History of economics
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The term economics, in the sense of political economy, was coined by 1840, [1] but was brought into common use by William Stanley Jevons. "Political economy" had been used through the 18th-19th centuries, with Adam Smith, David Ricardo and Karl Marx as its main thinkers and which today is frequently referred to as the "classical" economic theory. Both economy and economics are derived from the Greek oikos- for "house" or "settlement", and nomos for "laws" or "norms".
Economic thought may be roughly divided into three phases: Premodern (Greek, Roman, Indian, Persian and Arab), Early modern (mercantilist, physiocrats) and Modern (since Adam Smith in the late 18th century). Systematic economic theory has been developed mainly since the birth of the modern era.
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[edit] Overview of various economic schools of thought
The history of the various schools of thought in economics can be loosely categorised as follows:
- Schoolmen, mercantilism, physiocrats
- Classical economics, developed by David Ricardo, Thomas Malthus and John Stuart Mill in the 19th century.
- Neoclassical economics, arising from the Neoclassical Revolution which incorporated the marginal theory of value in the late 19th century. It is associated with e.g. Alfred Marshall
- Marxist economics is usually classified as a variant of classical economics and is based on the writings of Karl Marx, Friedrich Engels and others.
- The Austrian school, with its stress on Economic subjectivism and its rejection of economic modelling, developed by Carl Menger, Friedrich Hayek and Ludwig von Mises.
- German Historical school of economics and institutionalists, mainly American (Thorstein Veblen, Commons, Mitchell and followers; 1899-)
For an overview of macroeconomic schools, see macroeconomics. In brief, this includes mainly,
- Keynesian economics
- Monetarism
- New classical economics
- New Keynesian economics
- Supply-side economics
Contemporary alternative schools outside the mainstream of economic thought include:
- Post-Keynesian economics, which regards neoclassical economics as fundamentally flawed and develops a radically different analysis.
- Green economists, a loose group of theories associated with feminism, postmodernism, and the ecology movement.
- Modern variants of Marxist economics, such as Marxian and Post Marxist economics.
Neoclassical economics dominates in undergraduate textbooks. The core of contemporary economics rests on the microeconomic theory of neoclassical economics, but on many topics there is little agreement on which schools to develop to usefully explain existing economies. Outside mainstream economics more widely-divergent views abound.
Some extremely important tools, such as game theory, econometrics, and linear programming, do not easily fall unambiguously into only one of the schools listed above.
[edit] Premodern economic thought
Several ancient philosophers made various economic observations. Aristotle was concerned with transactions and labeled them either "natural" or "unnatural". Natural transactions were related to the satisfaction of needs and yielded wealth that was limited in quantity by the purpose it served. Un-natural transactions aimed at monetary gain and the wealth they yielded was potentially without limits. He explained the un-natural wealth had no limits because it became an end in itself rather than a means to another end – satisfaction of needs.
Chanakya (c. 350-275 BC) considered economic issues and is often regarded as the Indian Machiavelli. He was a professor of political science at the Takshashila University of ancient India, and later the Prime Minister of the Mauryan emperor Chandragupta Maurya. He wrote the Arthashastra ("Science of Material Gain" in Sanskrit), which can be considered a precursor to Machiavelli's The Prince. Many of the topics discussed in the Arthashastra are still prevalent in modern economics, including its discussions on the management of an efficient and solid economy, and the ethics of economics. Chanakya also focuses on issues of welfare (for instance, redistribution of wealth during a famine) and the collective ethics that hold a society together.
Medieval Muslims also made contributions to the understanding of economics. In particular, Ibn Khaldun of Tunis (1332–1406) wrote on economic and political theory in his Prolegomena, showing for example, how population density is related to the division of labour which leads to economic growth and so in turn to greater population in a virtuous circle. He also introduced the concept known as the Khaldun-Laffer Curve (the relationship between tax rates and tax revenue follows an inverted U shape).
Early Western precursors of economics engaged in scholastic theological debates during the Middle Ages. An important topic of discussion was the determination of the just price of a good. In the religious wars following the Reformation in the 16th century, ideas about free trade appeared, later formulated in legal terms by Hugo de Groot or Grotius (Mare liberum).
