History of economic thought

Economics is the social science that studies the production, distribution, and consumption of goods and services. The word 'economics' is from the Greek for οἶκος (oikos: house) and νόμος (nomos: custom or law), hence "rules of the house(hold)."

Origin of Economics takes its roots in the natural propensity of human beings to barter, to exchange or trade goods. Whilst there are no records of dogs ever having bartered bones, men has been bartering all sorts of goods since pre-history.

Economics as an independent science, and as we understand the word today, begins with the work of Adam Smith, The Wealth of the Nations. .

Before Smith, Economics was a chapter in political science, the art of managing a State. The list of acceptable definitions for Economics is enourmous. Economics is the study of those activities which, with or without money, involve exchange transactions among people. Economics is also the study of wealth. Several other definitions are acceptable

Paul Samuelson, in his famous book Economics - An Introductory Analysis, defines Economics as:"the study of how men and society 'choose', with or without the use of money, to employ 'scarce' productive resources to produce various commodities over time and distribute them for consumption, now an in the future, among various people and groups in society"

Introduction

In antiquity various philosophers have studied Economics, the most famous of which being Aristotle, who created some important economic concepts in his books Politics and Nicomachean Ethics , both written around 350 B.C.

Aristotle analysed the economic processes around him and was able to define the place of economy within a society that included commercial buying and selling. His economic thought (especially his value theory) is inspiring but sometimes contradictory and inconsistent.

In Book I of the Politics, Aristotle distinguishes between use value and exchange value, defines value as the ability to satisfy wants and demand as being governed by the desirability of a good (i.e., its use value). According to Aristotle, exchange value is derived from use value as communicated through market demand.

Xenophon (420?-355? BC) wrote a book called Economics in which he analyses Socrates' positions on the subject.

Ibn Khaldun (1332- 1406) was a famous Muslim historiographer and historian born in present-day Tunisia and is viewed as one of the forerunners of modern historiography, sociology and economics. His best known book is Muqaddimah "Prolegomenon" Khaldun was the first to understand the important interaction of forces between Sociology and Economics. Some researchers have compared Ibn Khaldun to Marx, based on economic theories in section 1, chapter V of the Muqaddimah about "The real meaning and explanation of sustenance and profit or profit is the value realized from human labour".

In the middle ages the economic thought was dominated by the teachings of Roman Catholic Church, with the Scholastics, divided in two main and fiercily opposing schools, the Dominicans (St. Thomas Aquinas (1225-1274) and the School of Salamanca - which was initiated by Francisco de Vitoria around 1536 and counted Navarrus and de Soto as its most prominent theoreticians; its influence lasted until circa 1624), and the Franciscans (aproximately 1295-1495).

After the Scholastics era, we had, in that order, Sir William Petty, the Mercantilists, Richard Cantillon, Jacques Turgot and Enlightenment Economics, François Quesnay and the Physiocrats, David Hume and the Scottish Enlightenment, Ferdinando Galiani and the Italian Tradition and the Social Philosophers and Commentators

The period that runs from early antiquity until past the Physiocrats and ends before Adam Smith is called the "Pre-Classical" period of economic thought.

History

Pre-Classical Period

The Ancients and the Scholastics

Aristotle

In the Topics Aristotle made a philosophical analysis of human ends and means. He explains that the value of means, or instruments of production, are a function of the end products's utility to people.

For Aristotle, the economic dimension is the individual human action of using wealth.

According to Aristotle, human nature has a dual material and spiritual character. For him economics is an expression of that dual character and the economic sphere is the intersection between the corporeal and mental aspects of men.

Aristotle classifies economics as a practical science, as opposed to speculative sciences, such as mathematics and metaphysics.

For Aristotle economics is concerned with both the household and the polis, relating to the use of things required for the good (or "virtuous") life. Economics is aimed at the good and is fundamentally moral. For him Economics was embedded in politics, so it can be said that the study of political economy began with Aristotle.

Theory of Value

In the Politics , Aristotle views labor as a "commodity" that has value but does not give value. He did not see labor as a source of wealth. Aristotle formulated a "theory of the value of labor". Observing that labor skill is not a determinant of exchange value, he maintains that, in the end, the basic requirement of value is utility, which is related to a person's desires. Value is the ability to satisfy wants. Demand is governed by the desirability of a good (i.e., its use value). According to Aristotle, exchange value is derived from use value as communicated through market demand.

