Advancing Economic Thought

advertisement
Advancing Economic Thought
(See related pages)
(9.0K)
The Past as Prologue:
The Prehistory of Economics
(29.0K)
Today the basic tools of economics are part of
everyday thinking. But these tools are of recent origin,
as is our conception of the economy and its operation.
In English, for example, the first use of the term
'economy' in its modern sense occurred in the 1600s,1
and not until the 1800s did the word gain the full
meaning it has today. This article outlines the ways
economic concepts were largely hidden, until the rise
of markets in Europe allowed economic theories to
gradually develop. The factors that led to the
emergence of capitalism are analyzed and the early
forms of economic reasoning described.
Economic concepts were by no means irrelevant in the past; instead they were shadowy notions only
dimly evident in ways of thinking. Why were these concepts so little understood? We begin by looking at
the economic conditions in the ancient world, then the changes associated with the Middle Ages (5001500 CE) and the early modern era (1500-1750 CE). This takes us up to the time when economics as we
know it today was developed by thinkers such as Adam Smith.
The Ancient World
Slavery was widespread throughout the ancient world, especially in agriculture. In the classical
Mediterranean world (both Greek and Roman), slaves were usually privately owned. In some other
regions, such as the Near East and most of Asia, private ownership was less typical, but slavery was still
present. It was usually the ruler (pharaoh, king, or emperor) who was at the center of economic life. High
rates of taxation and required labour were employed to ensure that the bulk of workers lived in conditions
hardly distinguishable from slavery. In both East and West, the intent of these practices was the same: to
maximize the economic surplus that resulted after providing slaves with a bare subsistence.
Towns and cities during antiquity had a more complex economic makeup than just slaves and
slaveowners, with artisans and labourers engaged in various types of rudimentay industry, and merchants
engaged in trade. Some of this trade spanned great distances. In the early Roman Empire, for example,
wealthy Roman citizens could buy jewels, spices and muslins from India, and even expensive silks from
China, the result of numerous exchanges as these goods passed along the mid-Eastern trade routes that
connected the Mediterranean with the Indian Ocean and the China Seas.2
But these cases are exceptional. In ancient societies the bulk of production, especially in rural areas, took
place outside markets. The generation of wealth, especially through 'artificial' means such as trade, was
seen as a regrettable evil, with the potential to corrupt those engaged in these activities. "No crime is
more grievous than the desire for gain,"3 observed the Chinese Book of Tao. In another part of the world,
the Greek philosopher Plato echoed this view: "a great return of gold and silver... has of all things the
most fatal results on a state whose aim is the attainment of just and noble sentiments..."4
Even the famous worldly Roman lawyer Cicero showed a distinct unease when it came to the social status
of trade. "Those who buy from merchants and sell again immediately" he said, "should be thought of as
demeaning themselves. For they would make no profit unless they told sufficient lies."5 Cicero reflected
the typical view that only trade conducted on a large scale "is not entirely to be criticized" especially if
merchants used the wealth they gained to set themselves up in the honourable occupation of agriculture.6
Not only trade was looked down upon; so too was labour hired by industry. Cicero again provides a typical
sentiment: "All those workers who are paid for their labour and not for their skill have servile and
demeaning employment," he says, "for in their case the very wage is a contract to servitude." 7 This
disdain for those involved in production had a significant impact. Despite scientific advances in some parts
of the ancient world, there was little desire to apply such advances to promote efficiency through laboursaving devices.
The widespread apathy towards technical innovation is neatly captured by an episode that involves an
inventor, Heron, from the city of Alexandria in Egypt. During the first century CE, he reputedly designed
devices based on the use of steam, a source of power that could have revolutionized production in the
ancient world, as it would later do in modern times. Instead of applying his inventions to productive
enterprise, however, Heron suggested their use in smoke-and-mirrors magic tricks, such as causing
temple doors to open automatically when a fire was lit on a nearby altar.8
This example illustrates a fundamental detachment from economic values. Economic activity was not seen
as an entity separate from society. Instead, production and trade were part of a larger picture dominated
by tradition and religious belief, as well as despotism and social inequality.
The problem of scarcity, so central to modern economics, was not viewed as one of life's main challenges.
Instead, scarcity was considered an aspect of the divinely ordained human condition. In the words of the
early Greek poet Hesiod, "The gods desire to keep the stuff of life hidden from us."9
Not surprisingly, when economic topics were touched upon in ancient writings, attention was usually
limited to practical observations about the day-to-day management of households or administration of
states. (This is illustrated by the Greek root of the word 'economics', which originally meant 'the art of
household management'.)