Economic policy in Europe during the late Middle Ages and early Renaissance treated economic activity as a good which was to be taxed to raise revenues for the nobility and the church. Economic exchanges were regulated by feudal rights, such as the right to collect a toll or hold a faire, as well as guild restrictions and religious restrictions on lending. Economic policy, such as it was, was designed to encourage trade through a particular area. Because of the importance of social class, sumptuary laws were enacted, regulating dress and housing, including allowable styles, materials and frequency of purchase for different classes.
Niccolò Machiavelli in his book The Prince was one of the first authors to theorize economic policy in the form of advice. He did so by stating that princes and republics should limit their expenditures, and prevent either the wealthy or the populace from despoiling the other. In this way a state would be seen as "generous" because it was not a heavy burden on its citizens.
See also: School of Salamanca
[edit] Early modern economic thought
During the Early Modern period, mercantilists came closer to establishing an economic theory. This diverse school mirrored the emergence of nation states in Western Europe and they emphasized keeping a positive balance of payments.
During the Enlightenment, the French physiocrats were among the first to consider economics in and of itself. The most important physiocrat was arguably Francois Quesnay. Other French thinkers of that period include Richard Cantillon and Anne Turgot. In his Austrian Perspective on the History of Economic Thought, Murray Rothbard argued that the modern history of economics should properly begin with the physiocrats rather than with Adam Smith.
Anders Chydenius (1729–1803) was the leading classical liberal of Nordic history. A Finnish priest and member of parliament, he published a book called The National Gain in 1765, in which he proposes ideas of freedom of trade and industry and explores the relationship between economy and society and lays out the principles of liberalism, all of this eleven years before Adam Smith published a similar and more comprehensive book, The Wealth of Nations. According to Chydenius, democracy, equality and a respect for human rights were the only way towards progress and happiness for the whole of society.
[edit] Modern economic thought
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Modern economic thought is usually considered to have begun with Adam Smith's The Wealth of Nations, published in 1776, although other earlier thinkers had made important contributions.
The central idea promoted by Smith was that the competition between various suppliers and buyers would produce the best possible distribution of goods and services, because it would encourage individuals to specialize and improve their capital, so as to produce more value with the same labor. Smith's thesis rests on the belief that large systems can be self-regulating by the activity of their parts, without specific direction. Smith's formulation is called the "invisible hand" and is still the centerpiece of market economics, and capitalism in particular.
Smith was by the era of Classical Economics, whose main contributors were John Stuart Mill and David Ricardo. John Stuart Mill, in the early to mid 19th century, focused on "wealth" which he defined exclusively in relation to the exchange value of objects, or what would now be called price.
In the 19th century, Karl Marx synthesized a variety of schools of thought involving the social distribution of resources, including the work of Adam Smith, as well as socialism and egalitarianism, and used the systematic approach to logic taken from the philosopher Georg Wilhelm Friedrich Hegel to produce Das Kapital. His work was the most widely adhered-to critique of market economics during much of the 19th and 20th centuries. Marxist economics is based on the labor theory of value that was initially put forward by the classical economists (including, most notably, Adam Smith) and later developed by Marx. The Marxist school holds that capitalism is based on the exploitation of the working class: the wages received by workers are always less than the full value of their labor, and the difference is kept by the capitalist employer in the form of profit. The Marxist paradigm of economics is not generally held in high regard by market economists, though concepts from Marx's work are occasionally used in mainstream contexts, particularly in labor economics and in political economy. The term Marxian is sometimes used to describe work which accepts concepts from Marx's work but does not necessarily subscribe to the political thrust of Marxist thought.
The late 19th century also saw the "marginal revolution", which altered the basis of economic reasoning to include concepts such as marginalism and opportunity cost. In addition to Marshall, the work of Carl Menger was influential in disseminating the framework of economics as the opportunity cost of decisions made at the margins of economic activity. This type of thinking is a basic building block in neoclassical economics as well as in the Austrian school.
In the early 20th century, economics became increasingly statistical, and the study of econometrics became increasingly important. Statistical treatment of price, unemployment, money supply and other variables, as well as the compiling of these statistics, became more and more central to economic writing and disputes within the field of economics.
