RH351
History of Economic Thought
Transparencies
Set 1
Why study the
History of Economic Thought ?
What is it?
“…the history of the intellectual efforts that men have made in order to
understand economic phenomena…”
Why study it?
“Current work, so one would think, will preserve whatever is still useful
of the work of preceding generations … Why then should we go back to
old authors and rehearse outmoded views? Cannot the old stuff be
safely left to the care of a few specialists who love it for its own sake? ”
Joseph Schumpeter
History of Economic Analysis (1954)
Why study the
History of Economic Thought ?
“Economics is more like art or philosophy than science, in the use that it can make of its
own history … When the natural scientist has come to the frontier of knowledge, and is
ready for new exploration, he is unlikely to have much to gain from a contemplation of the
path by which his predecessors have come to the place where he now stands. Old ideas
are worked out; old controversies are dead and buried. The Ptolemaic system may live on
in literature, or it may form the framework of a mathematical exercise; it has no direct
interest to the modern astronomer.
“Our position in economics is different; we cannot escape in the same way from our own
past. We may pretend to escape; but the past crowds in on us all the same … The facts
which we study are not permanent, or repeatable, like the facts of the natural sciences;
they change incessantly, and change without repetition …
“Accordingly, while we are right to allow ourselves to become wrapped up in those theories
which are useful now, we are unwise if we allow ourselves to forget that the
time may come when we shall need something different. We may then be
right to reject our present theories, not because they are wrong, but
because they have become inappropriate..”
Sir John Hicks
“‘Revolutions’ in Economics” (1976)
Precursors to “Modern” Economic Analysis
1000 BCE
500 BCE
0
500
1000
1500
Babylonia:
The Hammurabi Code
1800 BCE
Books of the
Hebrew
Pentateuch
1200– 900 BCE
Hebrew
Prophets
750– 500 BCE
The Greeks:
Plato, 427 – 347 BCE
Xenophon, 420 – 355 BCE
Aristotle, 384 – 322 BCE
Epicurus, 341 – 271 BCE
Zeno, 333 – 262 BCE
St. Augustine
354 – 430
Arab-Islamic Thought:
Abu Hamid al-Ghazali, 1058 – 1111
Ibn Khaldun, 1332 -- 1406
The Scholastics:
Thomas Aquinas, 1225 – 1274
John Duns Scotus, 1265 – 1308
Jean Buridan, 1295 – 1358
Nicole de Oresme, 1320 -- 1382
The Romans:
Lucretius, 427 – 347
Epictitus, 384 – 322
The “Jurists”
Aquinas
Schumpeter’s “Great Gap”
Toward the birth of Modern Economics
1500
1600
1700
1800
Francis Bacon
1561 - 1626
Galileo
1564 - 1642
Descartes
1596 - 1650
1900
Locke
Thomas Hobbes
1588 - 1679
John Locke
1632 - 1704
François Quesnay
1694 - 1774
Hobbes
Frances Hutcheson
1694 - 1746
Adam Smith
1723 - 1790
David Ricardo
1772 - 1823
Italian
Renaissance
Karl Marx
1818 - 1883
Protestant
Reformation
Smith
Mercantilism
Industrial Revolution
In England
Marx
Economic Analysis – Key Contributors, 19th century
Adam Smith
(1723 – 1790)
1800
1900
1850
David Ricardo (1772 – 1823)
Ricardo
Thomas Malthus (1772 – 1823)
John Stuart Mill (1806 – 1873)
Mill
Karl Marx (1818 – 1883)
August Cournot (1807 – 1877)
Johann von Thünen (1793 – 1850)
Hermann Gossen (1810 – 1858)
Cournot
Stanley Jevons (1835 – 1882)
Leon Walras (1834 – 1910)
Carl Menger (1840 – 1921)
Jevons
Walras
Alfred Marshall (1842 – 1924)
Marshall
Economic Analysis – Key Contributors, 20th century
1900
2000
1950
Alfred Marshall (1842 – 1924)
John Maynard Keynes (1883 – 1946)
Keynes
Thorstein Veblen (1857 – 1929)
Joseph Schumpeter (1883 – 1950)
Friedrich A. von Hayek (1899 – 1992)
Hayek
Milton Friedman (1912 – 2006)
Ronald Coase (1910 – )
Friedman
Paul Samuelson (1915 – )
Kenneth Arrow (1921 – )
Gary Becker (1930 – )
Robert Lucas (1937 – )
Lucas
The Evolution of “Textbook” Economics
Early 1800s: Political Economy
Smith, The Wealth of Nations (1776)
Ricardo, Principles of Political Economy (1817)
1850: Political Economy
Mill, Principals of Political Economy (1848)
1900: Economics
Marshall, Principals of Economics (1890)
1950: Economics
Samuelson, Economics, An Introductory Analysis (1948)
Part 1: Basic Economic Concepts and National Income
Part 2: Determination of National Income and its Fluctuations
Part 3: The Composition and Pricing of National Output
Macroconomics
Microconomics
The Sub-Disciplines of Economics
Journal of Economic Literature
(JEL) Classifications
A.