Of all the thinkers of ancient times, it was the philosopher Aristotle (see Chapter 5 of the Online Learning
Centre), who dealt with economic topics in the most analytical way, by trying to set out conditions for
justice in exchange. In later centuries, Aristotle’s analysis influenced the Arab world, where various
economic issues were studied by innovative thinkers such as Ibn Khaldun (see the article in Chapter 11 of
the Online Learning Centre).
The Middle Ages
The Middle Ages refers to the thousand years in Europe between the fall of the western Roman Empire in
about 500 CE and the birth of the modern era around 1500 CE. The prevailing economic system of this
era, known as feudalism, included peasants and land-owning nobles. Both classes were tied, at least in
theory, by a set of mutual obligations. Peasants provided labour, and in return looked to the nobility for
military protection. In practice, the peasantry often had few guarantees of security, and even fewer rights.
To call peasants 'serfs' (from the Latin word for slave) was only a slight exaggeration, for typically
peasants were tied through law and custom to a life of servitude.
Market activity during this time was guided by rules worked out by a group of religious-minded thinkers,
including the philosopher Thomas Aquinas (see the article in Chapter 6 of the Online Learning Centre). For
this group, the traditional suspicion against trade had not disappeared, which meant that medieval
commerce was often directed by regulations based on the notion of a 'just price'. Also, the lending of
money for interest, known as usury, was condemned by church law.
Medieval rules did not stop the development of markets. While most Europeans shared a common
Christian faith, political power was fragmented among a multitude of rulers. Many states discouraged
commercial enterprise through regulations and taxes, but others gave a measure of freedom to trade and
those who practiced it. Gradually, the toleration of merchant interests won the day. As it did so, the
Middle Ages witnessed the rise of thriving commercial centers.
The Emergence of Capitalism
The year 1500 is a useful dividing line between the medieval and modern eras. Pockets of capitalist
enterprise existed before then, but it was around this date that capitalist values started to emerge as the
dominant mode of economic thinking. Why did this occur first in Europe? The answer is by no means
straightforward
In 1500, Europe was neither the richest nor most technically advanced part of the world. If any region
could lay claim to that position it was China, with its sophisticated arts and literature, efficient government
administration and technological innovations that included printing and gunpowder. At closer range,
Europe vied for supremacy with the Ottoman Turks, whose wealthy empire could boast considerable
military might and a cosmopolitan Islamic-inspired culture.
Europe's advantages were more modest, and were accompanied by considerable turmoil. Two main
factors lay behind capitalism's emergence in Europe: population trends and a revolution in religious
opinion.
Population Trends and their Impact
During the last two centuries of the Middle Ages, the population in many parts of Europe had fallen.
Famines and wars played a part. More notable were plagues such as the Black Death, which between 1347
and 1348 carried away as much as one-third of Europe's populace. With fewer mouths to feed, food prices
fell. At the same time, a labour shortage caused wages to rise. For example, in one part of England (the
estates of the Bishop of Winchester), it is estimated that between 1320 and 1479 the price of wheat
dropped by over 50 percent while money wages rose by the same percentage.10
As a result, feudal relationships were undermined. In the latter centuries of the Middle Ages, many
landlords began to accept a monetary payment from their peasants as a replacement for feudal
obligations. Other landlords responded to the potential profits to be made from the cloth industry by
expelling their serfs so that lands could be used by grazing animals to produce wool. Peasants, deprived of
their traditional livelihood, had little choice but to enter the monetary economy themselves, as wagelabourers in the expanding capitalist sector.
The turmoil surrounding these events led to a new round of political rivalry within Europe. Aided by the
development of seaworthy ships for long ocean voyages, navigational tools such as the compass
(originally a Chinese invention), and firearms (first invented in Italy in the 1300s), the nature of European
warfare was transformed. The power once wielded by knighted cavalry passed to professional armies and
navies under the command of national rulers. As guns and artillery replaced the sword and bow, and seagoing nations established far-flung empires, political dominance depended more than ever on a country's
economic resources, so that military success and economic riches went hand in hand.
After 1500, Spain's and Portugal’s overseas conquests led to an inflow of precious metals into Europe.
These metals were the primary form of currency, so this influx meant a rapid expansion in Europe's
money supply and a disruptive period of inflation. During the 1500s, for example, prices rose by over 200
percent in Spain, while the rate of increase in countries such as England and France was in excess of 100
percent.11 The resulting economic upheaval harmed those such as wage labourers, whose incomes tended
to rise less rapidly than inflation, and benefited merchant capitalists, who were better able to keep up with
inflation.
