History of economic thought

Presentation 1Petr Wawrosz

Why to study the subject that concerns history?

• If we do not understand the past times we are not able to understand the present times.

• It is not necessary to discover something what had already discovered.

• It is not necessary to develop theories and opinions that had already developed.

• Past theories give us inspiration for future research. Our ideas (thinking) are very often influenced by previous ones.

• It can be funny fascinating and adventurous.

Why to study the subject that concerns history?

• A man who does not know what has been thought by those who have gone before him is sure to set an undue value upon his own ideas.

• A study of the history of opinion is a necessary preliminary to the emancipation of the mind.

Economics is science

• Economics tries to describe what happens in reality in form of terms, theories, principles and laws.

What is science• Science is the activity of individuals in societies using a variety of

tools to:- name, measure, describe and classify things and events or phenomena; it is the process of constructing an order of events and things.- tell plausible, useful stories about the relationships between these things and events. To describe cause and effect. A story about a specific instance of cause and effect may be plausible even if there is not 100% certainty that event A will be caused by event B.

• Science is not a royal road to truth. It is not particularly objective. It does not necessarily bring out the best in people. Science is a human construction.

Some definition of/approach to science

• Charles Sanders Peirce: “Science is that which the community of scientists eventually come to accept.”

• Karl Popper: Science can't “verify” theory, can only "falsify" it. • Thomas Samuel Kuhn: Science develops as a series of “paradigm shifts.”

“Normal Science” conducts experiments within a paradigm, leading to the accumulation of anomalies. A paradigm‟s core assumptions are eventually attacked by a new generation of scientists.

• Imre Lakatos: Science develops as series of movements to new "scientific research programs." These contain "hard core" of metaphysical assumptions—essentially articles of faith—defining topics and methods of research. Attractive scientific research programs are able to produce more new facts than those less attractive.

• Paul Feyerabend: There are no methodological rules that scientists actually follow. Science will progress more quickly with “methodological anarchism” than with rigid rules.

Science and theories

• A theory is an intellectual construct that consists of a set of consistent, coherent propositions that explains a particular class of phenomena. This set of propositions cannot include all aspects of a phenomenon. A theory must, of necessity, abstract from the real world and identify the most relevant features and aspects of a phenomenon. It is a simplified perception of reality. It provides a framework to identify which “facts” are relevant and a guide to interpret what the facts might mean.

• Without theory, facts are simply data without context or meaning.

• Theories are expressions about expected or perceived relationships among things or phenomena.

Theories and models

• Theories are typically presented as “models.” The word, model, has many meanings. In one sense, it is an abstract or simplified representation or standard that can be used to demonstrate, judge or compare phenomena.

• In economics, a model can be thought of as an abstract, simplified system that identifies and characterizes a set of phenomena and their relationships.

• A model usually begins with a set of axioms that provide the foundation for the relationships among the phenomena.

Science and theories

• These theories and models are an image of how the world works. The function of science is to develop and test the validity of these theories. The testing of these theories provides “knowledge” about the relationships and phenomena in the real world.

• Theories are not the real world; they are the representations of reality.

• The issue of “what we know” depends on the methods we use to test the validity of theories and the confidence that we place in the methods and tests of theories.

Epistemology and methodology• Epistemology is the study of the origin, nature, methods and limits

of knowledge. There are several disciplines that study the processes that contribute to knowing; the history of science and the sociology of knowledge are two closely related fields.

• Methodology is one aspect of epistemology. Methodology is generally seen as the system of values, beliefs, principles and rules that guide analysis within a given discipline. The methodology(ies) that prevails within a discipline plays a major role in the nature of questions that are asked as well as the answers that are offered.

• The study of the history of economic thought and methodology adds to the question “What do I know?” the question of “What do I believe?” This necessarily leads to the question of “Why do I believe?”

Knowledge

• Knowledge held at any time may be “true” or “not true.” Knowledge that is true may or may not be useful. Knowledge may be useful whether it is “true” or not.

