History of pre-classical economic thought

In economic theory, the pre-classical period of economic thought begins in early antiquity and runs through the 18th century Enlightenment, ending before Adam Smith.

Antiquity

In antiquity various philosophers studied topics in economics. Aristotle was the most important.

Aristotle

Aristotle created some important economic concepts in his books Politics and Nicomachean Ethics , both written around 350 B.C.

Aristotle analysed the economic processes around him and was able to define the place of economy within a society that included commercial buying and selling. His economic thought (especially his value theory) is inspiring but sometimes contradictory and inconsistent.

In Book I of the Politics, Aristotle distinguishes between use value and exchange value, defines value as the ability to satisfy wants and demand as being governed by the desirability of a good (i.e., its use value). According to Aristotle, exchange value is derived from use value as communicated through market demand.

In the Topics Aristotle made a philosophical analysis of human ends and means. He explains that the value of means, or instruments of production, are a function of the end products's utility to people.

For Aristotle, the economic dimension is the individual human action of using wealth.

According to Aristotle, human nature has a dual material and spiritual character. For him economics is an expression of that dual character and the economic sphere is the intersection between the corporeal and mental aspects of men.

Aristotle classifies economics as a practical science, as opposed to speculative sciences, such as mathematics and metaphysics.

For Aristotle economics is concerned with both the household and the polis, relating to the use of things required for the good (or "virtuous") life. Economics is aimed at the good and is fundamentally moral. For him Economics was embedded in politics, so it can be said that the study of political economy began with Aristotle.

Theory of Value

In the Politics , Aristotle views labor as a "commodity" that has value but does not give value. He did not see labor as a source of wealth. Aristotle formulated a "theory of the value of labor". Observing that labor skill is not a determinant of exchange value, he maintains that, in the end, the basic requirement of value is utility, which is related to a person's desires. Value is the ability to satisfy wants. Demand is governed by the desirability of a good (i.e., its use value). According to Aristotle, exchange value is derived from use value as communicated through market demand.

In Book I of the Politics, Aristotle distinguishes between "use value" and "exchange value". It was Aristotle who created the concept of "value in use". In addition, Aristotle distinguished between final goods and factors of production.

Aristotle anticipated the role of diminishing marginal utility in price formation. According to Aristotle, the quantity of a good reaches its saturation point when the use value plunges and becomes immaterial.

The Problem of Commensurability

Aristotle discovered, formulated, and analyzed the problem of commensurability. He wondered how ratios for the exchange of heterogeneous things could be set. Aristotle says that money, as a common measure of everything, makes things commensurable and makes it possible to equalize them. For Aristotle, money is a medium of exchange that makes exchange easier by translating subjective qualitative phenomena into objective quantitative phenomena.

The lending of money at interest is condemned as the most unnatural mode of acquisition. Aristotle insisted that money was barren.

Xenophon

Xenophon (420?-355? BC) was a soldier and philosopher from Athens who wrote a book called Economics, in which the cynic Kritoboulos and the sympathetic Isomachos engage in a philosophical exchange mediated by the figure of Socrates. The title is badly translated and misrepresents the book's subject. In Greek, the work "oikonomikon" signifies "household management". Xenophon's Economics verses instead about the management of agricultural endeavours focusing on the manner in which a good citizen ensures his own subsistence, along with a surplus for the state.

Xenophon, using Socrates's speeches, emphasizes the moral virtues of citizens and their freedom.

Ibn Khaldun

Ibn Khaldun (1332- 1406) was a Muslim historian born in North Africa (in present-day Tunisia) whose ideas, though not rediscovered until the 19th century, preshadowed modern ideas in historiography, sociology and economics. His best known book is "Muqaddimah "Prolegomenon" Khaldun was the first to understand the important interaction of forces between society and the economy.

In his Prolegomena (The Muqaddimah), he outlined the different fields of knowledge, in particular the science of civilization (al-'umran).

Ibn Khaldun was the first to systematically analyze the functioning of an economy, the importance of technology, specialization and foreign trade in economic surplus and the role of government and its stabilization policies to increase output and employment.

