Spring Semester 2001

Spring Semester 2001 Economic Thought and Methodology

Lecture One: Introduction Seminar Arrangements Economics before Adam Smith: Aristotle to Aquinas

Why study Economic Thought & Methodology? • You already have • but until now, textbooks have done it for you–badly! • Lost insights and preserved mistakes • “The bad that men do lives on after them; the good is oft’ interred with their bones. So let it be with ...” • Best of the past often forgotten by majority of profession • Errors often preserved (many examples given in this course) • “Path dependent development” • current state of theory reflects past history • learning history makes present theories easier to understand

Why study Economic Thought & Methodology? • Read the originals! Textbooks often very poor rendition of original works: 5 star restaurants vs “Big Macs” • “I accuse the classical economic theory of being itself one of these pretty, polite techniques which tries to deal with the present by abstracting from the fact that we know very little about the future.” [Keynes, OREF II] • But beware and be patient: Early writings will look really strange at first • Archaic language • Foreign concepts: nothing like economics you have learnt to date • but in many ways superior to modern economics

Why study Economic Thought & Methodology? • Economists from different schools behave like a comedy sketch: • Disagree over fundamentals • Argue past each other • Dispute the facts • Fail to communicate because of different assumptions • Impossible to decide best theory by appeal to facts

Why study Economic Thought & Methodology? • Exposure to non-mainstream thought • Macro/Micro/Finance cores reflect Majority opinion of profession • Significant minorities reject mainstream approach: • Post Keynesians, Austrians, Marxists, External critics of “economic rationalism” • You’ll get a taste of each of these in this course • covered in more detail in Political Economy (next year) • Problems with theories discussed • Theories of economics & finance not as “cut and dried” as textbooks make them appear • Weaknesses on all sides of economic debate

Lectures • Illustrate unifying themes in history of thought • Introduce you to each school and major proponents • Set each school in historical context • Explain areas of controversy • Some controversial interpretations of literature • Available on WebCT and on line at www.debunking-economics.com/uws/het

Textbooks • There isn’t one! • Instead… • Original Readings in Economics & Finance • Extracts from original writings from Aristotle (350BC) till now on WebCT

Seminars • Not your usual tutorial • 2 Presentations • Discussant for each presentation • Comments from tutor and class

Seminar presentations • Modelled on best academic work practices: • 12 minute presentation to the class, covering: • Arguments in original references • Arguments in papers commenting on originals • Your own opinions • Comments by “discussant” who has • Read the original references • Read the papers commenting on originals • Written a paper to same standard as presenter • Read presenter’s paper (received in this week’s lecture) • Comments by others in class and tutor

Essay • Seminar presentation becomes basis of essay • Essay should reflect benefit of comments from • Discussants • Class • Tutor • Chance to improve your essay before it’s marked • One topic worth 40%+ of total assessment • 10% for presentation • 20% for essay • equips you to answer one 10% question in exam • assists with doing 20% overview question • Worth doing it well

Assessment • 10% for seminar presentation • For content: • Primary sources read and understood; • Secondary sources consulted, views incorporated • Your own considered evaluation • Answer is pertinent to the question • Replies to comments sensible: accept constructive criticism, rebut ill-informed comments. • For presentation: • Overheads, handouts, etc. • Low mark for just reading a paper

Assessment • Presentation paper should be rough draft of your eventual essay • Not finished to essay standard, but • Arguments obvious to discussants • References shown • 2 copies needed; one for me, one for discussant • Due in the lecture the week before • 1/2 mark deducted per day (and given to discussant) if not delivered on time • Maximum deduction/transfer 2 marks for delivery in seminar • Can revise further (after submitting & before seminar)

Assessment • 20% for discussant • 10% for paper • 10% for critique of presenter’s paper • Good marks for critique if: • Read primary and major secondary sources • Read the seminar paper • Make critical comments (both favourable and unfavourable) • Devise questions which contribute to the class and the presenter’s understanding of the topic • Who plays role of discussant decided by coin toss when papers submitted

Assessment • 20% for essay • An extension of material in seminar presentation • Due 3 weeks after seminar presentation • Good marks for same reasons as for presentation content, plus incorporating comments made in seminar: • Improve argument where discussants found it lacked clarity • Incorporate references you may have missed • Rebut criticisms you disagree with • 50% for final exam • 3 hour exam, covering whole course • One compulsory overview question, 3 options out of over 12 choices

Materials • Web resources • http://bus.uws.edu.au/Steve-Keen/Courses/ETM • http://www.debunking-economics.com • Original Readings • Closed Reserve Materials under 18 headings: • Pre-Classical Economics, Physiocratic Economics, Classical Economics, Marx, The Rise of Neoclassicism (Walras to Marshall), Keynesian Revolution, The Neoclassical-Keynesian Synthesis, Neoclassical Resurgence, General Equilibrium Theory, Rational Expectations, Game Theory, The Capital Controversies, Finance, Methodology, Dynamics, Money, Alternative Schools, External critique • Book Debunking Economics (in bookshop) Now on to content...

