INTRODUCTION: Nature and Importance of Economic Thought

Nature and Definitions of Economic Thought

The History of Economic Thought deals with the origin, development, and interrelations of economic ideas. It is a broad discipline that traces economic ideas back to the birth of mankind, encompassing the writings of ancient Hebrews, Indians, Greeks, Romans, and thinkers of the Middle Ages.

Economic ideas are deeply coloured and conditioned by their environment:

• Plato and Aristotle: Their economic ideas were influenced by the institution of slavery, which was an accepted part of ancient Greek civilization.
• Karl Marx: The Industrial Revolution in England and the resulting development of the urban proletariat (working class) provided the foundational basis for his socialist ideas.

Economics as a systematized science is roughly two hundred years old, starting in the latter part of the 18th century. It formally began with the publication of the "Wealth of Nations" by Adam Smith in 1776, earning him the title of the 'Father of Political Economy.'

The History of Economic Thought is broadly divided into two parts:

1. The origin and development of economic ideas before the development of economics as a separate science.
2. The economic ideas since the birth of political economy (the science of Economics) as a separate science.

Distinguishing the Disciplines

Formal Definitions of the Subject

Key Terms

📌 Exam Tidbits

• Adam Smith (1776): Published "Wealth of Nations"; regarded as the 'Father of Political Economy'.
• Karl Marx: Socialist ideas driven by the Industrial Revolution and the urban proletariat.
• Plato & Aristotle: Economic ideas conditioned by the Greek institution of slavery.
• Prof. Bell: Defined the subject as a heritage spanning about 2,500 years.
• Prof. Haney: Defined the subject as a critical account searching into origins, interrelations, and manifestations.
• History of Economic Thought vs Economic History: The difference is that the former studies ideas, while the latter studies material/industrial development.
• 2 parts: The broad division of the history of economic thought (before and after economics became a separate science).

Theoretical Approaches to Economic Thought

There are nine distinct theoretical approaches to studying the history of economic thought.

Key Comparisons in Theoretical Approaches

Key Terms

📌 Exam Tidbits

• 9 theoretical approaches: Chronological, conceptual, philosophical, classical deductive, historical, neo-classical, welfare, institutional, and Keynesian.
• Jevons: Marginal utility.
• Walras: General Equilibrium.
• Marshall: Quasi-rent, long and short run, dual theory of value. Published "Principles of Economics" in 1890.
• Keynes: Liquidity preference, macro-economics, full employment.
• Schumpeter: Criticized the Philosophical approach, claiming early writers' economic analysis was not actually influenced by their philosophy.
• Historical School: Born in Germany; championed the inductive method and relative laws.
• Oskar Lange: "Welfare economics is concerned with the conditions which determine the total economic welfare of a community."
• Veblen: Founder of the Institutional approach (a 20th-century American product).
• Classical vs Welfare Approach: The difference is that Classical emphasizes cost, supply, and production, while Welfare emphasizes utility, demand, and consumption.
• Micro-economics vs Macro-economics: The difference is that Micro deals with the individual consumer, while Macro deals with the economy as a whole (employment, interest, money).

Philosophy and Methods in Economics

The attitude of economists towards economics as a science depends partially on their philosophical leanings. There are two main tendencies in philosophy, which are not independent but are two sides of social life that constantly react upon one another.

Philosophical Tendencies in Economics

Writers in economics utilize specific methods to seek truth. The modern consensus is that multiple methods are required.

Methods of Economic Inquiry

Key Terms

📌 Exam Tidbits

• 2 main tendencies in philosophy: Idealism and Materialism.
• 2 main methods of inquiry: Deductive and Inductive (plus Statistical as a combination).
• Idealism vs Materialism: The difference is that Idealism tends toward optimism, while Materialism tends toward pessimism, individualism, and laissez-faire.
• Deductive vs Inductive Method: The difference is that Deductive works from general to particular (abstract analysis), while Inductive works from particular to general (factual observation).
• Maxim (Modern View / Neo-classical): "Induction and deduction are both necessary for the science, just as the right and left foot are needed for walking."

Importance of Studying Economic Thought

There is a debate among economists regarding the value of studying the history of economic thought.

Two Main Views on the Subject's Importance:

Counter-argument to the View Against: This is not a correct view, for even the study of error would enable us to avoid it in future.

Seven Reasons to Study the History of Economic Thought:

1. Reveals Unity and Continuity: It connects us with ancient times. While some argue the Middle Ages were a complete break (due to an emphasis on the negative aspects of life), this is not totally true → even during that period there was speculation on economic topics such as money, interest and the views of these thinkers were similar to those of Greek thinkers of the past.

2. Explains the Origin of Economics: The nature and scope of economics is under dispute even today. History shows that economics was not originally a separate science, but merely a handmaid of politics and ethics.

3. Demonstrates the Relativity of Ideas: Economic ideas are rooted in economic practice and institutional arrangements conditioned by time, place, and circumstances.

   • Examples: Aristotle justified slavery because slavery was an accepted social fact of the Greek civilization; Mercantilist theories of foreign trade, physiocratic notions about agriculture, and the Ricardian theory of rent are still with us.

4. Provides a Broad Basis for Comparison: Familiarity with most of the old theories with all their fallacies prevents a person from being easily confused by new ideas or fads, enabling a well-balanced and reasonable judgment.

5. Fosters an Objective Point of View: Students realize that economics is one thing and economists are another. Controversies among economists will not last long → they will die soon → there may be synthesis of different conflicting theories → evolution of economic laws.

6. Shows the Recuperation of Old Doctrines: As Alexander Gray noted, "old doctrines never die; they only fade away, with a strange power of recuperation in an appropriate environment".

   • Example: Ideas of Keynes (one of the greatest of modern economists) may be traced back to socialist writers such as Sismondi and Proudhon, and to Malthus.

7. Identifies the Creators and Context of Current Principles: It enables us to know the persons responsible for formulations of the principles that constitute the framework of economics as at present taught, at what period these principles were enunciated, and what circumstances accounted for their enunciation just at that period.

Key Terms

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📌 Exam Tidbits

• 2 main views: One group calls it a 'history of errors'; the other believes history is essential to understand any doctrine.
• 7 reasons: The specific number of arguments provided for studying the history of economic thought.
• Gide and Rist: "...one cannot, moreover, be said to possess a knowledge of any doctrine, or to understand it until one knows something of its history"
• Alexander Gray: "old doctrines never die; they only fade away, with a strange power of recuperation in an appropriate environment"
• Keynes' intellectual roots: Traced back to Sismondi, Proudhon, and Malthus.
• Aristotle's justification of slavery: Rooted in the fact that it was an accepted social institution of Greek civilization.

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