The History of Economic Ideas

Economic Thought in Contemporary Context

Brandon Dupont

• Publisher: Routledge
• Year: 2017
• ISBN:
  9781317326809
• Edition: 1
• Topic: Business
• Subtopic: Business General
• Index: Business

The global financial crisis has drawn attention to the importance of understanding historical ideas and learning lessons from the past. However, it can sometimes be difficult to trace the connections between old ideas and modern day issues. This textbook traces the evolution of economic ideas from the ancient to the modern world by examining the contributions of the most important scholars to some of the most important ideas in economics.

The History of Economic Ideas surveys topics that are important for the understanding of contemporary economic issues, including the ethical foundations of modern economics; ideas regarding property rights; price theory; money and interest; public finance; the theories of business cycles and economic growth; international trade; and issues related to population and resource use. The book's originality lies in its overall organization, which allows readers to explore the development of ideas on a specific topic in detail. Yet it is brief enough to use alongside the original writings on which it is based.

Filled with student-friendly features including a series of "Did You Know" facts and end-of-chapter questions, this book is engaging and provides invaluable reading for all students of the history of economic thought and economic issues.

1 An Overview of the History of Economic Ideas

“A study of the history of opinion is a necessary preliminary to the emancipation of the mind.”

J. M. Keynes, “The End of Laissez-Faire”

Why Study the History of Economic Ideas?

As the French scholar César Chesneau Dumarsais once wrote, “the philosopher . . . acts only after reflection; he walks in the dark, but by a torch” (Kramnick, 1995, 21). The study of the history of ideas is the study of the lighting and the passing of that torch from one generation of scholars to the next. But the march of progress from ancient to modern ideas is not a steady and uninterrupted one; indeed, there have been reversals, wrong turns, and detours. We learn a great deal from both the progress and the mistakes, but only when we examine the well-trodden path that makes up the history of economic scholarship. This is the real objective of studying the history of economic ideas.

This book is, of course, no substitute for the originals and it is brief enough to be used alongside them (most are available in their entirety online). They are sometimes frustrating and sometimes delightful, but they are always enlightening. This book is intended to help you sort through some of the issues developed in the originals and to get a better sense of the historical development of the ideas that constitute modern economics.

Even the great books are products of their own time and place, so having a sense of the context in which the ideas formed is important. For instance, while the wisdom of Aristotle is profound, he lived in a world where slavery was the norm and the industrial revolution was still 2,000 years away. His world was dramatically different from our own, so not every lesson is relevant. We are unlikely to find resonance with his view that some people are slaves by nature, but we might agree with his retort to Plato (427–347 BC) that truth is to be found in the material rather than in the supernatural world. At the very least, we will get insights into his thinking, and a sense of where some of the issues that have defined the discipline of economics originated.

As you study the history of economics, look for the connections among scholars. It is often tempting to try to study each scholar in isolation, and to miss the important connections—but remember that scholarship builds over time, sometimes progressing and sometimes regressing. Without Plato we would have no Aristotle, and without Ricardo we would have no Marx. To fully understand today’s economic ideas requires that we examine their origins and that we try to uncover the important ties that link one scholar to another. Examining the evolution of specific topics is the easiest way to do that, which is why this book is organized topically rather than chronologically.

Justifications for the study of historical economics abound in the relatively small field of the history of economic thought. Perhaps this was a reaction to its declining importance in the teaching of modern economics. In a sense, historians of economic thought have long felt the need to justify their own work and, in some cases, the entire field in which they work. This reaction is understandable given that modern economics often eschews historical study in favor of the latest and most technically sophisticated methods; but the latest methods, while important, are only the most recent part of the social science whose roots are to be found in moral philosophy. In fact, the 2008 financial crisis prompted many people to reconsider the importance of understanding the ideas of the great thinkers of the past. As Robert Skidelsky (2012) wrote, “If the [2008] collapse can restore forgotten knowledge to the education of future economists, it will at least have done some good.”

If the historical scholarship is so important for understanding economics, why is it so often neglected in the training of modern economists? The answer seems to lie mostly in the misconception that economics develops in the way that mathematics does: while one may well marvel at the accomplishments of Euclid, Newton, or Leibniz, one does not need to study them to become an accomplished mathematician. The same is not always true in economics. As Kenneth Boulding (1971) pointed out, “one can still go back to Adam Smith even after many rereadings and find insights which one has never noticed before and which may have a marked impact on one’s own thought” (231). Indeed, a recent book by Russ Roberts called How Adam Smith Can Change Your Life did just that. We might expect that everything we need to know about economics is contained in the most recent cutting-edge economics, but that is simply not the case. Many interesting and insightful ideas have been mostly forgotten, and economics is full of “unnecessary originality,” as Richard W. Ault and Robert B. Ekelund (1987) put it. Learning economics stripped of its history can leave the erroneous impression that economic ideas are settled facts, neatly packaged in the latest textbooks. According to Bruce Caldwell (2010), students who do not learn the history of economic thought, “do not see that the development of ideas always involves argumentation and criticism, something that usually disappears in textbook treatments of issues . . . the history of economic thought course is one of the few places in the economics curriculum where economists connect economics to other disciplines within the social sciences and humanities.” The main goal of this textbook is to help you reconnect economics to those other disciplines by considering the historical origins of at least some of the most important ideas in the field.

