History of economic thought

Presentation 3Petr Wawrosz

From the beginning of human existence

• Bible: • Cast out of Eden: in the world of scare means.

Adam and Eve had to eat bread in the sweat of their faces.

• Ancient Egypt: Joseph and preparation that after 7 fat years come 7 lean years.

Egypt, Mesopotamia, Syria, and Persia

• Their civilizations had relatively developed economies, with surplus production efficiently mobilized and redistributed for the administrative and religious establishment.

• Their scribal schools produced a great number of manuals with detailed instructions for the running of the complex system. But, in their compact worldview, there was no space for an autonomous body of political thought and still less for one of economic thought.

Ancient Greece

Characteristic of ancient Greece

• Small states. • Agriculture.• Most of the population of the city-state were slaves or resident

foreigners, who generally performed the manual labor and commercial enterprise respectively. The privilege of citizenship was reserved to descendants of citizens. While Greek city-states fluctuated between outright tyrannies and democracies, at its most 'democratic' Athens, for example, reserved the privileges of democratic rule to 7 per cent of the population, the rest of whom were either slaves or resident aliens. (Thus, in Athens of the fifth century BC, there were approximately 30 000 citizens out of a total population of 400 000.)

Characteristic of ancient Greece

• The good' was not to be pursued by the individual but by the polis. Virtue and the good life were polis- rather than individual-oriented.

• Eexaltation of the alleged virtues of the military arts and of agriculture, as well as a pervasive contempt for labor and for trade, and consequently of money-making and the seeking and earning of profit.

• Dim view of economic innovation and entrepreneurship. That kind of social ideal was designed to promote a frozen society of politically determined status, and certainly not a society of creative and dynamic individuals and innovators.

Origin of word „economics“

• The word “Oikonomia” comes from “Oikos” and “nemein“.

• The first term = house. • The second term: law, and denotes ordinarily

nothing but the wise and legitimate government of the house for the common benefit of the whole family. The meaning of the term has later been extended to the government of the great family which is the state.

• Together: household management.

Hesiod -8th century B.C.

• Poem Works and Days: fundamental economic problem of scarce resources for the pursuit of numerous and abundant human ends and desires.

• Because of scarcity labor, materials and time have to be allocated efficiently. Scarcity, moreover, can only be partially overcome by an energetic application of labor and of capital.

• Competition also helps to overcome scarcity. Hesiod vigorously excludes such unjust methods of acquiring wealth as robbery, and advocates a rule of law and a respect for justice to establish order and harmony within society, and to allow competition to develop within a matrix of harmony and justice.

Democritus

• 460 – 370 B.C.• Founder of subjective value theory.• Moral values, ethics, were absolute, Democritus

taught, but economic values were necessarily subjective. 'The same thing', Democritus writes, may be 'good and true for all men, but the pleasant differs from one and another'.

• He was the first to arrive at a rudimentary notion of time preference and first to defend a system of private property.

Xenophon (428 – 354 B.C.)• The leader of the Oikos (kyrios) must organize and control the work

done by his douloi and laborers and then distribute among them a part of the product as the queen bee does.

• Every social agent acts as an entrepreneur-manager or as an administrator of the Oikos and is interested in the preservation and augmentation of the possessions of his Oikos.

• The three kinds of relationships between the members of the Oikos:1. The relationship between husband and wife: gamike 2. The relationship between father/mother and children: teknopoietike 3. The relationship between the head of household (kyrios) and domestic slaves (douloi).

• Condemns crafts and trade.

Plato (427 – 347 B.C.)• The Republic, The Laws• Theory of ideal state: through specialization and training.• Division people into three groups:

- Productive, which represents the abdomen. (Workers) — the laborers, carpenters, plumbers, masons, merchants, farmers, ranchers, etc. These correspond to the "appetite" part of the soul.- Protective, which represents the chest. (Warriors or Guardians) — those who are adventurous, strong and brave; in the armed forces. These correspond to the "spirit" part of the soul.- Governing, which represents the head. (Rulers or Philosopher Kings) — those who are intelligent, rational, self-controlled, in love with wisdom, well suited to make decisions for the community. These correspond to the "reason" part of the soul and are very few.