In Book I of the Politics, Aristotle distinguishes between "use value" and "exchange value". It was Aristotle who created the concept of "value in use". In addition, Aristotle distinguished between final goods and factors of production.

Aristotle antecipated the role of diminishing marginal utility in price formation. According to Aristotle, the quantity of a good reaches its saturation point when the use value plunges and becomes immaterial.

The Problem of Commensurability

Aristotle discovered, formulated, and analyzed the problem of commensurability. He wondered how ratios for the exchange of heterogeneous things could be set. Aristotle says that money, as a common measure of everything, makes things commensurable and makes it possible to equalize them. For Aristotle, money is a medium of exchange that makes exchange easier by translating subjective qualitative phenomena into objective quantitative phenomena.

The lending of money at interest is condemned as the most unnatural mode of acquisition. Aristotle insisted that money was barren.

Xenophon

Xenophon, was a soldier, philosopher and mercenary from ancient Greece who lived between 425 and 355 BC. He wrote a book called Economics, in which the cynic Kritoboulos and the sympathetic Isomachos engage in a philosophical exchange mediated by the figure of Socrates. The title is badly translated and misrepresents the book's subject. In Greek, the work "oikonomikon" signifies "household management". Xenophon's Economics verses instead about the management of agricultural endeavours focusing on the manner in which a good citizen ensures his own subsistence, along with a surplus for the state.

Xenophon, using Socrates's speaches, emphasizes the moral virtues of citizens and their freedom.

Ibn Khaldun

In his Prolegomena (The Muqaddimah), 'Abd al-Rahman Ibn Muhammad Ibn Khaldun al-Hadrami (A.D. 1332-1406), commonly known as Ibn Khaldun, a fourteenth century Muslim thinker, laid down the foundations of different fields of knowledge, in particular the science of civilization (al-'umran).

His contributions to economics place him in the history of economic thought as a forerunner, if not the "father", of economics. Ibn Khaldun planted the germinating seeds of classical economics analysing production, supply, or cost and pioneered in consumption, demand, and utility, the cornerstones of modern economic theory.

Ibn Khaldun was the first to systematically analyze the functioning of an economy, the importance of technology, specialization and foreign trade in economic surplus and the role of government and its stabilization policies to increase output and employment.

Ibn Khaldun, moreover, dealt with the problem of optimum taxation, minimum government services, incentives, institutional framework, law and order, expectations, production, and the theory of value.

For Ibn Khaldun, the role of the State is to establish law and order conducive for economic activities. The enforcement of property rights, the protection of trade routes and the security of peace are necessary for a civilized society to engage in trade and production.

For him "over-taxation" would occur when the demands bureaucracy and mercenary armies would expand beyond "normal" economic surplus.

For Ibn Khaldun, it is clear that "the profit human beings make is the value realized from their labor," but this value, the price of labor, is determined by the law of supply and demand, a point later missed by Karl Marx.

Khaldun recognized the advantages of specialization. For him, specialization meant the coordination of different functions of factors of production where, "what is obtained through the cooperation of a group, of human beings satisfies the need of a number many times greater (than themselves)."

There is a striking similarity in the economic thought of Ibn Khaldun and those of Adam Smith , writting four centuries apart. This leaves the question to ascertain direct or indirect links between these two great thinkers open to the economic historian. In thesis Adam Smith could have been exposed to Ibn Khaldun's contributions, even without having been aware of the author's name, during his six years research at Oxford University's library.

The early Scholastics

The "Scholastics" refer to the group of 13th and 14th Century theologians, notably the Dominican St. Thomas Aquinas, that set down the dogma of the Catholic Church in light of the resurrection of the Greek philosophy. In economics there were four themes the Scholastics were particularly concerned with: property, justice in economic exchange, money, and usury.

Private property and Christian teachings have been always at odds. In the 5th Century, the early Church fathers (the "Patricians", e.g. St. Augustine) had struck down "communistic" Christian movements and the Church itself went on to accumulate enormous amounts of property. In the 12th Century, St. Francis of Assisi began a movement (the "Franciscans"), which insisted on vows of poverty, "brotherhood" and deplored the accumulative tendencies of the Church.

Against the Franciscans were arrayed St. Thomas and the Dominicans, who dug out of Aristotle and the Bible the necessary arguments to put down their challenge. The Thomists took a practical stance.

Another question that arose was that of entrepreneurship. Should a merchant be allowed to profit from differentials in prices? The Scholastics replied with a qualified yes, provided the merchant is not motivated by pure gain and profit be only just enough to cover the "sacrifices" of the merchant. They argued that the trader is performing a valuable service and increasing general welfare by meeting different needs.