Ibn Khaldun, moreover, dealt with the problem of optimum taxation, minimum government services, incentives, institutional framework, law and order, expectations, production, and the theory of value.

For Ibn Khaldun, the role of the State is to establish law and order conducive for economic activities. The enforcement of property rights, the protection of trade routes and the security of peace are necessary for a civilized society to engage in trade and production.

For him "over-taxation" would occur when the demands bureaucracy and mercenary armies would expand beyond "normal" economic surplus.

For Ibn Khaldun, it is clear that "the profit human beings make is the value realized from their labor," but this value, the price of labor, is determined by the law of supply and demand.

Khaldun recognized the advantages of specialization. For him, specialization meant the coordination of different functions of factors of production where, "what is obtained through the cooperation of a group, of human beings satisfies the need of a number many times greater (than themselves)."

The early Scholastics

In the middle ages the economic thought was dominated by the teachings of Roman Catholic Church, with the Scholastics , divided in two main and fiercely opposing schools, the Dominicans (St. Thomas Aquinas (1225-1274) and the School of Salamanca - which was initiated by Francisco de Vitoria around 1536 and counted Navarrus and de Soto as its most prominent theoreticians; its influence lasted until circa 1624), and the Franciscans (approximately 1295-1495).

The "Scholastics" refer to the group of 13th- and 14th-century theologians, notably the Dominican St. Thomas Aquinas , that set down the dogma of the Catholic Church in light of the resurrection of the Greek philosophy. In economics there were four themes the Scholastics were particularly concerned with: property, justice in economic exchange, money, and usury.

Private property and Christian teachings have been always at odds. In the 5th century, the early Church fathers (the "Patricians", e.g. St. Augustine) had struck down "communistic" Christian movements and the Church itself went on to accumulate enormous amounts of property. In the 12th century, St. Francis of Assisi began a movement (the "Franciscans"), which insisted on vows of poverty, "brotherhood" and deplored the accumulative tendencies of the Church.

Against the Franciscans were arrayed St. Thomas and the Dominicans, who dug out of Aristotle and the Bible the necessary arguments to put down their challenge. The Thomists took a practical stance.

Another question that arose was that of entrepreneurship. Should a merchant be allowed to profit from differentials in prices? The Scholastics replied with a qualified yes, provided the merchant is not motivated by pure gain and profit be only just enough to cover the "sacrifices" of the merchant. They argued that the trader is performing a valuable service and increasing general welfare by meeting different needs.

The charging of interest on money lent (usury), came quickly under scrutiny. There is no clear basis for a ban on usury in Christian scriptures. To early Church fathers, like St. Jerome, the Christian notion that "all men are brothers" necessarily implied that usury must be banned outright. Another patrician, St. Ambrose, decided that lending with interest to enemies in the course of a just war was permissible.

Clerics had been prohibited from lending at interest at least since the 4th century.This ban was extended to laymen much later. In 1139, the Second Lateran Council denied all sacraments to unrepentant usurers and, in an 1142 decree, condemned any payment greater than the capital that was lent. Jews and Moors ("strangers" in Christian lands) were initially exempt, but the Fourth Lateran Council (1215) issued an admonition prohibiting non-Christians from charging "excessive usury" . In 1311, Pope Clement V at the Council of Vienna prohibited usury outright and condemned as "heretical" any secular legislation that tolerated it.

The issue of "justice in exchange" was a more complicated issue. Even if we hang the intrinsic value of a good on its "usefulness", how does one estimate what the "just price" (justum pretium) should be?. Following the Golden Rule ("Do unto others as you would have them do unto you"), the Scholastics decided that a person should not charge more for a good than what he would be willing to pay for it himself.

The Salamanca School

The University of Salamanca, founded 1218, is one of the oldest universities in the world. It was a prominent Dominican bastion in the late Scholastic period. Home of the Thomistic theology, it maintained its full strength even after the doctrines of St. Thomas Aquinas became under attack elsewhere in Europe, first under the Scotist and Nominalist onslaughts, and then from the Reformation.