Plato (427 – 347 B.C.)

• Only workers could possess property. • The rules and the guardians are, in Plato's

ideal state, to be forced to live under pure communism.

• Marriage. No freedom of speech and inquiry. Freezing the size of the population of the city-state

• No change, innovation or economic growth.

Aristotle (384 – 322 B.C.)

• Man is political and economical person.• Three relationships in the Oikos:

1. Master and doulos-oiketes (household slave): despotike2. Man and wife: gamike3. Father and children: teknopoietike

• Consumption is the objective of production and the surplus should be allocated to rearing children.

• In book VII of the Politics, Aristotle clearly formulated the concept of diminishing marginal utility and an ordinal hierarchy of values.

Aristotle• Chrematistike: possessing property trough trade and usury. Aristotle

condemned lending money with interest.• Distinction between „natural“ needs, which should be satisfied, and

„unnatural“ wants, which are limitless and should be abandoned. Desires filled by subsistence labor or barter are „natural“, whereas those satisfied by far more productive money exchanges are artificial, „unnatural“ and therefore reprehensible.

• Private property: Aristotle thought that property would be more likely to be better looked after if someone owned it and profited from it than if it were all treated as common.

• Education should teach people voluntarily to curb their rampant desires and thus lead them to limit their own accumulations of wealth. But no expropriation.

• Slavery: Aristotle justified it by differences of nature.

Aristotle

• The Aristotelian concept of equal value in exchange.• Origin of money: Fair exchange requires values exchanged

must be equivalent, and in order that the values exchanged must be equivalent there must be a common measure of value. This is the reason for the invention of money.

• Money is serviceable not only for contemporary exchange, it is also serviceable with a view to future exchange.

• He identified the uses of money as a medium of exchange, a unit of measure, and a store of value for future purchases. In listing these concepts, Schumpeter contended that Aristotle failed to identify money as a means of deferred payment.

The Economic Philosophy of Epicureans

• Epicurus (341–270 B.C.)• The central tenet of the Epicurean school was that

in order to achieve happiness (eudaimonia) it is necessary to avoid trouble; the highest pleasure is the “absence of disturbance” (ataraxia).

• Real wealth is only gained by limitation of wants, and he who is not satisfied with little will not be satisfied at all. “Self-sufficiency is the greatest wealth”.

Stoic Economic Thought• 3rd century B.C – 529 A.C.• Man: naturally a political animal, economic animal. • The establishment of the Oikos is the “first politeia”

and the Oikos constitutes the “beginning of the Polis“.

• The wise man is not only a citizen of the Polis where he lives, but he is a citizen of the Megalopolis of the universe, the cosmos, which follows a single administration and law.

Roman empire

Roman law

• Roman private law elaborated, for the first time in the West, the idea of property rights as absolute, with each owner having the right to use his property as he saw fit. From this stemmed the right o make contracts freely, with contracts interpreted as transfers of titles to property.

• Private property rights and laissez-faire were therefore the fundamental heritage of the Roman law to later centuries, and much of it was adopted by countries of the Christian West.

Books about agriculture

• Marcus Porcius Cato (234–149 B.C ) wrote a work entitled De agri cultura , where he praised small farms and denounced the large ones.

• Marcus Terentius Varro (116–27 B.C ) was trying to advise in his work De re rustica , libri tres (37 B.C.) both large and small landholders on what crops should be grown and on stockbreeding.

• L. Junius Moderatus Columella (1st centure A.C.): Rei rusticae , libri duodecim . He devoted most of the work to wine and olive growing, livestock, bees, and gardens, but neglected emphasizing grain crops.

Muslim contribution

Some examples

• fiscal and monetary policies, deficit financing, the use of taxation to encourage production, the existence of credit and credit instruments for the rudiments of checking and saving accounts, banking institutions, and procedures for the formation of partnerships, commendams contracts, and monopolies.

• All of which developed before the ninth century. By the ninth century, these developments had been enshrined in Islamic law.

Some examples

• Prophet Mohammad is reputed to have said that the state should have only a limited role in the productive process, in market structure, and in the movement of prices.

