History Of Economic Thought (BEC2154) PDF

HISTORY OF ECONOMIC THOUGHT (BEC2154) 1 LECTURES Weeks: 1-2 INTRODUCTION: Why study History of Economic Thought Ancient Economic Thought -Plato -Aristotle 2 HISTORY OF ECONOMIC THOUGHT...

HISTORY OF ECONOMIC THOUGHT (BEC2154) 1 LECTURES Weeks: 1-2 INTRODUCTION: Why study History of Economic Thought Ancient Economic Thought -Plato -Aristotle 2 HISTORY OF ECONOMIC THOUGHT 3  Why Study the History of Economic Thought? The History of Economic Thought deals with different thinkers and the theories in the subject that became Political Economy. It encompasses many different disparate Schools of Economic Thought. The great Greek philosopher Aristotle questioned whether property is best left in private or public hands. The “art” of wealth acquisition. 4  Why Study the History of Economic Thought?  Aids in the understanding of economics.  Provides an introduction to part of intellectual history. Helps:  Illustrate how ideas develop and change within academic disciplines.  Helps create more critical attitudes and abilities. 109  Three General Beliefs 1) Theory and historical processes are reciprocally interconnected. 2) Social and economic change are continuous. 3) Schools of thoughts in economic area are (and always have been), vitally concerned with social, political, historical, practical, and moral issues. 110 1.Theory and historical processes are reciprocally interconnected because: Social theories are based upon, grow out of, reflect, and attempt to explain ongoing events and circumstances. They are the “products” of the social and economic circumstances in which they are conceived. Also social and economic circumstances are the “products” of social theories. But it is equally true that human being act, create, shape, and change their social and economic circumstances on the basis of ideas and social theories. 111  2. Social and economic change are continuous because: In numerous respects, today’s Capitalism is substantially different from Capitalism of the late 18th century In this course there in been a try to illuminate the nature of contemporary controversies in economic theory by examining their historical antecedents 112  3. Schools of thoughts are vitally concerned with social, political, historical, practical, and moral issues. Their thoughts have both a cognitive, scientific element and emotive, moral, or ideological element. There is, in academic circles, a widely held view that science and value judgments are antithetical. History of economic thought as “value free”: theorists of this persuasion whom they dislike, particularly Marx, are presented as having values in their writings and these values are held to partially vitiate the scientific value of the writings. All theorists have values that significantly interpenetrate all cognitive endeavors. The discussion of the values and ideological aspects of the various theorists’ writings, there is no intention of conveying the notion that the having of values, per se, is a basis for criticizing a thinker. 113  Main Periods in the History of Economics? Pre-Classical (up to 1776). Classical (1776-1870s). The Marxist conception of Socialism as a precursor to communism (1848-to date). Marginal Revolution (1870s-1890s). Neoclassical Economics (1890s-to date). Keynesian revolution (1936-1960s). Formalist Economics (1945 to date). 114  1 Ancient economic thought (before 500 AD)... 2 Economic thought in the Middle Ages (500–1500 AD)... 3 Mercantilism and international trade (16th to 18th century)... 4 Pre-Classical (17th and 18th century)... 5 Classical (18th and 19th century)... 6 Neoclassical (19th and early 20th century) 115  School of Economic Thought (Broad Generalizations) GROUP 1 GROUP 2 Laissez-faire Government intervention Microeconomic Macroeconomic Deductive Approach Inductive Approach 116  The 1st economist, Hesiod, lived in the small agricultural community of Ascra-Boetia. Hesiod, a Boeotian who lived in the very early ancient Greece of the middle of the eighth century BC. Hesiod lived in the small, self- sufficient agricultural community of Ascra, which he himself refers to as a “sorry place … bad in winter, hard in summer, never good.” 117  INTRODUCTION The period before A.D 1500 represented an epoch far different from the 1500s to the present. Before A.D 1500: ▪ There was little trade ▪ Most goods were produced for own consumption. ▪ Money and credit were not widely used ▪ Strong national states & integrated national economies had not yet fully evolved ▪ No schools of economic thought had been formed 118 119  After 1500: ▪ Markets & trade expanded rapidly with the great geographical exploration both resulting from this process and accelerating it. ▪ The money economy superseded the self- sufficient economy. ▪ National states with unified economies became dominant forces. ▪ Economic schools arose, representing systematic bodies of thought and policy formation. 120  In the 1500s, the age of “political economy” began to supplant the age of “moral philosophy”. The focus on political economy brought with it: ▪ a more coherent organization of economic thinking ▪ Turning fragments of economic ideas into systematic theories 121  A TIME SCALE OF ECONOMIC IDEAS Economic thinking has displayed a significant degree of continuity over the centuries. The new school of economic thought is either: i. Support the earlier ideas and develop them further. ii. Reject the earlier ideas and try to replace it with their own thinking. These relations among different school of thought are depicted in the Time Scale of Economic Ideas 122  Each rectangle in the Time Scale represents a major school ▪ Mercantilism, Physiocracy, Classicism, Marxism & Socialism The name in each rectangle are economists who were most important in developing that school ▪ Mercantilism (Mun, Colbert) ▪ Physiocracy (Quesnay, Turgot) ▪ Classicism (Adam Smith, Ricardo, Malthus, Bentham, Say, Mill) 123  The name immediately above each rectangle are forerunners of the school. ▪ Classicism (North, Cantillon) ▪ German Historicism (List) ▪ Marxism & Socialism (Sismondi) A black arrow shows that the latter group was antagonistic to or rose in opposition to the earlier group. ▪ Example: Physiocrats (laissez faire) were completely opposed to the doctrines of the Mercantilist (government intervention) 124  A white arrow linking 2 rectangles shows that the later group was generally friendly to the group from which it grew or that it superseded. ▪ Example: Classical School were friendly toward the Physiocrats. ▪ Both school support the laissez-faire system. A dashed arrow indicates groups in which some contributors were friendly to predecessors, but others were antagonistic. ▪ Some welfare economists advanced marginalists ideas, whereas others challenged those ideas. 