Handout for lecture 2: Early economic thought ( ca 800 BC - ca 1500)
1. Chronology of economics
a) Some important dates in economics
1776, Adam Smith, An Inquiry into the Nature and Causes of the Wealth of Nations
1817, David Ricardo Principles of Political Economy and Taxation
1848, John Stuart Mill Some Principles of Political Economy and their Application to Social
Philosophy
1871-4, William Stanley Jevons Theory of Political Economy; Carl Menger, Principles of Economics, Leon Walras Elements of Pure Economics
1890, Alfred Marshall, Principles of Economics
1936, John Maynard Keynes, General Theory of Employment, Interest and Money
1948, Paul Samuelson, Economics
1959, Gerard Debreu, The Theory of Value
b) Important historical episodes in economics
Mercantilism, 13th - 16th centuries
Physiocracy, France 1750 -1789
Classical economics, first half of 19th century
Marginalism, starting late 19th century
Historical economics, late 19th century
American institutionalism, 1918 to 1940s
Rise of business cycle theory, early 20th century
Keynesian economics, 1940s onwards
Rise of econometrics and mathematical economics, 1940s onwards
Early economic thought (pre-classical economics) (8th century BC - 1776)
early pre-classical economics (Greeks, Scholasticism) (800 BC - 1500)
late pre-clasiccal economics (Mercantilism, 13th - 16th centuries; Physiocracy, France 1750 -1789) (1500-1776)
Though economic activity has been a characteristic feature of human culture from the beginning, there was little formal analysis of this activity until capitalism developed in Western Europe during the fifteenth century.
The economic studies of that time were not systematic: economic theory evolved very slowly from individual intellectual responses to contemporary problems. No grand analytical economic systems appeared.
In thinking about this early economic thought, we have to keep in mind several points:
1) the thinkers of this period addressed limited aspects of the economy and did not expand their analysis into a comprehensive economic system, they were not searching for grand, big, general theories.
2. The early pre-classical thinkers gave greatest attention to those kinds of non-market mechanisms of allocation (force, authority, power, tradition). They were also in general not concerned with the problem of efficiency of resource allocation, but rather considered the consequences of various types of economic activities for justice and quality of life (not for economic efficiency as it is in modern economics).
Modern economies are market economies, thus modern economic theory focuses on how markets help to deal with the problems of scarcity and gives almost no attention to the use of force, authority and tradition as mechanisms for resources distribution in the society.
People at the time were not dependent on markets to acquire goods, but were for the most part self-sufficient. Thus, early pre-classical economists were not interested in markets because of relative unimportance of markets in the daily activities of people.
This is one of the most significant differences between early pre-classical and modern orthodox economics. In a pre-market (and therefore pre-classical) setting, thinkers focused on the use of authority and power as an allocator of resources.
In addition, we should not forget that these writers believed that it was inappropriate to separate any particular activity - economic for example, from all other activities. In their writings, they therefore did not abstract economic activity from all other activities, as it is in contemporary economics.
And, finally, we have to remember that early pre-classical economics (the writings of Greek philosophers and the scholastics) was dominated by ethical, not purely scientific, considerations, the ethical, not purely scientific, questions of justice, fairness and the morality of commerce were central to these thinkers.
For example, the pre-classical writers examined exchange and prices with the purpose of evaluating their fairness and justice. Those kinds of considerations (the ethical ones) are almost completely absent in modern orthodox economics, but can be find in the modern heterodox economic thought form the 18th century to the present (for example in Marxism, institutionalism, radical economics and other currents).
So much for the introduction and we can turn to the Greek economic thought.
We shall now discuss the economic thought of:
Hesiod,
Xenophon,
Plato, and
Aristotle.
Hesiod, Works and Days, c. 800 BC
Xenophon, lived in 4th century BC
Plato, The Republic, c. 400 BC
Aristotle, Politics, c. 310 BC
The ideas of Hesiod were orally presented during the eighth century BC. The most important work with economic implications attributed to Hesiod is Works and Days, in which he initiates a pursuit of economic questions that continued for two centuries in ancient Greece. Being a farmer, Hesiod was interested in efficiency. Efficiency in a household for Hesiod was the result of hard work, honesty and peace.