• The role of the state should be restricted to factors which distorted normal conditions, these being competition and price determination through invisible forces such as God’s will and the interaction of supply and demand. However, when intervention by the state was deemed necessary it was usually kept at a minimum and exercised through the market.

• Mohammad refused to combat price rises by direct action, stating that only God alone sets prices (i.e., invisible hand?)

Some examples• Muslim jurist suggested certain principles that anticipated those

proposed 1,000 years later by Adam Smith as the four canons of taxation; namely, equity, certainty, convenience, and economy.

• To reduce the likelihood of corruption in the collection of taxes, Abu Yusuf proposed a centralized tax administration and the use of strictly supervised salaried workers as tax collectors.

• Discussion about various types of taxes, including specific taxes on commodities, death taxes, and import duties.

• “As for smaller canals from which people obtain water for their own farms, fruit orchards, vineyards, vegetable gardens, etc., the expense of cleaning and restoring them should be borne by the residents themselves. There should be no burden on the state treasury”.

Some examples• Man loves to accumulate wealth and possessions of all kinds of property. If he has

two valleys of gold, he wants to have a third.• Poverty is man’s worst evil and any quality which is to the credit of the wealthy is

itself a derogation of the poor. • The creditor desires the well-being of the debtor in order to get his money back

rather than because of his love for him. The debtor, on the other hand, does not take great interest in the creditor.

• Division of labor.• Money and barter: identification 3 problems associated with barter – the lack of

double coincidence of wants, the indivisibility of goods due to the lack of a common denominator, and limited specialization.

• Supply and demand:- Further you must buy when the market is slack and sell when the market is brisk.- If desire for goods increases while its availability decreases, its price rises. On the other hand, if availability of the good increases and the desire for it decreases, the price comes down.- concept of elasticity

The Scholastics

Historical background• Priest and teachers at churches and medieval universities • 5th - 14th century• Christian teology • bad organized markets, many transaction took place between

individual buyers and sellers who operated in relative isolation from other economic agents

• information asymmetry, possible exploitation• Guild system • Land and labor were transferred rather than bought and sold; and

this meant that there was no need for labor and land markets.• Authority, faith, and tradition were enough to guarantee that the

system worked well.

Basic ideas

• Just price theory was connected to the cost of production and, therefore, mainly to the cost of labor. A profit is included in the cost of production, but it must be fair and moderate.

• The Scholastics believed that the just price must be such as to guarantee commutative justice, that is, equal exchange, in such a way that nobody can obtain more than he gives from the exchange of goods. If this price is ‘just’ because it corresponds to the natural law.

• Just wage: the wage which would guarantee the worker a standard of living adequate to his social condition.

Basic ideas

• Prohibition of usury• 1139• Classically usury means any rate whatsoever

charged on a loan, no matter how low. The prohibition of usury was a prohibition against any interest charge on a loan.

• Hostility to the trade and merchants. • Support agriculture labor.

St. Augustin (354 -430)

• People's payments for goods, the valuation they placed on them, was determined by their own needs rather than by any more objective criterion or by their rank in the order of nature.

• Positive attitude towards the role of the merchant:- deceit and fraud are the fault not of the trade but of the trader himself. Such sins originated in the iniquity of the person, not in his occupation.

St. Thomas Aquinas (1225-74)• He was explicitly linked to Aristotelian philosophy and heavily marked by

the attempt to assimilate it into Christianity. His crucial assumption was that human intelligence is able to reach the truth by means of the speculative method.

• Summa Theologica: establish Thomism as the mainstream of Catholic scholastic theology.

• Aristotle's view of exchange as 'equating' values was rediscovered.• Natural price: cover costs plus adequate profit (not different from the

profit of other person, does not change the position of the person and does not damage the other person/part of the contract).

• Support to the ban of usury (interests): interest are price for time but time belongs to God and cannot be sold.

• Private ownership becomes a necessary feature of man's earthly state. It is the best guarantee of a peaceful and orderly society, and it provides maximum incentive for the care and efficient use of property.