The charging of interest on money lent (usury), came quickly under scrutiny. There is no clear basis for a ban on usury in Christian scriptures. To early Church fathers, like St. Jerome, the Christian notion that "all men are brothers" necessarily implied that usury must be banned outright. Another patrician, St. Ambrose, decided that lending with interest to enemies in the course of a just war was permissible.

Clerics had been prohibited from lending at interest at least since the 4th Century.This ban was extended to laymen much later. In 1139, the Second Lateran Council denied all sacraments to unrepentant usurers and, in an 1142 decree, condemned any payment greater than the capital that was lent. Jews and Moors ("strangers" in Christian lands) were initially exempt, but the Fourth Lateran Council (1215) issued an admonition prohibiting non-Christians from charging "excessive usury" . In 1311, Pope Clement V at the Council of Vienna prohibited usury outright and condemned as "heretical" any secular legislation that tolerated it.

The issue of "justice in exchange" was a more complicated issue. Even if we hang the intrinsic value of a good on its "usefulness", how does one estimate what the "just price" (justum pretium) should be?. Following the Golden Rule ("Do unto others as you would have them do unto you"), the Scholastics decided that a person should not charge more for a good than what he would be willing to pay for it himself.

The Salamanca School

The University of Salamanca, founded 1218, is one of the oldest universities in the world. It was a prominent Dominican bastion in the late Scholastic period. Home of the Thomistic theology, it maintained its full strenght even after the doctrines of St. Thomas Aquinas became under attack elsewhere in Europe, first under the Scotist and Nominalist onslaughts, and then from the Reformation.

The "School of Salamanca" begins with Francisco de Vitoria around 1536 and counted Navarrus and de Soto as its theoreticians. The Jesuit trio, Lessius, de Lugo and Luis Molina adhered to and further developed the Salamanca position.

During the confusing economic times of the inflationary 16th century, there was reversal of centuries of Scholastic thinking on economic matters. It was the Salamanca school that defined the just price as no more and no less than the naturally exchange-established price. Theologians moved away from past dogma and approached their questions in the spirit of natural law philosophy. Their analysis led them to trace a scarcity theory of value and employed supply-and-demand with dexterity. They rejected Duns Scotus's '"cost of production" conception of the just price, arguing that there was no objective way of determining price.

The Salamanca School discovered the essential properties of the "Quantity Theory of Money" , using it to explain the inflation of the 1500s arising from the influx of precious metals from Spanish America. They also provided a resounding defense of usury.

The ideas of the Salamanca School were fierciely opposed by the Franciscans Scholastics. Among them, John Duns Scotus, (1265-1308) an Oxford Franciscan theologian author of the Sententiae, 1295?, was the Thomists' most formidable opponent. Influenced by Neoplatonic mysticism, Scotus was the progenitor of the "Nominalist" movement that unravelled Thomism in the 16th Century.

In economic affairs he refused the "practical" Aristotlean resolutions of the Thomists, demanding proper explanations. In the process, he created a "cost theory of value" and formulated some interesting arguments about the nature of pure and monopolistic competition.

Jean Buridan, (c.1295 - 1358), was a French secular scholastic philosopher, a member of Ockham's "Nomalist School" who rose to become rector of the University of Paris, was a renowned critic of Aristotlean "just exchange" and was the originator of the "metallic theory of money".

Nicole de Oresme, (c.1320-1382) was a French theologian, student of Buridan, mathematician and originator of the "clockwork" theory of the universe. Oresme produced a succint analysis of currency debasement.

Gabriel Biel, (1425-1495), the "Last of the Scholastics" was one of the founders of the University of Tübingen. A late Nominalist, Biel is renowned for his defense of entrepreneurship and free contract. He undermined the concept of "just price" by noting that trade would actually not occur without advantages to the parties.

Sir William Petty and the Mercantilists

Sir William Petty

When British forces invaded Ireland in the 1650s, a problem emerged: how to partition the spoils among the victors or, more precisely, what were the spoils? The task of surveying Ireland and assessing its riches was given to a physician which had accompanied the British army, Sir William Petty. Thus, the first "econometrician" was born.

Petty's Political Anatomy (1672) is a work on Ireland. Petty was disciple of Hobbes and a Mercantilist in his policies.On his works one can find rudiments of the "labor theory of value". His writings were influential upon Davenant and Locke.