B.
C.
D.
E.
F.
G.
H.
I.
J.
K.
L.
M.
N.
O.
P.
Q.
R.
Y.
Z.
General Economics and Teaching
Economic Thought and Methodology
Mathematical and Quantitative Methods
Microeconomics
Macroeconomics and Monetary Economics
International Economics
Financial Economics
Public Economics
Health, Education, and Welfare
Labor and Demographic Economics
Law and Economics
Industrial Organization
Business Economics
Economic History
Economic Development and Growth
Economic Systems
Resource and Environmental Economics
Urban, Rural, and Regional Economics
Miscellaneous Categories
Other Special Topics
Simplified Grouping
1
Macroeconomics
Monetary Economics
Business Cycle Studies
Growth Theory
International Macroeconomics
3
2
Microeconomics
Industrial Organization (IO)
Labor Economics
Business Economics & Finance
Experimental Economics
International Trade and Exchange
Public Finance and Taxation
Economic Policy
Definitions of “Economic Science”
“Oeconomy, in general, is the art of providing for all the wants of a family, with
prudence and fugality.” (Steuart, 1767)
“Political Economy may be defined to be the science of the laws which regulate the
production, accumulation, distribution, and consumption of those articles or products
that are necessary, useful, or agreeable to man, and which at the same time possess
exchangeable value.” (McCulloch, 1864)
“… wealth constitutes the proper and exclusive subject-matter of Political Economy.”
(Cairnes, 1875)
“the study of man’s actions in allocating resources which are scarce” (Robbins, 1932)
Economics is frequently defined as the study of human behavior as a relationship
between a multiplicity of ends and scarce means that have alternative uses.” (Higgins,
1951)
Genealogy of Social Science: Economics and Sociology
There are two broad intellectual streams in the description and explanation of social
action. One, characteristic of the work of most sociologists, sees the actor as
socialized and action as governed by social norms, rules, and obligations. The
principal virtues of this intellectual stream lie in its ability to describe action in
social context and to explain the way action is shaped, constrained, and redirected
by the social context.
The other intellectual stream, characteristic of the work of most economists, sees
the actor as having goals independently arrived at, as acting independently, and as
wholly self-interested. Its principal virtue lies in having a principle of action, that
of maximizing utility. This principle of action, together with a single empirical
generalization (declining marginal utility) has generated the extensive growth of
neoclassical economic theory, as well as the growth of political philosophy of
several varieties: utilitarianism, contractarianism, and natural rights.
James S. Coleman, “Social Capital in the Creation of Human capital,” The American
Journal of Sociology, Vol. 94, Supplement (1988), pp. S95-S120.
Approaching the History of Economic Thought
Is there a “best” way to approach economic questions?
Methodological Individualism
“…every complex social situation,
institution, or event is the result of a
particular configuration of individuals, their
dispositions, situation, beliefs, and physical
resources and environments … we shall not
have arrived at rock-bottom explanations of
such large-scale phenomena until we have
deduced an account of them from
statements about the dispositions, beliefs,
resources and interrelations of individuals.”
J.W. N. Watkins
“Historical Explanation in the Social Sciences”
(1957)
“All social or collective phenomena, such as
institutions, are to be endogenized and
explained in terms of individual human
action.”
Malcom Rutherford
Institutions in Economics (1994)
Holism
(i)
“Society is the ‘whole’ which is more
than the sum of its parts”;
(ii) “Society affects the individual’s
aims”; and
(iii) “the social set up influences and
constrains the individual’s behavior”
Joseph Agassi
“Methodological Individualism”
British Journal of Sociology (1960)
“… holism is concerned with the social
influences that bear on individual action.
