Economic Perspectives in the Ancient World

Roger E. Backhouse: The Ordinary Business of LifeChapter 1 The Ancient World Udayan Roy

The ancient world • Homer and Hesiod • Xenophon • Plato • Aristotle • Economic justice • Acquisition of wealth • Rome THE ANCIENT WORLD

Homer and Hesiod • Homer • The Iliad and the Odyssey • Tales from a long oral tradition, finally written down c. 750-725 BC • Hesiod • Works and Days • Poems, c. 700 BC • Earliest written record in Europe THE ANCIENT WORLD

Homer • Describes the Mycenaean (Bronze Age) world of Troy around 1400–1100 BC • This society was not based not on market transactions • Wealth was acquired through gifts, theft, prizes for winning competitions, plunder received in war, and tribute paid by defeated cities to their conquerors. • This reflects a zero-sum society in which one person’s gain must come at the expense of another • This is the case when production technology is so primitive that cooperative activity creates no surplus in excess of subsistence THE ANCIENT WORLD

Homer • Compared to agriculture and war, trade was viewed by Homer as an inferior way of acquiring wealth. • Trade was new, unfamiliar, and not standardized • This may have left people feeling ripped off • Most economic activity took place in the household, understood as the landowner, his family, and all his slaves • Prosperity came from efficient management of the household THE ANCIENT WORLD

Hesiod • Hesiod realized that the basic economic problem is one of doing one’s best with scarce resources. • The reason men have to work is that ‘the gods keep men’s food concealed: otherwise you would easily work even in a day enough to provide you for the whole year without working’. THE ANCIENT WORLD

Hesiod • There is in Hesiod an intuitive understanding of the need to be inventive, and that • Choices have to be made between work (which leads to wealth) and leisure. • Hesiod even suggests that competition can stimulate production, for it will cause craftsmen to emulate each other. • But these ideas are not explicitly stated; one has to infer them • In Hesiod, the virtues that lead to prosperity are hard work, honesty and peace. • This is far from the aristocratic disparagement of work and support for martial virtues in Homer THE ANCIENT WORLD

Xenophon (c. 430 – 354 BC) • Oikonomikos, the title of Xenophon’s work, is the origin of the words ‘economist’ and ‘economics’. • Taken literally it means Household Management • The bookis in fact about the management of an agricultural estate. • Efficient management required effective leadership (of slaves). • Effective leadership required knowledge of the production technology and an understanding of the importance of order and organization THE ANCIENT WORLD

Xenophon on Government • Xenophon extended his ideas about household management to the administration of a state • The emphasis was on top-down administration, and not on decentralized markets • In the absence of a vibrant market-based economy, it is not surprising that Xenophon did not imagine a bottom-up and decentralized form of government THE ANCIENT WORLD

Xenophon: division of labor • Xenophon is important for two crucial insights: • Division of labor leads to higher productivity, and • The extent of division of labor is determined by the extent of the market THE ANCIENT WORLD

Xenophon: division of labor • Xenophon saw that in a small town the same workman may have to make chairs, doors, ploughs and tables, and realized that such a worker cannot be skilled in all these activities. • In large cities, however, demand is so large that a worker can specialize in each of these tasks, becoming more efficient. THE ANCIENT WORLD

Xenophon: division of labor • Turning back to the household, Xenophon argued that division of labor can be practiced in the kitchen. • Food prepared in a large kitchen will be superior to food prepared in a smaller kitchen where one person has to perform all tasks. • This is an early example of the use of economic logic to issues that are not obviously economic, foreshadowing the work of contemporary economists such as Gary Becker and Steven Levitt THE ANCIENT WORLD

Xenophon: division of labor • But in Xenophon’s writings, trade and markets are peripheral. • He does not connect division of labor to the market mechanism • He takes the extent of the market as given, and not as something that can be expanded through the expansion of trade THE ANCIENT WORLD

Plato (c. 429 – 347 BC) • Republic, blueprint for an ideal state • In a democracy, leaders would do only what was popular, not what was just • In a tyranny, the tyrant would do only what was good for himself • Plato proposed a middle ground. • Some people would appoint themselves to the role of guardians or philosopher kings. • They would be trained by the state for their roles. • They would be forbidden to own property. • The state would pay them a wage to cover their needs. • Therefore, they would put the state above their own interests THE ANCIENT WORLD

Plato • Plato shows a clear understanding of the role of incentives not only in economic activity but also in crime • He realizes that the only way to get honesty in public servants is by forbidding property accumulation • However, he also understands that to get people to volunteer to be guardians, the state must cover their needs THE ANCIENT WORLD

Plato • Plato’s application of economic logic to crime and politics foreshadows later work by contemporary economists such as Gary Becker (on crime) and James Buchanan (on politics) THE ANCIENT WORLD

