Evolution of Economic Thought
Early Economic Thought (Prior to c. 1600)
Sources: See Intro notes
So let's just briefly touch on some of the questions and ideas that came before 1600.
Basically we can say three things about this period:
2. They didn't expand their analysis into a comprehensive economic system
3. Ideas were strongly affected by the state of society - for example feudalism moving to capitalism (change in the institutions), etc.
But let's look at some of the theories that were discussed that fit in with our economic problems and with looking at institutions to deal with them.
Ancient and Medieval Economic Thought - The Greeks
Here are some Ancient Greeks that did come up with ideas that we can fit into the discipline of "economics": Xenophon, Plato, Protagoras, and Aristotle
The very word “economics” comes from Xenophon’s Oeconomicus – efficient management and leadership.
Greek thinkers were interested primarily in economic and organizational efficiency - Administration.
They were concerned with the question: What was the good state (in one form or another)?
Their economics came out of their concern for this question.
Man was the center of all things.
They talked about man making rational decisions – and maximizing happiness.
But it was more the art of administration – rather than that of economics, that the Greeks developed.
I want to briefly discuss a couple of Aristotle’s contributions regarding trade and money:
Aristotle (c.384-322 B.C.)
Two-Party Exchange and the Nature of Trade:
Aristotle:
Equity considerations: dominated his discussion
Isolated Exchange: he did not talk about market exchange - only an isolated exchange between two people.
No “going market price” – so the “fairness” of the exchange can only be determined by a disinterested third party – arbitrator or judge. Case by case basis.
Exchange is built upon the notion of reciprocity:.
Equality in trade: This concept, in one form or another, is seen throughout the history of economic thought. Maybe it all began with Aristotle?
Aristotle's “equality” in the trade:
“If then there is proportionate equality in the first instance, and retaliation or reciprocity follow, the result of which we are speaking will be attained. Otherwise the exchange will not be equal or permanent.”
What does he mean by equality?
Is it the same as Modern trade (or exchange) Theory:
So is there really any way of discussing “equality” in trade?
Or is he just saying that each person agrees to the exchange because they both want the other thing more than what they have?
That someone would not trade a car for a chocolate cake – the values are too far apart?
Money as an “equalizer”:
“. . . This is why all things that are exchanged must be somehow comparable. It is for this end that money has been introduced, and it becomes in a sense an intermediate; for it measures all things, . . . (Nichomachean Ethics, 1133 5-30)
Modern Theory (with the exception of Welfare Economics):
So money is not a “measure” of value – although perhaps a proxy. A dollar’s value to Betty is not comparable to a dollar’s value to Bob.
For Aristotle:
Money is like a measure that equates things, by making them
commensurable (measurable by a common standard or unit); for
association would be impossible without
exchange;
exchange without
equality,
and equality without commensurability.
Commensurability:
“This standard is in truth the demand for mutual services, which holds society together; for if people had no wants, or their wants were dissimilar (? My question mark), there would be either no exchange, or it would not be the same as it is now.”
So my summary (interpretation) of this would be:
Demand (I want what you have and vice versa) brings us together
↓
and Money makes things Commensurable (money gives the goods a commonality that allows us to “equate” things – allows us to figure out if the trade is worthwhile – “Is that car really worth $20,000 given that I could buy food for a year with the same $20,000”)
↓
Equality
(the value of the car is equated to the value of the food – BY ONE PERSON – so the idea of “equal” is not across people, but across goods - again, my interpretation of Aristotle)
↓
Exchange
↓
Association
And Aristotle does mention that the "equating" is through time –
“Money is serviceable with a view to future exchange.”
The value of money is not always the same, but “tends to have a more constant value than anything else.”
Am I giving him too much credit? Did he really think that value across people could be “equal” in some sense?
He did view the functions of money as we do today:
1. standard of value ("equalizer" in his word) - better name is "unit of account"
2. medium of exchange
3. store of value
But his main emphasis was on #1, not #2.
He also noted that money was something “intrinsically useful and easily applicable to the purposes of life.”