The individual is seen as socialized, as
having internalized the norms and values
of the society he inhabits. The holist
focuses attention on how social ‘forces’
(institutions, social conventions, etc.)
condition individual behavior.”
Malcom Rutherford
Institutions in Economics (1994)
Approaching the History of Economic Thought
How do economic theories arise?
From Harry Landreth and David C. Colander, History of Economic Thought, 4th ed.:
In broad terms, there are two approaches to answering this question …
Relativist interpretations
• Focus on the ways in which
external(historical, economic,
sociological, and political)
forces shape the content of
emerging theory.
• View the development of
economic thought as
responsive to historical
events.
Absolutist interpretations
• Stress internal forces in
explaining the development
of economic theory.
• View the development of
economic thought as a
process of discovering and
explaining unsolved
theoretical problems apart
from historical circumstance.
Approaching the History of Economic Thought
Is economic knowledge the same as knowledge in other sciences?
From A. K. Dasgupta, Epochs of Economic Theory, (1985):
Historians of economic theory seem inclined to believe that there is a continuity in
the development of their science. The progress of economic science is supposed
to be continuous and cumulative in a manner in which the progress of science
usually is -- a progress from the particular to the general.
…this manner of viewing the development of economic theory is misleading.
It is the nature of economic science that it involves events and phenomena which
not only change complexion from time to time but do not also occur at all places.
Problems that emerge as crucial at one time may turn out to be totally irrelevant at
another time in the same economy, and those that are relevant in the context of one
economy may well be irrelevant elsewhere. In economics old theories do not die.
And they do not die not because one is built on the other but because one is
independent of the other.
Approaching the History of Economic Thought
Interpreting / Analyzing Historical Texts in Economics
A suggested framework …
1. What is the historical background of the text, and how does this
contribute to our understanding of the work? (Relativist
interpretation)
2. What are the theoretical precursors to the text, and how does
familiarity with them contribute to our understanding of the
work? (Absolutist interpretation)
3. What modes of reasoning / rhetorical devises has the author
employed?
4. What have others said about the work? How has the work been
reinterpreted and why?
5. What is the work’s place / importance in economic thought today?
Has its contribution been a lasting one, or has it been displaced by
the subsequent work of others?
The Code of Hammurabi – 1800 BCE
51. If he have no money to repay, then he shall pay in corn or sesame in place
of the money as rent for what he received from the merchant, according to
the royal tariff.
102. If a merchant entrust money to an agent (broker) for some investment,
and the broker suffer a loss in the place to which he goes, he shall make good
the capital to the merchant.
Hebrew Law – 6th and 5th centuries BCE
Leviticus: The third book of the Hebrew Bible (the Old Testament), dealing mainly with
legal rules and priestly ritual. Probably dates from the 10th century BCE, but most likely
written in current form in the 6th century BCE.
Chapter 25: Jubilee years and property rights.
The Greeks – 5th and 4th centuries BCE
Plato (428 – 328 BCE), The Republic
Xenophon (430 – 355 BCE), Socratic Discourse, Oeconomicus
Aristotle (384 – 322 BCE), Politics, Nicomachean Ethics
The Far East
The School of Athens by Raphael, 1509–1510
Confucius (China, 551 – 479 BCE), Analects of Confucius (論語),
Kautilya (India, 300 BCE), Arthasastra (“Instructions on Material Prosperity”)
Plato, 427 – 347 BCE
The Republic – Plato’s conception of the ideal state
Book II, Chapter 6
Glaucon and the rest entreated me by all means not to let the question drop, but to proceed in the investigation. They
wanted to arrive at the truth, first, about the nature of justice and injustice, and secondly, about their relative advantages.
I told them, what I really thought – that the enquiry would be of a serious nature, and would require very good eyes.
Seeing then, I said, that we are no great wits, I think that we had better adopt a method which I may illustrate thus;
suppose that a short-sighted person had been asked by some one to read small letters from a distance; and it occurred to
some one else that they might be found in another place which was larger and in which the letters were larger --if they
were the same and he could read the larger letters first, and then proceed to the lesser --this would have been thought a
rare piece of good fortune.
Very true, said Adeimantus; but how does the illustration apply to our enquiry?
