The History of Economic Thought: A Concise Treatise for Business, Law, and Public Policy Volume I

Robert Ashford, Stefan J. Padfield

• Publisher: Business Expert Press
• Year: 2017
• ISBN:
  9781631570704
• Topic: Business
• Subtopic: Business Law
• Index: Business

This two-volume concise treatise on the history of economic thought is accessibly written for readers interested in business, law, and public policy

CHAPTER 1

Introduction

It is often said that history is written by the victors, and thus important truths and perspectives of the vanquished are frequently excluded. But fortunately this is not as true in the history of economic thought. The only cost to the losers of economic theory is to be excluded from the continuing development of mainstream economics. Apart from this banishment (which some regard as a badge of honor), the losers are free to repeat and refine their thoughts and sharpen their critique of mainstream theory. Thus, the history of economic thought is replete with questions, challenges, and alternative views that facilitate a deeper, more comprehensive and practical understanding of mainstream theory and its limitations.

Consistent with these admonitions and observations, our goal in writing this book is to provide interested professionals, students, and other global citizens a concise introduction to the relevant breadth of economic theory in order to allow them to bring a healthy critical judgment to the myriad important economic issues of our day. This is particularly important given that economics is becoming seemingly ever more complex, controversial, and important to decisions related to business, law, and public policy.

This book differs from most books on the history of economic thought by being generally shorter but at the same time more focused and comprehensive in certain ways. To be concise, we have omitted discussion of some contributors to the history of economic thought and some contributions of included contributors which would otherwise be discussed in longer works.¹ Readers with some background in the history of economic thought may be shocked at some of the comparative space allotments (e.g., while Milton Friedman is discussed at length in various sections of this two-volume treatise, the section bearing his name consists of but a single paragraph while the following section on Paul Davidson covers five pages), but we believe readers will nonetheless find here everything they need to lay a solid foundation for their hopefully ongoing study of the history of economic thought.

At the same time, our book is also more focused and comprehensive because we have included discussion of contributors to contemporary economic thought and implications flowing from economic principles that are of special importance to business, law, and public policy and that are not generally discussed by other authors of similar works. Thus, although we highly recommend consulting a number of books and other sources on the history of economic thought, many of which have greatly influenced our work,² we believe this book will prove to be an especially valuable initial introduction for the reader with a particular interest in business, law, and/or public policy. The reader will likely quickly see that many of the historical events and debates we highlight in this book have direct relevance to current policy debates.

So, what is economics? Not surprisingly it has been variously defined. One core definition that many economists would likely accept defines economics as the study of the production, distribution, and consumption of goods and services resulting from human choices among opportunities that are in some sense relatively scarce or mutually exclusive in order to achieve desired results. In a societal context, where people act both competitively and cooperatively, the relative scarcity arises from the fact that desires are frequently greater than the opportunities to satisfy them immediately, and thus one or more means are necessary to allocate the opportunities to satisfy those desires according to some priority. Historically, at least four social means of allocative priority can be identified: (1) brute force, (2) tradition, (3) authority (state or church), and (4) markets.³ Although many people may believe that historically societies have moved sequentially from primary reliance on the first through the fourth means, a strong case can also be made for the proposition that even in the most modern economies all four forms of allocative means are presently operative. In modern times, the special appeal of markets is that they provide a means of voluntary exchange among producers and consumers that is widely assumed to be wealth-maximizing for the society as a whole.

As defined above, “economics” is broader than its widely acknowledged primary focus on the production, exchange, distribution, and consumption of goods and services in discrete markets like the supermarket, the real estate market, or the New York Stock Exchange. Because “goods and services” are broadly defined to include anything people might desire (including leisure) or, in other words, anything from which they might derive usefulness or “utility,” some of the most celebrated and controversial contributions of economics may come from the application of economic analysis to implicit markets like, for example, marriage. Because much volitional human behavior involves choices that reflect the pursuit of desires (and therefore the expression of preferences reflecting trade-offs with foregone alternative courses of action), the scope of economic analysis is quite broad. Whether helpful understanding of human behavior regarding desires, in contexts both within and beyond discrete markets susceptible to meaningful quantification, is best achieved by way of the discipline of economics, psychology, sociology, anthropology, political science, history, biology, moral philosophy, religion, or some combination thereof is historically controversial both within and beyond the discipline of economics.