"The School of Salamanca" begins with Francisco de Vitoria around 1536 and counted Navarrus and de Soto as its theoreticians. The Jesuit trio, Lessius, de Lugo and Luis Molina adhered to and further developed the Salamanca position.

During the confusing economic times of the inflationary 16th century, there was reversal of centuries of Scholastic thinking on economic matters. It was the Salamanca school that defined the just price as no more and no less than the naturally exchange-established price. Theologians moved away from past dogma and approached their questions in the spirit of natural law philosophy. Their analysis led them to trace a scarcity theory of value and employed supply-and-demand with dexterity. They rejected Duns Scotus's '"cost of production" conception of the just price, arguing that there was no objective way of determining price.

The Salamanca School discovered the essential properties of the "Quantity Theory of Money" , using it to explain the inflation of the 1500s arising from the influx of precious metals from Spanish America. They also provided a resounding defense of usury.

The ideas of the Salamanca School were fierciely opposed by the Franciscans Scholastics. Among them, John Duns Scotus, (1265-1308) an Oxford Franciscan theologian author of the Sententiae, 1295?, was the Thomists' most formidable opponent. Influenced by Neoplatonic mysticism, Scotus was the progenitor of the "Nominalist" movement that unravelled Thomism in the 16th century.

In economic affairs he refused the "practical" Aristotlean resolutions of the Thomists, demanding proper explanations. In the process, he created a "cost theory of value" and formulated some interesting arguments about the nature of pure and monopolistic competition.

Jean Buridan, (c.1295 - 1358), was a French secular scholastic philosopher, a member of Ockham's "Nomalist School" who rose to become rector of the University of Paris, was a renowned critic of Aristotlean "just exchange" and was the originator of the "metallic theory of money".

Nicole de Oresme, (c.1320-1382) was a French theologian, student of Buridan, mathematician and originator of the "clockwork" theory of the universe. Oresme produced a succinct analysis of currency debasement.

Gabriel Biel, (1425-1495), the "Last of the Scholastics" was one of the founders of the University of Tübingen. A late Nominalist, Biel is renowned for his defense of entrepreneurship and free contract. He undermined the concept of "just price" by noting that trade would actually not occur without advantages to the parties.

Sir William Petty and the Mercantilists

Sir William Petty

When British forces invaded Ireland in the 1650s, a problem emerged: how to partition the spoils among the victors or, more precisely, what were the spoils? The task of surveying Ireland and assessing its riches was given to a physician which had accompanied the British army, Sir William Petty. Thus, the first "econometrician" was born.

Petty's Political Anatomy (1672) is a work on Ireland. Petty was disciple of Hobbes and a Mercantilist in his policies.On his works one can find rudiments of the "labor theory of value". His writings were influential upon Davenant and Locke.

Mercantilists

Mercantilism is economic nationalism for the purpose of building a wealthy and powerful nation-state. Adam Smith coined the term "mercantile system" to describe it.

Bullionism was an early and primitive form of mercantilism and is most closely associated with 16th- and 17th-century Spain, which was thought to owe its prosperity and military might to the gold and silver of its New World colonies.

Colbertism was the mercantilism as idealized by the French statesman Jean-Baptiste Colbert, one of the most successful practitioners of mercantilism. He encouraged the growth of industry through subsidies and tariff protection, regulated the qualities and prices of manufactured and agricultural products, worked to break down trade barriers within France, initiated a vigorous road-building program, and restricted the use of natural resources.

Mercantilism was adopted as an economic philosophy by merchants and statesmen during the 16th and 17th centuries. Mercantilists believed that a nation-state's wealth came primarily from the accumulation of gold and silver. Nation-states without mines should obtain gold and silver by trade, selling more goods than they bought from abroad. For this purpose nation-states intervened extensively in the free market, imposing tariffs on foreign goods to restrict imports and granting subsidies to incentivate exports of domestic goods. Mercantilism put commercial interests to the level of national states' policy.

The economic rationale for mercantilism during the sixteenth century was the consolidation of the regional power centers of the feudal era by large competitive nation-states. Contributing factors were the establishment of colonies outside Europe, the growth of European commerce and industry relative to agriculture, the increase in the volume and breadth of trade, and the increase in the use of metallic monetary systems, particularly gold and silver, as opposed to barter transactions.