• Before the Copernican Revolution, a common belief was that the Earth was a stationary center of the universe. In this system (called Ptolemaic system) , the sun, stars, planets and moon circled the Earth in repeated patterns. Complex models were constructed to explain and predict the paths of the objects. These models worked with reasonable accuracy and were useful to plan for seasons, planting of crops, and to prepare for floods. The models were useful, but “wrong.”

Definition of economics

• The definition changed over times.• Current understanding:• 1. Economics was the study of human behavior as a

relationships between given ends and scare means that have alternative means (Lionel Robins 1930).

• 2. Economics is concerned with the efficient utilization or• management of limited productive resources for the purpose of

attaining the maximum satisfaction of human material wants.• One of the previous definition:

Economics is the study of man in the ordinary business of life (Alfred Marshall 1870)

Why to study economics and HET

• There is a desire to understand, describe and explain the world in which we live.

• There is the desire to predict and control economic processes and their outcomes.

• The methods selected to describe, explain and predict economic processes shape the perceptions and values that individuals in societies hold about those processes.

Why to study economics and HET

• The history of economic thought is a study of alternative perspectives and explanations of how the economic processes function.

• An important aspect of the study of economic thought is to identify the factors that encourage different perspectives of the economy. It is also important to trace the evolution of the tools used for analysis and understand how the different perspectives and conditions encourage the use of different tools.

Why to study economics and HET• An understanding of the different approaches to economics, the

causes for those differences and how they have evolved over time provides a historical and philosophical context that encourages a more critical analysis of current economic tools and their applications.

• This critical approach has three advantages. • First, it provides a more complete understanding of the current state

of economic analysis.• Second, it may suggest alternative perspectives that will extend,

improve or alter the tools and analysis. • Third, through an increased awareness of our own perspective of

the economic process, it encourages a degree of humility and respect for others.

How to study - training versus education

• Training is the acquisition of skills necessary to perform particular activities and to solve problems within the "rules of the game." Since training is associated with skills to do particular things, it is often possible to measure outcomes.

How to study - training versus education

• Education requires the individual to recognize, evaluate and apply values. These values enable the individual to apply specific rules and perform particular activities, but also to identify, interpret, and evaluate the "rules of the game" with respect to both individual and social objectives.

• Education involves evaluation and judgment. More often than not, the outcomes of education cannot be subjected to quantitative measurement. The problem with education is that it produces individuals who question not only the way in which things are done within the “rules of the game,” but also the purposes for which things are done.

• Education may be disturbing and a source of discomfort. Education requires questioning what one believes. In many cases education is unsettling and may pose more questions than it answers. Education requires that the student explore ideas that are unfamiliar. It may require that long held beliefs be questioned and discarded. That is the way one learns.

How to study - training versus education

Training Education

Short run Long run

Specific skills General skills

Kingdom of Means

Kingdom of Ends

• Economics theories development (History of Economic Thought) should be learnt as education.

Problems of studding history

• We do not know all facts. We have to conjecture what we do not know.

• Even if we know all facts we have to select.• Conjecture and selection depends on our

personality and are always biased. • Preunderstanding of history.• The history must be always rewritten.

Problems of studding ETH/VET

• Our understanding can be biased.• Elements of past thought that appear similar to current

ideas are seized upon, while elements that have no relation to current thought are ignored. The result is a distorted view of past thought.

• Influence of thinkers that today are highly regarded is exaggerated, while the influence of thinkers that today are condemned is elided.

• Good history of thought tries to understand the past, not judge it.

Problems with modern economic

thinking

Positive versus normative economics

• Positive economics is preferred an is value neutral.• One of many social science: sometimes too narrow

scope of interests (homo oeconomicus), sometimes is eager to explain all human behavior from economic point of view (economics of marriage, economic of crime) and neglecting other explanation.

• A lot of par of economics: microeconomics, macroeconomics, economics of public sector, …

Economic imperialism versus economic determinism

• Economic imperialism: the belief that economic theory can be used to explain history, sociology, politics, religion, family life, sexual behavior and crime and so on.

• Economic determinism: the social system determines (or should determine) the operation of the economy.

