On the fiftieth birthday of my Foundations of Economic Analysis, a deluxe edition of it was embalmed in the German Klassiker der Nationalokonomie series alongside of Adam Smith, Eugen von Bohm-Bawerk, Irving Fisher, and many other illustrious suspects. With it, as customary, was published a slim volume in German, a Vademecum, with review essays by Jurg Niehans, Carl-Christian von Weizsacker, and a foreword by the editor Bertram Schefold. By invitation, like Tom Sawyer at his own funeral, I provided for German translation my own recollections under the title "How Foundations Came to Be." Here is the English original, slightly abridged; for some technicalities, readers are referred to the full German text. I remembered much, and, with the perspective of time, learned not a little.

A FLAGRANT ERROR dogged James Steuart, Adam Smith, David Ricardo, John Barton, John Stuart Mill, Karl Marx, and classical writers generally. Modern commentators on classicism are enough tempted by the fallacy to generally overlook it as a vital flaw in the earlier writers. This fallay can be called classically classical-not in the sense of being the greatest error in the classical paradigm (an award that would be hard even to define) but-in the sense that modern scholars ignorant of pre-1900 literature would be little tempted by it. I do not denigrate or patronize a great writer of the past, such as David Ricardo, when I objectively delineate his hits and misses. The fallacy can be simply put. Fixed capitals are prejudicial to wages and the demand for labor; circulating capitals (wage fund items that represent outlays paid to workers at the beginning of a period of production, which are not recouped until the end of that period of production and which of course bear an interest or profit rate during the transition) are allegedly favorable to the real rate and to the demand for labor. Fixed capitals are durable produced inputs that render their services over a number of different production periods. Circulating capitals are produced inputs used up within one period of production; they are relatable to, but distinguishable from, wage fund advances paid to workers at the beginning of a period of production, to be recouped at its end along with an interest or profit return. In the minds of heterodox economists and the lay public generally, a technological change that made machinery newly viable was supposedly the kind of invention that could put people out of work temporarily, reduce market-clearing rates, and in long-run equilibrium at an unchanged subsistence rate call for a significantly reduced population. By contrast, therefore, a new invention that displaced machinery in favor of various raw materials as inputs, would supposedly raise the short-run real and increase the demand for labor. So powerful was the grip of what I shall dub the Classical Fallacy that it was being reminded of it in 1819-21 that appears to have enabled Ricardo to recant, in his famous Third Edition chapter on machinery, his previous boner that every viable invention can be expected to raise every factor's return. From today's wisdomor indeed the wisdom of 1900-that previous position of Ricardo was nonsense. There is no Invisible Hand that seeks out machines or new techniques only if they benefit everyone.I

Adam Smith, David Ricardo, Thomas Robert Malthus, and John Stuart Mill shared in common essentially one dynamic model of equilibrium, growth, and distribution. When the limitation of land and natural resources is added to the model of Karl Marx, he also ends up with this same canonical classical model. In its present version the model is stripped down to its minimal essentials. For brevity I employ modern mathematical tools, but only to characterize in modern terms the relations that were actually common to all these writers. The reader should of course be warned that any simple codification of the classical economists' discursive writings must be an oversimplification: in some of their passages they qualify what they have written elsewhere; in some they provide negations and contradictions. Not a few of the stereotypes about the classical writers are, to paraphrase Voltaire, myths agreedupon by later commentators-distortions that both improve and libel the originals. The relevant object of study for a modern scholar is the corpus of original texts and the commentaries on them, the latter not being genuinely of less interest than the former once we have succeeded in telling them apart. To the fascinating question of whether classical political economy does, or can be made to, offer an alternative paradigm --in the sense of Thomas Kuhn [11, 1962]-to modern mainstream economics, the present investigation provides an instructive answer. So to speak, within every classical economist there is to be discerned a modern economist trying to be born. A Ricardo or Mill did not so much replace supply and demand by quite different mechanisms but rather sought to be able to say something significant and limiting about their properties, quite in the same way that we moderns endeavor to do. I describe and analyze here the basic classical model in its essential form.

There has been a great deal of discussion about whether the marginal utility of income rises with income. Most notably, Milton Friedman and Leonard J. Savage argued in their classic paper that the willingness to gamble implies that the marginal utility of income is rising over a range. The discussions of rising marginal utility and of Friedman-Savage gambles have proceeded independently of the literature on time preference, although the issues are in fact related logically. Drawing on this logical relationship we shall show 1) that at least when intertemporal utility is separable, the stable levels of consumption that are usually observed imply that the marginal utility of income decreases as income rises. 2) Even if the marginal utility of income does increase, Friedman-Savage gambles normally will not maximize utility; saving and dissaving can attain the levels of consumption which generate the most utility per dollar of income at a lower cost than gambles unless imperfections in the capital market are severe. 3) Even when the utility function is not temporally separable, repeated gambling cannot be a rational way of dealing with a rising marginal utility of income. We therefore conclude that observed gambling is seldom if ever explained by the logic set out in Friedman and Savage's seminal paper. In view particularly of the stability of consumption levels and the lack of FriedmanSavage gambles, we conclude that marginal utility of income does not rise with income. I. A Conceptual Framework