During this period, military conflict between nation-states was more frequent than at any time in history. Each government's economic objective was to command a sufficient quantity of hard currency to support a military that would deter attacks by other countries and help its own territorial expansion.

Most of the mercantilist policies were the result of an interaction between the governments of the nation-states and their mercantile classes. In return for paying levies and taxes, the mercantile classes convinced governments to enact policies that would protect their business against competition.

Shipping became important during the mercantile period. With the growth of colonies and the shipment of gold from the New World into Spain and Portugal, control of the oceans was considered vitally important to national power. Navigation policies by France, England, and other powers were directed primarily against the Dutch, who dominated commercial marine activity in the sixteenth and seventeenth centuries.

During the mercantilist era it was believed that the principal benefit of foreign trade was the importation of gold and silver.

Adam Smith refuted the idea that the wealth of a nation is measured by the size of the treasury in his famous treatise, The Wealth of Nations.

The last vestiges of the mercantile era were removed in England by 1860.

Richard Cantillon, Jacques Turgot and Enlightenment Economics

Richard Cantillon (1680?-1734)

Richard Cantillon, considered by many historians to be the first great economic "theorist", was an obscure character. An Irishman with a Spanish name who lived in France, reputedly made a fortune of some twenty million livres under John Law's schemes before moving to England. Not much more is known about his life.

Cantillon's wrote one remarkable treatise, Essai Sur la Nature du Commerce en Général , written in French (circa 1732) which was published anonymously in England some twenty years after his death.

His work was well-known to the Physiocrats and the French school, but fell into obscurity in the English-speaking world until he became popularized by William Stanley Jevons in the 1880s.

Cantillon described the supply-and-demand mechanism for the determination of short-run market price (but not long-run natural price). This work placed him as a progenitor of the Marginalist Revolution. His notes on entrepreneurship (as a type of arbitrage) have made him an icon of the modern Austrian School. Cantillon was also one of the first to articulate a Quantity Theory of Money and its reasonings.

As a consequence of his theory, he defended a quasi-Mercantilist policy for a favorable balance of trade but with a twist: Cantillon recommended the importation of "land-based products" and the exporting of "non-land-based" products as a way of increasing a nation-state wealth.

Jacques Turgot (1727-1781)

Anne-Robert-Jacques Turgot, (Baron de l'Aulne) was a leading economist of 18th-century France. His contributions were quite distinct and advanced considerably upon Physiocratic theories. Turgot have formed a distinct school of his own, counting the Abbé Morellet and the Marquis de Condorcet as close friends and disciples. Turgot exercised a deep influence upon Adam Smith, who was living in France in the 1760s and was on intimate terms with Turgot. Many of the concepts and ideas in Smith's Wealth of Nations are drawn directly from Turgot.

His major work was Reflections on the Formation and Distribution of Riches (1766) in which Turgot introduced the concept of capital into the Physiocratic system. He clarified the meaning of "surplus" and made the connection between the "surplus" and "growth" and related profit rate to the rate of interest. He made clear the distinction between "market" price and "natural" price. Turgot differed from original Physiocrats on the nature of the "produit net", defending that surplus could be generated by industry as well as agriculture. His ideas were to be taken up by Adam Smith and the Classical School.

Turgot was also one of the a forerunners of the Marginalist Revolution. On his book Valeurs et Monnaies (1769) he developed a demand-based theory of price. In that same work, he presents an account of how a large number of traders reduce the degree of indeterminacy of exchange, a topic later studied by Edgeworth. In his 1768 Observations he introduced the concept of variable input proportions in production. Turgot was also the first to conceive of the notion of diminishing marginal productivity to factor inputs. Finally, his 1766 discussion on money included the distinction (not made hitherto) between the "real" and "nominal" rates of interest.

Enlightenment Economics

Led by progresses in the science of astronomy during the 16th century - specially after Galileo Galilei's discoveries, which marked a sort of "turning point" in the scientific thought - there were various changes in the philosophy of science and the induction/deduction methods. The creation of classical physics and the new medical theories contributed to launch the western civilizations through a deep transformation which gave birth to the new "The Scientific Attitude". This paved the way to the birth of a period which became known as "The Enlightenment Period", when profound changes took place in all of the social sciences, including Economics.