The Protestant Reformation
The other main factor in the rise of capitalism involved a challenge to medieval spiritual values. With the
rediscovery of the writings of classical times in the 1300s and 1400s by the humanist scholars of the
Italian Renaissance, a more secular view of the human condition arose. The Renaissance fostered a
reawakening of scientific thought which, in later centuries, was applied to rapid technological innovation.
A more immediate impact of the Renaissance was on views of the after-life, or the fate of human souls
after death, within the Roman Catholic tradition. In the late Middle Ages, the stark dichotomy between
heaven and hell gave way to a less fearful conception which included Purgatory, a place where souls
destined for heaven are first cleansed of relatively minor sins, including those associated with market
transactions. With this new view came a growing tolerance by the late medieval church for money-making
and usury, though formally these practices were still frowned upon.
After 1500 came an even sharper break with the past. Until then, the Roman Catholic Church had been
able to maintain remarkable religious uniformity throughout Western Europe. A Christian believer's
personal salvation was seen as being determined by obedience to God's laws as outlined in official
doctrine, while the Church’s hierarchy, centred in Rome, was vested with considerable political power. But
in the last centuries of the Middle Ages this spiritual consensus dissipated as the Church became
entangled in political intrigue and was faced with growing dissent over traditional beliefs and practices.
During the 1500s, dissent turned into the violent ferment known as the Protestant Reformation. It was
sparked by the German reformer Martin Luther, who argued that individual faith, rather than churchsanctioned 'good works', was the key to personal salvation. At a slightly later date, the French reformer
John Calvin, who was to inspire the Puritan movement, popularized an even more radical notion. Calvin
believed that salvation was ultimately determined by God's own inscrutable judgment. This belief was
known as predestination.
Luther's and Calvin's ideas each had an economic impact. "Neither pope, nor bishop, nor any one else, has
the right to impose so much as a single syllable of obligation upon a Christian man without his own
consent,... for we are free from all things,"12 observed Luther in a ringing statement of individual liberty.
In succeeding centuries, this focus on individual rights gradually spread from spiritual to everyday life, as
the personal freedom to read and interpret the biblical scriptures made Protestants more likely to assert
the right to decide their own economic self-interest.
Though Calvin himself did not fully apply his beliefs to economic matters, his followers did. "What reason
is there," Calvin asked, "why the income from business should not be larger than that from landowning?"13
Why indeed, echoed his followers, most of whom were not members of the land-owning classes. Gradually
there arose the view among Calvin's Puritan followers that earthly riches could be seen as evidence of
God's favour. Since the consumption of luxuries was frowned upon, the principle of predestination offered
a potent justification to engage in saving and to accumulate wealth. As a result, it was in the Protestant
parts of Europe (the Netherlands, Britain, and certain regions in Germany and France) that capitalist
values were quickest to become entrenched.
Mercantilism
The strengthening of these values within Europe in the centuries after 1500 created a new emphasis on
trade and production, not just in everyday life but in the realm of ideas as well. For the first time,
economic matters became the object of systematic study. The economic philosophy of the early capitalist
era was based on a preoccupation with precious metals. In contrast to the Middle Ages, there was a new
willingness to condone self-interest and extol its benefits. A notable example of this change in mentality
was the Frenchman Antoyne de Monchrétien, writing in the 1600s:
I am not going to deny here that the mercantile mind is ordinarily attached to its own
covetousness than to public spirit; that the yellow luster of gold does not dazzle and
sometimes lead astray a little from equity; but ... if one were to constrain it so closely,
there would be no good labourers, good artisans, good advocates; because in these arts,
the best are those who can get more.14
Monchrétien was one of a group of writers known as mercantilists. They developed a system of economic
policy that stressed the short-term interests of national rulers and merchants. (The word mercantilism
means 'the principles of trade'.) According to this system, both individuals and nation states should aim to
accumulate precious metals ('treasure'), which could be used to enhance a nation's economic power and
military might. This underlying philosophy was aptly captured in a statement by the English merchant
Josiah Child, who remarked that "[f]oreign trade produces riches, riches power, power preserves our trade
and religion."15
Monchrétien, Child, and the other mercantilists supported government regulations to attract and keep gold
and silver within national borders. One of the best ways this could be done, they believed, was through a
surplus balance of trade, or an excess of exports over imports. Mercantilist thinking meant that tariffs
were often placed on imports to hinder the outflow of gold and silver, while state monopolies were granted
to help domestic merchants dominate trade and to stimulate exports.
