History of Economic Thought (Carmelo Ferlito)

HISTORY OF

ECONOMIC THOUGHT

by

Carmelo

Ferlito

March-July 2014

HISTORY OF

ECONOMIC THOUGHT Lecturer:

Carmelo Ferlito Verona, Italy, 1978

[email protected]

carmeloferlito.wordpress.com

https://newinti.academia.edu/CarmeloFerlito
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LESSON 1

-

ECONOMICS

AND

HISTORY OF ECONOMICS

References:

1. A. Roncaglia (2005) [2001], The Wealth of Ideas. A History of

Economic Thought, Cambridge, Cambridge University Press,

Chapter 1.

2. C. Ferlito (2013), Phoenix Economics. From Crisis to Renascence,

New York, Nova Publishers, pp. 1-9.

3. L. Robbins (2000) [1998], A History of Economic Thought. The

LSE Lectures, Princeton, Princeton University Press, pp. 5-10.

4. J.A. Schumpeter (2006) [1954], History of Economic Analysis,

London and New York, Routledge, pp. 2-45.

WHAT IS ECONOMICS?

A discipline, a region of the world of thought, should seek to know itself. Like an

individual human being, it has received from its origins to stamp of character, to native

mode of response to the situations confronting it. Right responses, responsibility, will

require of the profession as of the individual an insight into the powers and defects of

the tool which history has bequeathed to it. (G.L.S. Shackle).

Today most economists have given up questioning the purposes and the means of their

scientific work, seeking refuge on a second line: algebraic analysis of functional

relationships. Economics has become econometrics. The result is the formulation of

economic theories that are apparently exact but nevertheless not true. Not everything

that can be proven mathematically is also logically valid.

WHAT IS ECONOMICS?

Today economists believe that the method of natural sciences, founded

precisely on the discovery of universally valid functional relationships, can

be applied to economics. This is the result of relegating the question of

methodology to a kind of scientific itching for minor intellectuals and

meticulous scholars with a mania for philosophy..

But The knowledge is universal, when it manages to give us the meaning

of things, before whose magnitude and whose eternity, all that is pathos and

tendency among men disappears: when it leads us to the primordial and

cosmic, to what in the field of the spirit has the same characters of purity

and power as the oceans, deserts and glaciers. (J. Evola).

WHAT IS ECONOMICS?

Every economic theory can be only part of a more general gnoseological

awareness.

The social process is really one whole indivisible. Out of its great stream the

classifying hand of the investigator artificially extracts economic facts. The

designation of a fact as economic already involves an abstraction, the first of many

forced upon us by the technical conditions of mentally copying reality. A fact is

never exclusively or purely economic; other and often more important aspects

always exist. Nevertheless, we speak of economic facts in science just as in

ordinary life, and with the same right; with the same right, too, with which we may

write a history of literature even though the literature of a people is inseparably

connected with all the other elements of its existence. (J.A. Schumpeter).

METHOD for ECONOMICS?

The method is imposed by the object. This does not mean

surrendering to indistinct methodological relativism but

acknowledging that the phenomena of reality are complex and

varied in nature; it is therefore their deepest essence that inspires

the scholar to take one methodological direction rather than

another.

L. Giussani: This means that the method of knowing an object is

dictated by the object itself and cannot be defined by me.


Given this assumption, the fundamental step is evidently to define the object of economic

science. In this regard, we would like to declare from the outset that we do not at all share

the canonical definition whereby the economy is the science that studies the management of

scarce resources to satisfy individual and collective needs by minimising expenditure

(costs). We feel that Misess definition is much more appropriate:

Economics is not about goods and services, it is about the actions of living men. Its goal is

not to dwell upon imaginary constructions such as equilibrium. [] The sole task of

economics is analysis of the actions of men, is the analysis of processes. (L. von Mises).

Similarly, Shackle (2010c, pp. 244-245) argues that economics is about human nature,

human conduct and human institutions. The centre of economic analysis, in our view, is

therefore human action. Dealing with real people is very different from dealing with

phenomena in physics or chemistry or natural sciences in general.


It is evident that the proper perspective for studying economic phenomena is subjective.

Understood in this way, methodological individualism does not lend itself to any kind

of misinterpretation. It has nothing to do with presumed individualistic egoism. The

first fact to be noted as regards studying individuals and their actions is that every

gesture is guided by a principle of finality. It is the purpose, the expectation that

determines the action and precisely the opposite of what happens in natural sciences.