125  THE FIVE MAJOR QUESTIONS As each school of economic thought is introduced, 5 major questions about it will be considered. This method will provide perspective on the school and the social background that produced it. This concise summary at the outset will help clarify the main points as we study the ideas on the leading economists. 126  FIVE MAJOR QUESTIONS 1. What was the historical background of the school ? 2. What were the major tenets of the school ? 3. Whom did the school benefit or seek to benefit ? 4. How was the school valid, useful, or correct in its time ? 5. Which tenets of the school became lasting contributions ? 127 1. What was the historical background of the school ? Relativist Approach ▪ Some economists assign primary importance to the social, political and economic environment for shaping the nature of the questions economists ask, and hence the content of the economic theories that emerges during a particular period. ▪ According to them, what is “true,” or useful, in one time or place may or may not be useful in some other time or place. For example: 128 ▪ The Mercantilist school promoted nationalism, gave new dignity and importance to the merchant, and justified a policy of economic and military expansion because during that time only a powerful nation could capture and hold colonies, dominate trade routes, win wars again rival and compete successfully in international trade. ▪ The Classical School promote private enterprise and minimal government interference because they were aware of the substantial growth of manufacturing, trade and inventions brought by industrial revolution. 129  Absolutist Approach ▪ Many other economists, however disagree with the idea that environmental are primary shapers of economic theory. ▪ They argue that internal factors within a discipline, such as the discovery and explanation of unresolved paradoxes, account for most theoretical advances. ▪ Each generation of economists is seen as correcting errors made by their antecedents and adding new insights. ▪ For example: Alfred Marshall (Neo- classical) was the great synthesizer; combine the best of classical economics with marginalist thinking (classical + marginalist = neoclassical). 130  Alfred Marshall (Neo-Classical School) ▪ Alfred Marshall combine the ▪ Marshall’s also best of classical economics ✓ Introduced the concept of and marginalist thinking consumer and producer surplus. ▪ He stressed both demand and ✓ Added the element of supply in determining the time in economic market prices of goods, analysis services and resources ✓ Illustrated the idea of equilibrium price and ▪ Classical stress on supply quantity (using table & alone while Marginalists graph approach) stress only on demand 131 2. What were the major tenets of the school ? Provide broad generalizations about the ideas of successive economic schools. Strength: enables a concise presentation of the essence of the school (uniformity of ideas of groups of economists). Weakness: there are always exceptions to the generalization of ideas. ▪ Example: Classical School believe in free trade among nations; yet Malthus, a classical economist, favored tariffs on imported goods 132 3. Whom did the school benefit or seek to benefit ? In this section, we will try to identify the groups that supported each school of thought and the groups to which each school appealed for support, either successfully or unsuccessfully. Example: ▪ Mercantilist doctrine obviously benefited the merchant capitalists, the king and government officials. ▪ The Physiocrats especially favoured capitalists farms employing wage labor and advanced techniques. 133 Whom did the school benefit or seek to benefit Rich VS Poor Employer VS Employee 134 4. How was the school valid, useful, or correct in its time ? ▪ Ideas irrelevant to society at the time they are presented tend to wither & die. ▪ Ideas that are useful in solving some problems are disseminated and popularized. ▪ For example: Keynes’s ideas were given added impetus by the Great Depression of the 1930s. Demand that something be done about business fluctuations grew more insistent. Keynes provided both an explanation of fluctuations and a program to mitigate them. 135 5. Which tenets of the school became lasting contributions? Concepts that are widely accepted today may become inappropriate in the future. This section identifies the ideas presented by a school that have been of lasting significance and thus can still be found in current economic textbooks. For example: Keynesian concept such as the saving function, fiscal and monetary policy, IS-LM analysis and so forth are now standard fare in economics textbooks. 136  WHY STUDY THE HISTORY OF ECONOMIC THOUGHT ? Enhances one’s understanding of contemporary economic thought. ▪ “Contemporary theory wears the scars of yesterday’s problems now resolved, yesterday blunders now corrected and cannot be fully understood except as a legacy handed down from the past.” Mark Blaug, Economic Theory in Retrospect, 4th ed. (London: Cambridge University Press, 1985) 137  WHY STUDY THE HISTORY OF ECONOMIC THOUGHT ? Enable us to make fewer errors than in the past when making personal decisions and when formulating national and local economic policies. ▪ Numerous unsolved problems and unanswered questions remain in economics. ▪ Understanding of past successes, errors, and dead ends will be useful in solving economic problems and answering economic questions. 