Economists use the concept of efficiency in a number of contexts - for example, it is measured as a ratio of outputs to inputs. Maximum efficiency is then taken to be achieving the largest possible output with a given input. We can also thing about a similar procedure for minimizing inputs (costs) for a given output.
Much of the writings about efficiency during the early pre-classical period concerned the efficiency at the level of the individual producer and household. Those writers and Hesiod too were not interested in efficiency at the level of society. This problem, efficiency at the level of society is much more difficult and complex, then the problem of efficiency at the level of one producer or household. It is not surprising therefore that Hesiod and other Greek thinkers were pursuing problems related to this more obvious issue of efficiency.
Beside touching on the problem of efficiency, Hesiod realized that the basic economic problem is one of scarce resources, he also suggested that competition can stimulate production, for it will cause people to emulate each other (that is to imitate the activities, which are profitable).
However, though those ideas of efficiency, scarcity and competition are clearly present in Hesiod's Works and Days, they are not expressed in anything like abstract terms. It is just poetry, good, but only poetry. There are economic insights, but nothing is developed very far and it is difficult to know how much significance to attach to them.
Xenophon, writing some four hundred years after Hesiod, that is in the 4th century BC, took the concepts of efficient management much farther than Hesiod and applied them at the level of the household, the producer, the military, and the public administrator. This brought him insights into how efficiency can be improved by practicing a division of labor.
Oikonomikos, the title of Xenophon's work, is the origin of the words “economist” and “economics”. However, it is better translated as The Estate Manager or Estate Management. Taken literally it means Household Management, “oikos” being the Greek word for “household”. Xenophon's Oikonomikos is in fact a treatise on managing an agricultural estate. According to him, an efficient estate should be, first of all, efficiently organized. He believed that good organization could double productivity in agricultural estate.
He also argued that the division of labor should be practiced in the household or estate in order to increase efficiency. He observed that in a small town, the same worker may have to make chairs, doors and tables, but he cannot be skilled in all these activities. In large cities, however, demand is so large that men can specialize in each this task, becoming more efficient.
In Xenophon world markets and trade are still almost absent, managing the agricultural estate is as central to his view of economic activity as it was for Hesiod's.
Attention to the division of labor was continued by other Greek writers, including Aristotle, and later by the scholastics. We will see that at the level of society Adam Smith gave special recognition to the influence of the division of labor on the wealth of nations.
Next we turn to Plato. Living in the forth and third century BC.
Plato was mainly a great philosopher, but he had also some contributions to economics. In his treatise Republic, he was trying to provide a blueprint for the ideal state, which would be free of all the vices inherent weaknesses of democracy as well as tyranny (or monarchy). For Plato, the most important feature of society should be its stability. Leaders in democracy in his view would not do what was right and just, but rather use their office to gain support, while tyrants or kings, on the other hand, would use their power to further their own interests, not those of the state as a whole.
Plato's solution to this dilemma was to create a class of philosophers-kings, who would rule the state in the interests of whole society. What is important from economic point of view, for the ruling class not to become corrupt, they would be forbidden to own property or even to handle gold and silver, they would receive what they needed to live as a wage from the rest of community. In this harsh vision, even the wives and kids in the ruling class should be common property.
Nevertheless, returning to the economics, like other Greek thinkers Plato considered specialization in production as a key element to efficiency.
He saw a very limited role for trade and the markets in his ideal state. Consumer goods may be bought and sold (outside the ruling class), but property was to be allocated appropriately between citizens. There would be no profits or payment of interest on money loans.
Therefore, what is important here is the Plato's view that the ruling class should not possess private property but should hold communal property, to avoid corruption and conflicts. This is a first quasi-economic argument against private property in the history of economics.
So much on Plato.
Aristotle, living in the 4th century BC was a student of Plato. The influence of Aristotle on subsequent generations was such that for many, he was simply “the philosopher”. His writings encompassed philosophy, politics, ethics, natural science, medicine and virtually all others fields of inquiry, and it dominated thinking in these areas for nearly 2000 years, until let's say 15th, 16th century.
His contributions to what are now thought of as economic issues are found mostly in his work entitled Politics. He was concerned mainly with the issues of justice, the nature of the household and the state and the status of private property.
In the matter of private property, Aristotle believed that private property served a useful function in society and that no regulations should be made to limit the amount of property in private hands. He argued that private property gives incentives to efficient use of the economic resources.