Macroeconomics diverged from microeconomics with John Maynard Keynes in the 1920s, and was codified in the 1930s by Keynes and others, particularly John Hicks. It grew in popularity as a reaction to the Great Depression. Keynes had been an influential exponent of the importance of central banking and government involvement in economic affairs, as well as a critic of the political economy of the post-World War I period. His "General Theory of Employment, Interest and Money" encapsulated both criticisms of classical theory that had been levelled by Thorstein Veblen and others, as well a method for economic management of aggregate demand. For an overview of a number of competing schools, see macroeconomics.
Many economists use a combination of Neoclassical microeconomics and Keynesian macroeconomics. This combination, sometimes known as the Neoclassical synthesis, was dominant in Western teaching and public policy in the years following World War II and up to the late 1970s. The neoclassical school was challenged by monetarism, formulated in the late 1940s and early 1950s by Milton Friedman and associated with the University of Chicago (the Chicago school of economics) and also by supply-side economics.
In principle, economics can be applied to any type of economic organization. However, the majority of economic theory centers on systems where goods are exchanged in the market—where buyers and sellers seek to maximize their results by trading. The dominant form of market economics focuses on societies where property is owned by individuals, money has a rational basis, and profit comes from utilizing labor and capital to produce goods to be sold in the market—or capitalism. However, economic theory is also applied to markets where the control of capital is in the hands of the state or society, which include socialism and mercantilism, and to societies where the allocation of resources is not through the market, but through other mechanisms—see, for example, planned economies and gift economies, which are cornerstones of communism and anarchism, respectively. Some economists assert that it is impossible to avoid the "Invisible Hand" of the Market, and hence all societies can be modelled through market dynamics, though this viewpoint has vehement opponents across the political spectrum.
The development of economics as a field of study is closely related to the rise of capital as the primary determining factor of production and trading, hence its most detailed and precise work has dealt with the institutions belonging to market societies, and most specifically to capitalist and socialist societies. To what extent economics must be adjusted to be applied to earlier forms of social organization has been a source of discussion. Generally, mainstream economists mostly feel that the basic framework of economics is relevant and flexible enough to be applied to virtually any form of society. Marxist economics asserts that history is divided into eras which are determined by which two classes are struggling to control the means of production—that is slaves and masters, peasants and royalty, wage workers and capitalists—and that mainstream economics only applies to those societies which are "objectively" industrial, that is to say, societies which are capable of industrial production based on their own knowledge and resources. (See Marxism, particularly "The Hegelian Roots of Marxism")
In the late 20th Century three of the areas of study which are producing change in economic thinking are: risk-based rather than price-based models, imperfect economic actors, and treating economics as a biological science, based on evolutionary norms rather than abstract exchange.
The study of risk has been influential, which viewed variations in price over time as more important than actual price. This particularly applies to financial economics where risk-return tradeoffs are the crucial decisions to be made.
The most important area of growth has been in the study of information and decision. Examples of this school include the work of Joseph Stiglitz. Problems of asymmetric information and moral hazard, both based around information economics, profoundly affect modern economic dilemmas like executive stock options, insurance markets, and Third-World debt relief.
Finally, there are a series of economic ideas rooted in the conception of economics as a branch of biology, including the idea that energy relationships rather than price relationships determine economic structure, and the use of fractal geometry to create economic models. (See Energy Economics)
In its infancy is the application of non-linear dynamics to economic theory, as well as the application of evolutionary psychology. So far the most visible work has been in the area of applying fractals to market analysis, particularly arbitrage. (See Complexity in Economics)
Another infant branch of economics is neuroeconomics. This combines neuroscience, economics, and psychology to study how we make choices.
[edit] Economics and political thought
Throughout the history of economic thought, different political ideas have often been associated with different schools of thought about how economies operate. For example, Adam Smith used his theories of trade and of the division of labour to argue for laissez-faire government economic policies, particularly against mercantilism. Similarly, Marx developed his theories, which focus on production and labor, to advocate socialism and communism.
An example of another economic system which has recently been advocated is the participatory economics model. This uses neither market methods nor centralised methods for allocation, but incorporates many local positive and negative feedback loops in order to respond to the most positive human values. The participatory economics model is neither communist nor capitalist. One example of this school of thought is the Post Autistic Economics movement.