Why does economics exist? • Key reason: the complexity of capitalism • pre-capitalist production and distribution transparent • Slave empires • Conquerors live on work of slaves • Feudal system • Feudal king rules lords, lords rule serfs, serfs do the work • Capitalism far less transparent • Output, distribution determined by market • But what determines the market? • Many theories: economic theories attempt to uncover fundamental determinants of production, exchange & distribution in capitalist economies • Some central themes, with different interpretations characterising different schools…

Central themes • (I) Concept of value • “Value in use” and “value in exchange” • Value reflects objective effort; vs • Value reflects subjective utility • (II) Role of utility/use-value in determining price • Pre-classicals: mixed • Classicals: none • Neoclassicals, Austrians: pivotal • Marx: eclectic & misunderstood • Post Keynesians, Sraffians: determines quantity, not price

Central themes • (III) Role and nature of money • Quantity Theory: • Money simply “a veil over barter” • money supply exogenous (set by government) • Banking School, Keynes etc. • Money economy fundamentally different to barter economy • Money supply endogenous (set by market) • (IV) Uncertainty as unknowable vs risk as proxy for uncertainty (Lecture 6) • (V) Static analysis vs dynamic analysis (Lecture 10) • (VI) The concept of surplus (Lecture 3)

Pre-Classical • Aristotle & Aquinas • Just Price (with ambiguous meaning) • Mercantilists • Nationalism in pricing • Commerce as “the pursuit of war by other means” • Physiocrats • Dynamic input-output vision of economy • Land as the ultimate source of “value”

Aristotle: The “Just Price” • Philosopher writing in Greece, 350BC • Social/economic system of the time: • Freemen: owned everything, directly or via State • Slaves: owned nothing, produced vast majority of output • Within Freemen • Ranked by land ownership, religious function, birth (aristocracy vs non-aristocratic), sex • City-state Democratic system of government • Every citizen could attend Assembly and vote • Strong sense of nation-state, the common good (of freemen)

Aristotle: The “Just Price” • Most transfers of goods not exchange as we know it but based upon role/rank in society • But some exchange between individual producers, traders from other societies, etc. • Aristotle considered philosophical basis for value placed on commodities in exchange • Overall context was maintenance of justice between freemen • Starting from “both the unjust man and the unjust act are unfair or unequal”, Aristotle derives: • Exchange must involve equality

Aristotle: The “Just Price” • For exchange to be just, things being exchanged must in some sense be equal. Parties must not feel they have lost or gained: “These names, both loss and gain, have come from voluntary exchange; for to have more than one's own is called gaining, and to have less than one's original share is called losing, e.g. in buying and selling and in all other matters in which the law has left people free to make their own terms; but when they get neither more nor less but just what belongs to themselves, they say that they have their own and that they neither lose nor gain. Therefore the just is intermediate between a sort of gain and a sort of loss, viz. those which are involuntary; it consists in having an equal amount before and after the transaction.”

Aristotle: The “Just Price” • Must be something comparable in two different goods: “Let A be a builder, B a shoemaker, C a house, D a shoe. The builder, then, must get from the shoemaker the latter's work, and must himself give him in return his own. … For it is not two doctors that associate for exchange, but a doctor and a farmer, or in general people who are different and unequal; but these must be equated. This is why all things that are exchanged must be somehow comparable.” [OREF I] • Comparable how? An equal amount of what?

Aristotle: The “Just Price” • Aristotle’s nomination: money “It is for this end that money has been introduced, and it becomes in a sense an intermediate;... The number of shoes exchanged for a house ... must therefore correspond to the ratio of builder to shoemaker. For if this be not so, there will be no exchange and no intercourse. And this proportion will not be effected unless the goods are somehow equal. All goods must therefore be measured by some one thing... Now this unit is in truth demand, which holds all things together (for if men did not need one another's goods at all, or did not need them equally, there would be either no exchange or not the same exchange); but money has become by convention a sort of representative of demand…” [OREF]