This may be considered as a first quasi-economic, intuitive, not-formal, argument for private property.
Aristotle was also interested in the problem of justice in distribution and exchange. We should remember that in his times the allocation of goods was not guided by competitive markets, but rather by authorities. In addition, the prices of goods were highly regulated. The question of how justly distribute goods and what is the fair price were therefore important.
When dealing with these problems of distribution and exchange Aristotle distinguished between three types of justice: distributive justice, rectificatory justice and commutative justice (or justice in exchange).
The first concept applies to the distribution of goods. It is said by Aristotle that goods are distributed justly in this sense if they are supplied to people in proportion to their merit (goodness, virtue, quality of character, contributions to the prosperity of state). It was a very elastic notion, for merit can be defined in different ways in different settings.
Second type of justice is rectificatory justice, that is putting right previous injustice by compensating those who had lost something. It is not interesting from our point of view.
Finally, there comes commutative justice, justice in exchange.
If two people exchange goods, how do we assess whether the transaction is just? We could say that if exchange is voluntary, than it must be just. Aristotle recognized however, that in such exchanges justice 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. There is therefore a scope for a rule to determine the just price within this range.
His answer was the harmonic mean of the two extreme prices, which is given by the formula:
2/[1/p1+1/p2],
Where, p1 and p2 are the relevant prices.
The harmonic mean has the mathematical property that if the just price is, say 40% above the lowest price the seller will accept, it is also 40% below the highest price the buyer is prepared to pay.
This is Aristotle's concept of justice in exchange.
We should remember - he was not dealing with exchange in competitive markets, where there is a unique price, for in his times the role of markets was limited.
Aristotle also developed a distinction between economics - the science of household or estate management, and the science of wealth getting, which is called chrematistics (that is wealth-getting, accumulating wealth).
Aristole distinguished between two kinds of chrematistics - natural and unnatural one. The first one, natural chrematistics is a part of economics (that is household management), for a person should know whether to engage in planting wheat or bee keeping, or should know where to go fishing or hunting. These were natural ways in which to acquire, to get wealth (barter exchange was also part of natural chrematistics).
In contrast, the second type of chrematistics is getting wealth through exchange using the money. It is according to A. unnatural, for this could involve making a gain at someone else's expense. Unnatural ways to acquire wealth included commerce by the use of money and usury (lending money at interest). This kind of chrematistics is not included in economics and should be condemned as unnecessary and evil, morally bad.
What does it mean that for A. commerce and exchange were unnatural and therefore morally bad?
In Aristotle's vision, people should aim at a good life. To do this they needed material resources, provided by their estate. These could be obtained by means of natural chrematistics or by trade and exchange (unnatural, bad kind of chrematistics). However, according to Aristotle a characteristic feature of a good life is that human needs are limited and high levels of consumption are not part of a good life. Therefore, there is a limit to the natural acquisition of wealth - that is fulfilling your basic needs.
What disturbed Aristotle about commerce was that it offered the prospect of an unlimited accumulation of wealth, far beyond the needs of the household. He thought of money exchange rather as an attempt to satisfy unlimited desires of human beings. While satisfying the desires was not a part of Greek notion of a good life.
So therefore, according to Aristotle, market exchange with the medium of money, suggests that a person want to make a monetary gain through the exchange and satisfy the unlimited desire for money and wealth. These activities do not lead to a good life and as such, unnatural chrematistics should be considered as morally bad.
So much on Aristotle's economic views.
He had enormous impact on economic ideas during the period of scholasticism. It was Aristotle's views that St. Thomas Aquinas and other churchmen developed further in the 13th and 14th century.
One last remark. The ancient world was dominated by self-sufficiency and isolated (non-market) exchange. However there was no market economy in the modern sense, commercial activity were sufficiently developed to provide a big challenge to the thinkers.
Overall, the thinkers whose views are known to us were rather suspicious of commerce and exchange. The two subjects dominated discussions of economic issues right up to the 17th century - justice and the morality of commerce and exchange. Only by 17th century, the existence of market economy and commercial mentality had come to be accepted.
The Middle Ages and the so-called scholastic economic doctrine.
Some general remarks on the scholasticism.