138  WHY STUDY THE HISTORY OF ECONOMIC THOUGHT ? Provides perspective and understanding of our past, of changing ideas and problems, and of our direction of movement. ▪ A study of the evolution of economic thought & the changing social background associated with it can illuminate changes in other areas of concern to us, such as politics, art, philosophy and science. ▪ It help us appreciate that no group has a monopoly on the truth & many groups and individuals have contributed to the richness and diversity of our intellectual, cultural 139 and material inheritance.  Plato Athens, Greece in about 427 B.C. He was ancient Greek philosopher Plato was a student of Socrates. Plato was Aristotle's teacher. Plato is one of the greatest philosophers and literati in world history. Plato is also known as the founder of the Academy, which is considered to be the world's first higher education institution. One of his students was Aristotle. Plato's philosophy is believed to have been the first to touch on all the five main branches of philosophy: metaphysics, epistemology, ethics, politics and aesthetics. 140  Plato Plato shows a clear understanding of the role of incentives not only in economic activity but also in crime – He realizes that the only way to get honesty in public servants is by forbidding property accumulation – However, he also understands that to get people to volunteer to be guardians, the state must cover their needs 141  Plato Plato’s application of economic logic to crime and politics foreshadows later work by contemporary economists such as Gary Becker (on crime) and James Buchanan (on politics) Like Xenophon, Plato noted the importance of division of labor – Men should specialize in those activities for which they were naturally suited, and should be trained accordingly. – The origins of cities (states) lay in specialization and the dependence of people on one another. 142  Plato Though he saw a role for trade, the role for markets in his ideal state was very limited. – Consumer goods might be bought and sold, but not property, which was to be allocated by the state (on mathematical principles) – There would be no profits or payment of interest. 143  Aristotle (384 – 322 BC) The Greek philosopher Aristotle (384-322 B.C.) made significant and lasting contributions to nearly every aspect of human knowledge, from logic to biology to ethics and aesthetics. Aristotle was born in 384 B.C. in Stagira in northern Greece. Both of his parents were members of traditional medical families, and his father, Nicomachus, served as court physician to King Amyntus III of Macedonia. His parents died while he was young, and he was likely raised at his family’s home in Stagira. At age 17 he was sent to Athens to enroll in Plato's Academy. 144  Aristotle: Economic Justice In organized, modern markets, the scope for disputes between buyers and sellers is limited However, in Aristotle’s days, markets were not widespread, and products were not standardized. This led to legal disputes between buyers and sellers. Aristotle sought to set out the principles for the settlement of such disputes. 145  Aristotle considered three concepts of justice – Distributive justice: how should the spoils of war be shared – Rectificatory justice: how should one be compensated for past injustice – Reciprocal justice: when is an economic exchange between a buyer and a seller just 146  Aristotle: Distributive Justice How should, say, the spoils of war be shared? Aristotle felt that when concrete cases of such disputes are considered, the just share for each person usually becomes obvious. The sharing must be done according to each person’s ‘merit’ In concrete cases, the ‘merits’ of the people involved in the joint acquisition of wealth are clear and the wealth should then be shared in proportion to ‘merit’ 147  Aristotle: Rectificatory Justice Rectificatory justice restores equality by compensating those who had suffered from past wrongs 148  Aristotle: Reciprocal Justice If two people exchange goods, how do we assess whether the transaction is just? One idea, commonly understood in ancient Greece, is that if an exchange is voluntary it must be just. – Xenophon cited the example of two boys – one tall and with a short tunic, the other short and with a long tunic – who exchanged tunics. The conventional view was that this was a just exchange, for both boys gained from it. Aristotle accepted this argument 149  Aristotle: Reciprocal Justice Aristotle recognized, however, that voluntary exchange does not determine a unique price, but merely a range of possible prices in between the lowest price the seller is prepared to accept and the highest price the buyer is prepared to pay. Within this range, what is the just price? Aristotle’s answer was the harmonic mean of the two extreme prices. 150 Aristotle: Acquisition of Wealth Getting rich by identifying and pursuing a profitable productive activity was fine Exchange of one’s surplus product for the surplus of another was fine But getting rich through commerce and usury was unnatural and unacceptable It was assumed that there was a socially acceptable level of consumption Anything in excess was frowned upon 151  Aristotle: Commerce, Markets Aristotle was suspicious of trade He felt that commerce and usury enabled people to make huge amounts of money, without doing any hard work and far in excess of normal needs This implied that money was being made simply for the sake of making money, and not for the needs of the good life This implied that commerce and usury were unnatural Aristotle did not see markets as a social regulatory mechanism He saw the running of society as basically a top-down administrative issue 152  Aristotle on Money Money had three basic functions – Means of exchange – Measure of value (unit of account) – Store of value As the metallic content of money is a convention determined by the state, the ruler was entitled to profit by reducing the metal content of money 153