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Sunday, May 19, 2013

The Pettyites: Davenant, King and ‘the law of demand’

Jonathan Swift's A Modest Proposal should have provided the last word on political arithmetic, except that an epilogue has been furnished by the quantophrenic and metromanic folly of modern historians of economic thought, who have resurrected a Baconian or Pettyite ‘quantitative law’ expounded in the 1690s as if it were a veritable marvel of anticipation of modern econometrics.

Charles Davenant (1656–1714), son of a poet laureate and dramatist, was an attorney who spent his life scrambling for the main chance. To supplement his meagre income from law practice, he managed to obtain the appointment of commissioner of excise in 1678. By the mid-1680s, Davenant was making a handsome salary as commissioner and was also an MP. His comfortable and placid existence, however, was grievously disrupted by the Revolution of 1688, which lost Davenant his high post; moreover, substantial loans of his to the Crown of Charles II remained unrepaid.

A Tory confronting a Whig regime, Davenant now began to turn his attention to writing economic tracts on the problems of the day. All his publications centred around special pleading for his own political interests, a quest for subsidy or for resuming his high post in the government. Davenant's first tract, An Essay upon the Ways and Means of supplying the War was published in 1694, after five years of war with the Dutch, and after the same number of years of Davenant's trying unsuccessfully to get back his old post as commissioner of excise. The burden of the tract was denouncing the government for financing any part of the war by public debt, and urging instead that it rely almost totally on the excise, coincidentally Davenant's own area of expertise. After again denouncing the government that stubbornly refused to see his own virtues, Davenant turned to another area of self-interest.

Davenant has been termed inconsistent and confused on the free trade issue, sometimes appearing to favour free trade and other times favouring protection. But these inconsistencies magically clear up if we realize that Davenant, in an attempt to get on the East India Company bandwagon, revived the by now grand seventeenth century tradition of arguing about the rights and wrongs of the East India trade. Davenant unsurprisingly took the standard Munian line of supporting an overall, or general,
‘favourable’ balance of trade, but pointed out the absurdity of trying to balance trade with each country, and defending the East India Company's deficit with the Far East. Davenant's pro-East India trade position was expressed in his 1696 tract, Essay on the East India Trade. The following year, Davenant urged the East India Company to send him to India; failing that, Davenant continued to curry favour with the company by publishing two Discourses on the Publick Revenues and on the Trade of England (1697–98), and another Essay upon... the Balance of Trade in 1699, continuing his Munian foreign trade analysis.

By 1698, indeed Charles Davenant's fortune had changed; he was now a Tory MP and the East India Company agreed to send him to India. From then on, Davenant's writings were mainly strictly political, and in 1703 he finally achieved his objective of regaining a high government post, inspector-general of exports and imports. Davenant was in and out of trouble, however, his writings changing radically from ‘moderation’ to ‘extremism’ and back with each change of the political winds, or from Tory to Whig, until he ended his career generally scorned and trusted by none, in financial difficulties and living on the largesse of his old friend James Brydges, the Duke of Chandos. All in all, his biographer Professor Waddell does not seem too severe when he concludes that:

Davenant's career was thus not much of a success. He lacked the force of personality and obvious integrity necessary for the role... he... tried to play – that of a partisan pamphleteer who was yet a man of independent judgment and not a mere hack. He was on the losing side in nearly every controversy he joined.... He proved incapable of managing his own affairs and became a burden on his friends.... He was neither an original thinker, nor a practical man of affairs, but merely a competent publicist. The relationship between his writings and his personal circumstances suggests that his enemies had some excuse for regarding him as a purely self-seeking and mercenary time-server.1