A Very Brief Summary of 2,000 Years of Economic Ideas

Instead of tracing the chronological evolution of the discipline, which forces us to jump from one topic to another, each chapter in this textbook focuses on one subject, explaining how ideas about it have evolved over time. While we can benefit from this organization, it is also important to have a general sense of the overall timeline. That overview is presented in the following section, which briefly introduces the important scholars and economic issues with which we will deal in the following chapters.

The Ancient World

Any examination of the ideas that have come to form modern economic science must begin where western civilization itself began—in ancient Greece. The Greeks were remarkable both in their influence on western ideas (they have been called the cradle of civilization for a reason), and on their ability to maintain a powerful civilization for so long (776 BC to 30 BC).

We know that ancient peoples engaged in economic activity like local and long-distance trade in items such as olive oil, wine, and various grains.¹ Monetary exchange and widespread trading was taking place by the 5th century BC, although it is important to remember that this was not a market economy in the modern sense of the term. The Greek culture elevated the community over the individual; by contrast, the individual—and that individual’s pursuit of his or her own interests—is the hallmark of a modern market economy. Most of the productive activity that was carried out from day to day in the ancient world was designed to provide sustenance for one’s family rather than to produce surplus product that could be sold for profit. Once these essential material requirements were satisfied, the citizen’s obligation was to the community and included things like military or political service.

Most of the economics to be found in ancient scholarship comes from the Classical period (5th to 4th century BC), during which Plato founded the Greek Academy at Akademia.² But some economic concepts were written about even before the Classical period, including by the 8th-century-BC poet Hesiod whose Works and Days was probably the first economic essay. In its early verses, Hesiod asks how we can explain the existence of an obligation to work, and he deals with the economic concepts of scarcity, choice, and resource allocation. Hesiod believed that the gods withheld the means of life, which created scarcity. As a consequence, men had to make choices, and they had to determine how to most efficiently allocate labor and resources. In his view, only hard work could overcome these hardships.

Centuries after Hesiod, Xenophon (430–354 BC) wrote Oikonomikos (which literally means “experienced in the art of household management”) and Ways and Means, both of which contain some insights into ancient economic ideas. Xenophon explained that man’s desires for material things must be balanced–he must adjust them to the means available for obtaining them. If he failed to achieve that balance, even the wealthiest man can become miserably unhappy.

Did You Know 1.1

Modern studies of the links between happiness and wealth lend some support to this conclusion. Studies have found that when you are poor, a little extra money can certainly increase your happiness. But as you accumulate more and more wealth, it gets harder to “purchase” additional happiness.

Xenophon also tells us that wealth is derived from primary industry, and that agriculture and husbandry were the origins of all the other economic activities in society. Perhaps most importantly, he gave us what was probably the best treatment of the division of labor, or specialization by task, in the ancient writings. In addition to describing the division of labor, Xenophon linked it to greater productivity in Cyropaeida:

in the great cities, owing to the wide demand for each particular thing, a single craft will suffice for a means of livelihood, and often enough even a single department of that; there are shoe-makers who will only make sandals for men and others only for women. Or one artisan will get his living merely by stitching shoes, another by cutting them out, a third by shaping the upper leathers, and a fourth will do nothing but fit the parts together. Necessarily the man who spends all his time and trouble on the smallest task will do that task the best.

(trans. Dakyns 2009, Book 8, C.2)

Plato, perhaps the greatest of the Greek philosophers, did not dwell at length on economic issues in either The Republic or The Laws, but there are some important economic ideas contained in each book. First, he saw society itself as having been organized around exchange and mutually beneficial trades. In The Republic, Plato presents the following dialogue (1987, 55–56):

“Society originates then,” said I, “so far as I can see, because the individual is not self-sufficient, but has many needs which he can’t supply himself. Or can you suggest any other origin for it?”

“No, I can’t,” he said.

“And when we have got hold of enough people to satisfy our many varied needs, we have assembled quite a large number of partners and helpers together to live in one place; and we give the resultant settlement the name of a community or state?”

“Yes, I agree.”

“And in the community all mutual exchanges are made on the assumption that the parties to them stand to gain?”

“Certainly.”

Like Xenophon, Plato discussed the division of labor in The Republic, explaining that it is at the very heart of civilization itself. According to Socrates (471–399 BC), who is the primary speaker in Plato’s dialogue, the state exists because men are not self-sufficient and thus find it advantageous to live near other people with whom they can trade. The only way to obtain those things is to trade with someone who can produce them, and that trade is facilitated when the buyer and seller live near each other. Moreover, Socrates (again, speaking to us through Plato’s dialogue) tells us that this trade must be beneficial to the buyer and to the seller, or it would never happen.

Plato’s more pressing question was what made the society he described a good one? He answered that the ideal existed when the people in society manifested the virtues of wisdom, courage, self-discipline, and justice. An individual’s actions were considered just when they conformed to good behavior and when they were governed by reason. Plato thus conceived of justice as internal to the individual rather than tied to social norms. The primary objective of the state was to “make its citizens virtuous” and to ensure their material and moral welfare.

For a smoothly functioning society, Plato argued that there must also be a social organization whose makeup was determined by the principle of specialization. The most important members of society were the guardians who were of two types: the rulers, who would make decisions on behalf of society, and the soldiers who would be responsible for defense against outside aggression and for enforcing the laws. All the others who were engaged in various forms of production belonged to the third. These three classes must work t...