Plato • Like Xenophon, Plato noted the importance of division of labor • Men should specialize in those activities for which they were naturally suited, and should be trained accordingly. • The origins of cities (states) lay in specialization and the dependence of people on one another. THE ANCIENT WORLD

Plato • Though he saw a role for trade, the role for markets in his ideal state was very limited. • Consumer goods might be bought and sold, but not property, which was to be allocated by the state (on mathematical principles) • There would be no profits or payment of interest. THE ANCIENT WORLD

Aristotle (384 – 322 BC) • His writings dominated Western thought in most areas for nearly 2,000 years. • His thoughts on economic issues are found in • Book V of the Nichomachean Ethics, which was on justice,and in • Book I of the Politics, which was about the household, the state, and wealth acquisition. THE ANCIENT WORLD

Aristotle: Economic Justice • In organized, modern markets, the scope for disputes between buyers and sellers is limited • However, in Aristotle’s days, markets were not widespread, and products were not standardized. • This led to legal disputes between buyers and sellers. • Aristotle sought to set out the principles for the settlement of such disputes THE ANCIENT WORLD

Aristotle: Economic Justice • Aristotle considered three concepts of justice • Distributive justice: how should the spoils of war be shared • Rectificatory justice: how should one be compensated for past injustice • Reciprocal justice: when is an economic exchange between a buyer and a seller just THE ANCIENT WORLD

Aristotle: Distributive Justice • How should, say, the spoils of war be shared? • Aristotle felt that when concrete cases of such disputes are considered, the just share for each person usually becomes obvious. • The sharing must be done according to each person’s ‘merit’ • In concrete cases, the ‘merits’ of the people involved in the joint acquisition of wealth are clear and the wealth should then be shared in proportion to ‘merit’ THE ANCIENT WORLD

Aristotle: Rectificatory Justice • Rectificatory justice restores equality by compensating those who had suffered from past wrongs THE ANCIENT WORLD

Aristotle: Reciprocal Justice • If two people exchange goods, how do we assess whether the transaction is just? • One idea, commonly understood in ancient Greece, is that if an exchange is voluntary it must be just. • Xenophon cited the example of two boys – one tall and with a short tunic, the other short and with a long tunic – who exchanged tunics. The conventional view was that this was a just exchange, for both boys gained from it. • Aristotle accepted this argument THE ANCIENT WORLD

Aristotle: Reciprocal Justice • Aristotle recognized, however, that voluntary exchange does not determine a unique price, but merely a range of possible prices in between the lowest price the seller is prepared to accept and the highest price the buyer is prepared to pay. • Within this range, what is the just price? • Aristotle’s answer was the harmonic mean of the two extreme prices. THE ANCIENT WORLD

Aristotle: Harmonic Mean • Suppose • the lowest price the seller would accept is $5.00, and • The highest price the buyer would pay is $8.00 • According to Aristotle, the just price for this exchange is the harmonic mean of 5 and 8. • This is 2/((1/5)+(1/8)) = $6.15 • This price is 23.08% higher than $5.00 and 23.08% lower than $8.00 • This general property of the harmonic mean makes it the just solution, according to Aristotle THE ANCIENT WORLD

Aristotle: Acquisition of Wealth • Getting rich by identifying and pursuing a profitable productive activity was fine • Exchange of one’s surplus product for the surplus of another was fine • But getting rich through commerce and usury was unnatural and unacceptable • It was assumed that there was a socially acceptable level of consumption • Anything in excess was frowned upon THE ANCIENT WORLD

Aristotle: Commerce, Markets • Aristotle was suspicious of trade • He felt that commerce and usury enabled people to make huge amounts of money, without doing any hard work and far in excess of normal needs • This implied that money was being made simply for the sake of making money, and not for the needs of the good life • This implied that commerce and usury were unnatural • Aristotle did not see markets as a social regulatory mechanism • He saw the running of society as basically a top-down administrative issue THE ANCIENT WORLD

Aristotle on Money • Money had three basic functions • Means of exchange • Measure of value (unit of account) • Store of value • As the metallic content of money is a convention determined by the state, the ruler was entitled to profit by reducing the metal content of money THE ANCIENT WORLD

The Roman Era • The Greek glorification of agriculture and suspicion of commerce and usury continued • War and conquest remained the major source of wealth acquisition • Most wealth was held in the form of land • Legal protection of property (land) became an important contribution to subsequent eras THE ANCIENT WORLD

Conclusions • The Greeks and the Romans asked the fundamental questions • They established the methods of thinking that we still use today • Their emphasis was on logic, and not on revealed knowledge • They were far more suspicious of market activity and the acquisition of wealth than we are today THE ANCIENT WORLD

Economic Perspectives in the Ancient World