I will tell you, I replied; justice, which is the subject of our enquiry, is, as you know, sometimes spoken of as the virtue
of an individual, and sometimes as the virtue of a State.
True, he replied.
And is not a State larger than an individual?
It is.
Then in the larger the quantity of justice is likely to be larger and more easily discernible. I propose therefore that we
enquire into the nature of justice and injustice, first as they appear in the State, and secondly in the individual,
proceeding from the greater to the lesser and comparing them.
That, he said, is an excellent proposal.
Plato, 427 – 347 BCE
The Republic – Plato’s conception of the ideal state
Book II, Chapter 6
And if we imagine the State in process of creation, we shall see the justice and injustice of the State in process of
creation also.
I dare say.
When the State is completed there may be a hope that the object of our search will be more easily discovered.
Yes, far more easily.
But ought we to attempt to construct one? I said; for to do so, as I am inclined to think, will be a very serious task.
Reflect therefore.
I have reflected, said Adeimantus, and am eager for you to proceed.
A State, I said, arises, as I conceive, out of the needs of mankind; no one is self-sufficing, but all of us have many wants.
Can any other origin of a State be imagined?
There can be no other.
Plato, 427 – 347 BCE
The Republic – Plato’s conception of the ideal state
Book II, Chapter 6
Then, as we have many wants, and many persons are needed to supply them, one takes a helper for one purpose and
another for another; and when these partners and helpers are gathered together in one habitation the body of
inhabitants is termed a State.
True, he said.
And they exchange with one another, and one gives, and another receives, under the idea that the exchange will be
for their good.
Very true.
Then, I said, let us begin and create a mental image of a State.
Of course, he replied.
Now the first and greatest of necessities is food, which is the condition of life and existence.
Certainly.
The second is a dwelling, and the third clothing and the like.
True.
Plato, 427 – 347 BCE
The Republic – Plato’s conception of the ideal state
Book II, Chapter 6
And now let us see how our city will be able to supply this great demand: We may suppose that one man is a
husbandman, another a builder, some one else a weaver – shall we add to them a shoemaker, or perhaps some other
purveyor to our bodily wants?
Quite right.
The barest notion of a State must include four or five men.
Clearly.
And how will they proceed? Will each bring the result of his labors into a common stock? – the individual husbandman,
for example, producing for four, and laboring four times as long and as much as he need in the provision of food with
which he supplies others as well as himself; or will he have nothing to do with others and not be at the trouble of
producing for them, but provide for himself alone a fourth of the food in a fourth of the time, and in the remaining threefourths of his time be employed in making a house or a coat or a pair of shoes, having no partnership with others, but
supplying himself all his own wants?
Adeimantus thought that he should aim at producing food only and not at producing everything.
Plato, 427 – 347 BCE
The Republic – Plato’s conception of the ideal state
Book II, Chapter 6
Probably, I replied, that would be the better way; and when I hear you say this, I am myself reminded that we are
not all alike; there are diversities of natures among us which are adapted to different occupations.
Very true.
And will you have a work better done when the workman has many occupations, or when he has only one?
When he has only one.
Further, there can be no doubt that a work is spoilt when not done at the right time?
No doubt.
For business is not disposed to wait until the doer of the business is at leisure; but the doer must follow up what he
is doing, and make the business his first object.
He must.
And if so, we must infer that all things are produced more plentifully and easily and of a better quality when one
man does one thing which is natural to him and does it at the right time, and leaves other things.
Undoubtedly…
Plato, 427 – 347 BCE
The Republic – Plato’s conception of the ideal state
Book II, Chapter 6
Then, again, there is the situation of the city – to find a place where nothing need be imported is well-nigh impossible.
Impossible.
Then there must be another class of citizens who will bring the required supply from another city?
There must.
But if the trader goes empty-handed, having nothing which they require who would supply his need, he will come back
empty-handed.
That is certain. And therefore what they produce at home must be not only enough for themselves, but such both in
quantity and quality as to accommodate those from whom their wants are supplied.
Very true.
Then more husbandmen and more artisans will be required?
They will.
Not to mention the importers and exporters, who are called merchants?
Yes.
Then we shall want merchants?
We shall.
Smith, 1776
The Wealth of Nations – Smith’s take on division of labor
Book I, Chapter 1:
The Greatest improvement in the productive powers of labour, and the greater part of the skill,
dexterity, and judgment with which it is any where directed, or applied, seem to have been the
effects of the division of labour.
