Introduction of the History of Economic Thought

The History of Economic Thought
• 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

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• After 1500:
 Markets & trade expanded rapidly with the great geographical exploration both resulting from this process & 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  The money economy superseded the self-sufficient economy.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.
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• 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.

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A TIME SCALE OF ECONOMIC IDEAS
• Economic thinking has displayed a significant degree of continuity over the centuries. • The founders of a new theory:  may draw on the ideas of their predecessors & develop them further  May react in opposition to earlier ideas that stimulate their own thinking in new directions. • These relations among different school of thought are depicted in the Time Scale of Economic Ideas

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Each rectangle in the Time Scale represents a major school or approach
 Mercantilism, Physiocracy, Classicism, Marxism & Socialism

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The name in each rectangle are economists who were most important or most typical in developing that school or approach.
   Mercantilism (Mun, Colbert) Physiocracy (Quesnay, Turgot) Classicism (Adam Smith, Ricardo, Malthus, Bentham, Say, Mill)
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• 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.
 Physiocrats were completely opposed to the doctrines of the Mercantilist.

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• 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.
 Classical School were friendly toward the Physiocrats.

• 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.
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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.
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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 ?

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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:
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1. What was the historical background of the school ?
• 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.

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1. What was the historical background of the school ?
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:
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1. What was the historical background of the school ?
• Adam Smith (Classical School) corrects errors in the theories of the Mercantilists and Physiocrats, synthesizes them and adds new insights to further economic knowledge. • Alfred Marshall (Neo-Classical School) corrects mistakes in Smith and other Classical economists, includes new developments, tools of analysis and insights about microeconomics and improves the ability of economic theory to describe economic phenomena.

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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

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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.

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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, and Keynes provided both an explanation of fluctuations and a program to mitigate them.

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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.
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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)
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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. • Yet numerous unsolved problems and unanswered questions remain in economics. • Our understanding of past successes, errors, and dead ends will be useful in solving economic problems and answering economic questions.
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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 and that many groups and individuals have contributed to the richness and diversity of our intellectual, cultural and material inheritance.

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