Sounds like part of Menger’s Theory of the Evolution of Money:
With regard to Usury: “wherefore of all modes of making money this is the most unnatural.”
And therefore should be under the watchful eye of government – the state.
Medieval Muslim Contributions
Some of my sources for this section:
The History of Economic Thought, Sammuels, Biddle and Davis, Chapter 3.
“Islam and Markets” by Imad A. Ahmad
IQTISAD AL ISLAMY (Islamic Economics): “Ibn Khaldun, Father of Economics” by Dr. Ebrahim M. Oweiss
Medieval Islamic Economic Thought: Filling the “Great Gap” in European Economics by S. M. Ghazanfar (ed.)
The "Great Gap"
Muslim contribution to economics has failed to be generally recognized in the Western literature that deals with the history of economic thought. This led to the concept of a “Great Gap” of over 500 years in the history of economic thought from the time of the Greek contribution to that of the Scholastics. Joseph Schumpeter, in his History of Economic Analysis (1954) said that this intervening period was “sterile and unproductive.”
However, the Muslim civilization did make contributions to intellectual activity during that time. Many think that the Scholastics were greatly influenced by the Muslim contributions.
There are many who contributed. Some of the names most often mentioned are: Ibn Sina, Ibn Rushd, Maimonides, Ibn Taimiyyah, Imam Shatibi, Iman Ghazzali and, most especially, Ibn Khaldun.
We will look at a couple of Ibn Khaldun’s contributions later. He appears to be the most popular contributor. Some think that he should be known as the “father of economics.” But first...
General Overview of the Muslim Contributions on Trade:
According to Imad A. Ahmad (President of the Minaret of Freedom Institute):
"The relationship between Islam and trade is not well appreciated in the West. The Prophet Muhammad (peace be upon him) and his wife Khadija were both merchants. The Qur’an, the Muslim scripture, is filled with parables using the language of trade. It was merchants, not soldiers, who were mainly responsible for the spread of Islam throughout the world."
Market Analysis and Price Controls
Muhammad disliked price controls and limited his interventions to the prohibition of practices like fraud and ribâ (overcharging inherent in barter ?)
The Islamic analysis of markets in the fourteenth century by historian Ibn Khaldun was somewhat sophisticated.
Nature and Economics
To him, the fact that the policies mandated by God could be scientifically demonstrated as the best social policies was the natural consequence of the fact that the laws of economics and the laws of good living had the same Creator.
His understanding of the harmfulness of a planned economy can be seen from the titles of the section headings in the Muqaddimah (Introduction to History) – for example:
“Commercial activity on the part of the ruler is harmful to his subjects and ruinous to the tax revenue.”
In general then the early Arabs seemed to have had a strong commitment to trade and bargaining.
The rise of Islam did not change, nor did it seek to change, the centrality of trade and commerce to the Arab way of life. Instead we see:
1. the establishment of commercial law,
2. the prohibition of fraud,
3. the call for the establishment of clear standards of weights and measures, and
4. the uncompromising defense of property rights (even while calling for a greater responsibility for alleviating the plight of the poor and needy).
Ibn Khaldun (May 27, 1332 AD - March 19, 1406 AD)
He is best known for his Muqaddimah (known as Prolegomenon in Greek), the first volume of his book on universal history, Kitab al-Ibar.
Much of the following is from this book.
His is actually given credit for coming up with ideas that were later developed by the Mercantilists, Sir William Petty (A.D. 1623-1687), Adam Smith (A.D. 1723-1790), David Ricardo (A.D. 1772-1823), Thomas R. Malthus (A.D. 1766-1834), Karl Marx (A.D. 1818-1883), and John Maynard Keynes (A.D. 1883-1946), to name only a few. Not clear that that is true though.
In reading he ideas I was struck by some contradictions – as has been common in those we will discuss.
He still didn’t seem to have a “system” of ideas – theories here and there that do not always reconcile with each other if carefully thought out.
Nonetheless, he did seem to have an idea about a lot of issues that others are given credit for much later.
So the question is – did these “others” have access to Khaldun’s ideas.
