History of economic thought

Economics is the social science that studies the production, distribution, and consumption of goods and services. The word 'economics' is from the Greek for οἶκος (oikos: house) and νόμος (nomos: custom or law), hence "rules of the house(hold)."

Origin of Economics takes its roots in the natural propensity of human beings to barter, to exchange or trade goods. Whilst there are no records of dogs ever having bartered bones, men has been bartering all sorts of goods since pre-history.

Economics as an independent science, and as we understand the word today, begins with the work of Adam Smith, The Wealth of the Nations. .

Before Smith, Economics was a chapter in political science, the art of managing a State. The list of acceptable definitions for Economics is enourmous. Economics is the study of those activities which, with or without money, involve exchange transactions among people. Economics is also the study of wealth. Several other definitions are acceptable

Paul Samuelson, in his famous book Economics - An Introductory Analysis, defines Economics as:"the study of how men and society 'choose', with or without the use of money, to employ 'scarce' productive resources to produce various commodities over time and distribute them for consumption, now an in the future, among various people and groups in society"

Introduction

In antiquity various philosophers have studied Economics, the most famous of which being Aristotle, who 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.

Xenophon (420?-355? BC) wrote a book called Economics in which he analyses Socrates' positions on the subject.

Ibn Khaldun (1332- 1406) was a famous muslim historiographer and historian born in present-day Tunisia and is viewed as one of the forerunners of modern historiography, sociology and economics. His best known book is Muqaddimah "Prolegomenon" Khaldun was the first to understand the important interaction of forces between Sociology and Economics. Some researchers have compared Ibn Khaldun to Marx, based on economic theories in section 1, chapter V of the Muqaddimah about "The real meaning and explanation of sustenance and profit or profit is the value realized from human labour".

In the middle ages the economic thought was dominated by the teachings of Roman Catholic Church, with the Scholastics, divided in two main and fiercily 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 (aproximately 1295-1495).

After the Scholastics era, we had, in that order, The First Economists, Sir William Petty, the Mercantilists, Richard Cantillon, Jacques Turgot and Enlightenment Economics, François Quesnay and the Physiocrats, David Hume and the Scottish Enlightenment, Ferdinando Galiani and the Italian Tradition and the Social Philosophers and Commentators

The period that runs from early antiquity until past the Physiocrats and ends before Adam Smith is called the "Pre-Classical" period of economic thought.

History

Pre-Classical Period

The Ancients and the Scholastics

Aristotle

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 antecipated 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, was a soldier, philosopher and mercenary from ancient Greece who lived between 425 and 355 BC. He 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 speaches, emphasizes the moral virtues of citizens and their freedom.

Ibn Khaldun

In his Prolegomena (The Muqaddimah), 'Abd al-Rahman Ibn Muhammad Ibn Khaldun al-Hadrami (A.D. 1332-1406), commonly known as Ibn Khaldun, a fourteenth century Muslim thinker, laid down the foundations of different fields of knowledge, in particular the science of civilization (al-'umran).

His contributions to economics place him in the history of economic thought as a forerunner, if not the "father", of economics. Ibn Khaldun planted the germinating seeds of classical economics analysing production, supply, or cost and pioneered in consumption, demand, and utility, the cornerstones of modern economic theory.

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, a point later missed by Karl Marx.

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)."

There is a striking similarity in the economic thought of Ibn Khaldun and those of Adam Smith , writting four centuries apart. This leaves the question to ascertain direct or indirect links between these two great thinkers open to the economic historian. In thesis Adam Smith could have been exposed to Ibn Khaldun's contributions, even without having been aware of the author's name, during his six years research at Oxford University's library.

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 strenght 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 succint 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.

Bibliography

• HANEY, Lewis H., Ph.D. History of economic thought: a critical account of the origin and development of the economic theories of the leading thinkers in the leading nations. New York: The Macmillan Company, 1920.