Several important authors published a sequence of books on Economics during the Enlightenment Period. Among them: Charles de Secondat, Baron de Montesquieu (The Spirit of the Laws); Jean Jacques Rousseau (A Discourse on Political Economy), 1755; Caesar Beccaria (A Discourse on Public Economy and Commerce); Adam Ferguson (An Essay on the History of Civil Society), 1767; David Hume (1711-1776) (Of the Original Contract, 1748; (On Money), 1752; (On Interest);(Idea of a Perfect Commonwealth), 1754; (On the Balance of Trade); (Selected Essays); Jeremy Bentham (Defence of Usury), 1787; St. George Tucker (Blackstone's Commentaries with notes (...), 1803; David Ricardo (1772-1823) (The principles of political economy and taxation), 1815; James Kent (Commentaries on American Law), 1826.

On 1776 Adam Smith (1723-90) published his masterpiece An Inquiry into the Nature and Causes of the Wealth of Nations, which marked the beginning of Classical Economy and will be subject of a separate chapter in this article.

François Quesnay and the Physiocrats

François Quesnay, 1694-1774.

François Quesnay is considered to be the father of the Physiocrats.

Quesnay opposed the mercantilist doctrines of Colbert believing that they concentrated too much on propping up industry and commerce rather than agriculture.

Quesnay theory began with the axiom that "agriculture is the only source of produit net" (net product, or surplus of output above cost). He believed that manufacturing and commerce were "sterile" as the value of their output was equal to the value of their inputs. Only land, he said, produced more than went into it. Quesnay observed that the wealth of a nation lies in the size of its net product.

Influenced by the advocates of laissez-faire, Quesnay wished to see many of the Medieval rules governing agricultural production lifted for the economy to find its "natural state". The natural state of the economy was the balanced circular flow of income between economic sectors. Quesnay, a physician in Louis XV's court, saw analogies to the circulation of human blood and the homeostasis of a body.

Quesnay emphazised the distinction between the ordre naturel (nature's order) and the ordre positif (positive, i.e. human-idealized, order). A good government, Quesnay argued, should follow a laissez-faire policy so that the ordre naturel could emerge.

Mirabeau (1760, 1763), Mercier de la Riviere(1767) and DuPont de Nemours (1767) commentaries of Quenay's articles gave Quesnay's ideas a more systematic feel.

The Physiocrats

The Physiocrats were a group of French Enlightenment thinkers of the 1760s that followed François Quesnay's ideas. The founding document of "Physiocratic doctrine" was Quesnay's Tableau Économique (1759) .

This circle included the Marquis de Mirabeau, Mercier de la Rivière, Dupont de Nemours, La Trosne, the Abbé Baudeau and a handful of others. To their contemporaries, they were known simply as the économistes.

The cornerstone of the Physiocratic doctrine was François Quesnay's (1759, 1766) axiom that "only agriculture yielded a surplus", called produit net (net product). Manufacturing, the Physiocrats argued, took up as much value as inputs into production as it created in output, and consequently created no net product.

The Physiocrats believed that the wealth of a nation lies not in its stocks of gold and silver, but rather in the size of its net product, going against the prevailing mercantilists' theories.

Believing that industries cannot generate any produit net, the Physiocrats argued that the old Colbertiste policies of encouraging commercial and industrial corporations was wrong-headed. Government policy, if any, should be geared to maximizing the value and output of the agricultural sector.

They defended a laissez-faire attitude. They called for the removal of restrictions on internal trade and labor migration, the abolition of the corvée, the removal of state-sponsored monopolies and trading privileges, the dismantling of the guild system, etc.

The Physiocrats defended their "single tax" on landed property -- l'impôt unique. Mirabeau (1760) laid out the logic of its defense arguing that if only land creates a surplus, all taxes represent just a transfer of money form one sector to another.

David Hume and the Scottish Enlightenment

David Hume (1711-1776.)

