A Short History of Economic Thought

Bo Sandelin, Hans-Michael Trautwein, Richard Wundrak

• Publisher: Routledge
• Year: 2014
• Print ISBN: 9781138780200
• eBook ISBN: 9781317673750
• Edition: 3
• Topic: Business
• Subtopic: Business General
• Index: Business

This book, now in its third edition, provides an elementary introduction to the history of economic thought. A chapter is devoted to each of the major developments in the history of the discipline, before a concluding chapter in which the authors draw together some of the key strands and comment on some major works and textbooks in the history of economic ideas. They also reflect on the changes in economic thinking within the general context of the philosophy of science.

This new edition continues to offer the clear and concise coverage of the main schools of thought and paradigm shifts in the field that has become the volume's trademark. The book has been thoroughly updated throughout in order to reflect changes in the landscape of the field. Details on key thinkers, and aspects of the story such as the evolution of scholarship on growth and development, have been added or expanded, whilst not compromising on the book's concise approach. Key updates include:

• Biographical- and bibliographical information is brought up to date throughout the text

• 
  
  

• North American economists John Kenneth Galbraith and Kenneth Ewart Boulding make their first appearance in this edition

• 
  
  

• Information on developments in institutional economics, addressing in particular the works of 2009 Nobel prize winner Elinor Ostrom).

• 
  
  

This book has become well known for its innovative coverage of the economic thinking of mainland Europe, whilst also addressing Anglo-American trends. It provides a short and highly readable overview of the evolution of economic thought, usable in courses where the history of economic thought constitutes only a small part or required background reading. It continues to be an extremely useful, much needed text for all introductory economics courses in the field.

1 Introduction

DOI: 10.4324/9781315770895-1

Economics is a relatively young academic discipline. Until the early twentieth century, only a few chairs existed at the established universities of Europe and North America, mostly in the faculties of law or philosophy. In the turbulent period between the two World Wars, when deflation, hyperinflation and the Great Depression raged in many countries, the public interest in economics was greatly intensified. But its breakthrough as a prominent and widely studied discipline came only after the Second World War, roughly sixty years ago.

Economic thinking, on the other hand, has a much longer tradition. Early writings about markets, money and other economic issues can be found in the Bible, in ancient Greek philosophy and in medieval tracts. The rise of national states in the sixteenth to eighteenth centuries was accompanied by the propagation of trade strategies and industrial policies, some of which keep reverberating in modern debates about globalization. The century between the 1770s and the 1870s was the classical era of economic thinking, in which many of the foundations of modern economics were laid. The neoclassical view that was developed in the late nineteenth century still dominates current economic research and teaching.

With the post-war breakthrough of the discipline, however, the general mode of economic thinking began to change. As a quick glance at the leading journals and textbooks will show, economics is nowadays strongly characterized by strictly formalized reasoning in mathematical models, and by the quantification of market interaction and effects of policy measures in terms of econometrics, simulation or even experiments. Many economists tend to regard their discipline as the physics of the social sciences, striving to derive explanations of observable phenomena from a minimum set of universal principles. Designing specific policies as outcomes of their models, they also like to describe their work – half critically, half self-admiring – as ‘social engineering’.

What, in such a rigorous, progress-oriented discipline, can be the use of the history of economic thinking? Isn’t all that is worth knowing embodied in the present state of the art? A clear indication that history still matters to modern economists is the frequent use that they make of such labels as, say, neoclassical, New Keynesian, or neo-Schumpeterian, to mark elements of tradition in their theories. Since the labels are shorthand expressions that refer to sets of distinctive ideas and methods, which are often matters of deep and recurring controversies, it helps to have some knowledge of those earlier thinkers and schools of thought. Mostly without using the labels, modern politicians, too, refer to the ideas of older economists, rightly or wrongly. Again, evaluating the strengths and weaknesses of those ideas could help to put them in context.