These principles can be found in various writings from the 1500s to the mid-1700s. Most mercantilist
authors were from England or France, the two countries that, along with some smaller states such as the
Netherlands, dominated European trade and colonization. Mercantilist thinking represented a transitional
stage between feudalism and full-fledged capitalism, its traditional stress on the need for strict political
rules governing trade and production combined with a new positive emphasis on money-making.
These conflicting principles meant that the views of the mercantilists were by no means consistent, and
never developed into a complete body of theory. Moreover, to modern eyes, their over-riding interest in
the role of money as a generator of wealth appears misplaced. After all, it is not the quantity of money,
but rather the extent of a country's productive assets that determines whether a country will grow and
prosper. A wish to gain prosperity simply through an accumulation of precious metals alone is therefore
bound to fail.
This principle was illustrated by Spain during the 1500s, when little permanent gain was realized from the
influx of precious metals from the New World. Instead, Spaniards (in particular, Spain's monarchs)
frittered away the bulk of their nation's newly acquired gold and silver on foreign products. If anything,
the Spanish economy's productive capacity declined during this century, given the avalanche of
consumption spending by Spaniards on imports. Meanwhile, other European countries such as France and
England benefited from a significant rise in their exports.
The Birth of Modern Economics
By 1750, mercantilist thinking was on the wane, as the mutual benefits of trade, as well as the
advantages associated with competitive markets, began to be understood by a new breed of economic
thinkers. After the publication of Adam Smith's Wealth of Nations popularized these ideas, the mercantilist
stress on economic rivalry and the accumulation of precious metals seemed outdated, and the modernday view of markets and the economic role of government began to predominate.
It is no exaggeration to say that it took the pioneering work of economists such as Adam Smith and his
followers such as David Ricardo and Thomas Malthus before it was possible to visualize the economy as a
separate entity.16 With this transformation, the prehistory of economics ended, the groundwork laid for the
appearance of economics as a distinct discipline.
Notes
1. Oxford English Dictionary (Oxford: Clarendon Press, 1989).
2. H. G. Rawlinson, Intercourse Between India and the Western World (New York: Octagon Books, 1971),
pp. 101-102.
3. Lao Tzu, Tao Te Ching (New York: Bantam Books, 1990), 46, p. 14.
4. "Laws," in The Dialogues of Plato. 4th ed. (Oxford: Clarendon Press, 1953), vol. 4, 705b, p. 274.
5. On Duties (Cambridge UK: Cambridge University Press, 1991), I:150, p. 58. Cited in Neal Wood,
Cicero's Social and Political Thought (Berkeley: University of California Press, 1988), p. 117.
6. Ibid, p. 58.
7. Ibid, p. 58.
8. Technology in Western Civilization, M. Kranzberg, C.W. Pursell Jr., eds. (New York: Oxford University
Press, 1967), vol. 1, pp. 51-55.
9. "Theogony," in Hesiod, Theognis (Harmondsworth UK: Penguin, 1973), p. 60.
10. The Cambridge Economic History of Europe, M. M. Postan, ed., 2nd ed. (Cambridge UK: Cambridge
University Press, 1966), vol. 1, p. 691.
11. Michel Beaud, A History of Capitalism 1500-1800 (New York: Monthly Review Press, 1983), pp. 1920.
12. Quoted in Christopher Hill, "Protestantism and the Rise of Capitalism," in The Rise of Capitalism, David
Landes, ed. (New York: Macmillan, 1966), p. 44.
13. Quoted in R. H. Tawney, Religion and the Rise of Capitalism (London: John Marley, 1926), p. 105.
14. Quoted in Guy Routh, The Origin of Economic Ideas (London: Macmillan, 1975), p. 33.
15. Quoted in Revisions in Mercantilism D. Coleman, ed. (London: Methuen, 1969) p. 76.
16. Karl Polanyi, "Aristotle Discovers the Economy," in Primitive, Archaic, and Modern Economies (New
York: Doubleday & Company, 1968), p. 86.
If directed to do so by your instructor, the following questions can be answered online and emailed to
him/her or yourself.
Could the lack of interest in labour-saving innovation in the ancient world be connected with the
1 prevalence
of slavery? Explain.
Summarize how the religious innovations of Martin Luther and John Calvin helped promote the
2 emergence
of capitalist values.
Explain why a classical economist like Adam Smith disagreed with the mercantilist belief that a
3 country’s
wealth was based on the accumulation of precious metals.
Download