himself, in America as in England (Mill, 1909, p. 567).