The history of economic thinking may thus be used like a map or a landscape in which various schools of thought are located in different places, and where the objects of explanation form mountains, rivers, swamps and jungles between those places. The most modern, currently dominating school may be located in a prominent place, providing a clear view over large parts of the ground from a high level. But in order to gain a full view of the objects of explanation, one may have to track the ways back to older schools of thought that yield different perspectives on them. The history of economic thought may, furthermore, help to find crossroads at which alternative routes of thinking could have been (and can still be) taken. It may thus provide some orientation, not only on alternative ideas of the past, but also for promising directions of research in the future.

This short history of economic thinking is a very rough map that covers a large area by broadly outlining the main schools and tracks. We hope that it can nevertheless give the reader a fair idea of what could be found in more detailed maps. Some guidance to such finer maps will be provided, both in the references at the end of each chapter and in the final chapter, where we comment on some major works and textbooks on the history of economic ideas. In the final chapter, we will also briefly reflect on the changes in economic thinking in the more general terms of the philosophy of science. It might be argued that such methodological discussion should be at the beginning of the book, not at its end. We think, however, that we should first relate what economists have been thinking before we discuss how and why they changed their ideas in the course of time.

2 Pre-classical economic thought

DOI: 10.4324/9781315770895-2

As long as humans have lived on earth, they have resolved economic questions such as how to divide an available amount of food between consumption today and consumption tomorrow, or how to divide labour between the members of a group. Written documents of reflections on economic matters are available for a period of more than 2,000 years, beginning with the biblical writers and the ancient Greeks. More recent writers, such as the scholastics in the thirteenth century and Adam Smith in the eighteenth century, were deeply read in those ancient works. They transmitted some ideas to our time and rejected others. We begin with a few passages about the earliest manifestations of economic thinking (see Figure 1).

The ancient Greeks

Many concepts and questions that are still important in economics are found in ancient authors such as Xenophon (c. 430–c. 354 bc), Plato (427–347 bc) and Aristotle (384–322 bc). They wrote about the division of labour and specialization, money, exchange, value, self-interest, estate management and public administration. Let us see how they treated a few of those questions.

Division of labour

In Politeia (c. 370 bc; translation: The Republic) Plato described how a society develops with a division of labour that results in higher productivity:

‘Well,’ I said, ‘a community starts to be formed, I suppose, when individual human beings find that they aren’t self-sufficient, but that each of them has plenty of requirements which he can’t fulfil on his own. Do you have an alternative suggestion as to why communities are founded?’

‘No,’ he said.

‘So people become involved with various other people to fulfil various needs, and we have lots of needs, so we gather lots of people together and get them to live in a single district as our associates and assistants. And then we call this living together a community. Is that right?’

‘Yes.’

‘And people trade goods with one another, because they think they’ll be better off if each gives or receives something in exchange, don’t they?’

‘Yes.’

‘All right, then,’ I said. ‘Let’s construct our theoretical community from scratch. Apparently, its cause is our neediness.’

‘Of course.’

‘And the most basic and most important of our needs is that we are provided with enough food for existence and for life.’

‘Absolutely.’

‘The second most important is our need for somewhere to live, and the third is our need for clothing and so on.’

‘True.’

‘All right,’ I said. ‘How will our community cope with all this provisioning? Mustn’t one member of it be a farmer, another a builder, and another a weaver? Is that all the people we need to look after our bodily needs? Shall we add a shoemaker to it as well?’

‘Yes.’

‘And there we had our community. Reduced to its bare essentials, it would consist of four or five people.’

‘So it seems.’

(Plato 1993, pp. 369–70)

Figure 1 Pre-classical economic thought

Plato then went on to introduce more and more specialized tasks in a larger and larger society. The economic message was that efficiency increases if everyone can specialize in the tasks for which she or he is best qualified. Specialization is also discussed in Xenophon’s Cyropaedia (c. 375 bc). Xenophon argued that in small towns one person may produce furniture, doors, ploughs, and perhaps complete houses. In large cities, in contrast, a craftsman may specialize and become more skilful at one of these things. More than two thousand years later, we find the same discussion in Adam Smith, with the same kind of craftsmen.