David Hume was one of the most important figures of the Scottish Enlightenment and a friend of Adam Smith. Hume's contributions to economics are found mostly in his Political Discourses (1752), incorporated into his Essays (1758).

Hume opposed Mercantilism. He defended that wealth of a was measured by the stock of commodities of a nation, not its stock of money.

He was also one of the creators of the Quantity Theory and the neutrality of money ("It is none of the wheels of trade: it is the oil which renders the motion of the wheels more smooth and easy", Of Money, 1752.

The "Scottish Enlightenment" (1740-1790)

The "Scottish Enlightenment" stretched roughly from 1740 to 1790. Many of its protagonists were academics. Francis Hutcheson, Adam Smith, Thomas Reid and John Millar were professors at the University of Glasgow. Adam Ferguson, Dugald Stewart and William Robertson were at the University of Edinburgh. Some important figures outside the academy included Lord Kames, Sir James Steuart, Dr. James Anderson and, last but not least, David Hume.

The major areas of concern for Scottish philosophers were moral philosophy, history and economics. David Hume led the way in all three.

The Scottish Enlightenment came to an end in the early 1800s.

Ferdinando Galiani and the Italian Tradition

Ferdinando Galiani, 1728-1787

Ferdinando Galiani was one of the leaders of the "Neapolitan Enlightenment" and the creator the Italian utilitarian tradition. Living in France from 1759 to 1769, Galiani knew many French economists and opposed the Physiocrat doctrine

Galiani rejected most of the Physiocratic analysis, in particular its "land theory of value".

Is his book Della Moneta (1751) Galiani introduced an alternative theory of value based of utility and scarcity and which made him the "Grandfather of the Marginalist Revolution".

In his book Dialogues sur le commerce des bleds (1770) he provided a quite modern analysis of balance of payments.

Denis Diderot was one of his strongest supporters and followers.

The Italian Tradition

The Italian Tradition , or Italian Utilitarian Tradition begins in the 17th century when Ferdinando Galiani boke form the mainstream Enlightenment economic thinking.

Galiani initiated the two first branches which formed the "Italian tradition" in economics: the analysis of government as an economic entity and a utility-based theory of natural value. Government, he argued, is an important entity in any economy. It can, via its laws and fiscal policies, influence the economy and society for good and evil. This line of reasoning was closer to the French Neo-Colbertistes and German Neo-Cameralists.

The economic theory of the State was an Italian concern and passed through several stages. First it was explicitly utilitarian. Cesar Beccaria, and Pietro Verri focused their analysis on the impact of the State and fiscal policy on the economy. The Italians found in the notion of utility - or "happiness" -- a criteria by which to evaluate policy. During the 19th century by the works of Francesco Ferrara, Antonio de Viti de Marco, Ugo Mazzola, Luigi Einaudi, Pareto, Barone, Pantaleoni and others, the State began being analyzed as an economic entity itself. This involved examining the government as both a "productive" agent (i.e. a producer of collective goods -- which are also inputs into private production) as well as an "optimizing" agent (i.e. a "revenue-maximizer").

Social Philosophers and Commentators

• Jean Bodin (1530-1596) (or Baudin or Bodinus) was a XVI century French, natural law philosopher and precursor of Mecantilism. Bodin put forth what is generally acknowledged as one of the first statements of the Quantity Theory of Money, detailing the relationship between price levels and the money supply, generally speaking.

• Sir Francis Bacon (1561-1642) was an English empiricist philosopher and originator of the modern "positivist" view of science, as opposed to the Aristotlean approach to knowledge of the Scholastics. Argued for grounding of "natural law" doctrines in methodological individualism.

• Charles Louis de Secondat, Baron de Montesquieu (1689-1755) was among the first to attempt to apply Newtonian analogies to political, social, economic and moral behavior. Conceived of the concepts of "social laws" and a natural "social equilibrium" as the balance of opposing forces, that were later taken up by the Physiocrats.

(For an extensive analysis on this subject, view Social Philosophers and Commentators at the History Of Economic Thought Website)

See also

• History of economic thought
• History of economic thought
• Economics
• Economic Theory