The scholastics were educated monks, who tried to provide religious guidelines to applied to secular (for example economic) activities. Their aim was not so much to analyze economic activity taking place during their times, as to prescribe rules of economic conduct compatible with religious dogma. The economic insights they produced, usually referred to as “scholasticism” or scholastic economics, were concerned primarily with ethical connotations of economics.
The most important of scholastic writer was St. Tomas Aquinas, Summa Theologica, c. 1273, lived in 13th century.
Few words about the economy during the Mddle Ages.
Although the production of goods for sale in a market increased throughout the period, it did not play a dominant role in everyday life. The feudal economy of the middle ages consisted mainly of agriculture in a society bound together not by a market but by tradition, custom and authority. The society was divided into 4 groups: serfs, landlords, royalty and the church. All land was fundamentally owned by the Roman Catholic Church or the king. Use of the land owned by the king was given to the lords, who in exchange had certain obligations to the central authority. The relationship between lord and serf was also dictated by custom, tradition and authority, the serf was tied to the land by tradition and paid the lord for use of the land with labor, corps and sometimes money. What is also important, the church as a largest landholder in Western Europe had significant secular influence in society.
The scholastics essentially addressed the same economic issues as ancient Greeks: that is the institution of private property and the concepts of just price and usury. We may risk a judgment that scholastic literature is an attempt to reconcile the religious teachings of the church with the slowly increasing economic activity of the time. Scholastic writings represent a gradual acceptance of certain aspects of economic activity as compatible with religious doctrine. The significance of Aquinas ideas lies in his fusion of religious teachings with the writings of Aristotle, which provided scholastic economic doctrine with much of its content.
To reconcile religious doctrine with the institution of private property and with economic activity, Aquinas had to challenge numerous biblical statements condemning private property, wealth and the pursuit of economic gain.
As you know, we can find in the Bible the following statements:
And Jesus said to His disciples, 'Truly I say to you, it is hard for a rich man to enter the kingdom of heaven.
Or: 'And again I say to you, it is easier for a camel to go through the eye of a needle, than for a rich man to enter the kingdom of God.'
Based upon the New Testament early Christian thinkers held also that communal property is the natural state of the world.
St. Thomas using Aristotle's thought were able to argue in a convincing way that private property is not contrary to natural law or religious beliefs. Although he agreed that under natural, god's law, all property is communal, he maintained that the private property was an addition, not a contradiction, to natural, god's given, law. The nature of this argumentation was religious, not economical, but the implications of Aquinas reasoning were powerful and extremely beneficial for the economy.
Aquinas was also concerned with another aspect of economic activity, that is the price of goods. Unlike modern economists, he was not trying to analyze the formation of prices in an economy or to understand the role that prices play in the process of resource allocation.
He focused on the ethical aspect of prices, raising issues of justice in exchange. Mainly, he was asking - What is a just price?
Historians of economics differ in their interpretations of the Aquinas notion of just price. Some of them argue that a just price of a commodity according to Aquinas is an equivalent to the cost of the labor embodied in the commodity.
Others, that is an equivalent in terms of the utility, and others that the just price is an equivalent in terms of total cost of production.
The most popular interpretation is, however, that for Aquinas just price meant simply the market price.
If this is correct - we should stress that it is not useful solution, since Aquinas had no economic theory explaining the forces that determine market price.
Scholastic thinkers, following Aristotle, were also in the early middle ages prohibiting the usury, that is taking the interest on money loans, but later in the period they accepted it, at least if money was lent on business purposes.
St Thomas Aquinas was a complex and interesting thinker. On the one hand, he held back economic thinking by emphasizing ethical issues and focusing on moral aspects of economics; on the other hand, he advanced economics by his use of little more abstract thinking than writers before him.
So much on Aquinas.
Short summary of early pre-classical economics.
Pre-classical thinkers did not pursue economics as a separate discipline; they were interested in much broader, more philosophical issues. Moreover, since the economic activity they observed during those early times was not organized into a market system as we know it, they concentrated not on the nature and meaning of the price system but on ethical questions concerning justice and fairness.
The Greeks studied the administration of resources at the level of the household and producer and pursued the ideas of efficiency and division of labor. They examined the role of private property, different notions of justice and the distinction between human needs and wants.
Later, scholastic doctrine did not attempt to analyze the economy, but rather to set religious standards by which to judge economic conduct. Nevertheless, the scholastic doctrine helped to form a base for the development of a more analytical, abstract approach to economics.