St. Thomas Aquinas• Significance of reason: • St Thomas introduced and established in the Christian world a

philosophy of natural law, a philosophy in which human reason is able to master the basic truths of the universe. In the hands of Aquinas as in Aristotle, philosophy, with reason as its instrument of knowledge, became once again the queen of the sciences. Human reason demonstrated the reality of the universe, and of the natural law of discoverable classes of entities. Human reason could know about the nature of the world, and it could therefore know the proper ethics for mankind. Ethics, then, became decipherable by reason. This rationalist tradition cut against the 'fideism' of the earlier Christian Church, the debilitating idea that only faithand supernatural revelation can provide an ethics for mankind.

The Franciscans• Property rights are were not, as even Aquinas had

believed, a product of positive law or social convention; they were rooted in man's nature, as created by divine law. Property rights were therefore natural and coextensive with man's actions in the material world.

• Property is a basic fact about human beings, on which their social and political concepts had to be posited.

• God's dominion over the earth was reflected in man's dominion or property over his material possessions.

The Franciscans

• Economic value is determined by three factors: scarcity (raritas); usefulness (virtuositas); and desirability or desiredness (complacibilitas).

• The solution of value paradox. • The concept of capital: it is possible to use

money in a fruitful way, to gain a profit.

Last Scholastics

• Especially in Spain• Acceptation of interests• Quantitative theory of money

14th and 15th century

The great depression of the 14th century

• Black Death (plague). • Total population in western Europe, estimated

at 24 million in the year 1000 AD, had vaulted to 54 million by the year 1340. In little over a century, from 1340 to 1450, however, the western European population fell from 54 million to 37 million.

• The Black Death was largely the consequence of people's lowered living standards caused by the great depression!

The great depression of the 14th century

• During the medieval synthesis of the High Middle Ages there was a balance between the power of Church and state, with the Church slightly more powerful. In the fourteenth century that balance was broken. The decline of Church authority was matched by the rise in the power of the absolute state.

• Evasion of taxation: In the medieval era, while the king was supposed to be all-powerful in his own sphere, that sphere was restricted by the sanctity of private property. The king was supposed to be an armed enforcer and upholder of the law, and his revenues were supposed to derive from rents on royal lands, feudal dues and tolls. There was nothing that we would call regular taxation. But it changes.

• The wars of the fourteenth century did not cause a great deal of direct devastation: armies were small and hostilities were intermittent. The main devastation came from the heavy taxes and from the monetary inflation and and borrowing to finance the eternal royal .To combat evasion of the tax, the governments established monopoly markets.

• Wage control, attempts to reduce workers movement.

The period 1500-1650

Basic facts

• Overseas discoveries. The growth of amount of gold and silver and the growth of prices (doubled)

• Commercial expansion. • Hugo Grotius (1583-1645): a father of international law • Scientific revolution. • Nicolaus Copernicus (1473-1543), Galieo Galilei (1564-

1642), Isaac Newton (1642-1727)

• Niccolo Machiavelli (1469 – 1527): The Prince (The Ruler).

Protestants

• Martin Luther (1483 – 1546), John Calvin (1509-1564).• Luther taught that salvation is not earned by good

deeds but received only as a free gift of God's grace through faith in Jesus Christ as redeemer from sin. His theology challenged the authority of the Pope of the Roman Catholic Church by teaching that the Bible is the only source of divinely revealed knowledge.

• Enabled critic thinking and using of reason

Protestants

• Protestantism spread across Europe.• Economic motive for becoming Protestant: the

confiscation of the often wealthy monasteries and other Church property.

The Protestant Ethic and the Spirit of Capitalism

• By Max Weber (1864 – 1920). Published 1905.• Spirit of capitalism as the ideas that favor the rational pursuit of economic

gain.• Capitalism does not refer to the pursuit of gain and greatest possible

amount of money, but rather to the pursuit of forever-renewable profit. Economic action is therefore based on the amount of profit made.

• Weber noted the post-Reformation shift of Europe's economic center away from Catholic countries such as France, Spain and Italy, and toward Protestant countries such as the Netherlands, England, Scotland and Germany.

• The Protestant ethic motivated the believers to work hard, be successful in business and reinvest their profits in further development rather than frivolous pleasures.

• Each individual had to take action in order to be saved; just being a member of the Church was not enough.