We conclude this introductory chapter with some important questions that are relevant to contemporary issues in law, business, and public policy and that may help to identify which contributors to the history of economic thought provide clarity, shed light, and/or fuel controversy. We suggest that you read these questions slowly and try to come up with your own answers to the questions, then return to them after you have finished reading this history to see how your answers may have changed and what you have learned.

• What motivates people? Different theorists will argue pain, pleasure, utility, indifference, altruism, or faith, to name a few. The famous psychologist Abraham Maslow postulated that people seek to satisfy a hierarchy of needs ranging from the physiological need for food, air, and water to “self-actualization.”⁴ This question is extremely important because when we rely on economists to help guide, for example, our governmental policy making, we are assuming they can to some meaningful extent predict how people will respond to various conditions, which requires knowing what motivates people.
• What are the causes of per-capita growth (i.e., per-capita increases in production)?
• What effect does distribution have on growth?
• Which causes of growth are comprehended by economic theory (endogenous) and which causes are external to economic theory (exogenous)?⁵
• Do economies gravitate toward equilibrium (as Adam Smith and most modern economists assume), or is the process evolutionary? In other words, are economic phenomena Newtonian or Darwinian? Arguably on the Darwinian side, the ancient Greek philosopher Heraclitus is said to have proclaimed: “You never step into the same river twice.”⁶
• Is economics more a natural science or social science?
• What is the relation between efficiency and growth?
• To what extent are future economic phenomena determined by (or predictable based on) the past? In other words, what economic phenomena are ergodic or nonergodic?⁷
• What is unutilized capacity? In what context, if any, does it exist?
• What are the determinants of value and price?
• What is included within “capital?” What are the differences between real and financial capital? What determines its earning capacity, rate of return, and price? What is its relation to the interest rate?
• To what extent are the costs of production (present and future) reflected in market prices? (This question raises the problem of externalities.)
• Does monetary policy matter in the short and long run? Is money “neutral”?
• How do opportunity costs differ from other (expensed) costs?
• Does economics have a normative component?
• What is the relation of regulation to property, autonomy, efficiency, and growth?
• What is the relation between economics and democracy?
• What is the theory of the second best?

Although we may not directly answer every one of these questions, we may at least provide a sufficient grounding in the history of economic thought to allow readers to begin to generate answers on their own. As suggested above, it would likely be a useful exercise to return to these questions once the reader has completed this history.

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¹Compare this work to reading R.B. Ekelund, Jr. and R.F. Hebert. 2013. A History of Economic Theory & Method, 6th ed., (Chicago: Waveland Press, Inc.) (hereinafter “Ekelund and Hebert”) (733 pages) or T.G. Buchholz. 2007. New Ideas from Dead Economists: An Introduction to Modern Economic Thought (USA: Penguin) (368 pages), or listening to recorded lectures like T. Taylor’s Legacies of Great Economists (7 hours and 24 minutes). Although we consider the concise nature of our work to be an asset, the longer sources listed in this footnote are all excellent and highly recommended for further reading, and we will routinely direct readers to specific portions of these works as well as those listed in the next footnote.

²Other related works of interest include: J.F. Bell. 1980. A History of Economic Thought, 2nd ed., (Huntington, New York: Robert E. Krieger Company) (hereinafter “Bell”); J.K. Galbraith. 1987. Economics in Perspective: A Critical History (Boston: Houghton Mifflin Company) (hereinafter “Galbraith”); H. Landreth and D.C. Colander. 1994. History of Economic Thought, 3rd ed., (Boston: Houghton Mifflin Company) (hereinafter “Landreth and Colander”); S. Pressman. 2013. Fifty Major Economists, 3rd ed., (New York: Routledge), p. 79.

³Landreth and Colander, at p. 2.