Absolutist versus relativist approach

• Absolutist approach: tends to believe that there are some objective, absolute “facts or truths” about the perceptions and patterns of economic behavior that cross cultural, temporal and social boundaries. These beliefs and patterns of behavior are perceived as universal. They are believed to apply in every society at all times in similar ways.

• Relativist approach: holds that what is “true,” or useful, in one time or place may or may not be useful in some other time or place. Economic theory is a product of its environment. The relativist tends to believe that economic theory is shaped by technology, social and economic institutions.

Absolutist versus relativist approach

• How to solve the conflict?• Perhaps a position somewhere between the

extreme relativist and absolutist positions is more reasonable. There may be universal patterns of economic beliefs and behavior that span all societies. However, cultural features, technology and other factors influence our perceptions, values and behavior.

• Economic theory is both a determinant and reflection of the society of which it is a part.

Ideology

• Ideology consists of values, attitudes, beliefs, and perspectives that are held in common by a social group.

• Ideology influences what we choose to observe as important and the interpretations we make of those observations. It also alters the criteria we use to evaluate phenomena and judge the morality of choices and behavior.

Ideology • Ideology is a fundamental aspect of a culture. The dominant

ideology shapes the rules that establish what is acceptable and unacceptable behavior patterns. It is also a guide and the criteria that are used to evaluate “right and wrong.” It is the foundation of our system of morality and ethical behavior.

• From a political perspective, ideology may establish the distribution of power within a society. The dominant ideology is typically associated with a system of implicit and explicit rules and rewards for those whose behavior and views are consistent with those of the prevalent ideology.

• Smaller groups within a society may have an ideology that is inconsistent to the dominant ideology. Ideology is also present in the individual.

Ideology • Each individual accepts, consciously or unconsciously, a set of

values and principles that shape their perceptions and guide their choices. Adherence to ideologies that are inconsistent with the principles and values expressed in the dominant ideology may lead to disenfranchisement of an individual or group.

• From an epistemological perspective, ideology is a strong influence on perceptions of important phenomena. It identifies which phenomena are relevant to our values and it shapes the interpretation of those phenomena.

• The ideology shifts over time.• Ideology is the foundation that provides the axioms and nature of

the theories that are used to explain the ways that the world works.

Possible danger of market ideology

• A theory of markets that could be based on individual pursuit of self-interest justifies behavior that is based on self-interest.

• A person living in a society explained by theories that stress individual self-interest feel justified in pursuing their self-interest. If the ideology and resulting theories ignore forces (ethics, duty, morality, sympathy etc.) the individuals feel justified in behavior that ignores or is devoid of those same forces.

Problems with previous economic theories

• Till 18th century it is not possible to speak about economics.

• Theories were not often value neutral, were part of philosophy.

• Much narrow scope than today.

Problem of linguistics, rhetoric and technology

• When a particular word is used, it represents some event, process, thing, idea, emotion, feeling or… . Often a word may have several alternative meanings. If we want to understand each other we must know what we mean.

• Words are symbols; and, as such, may have multiple meanings. Meanings may be altered by context.

• Emotional context: some words are felt as good (e.g. free market), some as bad (e.g. „planning“). The view depends on the ideology.

Problem of linguistics, rhetoric and technology

• Meaning depends on the history, technology and other factors (e.g. words as internet, computer, car)

• Not only absolute but also relative value.

Political consequences of economic thought

• Government interference (measures) can affected economy.

• Economic theories (thought) can influence government measures.

• Example: - Keynes and his followers influenced government policy in 50th and 60th of 20th century.- monetaristic and liberal ideology influenced Ronald Reagan and Margaret Thacher.

Economic school

• The group of people wish similar opinion (theory).

• They follow each other. • They need not live in same time and same

place.

Economic school

• Some of the characteristics:• A school must have a leader.• The school may be united by substantive scientific

views.• If the school is united on methodology rather than

substantive doctrines, its life will be longer.• A school may be based on policy views rather than

upon economic analysis or scientific methodology.