Aristotle: The “Just Price” • Problem: what is money equal to? • A circular argument; and • Conflicting themes: equality of effort (“The builder... must get from the shoemaker the latter's work, and must himself give him in return his own”) and equality of demand (“Now this unit is in truth demand”) • Never resolved by Aristotle • Marx’s explanation for this failure: • Aristotle’s theory based on equality, but • Grecian society based on slavery • Aristotle couldn’t see past contradiction

Aristotle: The “Just Price” • Methodological issues: • Rational Deductivism (vs Rational Inductivism) • Deductive logic: derive general principles from initial premises • Inductive logic: induce general principles from observation • Aristotle tried to deduce all from initial premise: “EVERY art and every inquiry, and similarly every action and pursuit, is thought to aim at some good; and for this reason the good has rightly been declared to be that at which all things aim”

Aristotle: The “Just Price” • Problem: what is the good to which slavery aims? • One-sided only--good of slave owner, not slave: “Tyrannical too is the rule of a master over slaves; for it is the advantage of the master that is brought about in it. Now this seems to be a correct form of government…” says a slave-owner! • Deductivism blinded Aristotle to key aspect of society: • Slavery basis of production • Production basis of exchange • Inequality and injustice therefore fundamental to exchange in Grecian economy • Could not then “deduce” what made 2 goods equal in exchange in his society

Aquinas: The “Just Price” • Theologian, writing in 1250AD • Feudal society: • King/Lords at peak of society • Wealth based on land ownership • Agricultural society, direct manual labour by serfs:

Aquinas: The “Just Price” • Ownership of land included ownership of those living on it • Serfs • Rural “workers” • Unfree, could be sold, but far more rights than slaves. • Some land reserved for own produce (minimum 4 acres in England), so normally self-sufficient • Required to work land of lord as well • Some people unbonded to land: guild-owners, workers in guilds • Catholic religion dominated thought: good & evil, worship of god, etc. • All arguments made with reference to role of god

Aquinas: The “Just Price” • Revived Aristotlean focus on rationality in context of religious Middle Ages • As with Aristotle, focus on justice • More emphasis upon work as basis of equality: “Because a man's work is said to be just when it is related to some other by way of some kind of equality for instance, the payment of the wage due for a service rendered.” • But two bases for justice in exchange: • “a thing can be adjusted to a man ... when a man gives so much that he may receive equal value in return, and this is called natural right. In another way a thing is adjusted or commensurated to another person by agreement,... when ... a man deems himself satisfied if he receive so much.”

Ambivalence towards trade • A utility or cost basis for Just Price? • “the amount of the recompense for a favor received should depend on the utility accruing to the receiver, and this utility sometimes is worth more than the thing given, for instance, if the receiver be in great need of that thing…” • “exchange of things is twofold; one, natural ... and necessary whereby … money [is] taken in exchange for a commodity in order to satisfy the needs of life... The other kind of exchange is ... of any commodity for money not on account of the necessities of life but for profit,… the latter is justly deserving of blame... Nevertheless, a man may ... seek gain, not as an end, but as payment for his labor.”

Finance: The Prohibition of Interest • Usury: as any interest on money lent: • “To take interest for money lent is unjust in itself, because this is to sell what does not exist, and this evidently leads to inequality which is contrary to justice.” • “money … was invented chiefly for the purpose of exchange, ... Hence, it is by its very nature unlawful to take ... interest, and just as a man is bound to restore other ill-gotten goods, so is he bound to restore the money which he has taken in interest.” • He ... may accept repayment..., but he must not exact more. ... if he exacts more for the usufruct of a thing which has no other use but the consumption of its substance, ... his exaction is unjust.

Medieval Ideology • Anti-capitalist in significant ways: • Against merchant profit: • “Now if you sell a thing for a higher price than you paid for it, you must either have bought it for less than its value or sell it for more than its value. Therefore, this cannot be done without sin.” • Support tradesmen only w.r.t recompense for labour: • “if he sells at a higher price some-thing that has changed for the better, he would seem to receive the reward of his labor.” • Again, a cost-basis for exchange • Anti-financiers • “it is by its very nature unlawful to take … interest”

Medieval Reality • Feudal manse centre of agricultural output; but • trade necessary for delicacies, specialty items, manufactures • merchants needed for trade • finance needed to fund merchants, wars • In practice, moneylending made province of non-Catholics • Catholic strictures not strictly applicable to non-Catholics • Old Testament/Jewish Talmud not as prohibitive of interest: • Deuteronomy: “Unto a stranger thou mayest lend upon usury” • “Ruses” used by all religions to circumvent usury laws And now for something completely different...

Spring Semester 2001