Most think they did – or at least there is a lot of evidence that they had access to his writings. So why wasn’t he referenced if that’s the case?
Labor, Value and Productivity
According to Ibn Khaldun:
Human Effort: All earnings are value realized from human labor, that is, obtained through human effort. Even though the value of objects includes the cost of other inputs of raw material and natural resources, it is through labor and its efforts that value increases and wealth expands, according to Ibn Khaldun.
With less human effort, a reversal to an opposite direction may occur.
So he seems to have a production theory somewhat similar to Adam Smith – productivity is the key to wealth and labor is necessary to obtain this wealth.
He gave an explanation for the reasons behind the differences in labor earnings.
They may be attributed to differences in skills, size of markets, location, craftsmanship or occupation, and the extent to which the ruler and his governors purchase the final product. (My italics).
As a certain type of labor becomes more precious, that is, if the demand for it exceeds its available supply, its earnings must rise.
So now he has value (or at least earnings) determined by demand for it (relative to supply).
And notice this: High earnings in one craft attract others to it, a dynamic phenomenon which will eventually lead to an increase in its available supply and consequently lower profits.
Here we have a dynamic analysis of markets and how they work.
"Income and expenditure balance each other in every city. If the income is large, the expenditure is large, and vice versa. And if both income and expenditure are large, the inhabitants become more favourably situated, and the city grows."
If income is derived from production (not clear that he means that though), then this sounds like Say’s law. Otherwise, it sounds like Keynes.
In any case he does seem to understand “derived demand” - Demand for a craftsman is derived from the demand for his product in the marketplace.
Tax Theory:
"When tax assessments and imposts upon the subjects are low, the latter have the energy and desire to do things. Cultural enterprises grow and increase, because the low taxes bring satisfaction. When cultural enterprises grow, the number of individual imposts and assessments mount. In consequence, the tax revenue, which is the sum total of the individual assessments, increases";...
Supply side economics?
Early Christian Contributions
From the time of the fall of Rome to the end of the eighteenth century—most writers in economics were lawyers or businessmen of some kind.
Early Christian thought gave us another view
Morality vs. Economics: More interested in the morality of individual behavior - not the how and why of economics. But they still made some interesting contributions.
Scholastics
Medieval economics was a product of the clergy, particularly a group of writers known as the Scholastics. (teachers, professors, “schoolmen”).
Some famous names being: St. Thomas Aquinas, Albertus Magnus, Duns Scoutus in the 13th century, Nicolas Oresme in the 14th century, and in early modern times the Spanish Jesuit Luis Molina (many of the ideas below can be attributed to St. Thomas Aquinas).
General Interest and Welfare Economics: Usually what was declared as "just" was whatever serves the general interest - in this sense Scholastic economics became an early form of welfare economics:
Modern Welfare Economics:
Natural Order:
Again we see the notion of nature creating an order (economic and otherwise) - and nature was God:
Argued that there is a “natural” order (value) and an “economic” order (value) —in which things are valued differently.
Value:
Principle of Plentide—
In determining the intrinsic value of a good.
All goods were assigned to a class—which also determined their value and had nothing to do with costs.
In the economic order goods are measured in relation to labor …actually labor and expenses.
Paradox of Value: We will see that this is typical of the Scholastics and actually posed a problem for them -- the so-called and later termed "paradox of value":
For example, when St. Thomas is faced with the fact that a pearl fetched a high price and a mouse no price, although the “class” of the mouse had been created after that of the pearl and appeared to be entitled to a higher rank in the natural scale of valuation—he referred to St. Augustine and replied that the
“principle of salable things was not reckoned in accordance with the rank of nature…but in accordance with the extent to which the things are useful to man.”
Market Price and Resource Allocation:
If the market price does not cover costs of production, production will eventually cease.
Why is this important (to mainstream economics today)?
(1) suggested that costs had something to do with prices
(2) if costs were not covered than the economic value was not high enough and production would cease.
Again we see a dislike of Usury:
“. . . to receive usury for money lent is, in itself unjust, since it is a sale of what does not exist; whereby inequality obviously results, which is contrary to justice.”