⁴M.H. Abraham. 1943. “A theory of human motivation,” Psychological Review 50, no. 4, pp. 370–96 (identifying physiological safety, love and belonging, esteem, and self-actualization).

⁵An example of a factor determining long-run growth that may be considered exogenous to standard economic models is unexpected technological progress. The more economic growth that is attributed to such exogenous factors, the less predictive power can be ascribed to the economic models.

⁶As quoted in Plato, Cratylus, 402a.

⁷The assertion that future economic developments can be predicted on the basis of past and present experiences may be described as the “ergodic axiom.” The harder it is to make such predictions, the more the economy may be described as nonergodic.

CHAPTER 2

Overview of the History of Economic Thought from the Ancients Through Keynes

In this chapter, we will provide a brief overview of the material set forth in more detail in the remainder of this volume. Hopefully, this will provide the reader with a useful outline that will make it easier to digest the subsequent chapters. However, reading this overview should in no way be understood to serve as a replacement for reading the remainder of the book, as space limitations have led to a number of important ideas and theorists being left to the pages following this overview.

The roots of modern economics can be found in the Ancients, including Xenophon (c. 430–354 BC), Plato (c. 427–347 BC), Aristotle (384–322 BC), Heraclitus (c. 535–475 BC), Zeno (c. 490–430 BC), and the Romans. The word “economics” itself arguably comes from Xenophon’s Oeconomicus (c. 360 BC). Plato identified specialization and the division of labor as leading to increased efficiency and productivity; but to achieve the greatest social welfare, he did not believe markets were capable of complete self-regulation. He was also concerned about the corruption of individuals via an unbridled pursuit of profit. Furthermore, in his Republic, Plato expressed concerns about the divisiveness and discord engendered by private property. In contrast, Aristotle took the view that “It is clearly better that property should be private” (Politics Book II, Part V). At the same time, Aristotle worried that encouraging the accumulation of money in order to make more money would foster unbridled self-interest in a way that would lead to inequality and distributive injustice.¹ In addition, the tension between Heraclitus’s dynamic view of the world and Zeno’s static view set the stage for a debate that continues to the present day. Essentially, the question is whether it is more appropriate to view economic life as governed by fixed laws akin to the laws of Newtonian physics or changing phenomena more akin to evolutionary Darwinism. Finally, by way of its codification of principles reflected in the law of private property, contracting, and the corporation as an independent entity distinct from its investors and agents, the Roman contribution to the foundations of economic theory is enormous.

Next we come to the Scholastics. With the fall of the Roman Empire, the Catholic Church became the primary source of social authority in most of Europe. Economic activity was highly localized, but the authority of the Church pervaded economic thinking throughout the domain of its influence. Albert Magnus (c. 1206–1280) aligned value-in-exchange with cost-of-production (labor and expenses), which, as we shall see, laid the foundation that was to be built upon for generations. Coming at the problem of value from another perspective, Thomas Aquinas (c. 1225–1274) focused on demand, arguing that price varies with desire, and thus need/want becomes another regulator of value. Aquinas, following in the footsteps of the Greeks, also struggled with the notion of “just price.”

In the history of economic thought, the period from roughly 1450 through 1750 is known as the Mercant...

Table of contents

• Cover
• Half Title Page
• Title Page
• Copyright Page
• Dedication
• Contents
• Foreword
• Chapter 1 Introduction
• Chapter 2 Overview of the History of Economic Thought from the Ancients Through Keynes
• Chapter 3 Preclassical Economics
• Chapter 4 Classical Economics
• Chapter 5 Socialist Economics and Other Critiques of the Classical Economists
• Chapter 6 Neoclassical/Austrian Economics
• Chapter 7 American Institutional Economics
• Chapter 8 Modeling Imperfect Competition
• Chapter 9 Keynesian Economics and the Rise and Fall of Samuelson’s Neoclassical Keynesian Synthesis
• Chapter 10  Other Schools (More Austrian Economics, Public Choice, and Behavioral Economics)
• Afterword
• Index