History of Economic Thought

1. History of EconomicThought Introduction Lec 1

2. Why Study the History of Economics? • 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

3. The Evolution of Economic Ideas • Economics is a critical discourse • This discourse takes place within generally agreed standards of “scientific” procedure, which themselves change over time • This discourse takes place within a context of intellectual developments in other disciplines • This discourse takes place within a context of events • The history of this discourse is not predetermined or predictable, but is contingent

4. Main Periods in the History of Economics • Pre-Classical (up to 1776) • Classical (1776-1870s) • Marginal Revolution (1870s-1890s) • Neoclassical Economics (1890s-to date) • Keynesian revolution (1936-1960s) • Formalist Economics (1945 to date) • History of Economic Thought covers some of the pre-Classical period and the Classical period • Some background to this period

5. Intellectual Background • Middle Ages (fall of Rome until mid- 15th C) - Limited trade, manorial system - Economic discussion linked to Church doctrine - Thomas Aquinas (1225 – 1274) and Nicolas Oresme (1320 – 1382) - Doctrines of Usury and the Just Price - Suspicion of the ethics of profit through trade

6. Intellectual Background • Renaissance (15th and 16th C) - Growth of trade, markets, and towns - Decline of the manorial system - Growth of science (Leonardo da Vinci 1452-1519; Galileo Galilei 1564-1642; Francis Bacon 1561-1626; Rene Descartes 1596-1650) • Provided the foundation for Issac Newton’s (1642-1727) linkage of rational thought and empirical observation

7. Early Applications of “Science” to Political Philosophy • Thomas Hobbes, 1588-1679 - Leviathan 1651 - Hobbes attempting to apply science (as he understood it from Galileo) to politics - Social phenomena must first be reduced to individual behavior - Individuals are both rational and self-interested - In the original “state of nature” this leads to a war of all against all - Rational individuals will agree to a government - Argues for a strong Monarchy

8. Early Applications of “Science” to Political Philosophy • John Locke (dates) - Two Treatises of Government (1689) - An Essay Concerning Human Understanding (1689) - State of nature not as Hobbes thought, but subject to natural laws - Reason indicates all people are equal and independent and that no one should harm another in life, health, liberty or property - Labour is the origin and justification of property

9. Locke (Continued) - Free and rational people will form a political society for the better protecting of natural rights - State does not have unlimited authority - Contract or consent is the basis of government and fixes its limits - influenced the American constitution

10. Economic and Political Background • Agricultural revolution (1730-1830) • Industrial revolution (1730-1830) • Political unrest in Europe, wars, French revolution (1789), Napoleonic Wars, Battle of Waterloo 1815 • Colonies and empire building by European states • Issues of the franchise, free trade, population, poor laws, factory acts, Ireland, slave trade

11. Map of the Course • Classical Era (1680-1830) in which progress was made in macroeconomics, in studying the interconnections between the different sectors of the economy • Marginalist Era (1830-1930) in which progress was made in microeconomics, in understanding what rational behavior by consumers and businesses looks like and what rational behavior means for the economy as a whole • Current Era (1930- ) in which progress was made in making mathematical precision the acceptable way and the main way of making an economic argument

12. Before Adam Smith: Pre-Classical Economics Pre-Classical Economics (18th century and earlier). The economic knowledge that existed prior to the emergence of the Classical School came from three main sources: • Everyday experience • Scholastic moral philosophy • Mercantilist writings Commonplace economics. Some economic ideas were so well known even to common people that it makes no sense to try to figure out who stated them first. Examples: • Successive units of a commodity are less and less urgently needed • Abundance reduces prices and scarcity increases them • Demand is inversely related to price and supply is directly related • More fertile and/or better-located land earns higher rent • Trade occurs because natural resource endowments vary from place to place

13. Scholastic Economics. In the Middle Ages (476-1453), some economic thinking was carried out by Catholic priests and philosophers teaching in the then emerging universities. • Their initial motivation was to address ethical issues related to economic activity. • They were not satisfied with evaluating economic outcomes on the basis of divine revelation. • Following Aristotle (384-322 B.C.), whose writings were rediscovered towards the end of the Middle Ages, the Scholastics sought to base their understanding • of what was or wasn’t just based on natural law, by which was meant the predictable ways in which societies function which in turn was thought to be akin to and as dependable as the laws of nature.

14. Mercantilism. This school of economic thought arose in England during the 16th through the 18th centuries. Many of the contributors to this literature were merchants or members of the mercantile class, hence the name. The main themes of this literature were as follows: • The ultimate objective of economic policy is the political power of the state, both internal and external. • The power gained by one state is inevitably associated with power lost by another state. Therefore, the interests of nation states are perpetually in conflict. • A nation’s power is measured by its population and its stock of precious metals such as the gold and silver embodied in the money in use at the time. A high population could supply soldiers. Money (in the government’s treasury) could pay for large armies and navies. • Population growth and a rich treasury could only come from prosperous industry and trade. • This prosperity could be brought about if the economy’s stock of money (i.e., gold and silver coins) was large.