It is intriguing that Davenant, as a devoted follower of political arithmetic, would try to justify his self-seeking wavering by employing political arithmetic as a kind of cost–benefit analysis, in which the statesman, possessing ‘a computing head’, arrives at a balance of advantages, ‘by summing up the difficulties on either side, and by computing upon the whole. In that way, he shall be able to form a sound judgment and to give right advice; and this is what we mean by Political Arithmetic’.2
Davenant would be a forgotten and no-account minor mercantilist writer, except for the extravagant praise lavished by modern quantophrenic historians of thought upon a previously unknown and alleged ‘economic law’ discovered by Davenant and by his quiet political arithmetical and political ally, the accountant Gregory King (1648–1712). This ‘law of demand’ is now hailed as the origin of econometrics, predating Bernoulli's alleged law of the diminishing utility of money of 1738 (see below). Embarrassing adulation has been heaped upon this absurd ‘law’ by modern economists zealously trying to find prefigurements of econometric ‘science’. There has been much confusion on the precise credit for authorship of this alleged law, how attribution should be shared between King and Davenant, and even, solemnly, whether it should be called the ‘Davenant–King’ or the ‘King–Davenant’ law, as valueless a piece of scholarly disputation as has appeared in many a moon. The law first appeared in Davenant's Essay upon... the Balance of Trade of 1699, citing an unpublished manuscript by King, the Natural and Political Observations... written in 1696.3 The ‘law’ states baldly, and without evidence, that the following will happen when the supply of the harvest of corn (wheat) is reduced below the usual amount: not simply, as has been known since the scholastics, that a lower supply of a product will tend to raise the price, but that the effect will be a definite quantitative relation, as follows:

Modern economists have generally, pace Alfred Marshall, grievously misinterpreted this quantitative statement as a ‘demand schedule’, or tabular basis for a demand curve, and as a pioneering attempt to ‘measure’ the elasticity of such a curve. But the grave fallacy here is that this quantitative relation has nothing whatever to do with the consumer demand schedule that plays such a deservedly important part in modern economics. The genuine demand schedule is hypothetical, subjective, and instantaneous: all it says is that at a given moment, at price x, consumers would purchase a certain quantity y of the product. And the point of this schedule is precisely that we don't know and can't know this subjective relation, that there is no way to find out, and that the only point of the demand schedule is to show that, at any given time, the demand curve is ‘falling’, that is, as the price falls the quantity demanded increases, and vice versa. Properly, the law is qualitative and never quantitative, and there is never any way to establish such quantities.

What the pro-Davenant ‘law’ economists fail to realize, then, is that even if this Davenant table were based on historical fact, all it would establish is not a demand schedule or curve, but only the factual ‘equilibrium’ points each year, that is, each year's price and quantity produced. These points have nothing to do with any genuine demand schedule or ‘law of demand’, which is strictly qualitative and subjective to the minds of consumers.

Second, even if these historical data were correct, they would only establish a relation for the particular years and particular markets in question; they would in no sense establish any sort of ‘law’ for the same continuing quantitative relationship between supply and price in any other year or place.

But finally, there is no evidence that this table is based on any factual evidence at all! Thus, despite the solemn repetition of this table from the late nineteenth century onwards, and despite its alleged pioneering of econometric science, this Davenant–King table has no value whatever either as factual data, as statistics, as econometrics, or as economic theory. It is testimony only to the quantophrenic folly of modern economics.

And yet economists, striving desperately to maintain that the Davenant– King ‘law’ must have clothes, have taken one of two contradictory directions in presuming the importance of the law, and sometimes have taken both stances at once. Thus Jevons (1871), without any evidence at all, simply assumed that the Davenant–King table was ‘accurate’ and pronounced it a scandal that economists and statisticians hadn't yet matched these numbers in accuracy. On the other hand, William Whewell, an odd combination of expert Cambridge mathematician and arch-empiricist in the philosophy of science and economics had, two decades earlier (1850), sensed that the Davenant table was really the mere working out of a mathematical formula, and yet he still assumed that it must have been based on empirical observations. Similarly, in his recent careful study, Professor Creedy has convincingly shown that the King–Davenant numbers were the working out of the mathematical formula of ‘factoral expansion of a polynomial’, a method first discovered by the English mathematician James Gregory and then used by Isaac Newton for his great work in physics. But, after usefully pointing out how King could have rapidly discovered and used the new Gregory–Newton method Creedy, instead of concluding sensibly that the statistical or econometric soundness of the Davenant–King ‘law’ lies in ruins, blithely proceeds to save the theory by simply asserting that it ‘was quite possible’ that the polynomial formula ‘was fitted to actual observations’. ‘Quite possible’, but there is no evidence whatever, and, since this ‘law’ was never replicated, and was even changed by King, it is far more likely that, enchanted with the new maths as Creedy himself concedes, ‘hypothetical values of coefficients were used with an arbitrarily chosen polynomial in order to generate the basic “data”’; in other words, that King and/or Davenant made it all up, as part of their ‘new science’

Austrian Perspective on the History of Economic Thought (2 volume set)

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