Mercantilists

Mercantilism is economic nationalism for the purpose of building a wealthy and powerful nation-state. Adam Smith coined the term "mercantile system" to describe it.

Mercantilism was adopted as an economic philosophy by merchants and statesmen during the 16th and 17th centuries. Mercantilists believed that a nation-sate's wealth came primarily from the accumulation of gold and silver. Nation-sates without mines should obtain gold and silver by trade, selling more goods than they bought from abroad. For this purpose nation-sates intervened extensively in the free market, imposing tariffs on foreign goods to restrict imports and granting subsidies to incentivate exports of domestic goods. Mercantilism put commercial interests to the level of national states' policy.

The economic rationale for mercantilism during the sixteenth century was the consolidation of the regional power centers of the feudal era by large competitive nation-states. Contributing factors were the establishment of colonies outside Europe, the growth of European commerce and industry relative to agriculture, the increase in the volume and breadth of trade, and the increase in the use of metallic monetary systems, particularly gold and silver, as opposed to barter transactions.

During this period, military conflict between nation-states was more frequent than at any time in history. Each government's economic objective was to command a sufficient quantity of hard currency to support a military that would deter attacks by other countries and help its own territorial expansion.

Most of the mercantilist policies were the result of an interaction between the governments of the nation-states and their mercantile classes. In return for paying levies and taxes, the mercantile classes convinced governments to enact policies that would protect their business against competition.

Shipping became important during the mercantile period. With the growth of colonies and the shipment of gold from the New World into Spain and Portugal, control of the oceans was considered vitally important to national power. Navigation policies by France, England, and other powers were directed primarily against the Dutch, who dominated commercial marine activity in the sixteenth and seventeenth centuries.

During the mercantilist era it was believed that the principal benefit of foreign trade was the importation of gold and silver.

Adam Smith refuted the idea that the wealth of a nation is measured by the size of the treasury in his famous treatise, The Wealth of Nations.

The last vestiges of the mercantile era were removed in England by 1860.

Richard Cantillon, Jacques Turgot and Enlightenment Economics

Richard Cantillon (1680?-1734)

Richard Cantillon, considered by many historians to be the first great economic "theorist", was an obscure character. An Irishman with a Spanish name who lived in France, reputedly made a fortune of some twenty million livres under John Law's schemes before moving to England. Not much more is known about his life.

Cantillon's wrote one remarkable treatise, Essai Sur la Nature du Commerce en Général , written in French (circa 1732) which was published anonymously in England some twenty years after his death.

His work was well-known to the Physiocrats and the French school, but fell into obscurity in the English-speaking world until he became popularized by William Stanley Jevons in the 1880s.

Cantillon decribed the supply-and-demand mechanism for the determination of short-run market price (but not long-run natural price). This work placed him as a progenitor of the Marginalist Revolution. His notes on entrepreneurship (as a type of arbitrage) have made him an icon of the modern Austrian School. Cantillon was also one of the first to articulate a Quantity Theory of Money and its reasonings.

As a consequence of his theory, he defended a quasi-Mercantilist policy for a favorable balance of trade but with a twist: Cantillon recommended the importation of "land-based products" and the exporting of "non-land-based" products as a way of increasing a nation-state wealth.

Jacques Turgot (1727-1781.)

Anne-Robert-Jacques Turgot, (Baron de l'Aulne) was a leading economist of 18th Century France. His contributions were quite distinct and advanced considerably upon Physiocratic theories. Turgot have formed a distinct school of his own, counting the Abbé Morellet and the Marquis de Condorcet as close friends and disciples. Turgot exercised a deep influence upon Adam Smith, who was living in France in the 1760s and was on intimate terms with Turgot. Many of the concepts and ideas in Smith's Wealth of Nations are drawn directly from Turgot.

Bibliography

• CANTILLON, Richard. An Essay on Commerce in General. Hamilton, Ontario: McMaster University

• HANEY, Lewis H., Ph.D. History of economic thought: a critical account of the origin and development of the economic theories of the leading thinkers in the leading nations. New York: The Macmillan Company, 1920.

• SMITH, Adam (1723-1790). An Inquiry into the Nature and Causes of the Wealth of Nations. London: Methuen and Co., Ltd., ed. Edwin Cannan, 1904. Fifth edition. (Downloadable)

• TURGOT, Anne-Robert-Jacques Turgot, Baron de l'Aulne (1727-1781).Réflexions sur la formation et la distribution des richesses, Paris, 1788