Exchange, money and interest

In his Politics and Ethics (c. 330 bc) Aristotle treated economic questions such as exchange, money, prices and value. Although he may have intended to be analytical, it is the moral undertones that are most striking. Aristotle’s interest in exchange presupposes private ownership, which he deemed to be good because it increases efficiency, whereas Plato was more inclined to support collective ownership. Aristotle considered the exchange of one commodity for another to be natural. Such an exchange is subject to limitations because human needs are limited. If one gets an extremely large quantity of a thing, it may be harmful or at any rate not be useful. This was Aristotle’s way of saying what Adam Smith in the eighteenth century expressed by writing that ‘the desire of food is limited in every man by the narrow capacity of the human stomach’. The same idea returned in neoclassical thought at the end of the nineteenth century, in the concept of diminishing marginal utility.

Exchange involving money is not natural, but to sell in order to acquire money to be able to buy another good is, nevertheless, a necessary form of exchange. Usury, i.e. money lending in order to get interest, is a perverted form of exchange. It is natural that crops and cattle multiply, but not money; money is created in order to be a medium of exchange. This negative view of interest-taking persisted for a long time. It can be found in the medieval scholastics, and it was firmly held within the Catholic Church. Regarded as usury, interest was forbidden or regulated by usury laws, of which remnants still exist in many countries. This negative view on interest is found today in Islamic thought, and there are also secular organizations working for an interest-free economy.

Value and prices

Aristotle used a distinction that can also be found more than 2,000 years later in the classical economists and especially in Marx, namely the distinction between value in use and value in exchange. Aristotle used a shoe as an example. A shoe can be used as footwear; then it has a use value. However, it can also be sold or exchanged for another good; then it has a value in exchange. In this context, Aristotle touched upon the concept of the just price in exchange, a concept that the medieval scholastics came to develop further (see below).

The Bible

Although the Bible is not primarily a book on economics, there are economic features within it. Some of these are similar to those found in the works of the Greek philosophers, especially with regard to interest-taking. At least in the Old Testament, the basic attitude towards interest is negative. ‘You shall not charge interest on anything you lend to a fellow countryman, money or food or anything else on which interest can be charged’ (Deuteronomy 23:19). In the New Testament there is no such attitude.

The problem of scarcity is the central economic problem. It arises after the Fall of Man, and is resolved in various ways in the Bible, not only by hard work. One way is by faith. During the Exodus, Moses asks God what to do when the people are dissatisfied because of a lack of water. God tells him to strike the rock with his stick. Moses does so; he believes they will be sustained by water from the rock, and this indeed is what happens (Exodus 17). Another solution, closely related to the first, is to set one’s mind on God’s kingdom. Let us look at an example from the New Testament:

… do not ask anxiously, What are we to eat? What are we to drink? What shall we wear? All these are things for the heathen to run after, not for you, because your heavenly Father knows that you need them all. Set your mind on God’s kingdom and his justice before everything else, and the rest will come to you as well.

(Matthew 6:31–3)

A third solution is by observance of the law:

You are to observe these commandments, statutes, and laws which I give you this day, and keep them. If you listen to these laws and are careful to observe them, then the LORD your God will observe the sworn covenant he made with your forefathers and will keep faith with you. He will love you, bless you and cause you to increase. He will bless the fruit of your body and the fruit of your land, your corn and new wine and oil, the offspring of your herds, and of your lambing flocks, in the land which he swore to your forefathers to give you.

(Deuteronomy 7:11–13)

The scholastics

Scholastic thought is sometimes considered as an amalgamation of three different intellectual traditions. One is Aristotle’s philosophy, another is the Bible and the Church Fathers, and the third is Roman law. The heyday of scholasticism was the thirteenth and fourteenth centuries, and Thomas Aquinas (1225–74) is its main representative. The rise and decline of the School of Salamanca in the sixteenth century marks the end of the scholastic e...

Table of contents

• Cover Page
• Half-Title Page
• Title Page
• Copyright Page
• Table Of Contents
• List of illustrations
• Preface
• 1 Introduction
• 2 Pre-classical economic thought
• 3 Classical political economy
• 4 Neoclassical economics
• 5 Historical schools and institutionalism
• 6 Monetary macroeconomics
• 7 Orthodoxy and change
• Index