G. Menegazzi reaffirms, as a characteristic principle of life, the principle of finality []. It appears that this

thinking the links to the finality outlined by the Aristotelian-Thomistic school, revealing [] how the vital

phenomenon involves a reversal of the causal relationship: in physical phenomena, the result follows in

accordance with an automatic need for the facts that preceded it; in organic phenomena, on the contrary, the

final result, although not yet accomplished, determines the preceding phenomenon. In the physical-chemical

world, there is nothing that would even remotely resemble this self-regulating capacity of living beings. In a

mechanism, the result depends on the process; in an organism, on the contrary, the process depends on the

result: a guiding and unifying entity is manifested that transcends every possible experiment: it is the

principle of life.


Scientific evolution has ignored two fundamental characteristics of human

action, i.e. unpredictability and freedom. These aspects impose serious limits on

possibilities for theorising and prediction in the sphere of economics. The

desire to apply the methods of natural sciences to human sciences generates the

perverse effect of identifying presumed functional relationships of a

mathematical nature.

Yet this is not possible: it is, as defined by Hayek, an abuse of reason.

This faulty belief gave rise to the theoretical artifice of general equilibrium

theory, a constructivist tool that is actually rather pointless for economists

having a sincere interest in reality. What, on the other hand, can we ask of

economic science?


Economists are faced by qualitatively very well defined elements: man and reality.

The essence of an economists work lies in observation of reality, without seeking to put

it in a cage. Observation of reality helps identify certain dynamic trends that represent

constants in human action. For example, as we have seen, the human action has a

finalistic nature. That is not to say, as in the rationalist terms of the general equilibrium

theory, that every subject maximizes units of utility in accordance with mathematical

models. This is not what happens in reality. It is true, however, as a dynamic trend, that

man acts to achieve goals, to achieve desires. This sees the onset of relationships with

the surroundings, people, things and complex society in general. Economists may

certainly analyse everything that individuals do within the dynamics of enterprise in the

search to attain their objectives. True means much more than rational.

The fragments of what he believed to be his most general happiness.

MATHS, STATS AND HISTORY

In a methodological sphere, there has been considerable discussion about the role of

mathematics, history and statistics in support of economic analysis.

Economic history which issues into and includes present day facts is by far the most important. I

wish to state right now that if, starting my work in economics afresh, I were told that I could study only

one of the three but could have my choice, it would be economic history that I should choose. And this

on three grounds. First, the subject matter of economics is essentially a unique process in historic time.

Nobody can hope to understand the economic phenomena of any, including the present epoch, who has

not an adequate command of historical facts and an adequate amount of historical sense or of what may

be described as historical experience. Second, the historical reports cannot be purely economic but

must inevitably reflect also 'institutional' facts that are not purely economic: therefore it affords the best

method for understanding how economic and non-economic facts are related to one another and how

the various social sciences should be related to one another. Third, it is, I believe, the fact that most of

the fundamental errors currently committed in economic analysis are due to lack of historical

experience more often than to any other shortcoming of the economists equipment (Schumpeter).


Why does history matter? The study of history gives us a preferential observatory

for the analysis of human action that, obviously, took place in a given historical

time. In addition, historical periods have unitary elements and typical

characteristics which define them and enable us, albeit artificially, to isolate them

from other periods in order to study their specific features. However, even history

cannot be used in ideologically to identify laws of inevitability.

History is made by men. The conscious intentional actions of individuals, great

and small, determine the course of events insofar as it is the result of the inter

action of all men. But the historical process is not designed by individuals. It is the

composite outcome of the intentional actions of all individuals. No man can plan

history. All he can plan and try to put into effect is his own actions which, jointly

with the actions of other men, registered the historical process (Mises).


So, although with a certain degree of abstraction and with all the nuances of

the case, we can identify some general features of human action, which

relate to the individual as such. The isolation of these features allows us to

locate anything that may be of a universal as part of our science. An

example is, as seen, the body of the character action. Another example is the

theory of the origin of the currency and price formation in the market.

But, on the other hand, there are other phenomena that are typical only of

some certain historical periods and that theorization then goes exclusively

related to the analysis of that particular period. We have in mind in this

regard some historical elements of the industrial revolution or the theory of

business cycles.