The effects of the division of labour, in the general business of society, will be more easily understood by considering in
what manner it operates in some particular manufactures. It is commonly supposed to be carried furthest in some very
trifling ones …
To take an example, therefore, from a very trifling manufacture; but one in which the division of labour has been very
often taken notice of, the trade of the pin-maker …
This great increase in the quantity of work which, in consequence of the division of labour, the same number of people
are capable of performing, is woing to three different circumstances; first to the increase of dexterity in every particular
workman; secondly, to the saving of the time which is commonly lost in passing from one species of work to another;
and lastly, to the invention of a great number of machines which facilitate and abridge labour, and enable one man to do
the work of many.
Book V, Chapter 1:
For a very small expense the public can facilitate, can encourage, and can even impose upon almost the whole body of
the people, the necessity of acquiring those most essential parts of education … There is scarce a common trade which
does not afford some opportunities of applying to it the principles of geometry and mechanics, and which would not
therefore gradually exercise and improve the common people in those principles, the necessary introduction to the most
sublime as well as to the most useful sciences … The public can encourage the acquisition of those most essential parts
of education …
Plato, 427 – 347 BCE
The Republic – Plato’s conception of the ideal state
1. Division of labor
“…when we first began to establish our commonwealth and several times since,
we have laid down, as a universal principle, that everyone ought to perform the
one function in the community for which his nature best suited him. That
principle, or some form of it, it justice.” [p. 127; Part II, Chapter 12; Book IV,
432]
2. Exchange in markets
3. Class analysis
4. Community property – An idea that Aristotle strongly opposed
5. Utilitarianism
“…our aim in founding the commonwealth was not to make any one class
especially happy, but to secure the greatest possible happiness for the community
as a whole.” [p. 420; Part II, Chapter 10; Book IV, 420]
Arisotle, 384 – 322 BCE
Politics
Nicomachean Ethics
1. The nature of wealth getting -- œconomia and chrematistiké
2. Usury
3. The theory of “just price” and value
4. Common vs. private property [Politics, Book II, Chapter 5]
“…what should be our arrangements about property: should the citizens of the perfect
state have their possessions in common or not?”
“… indeed there is always a difficulty in men living together and having all human
relations in common, but especially in their having common property. The partnerships
of fellow-travelers are an example to the point … Indeed, we see that there is much more
quarrelling among those who have all things in common, thought there are
not many of them when compared with the vast numbers who have
private property.”
“Property should be in a certain sense common, but, as a general rule,
private; for, when every one has a distinct interest, men will not complain
of one another … It is clearly better that property should be private, but the
use of it common …”
Arisotle, 384 – 322 BCE
Politics
Nicomachean Ethics
5. Division of Wealth, Social Stability [Politics, Book II, Chapters 6 and 7]
“… poverty is the parent of revolution and crime … it is a bad thing that many from
being rich should become poor; for men of ruined fortunes are sure to stir up
revolutions. That the equalization of property exercises an influence on political society
was clearly understood even by some of the old legislators… there have been laws which
enjoin the preservation of the original lots”
“Clearly, then, the legislator ought not only to aim at the equalization of properties, but at
moderation in their amount.”
“… the common people quarrel about the inequality of property, the higher class about
the equality of honor … the greatest crimes are caused by excess and not by necessity.
Men do not become tyrants in order that they may not suffer cold; and
hence great is the honor bestowed, not on him who kills a thief, but on him
who kills a tyrant.”
“… the avarice of mankind is insatiable … men always want more and more
without end … The beginning of reform is not so much to equalize property
as to train the nobler sorts of natures not to desire more, and to prevent the
lower from getting more; that is to say, they must be kept down, but not
ill-treated.”
Aquinas, 1225 – 1274
Summa Theologica
1. Property
“… man ought to possess external things, not as his own, but as
common, so that, to wit, he is ready to communicate them to others
in their need.”
2. Just price
“It is altogether sinful to have recourse to deceit in order to sell a thing for more than its
just price, because this is to deceive one’s neighbor so as to injure him.”
3. Distributive and commutative justice
4. Usury
“The divine law declares expressly, ‘Thou shalt not lend on usury to thy brother or thy
neighbour.’” Saint Basil (329 – 379)