The role of mathematics and statistics is a little more complex. In

fact, mathematics, especially with the advent of econometrics, has

taken on an all-embracing role in the context of doctrine.

Yet we feel that statistics can be useful. But the quantitative

dimension must not define theory. It should rather be a tool

supporting the analysis of reality that can also be independent of

the weight of numbers.

Today, unfortunately, statistics are used to represent sure-fire

forecasts.


Hayek: Empirical studies, whether they are undertaken with such practical aims in view, or

whether they are confined merely to the amplification, with the aid of special statistical devices,

of our knowledge of the course of particular phases of trade fluctuations, can, at best, afford

merely a verification of existing theories; they cannot, in themselves, provide new insight into the

causes of the necessity of the Trade Cycle.

The elaboration of theory as such does not need statistics for the vision to arise. Statistics can be

used later on as a verification tool. Yet mathematical data can hardly disprove a theory. Or, rather,

it may neither deny nor confirm anything. The interpretative force of an intuition cannot be

assessed by statistics. Let us suppose, in a given historical moment, that it is statistically possible

to observe that increased demand caused a certain variation in prices. The fact that this occurred

does not prove that a given variation in demand will always correspond to the same variation in

price. And such evidence may not even be enough to show that the variation in price was caused

by the variation in demand. The variation in the price level, for example, may have been caused

by a variation in the amount of money (mention need only be made of the price revolution in the

Sixteenth Century and the relationship with the discovery of new American mines).


Reality is far too complex for relationships between two phenomena to be isolated from

the context and interpreted merely by means of statistical analysis. The intelligence of

the scientist makes the difference and gives rise to a true theory, even if it is not exact in

terms of mathematical measurability.

Is economic forecasting possible? It depends on what we mean by forecast. If we

purport that our science is able to say when and to what extent a certain economic event

will occur, obviously such forecasts are not possible.

The power of a genuine albeit inexact economic theory lies in saying what may happen

in the wake of other phenomena. For example, as we shall see, we support that the

imbalance between the natural rate and the monetary rate of interest will produce an

alteration of productive structure capable of generating, after an artificial boom, an

economic crisis. But to say when this will occur, to what extent and how long the crisis

may last is pure science fiction.


A good economist is like a bottle of wine. He

must begin by having the luck to be laid down,

as it were, in a vintage year, when he himself

and his class companions are the high-quality

stuff in which ideas and theories ferment and

discourse sparkles in a glow of golden light. But

this is not enough. He must mature. (Shackle).

WHAT IS HISTORY of ECONOMICS?

-The importance of space and time: do you know what we are talking about?

-Definition (Schumpeter): BY HISTORY of Economic Analysis I mean the history of

the intellectual efforts that men have made in order to understand economic phenomena

or, which comes to the same thing, the history of the analytic or scientific aspects of

economic thought.

-Is History of Economic Thought still relevant?

- Progress in Economics? What does it mean? ECONOMICS IS NOT CUMULATIVE.

-Economics as Social Science - The role of History vs Exact Sciences. Is Economics a

science? (Schumpeter 1.3).

- The wide ignorance of today economists: they are useless.

WHAT IS HISTORY of ECONOMICS?

-History as a mean to open your mind and to make you a better

scientist.

There are more things in heaven and earth, Horatio, than are dreamt of

in our philosophy: the history of economic thought, with its own various

research strategies, is of great help in keeping economists fully aware of

the truth of Hamlets observation. Not least for this reason, it is a field

which every economist should practise.

How and Why to study

HISTORY of ECONOMICS?

Schumpeter (1908): To understand is to forgive.

Robbins: The question may have arisen in your minds, Why do reasonable people

studying economics attach some importance to the history of the subject? Well, the

history of the subject is not necessarily important to you in professional life, unless you

aspire to teach the subject matter later on. Be under no delusion in that respect. But as

regards understanding of what goes on in the contemporary world, of what goes on in

intelligent conversation about our subject, the answer is different. The answer is, I

think, that the subject is of some use. Its a subject which, strange as it may seem, has

the property of being describedto use the fashionable wordas relevant to your

interest in the world around you.

How and Why to study

HISTORY of ECONOMICS?

Advantages (Schumpeter, 1.2).

Why Economics is a science (Schumpeter 1.3).

Supports for Economics (Schumpeter chapter 2): History, Statistics,

Theory, Sociology.

History of Economic Thought (Carmelo Ferlito)

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