Evolution of Economic Thought
Economics as a discipline and body of theory goes back many centuries. Over the years, many ideas put forward have been discredited or downplayed by successors. Others have withstood the test of time, in part because they illuminate a fundamental economic process or mechanism and in part because no one has yet convincingly disproved them. Like most fields of human endeavor, brilliant minds over the course of centuries have shaped and reshaped our thinking on the workings of the marketplace. This evolution is most clearly evident in the changing views held about price central to the theory of value and the efficient allocation of resources.
Keywords General Equilibrium; Imperfect Competition; Invisible Hand; Laissez-Faire; Marginal Analysis; Utility Theory of Value
Economics: Evolution of Economic ThoughtOverview
Looking back at the evolution of economic thought, one cannot help but marvel at how concepts we consider patently obvious, like supply and demand, weren't always so. In point of fact, the Laws of Supply and Demand were not formally articulated until the late nineteenth century. This does not mean, of course, that the fundamental dynamics of markets did not exist before then, or that they were unknown, but simply that they were not yet full-fledged ideas in their own right. Nor would they have been if not for the flash of insight and carefully reasoned arguments of a dozen brilliant minds: Smith, Ricardo, Cournot, Jevons, Menger, Walras, Marshall, and Keynes, chief among them. Keen observers all, each commented on the economic realities of his day. As historical documents then, each individual work mirrors the successive changes in the means and scale of production that have transformed economic life over the last two and a half centuries. Looking to the future, though, the true import of theirs and other innovative economists' work lies in the synthesis of ideas, new and old, confirmatory or contradictory, into a coherent understanding of economic forces that, when applied, will bring us and future generations good rather than ill fortune. To first appreciate the vitality of this synthesis we must go back in time thousands of years to the very beginnings of economic thought.Further Insights Stages of Thought Ethical Living
Production and trade, investment and profits, poverty and wealth all, of course, predate the rise of capitalism by many, many centuries. Yet the intelligentsia of the ancient world paid scant attention to questions of supply and demand, capital accumulation and investment, and income distribution that would come to preoccupy classical and modern economics. Ethical rather than commercial considerations dominated the debate even as sea-faring Athens grew rich from trade. Some very modern-sounding business practices, what's more, were well established two thousand five hundred years ago. In Ways and Means to Increase the Revenues of Athens, the philosopher Xenophon chronicled how the supply of goods affected prices; how investment companies pro-rated earnings per share and paid out dividends, and how the sharing of risk lowered individual investor's exposure (Perrotta 2003). As long as commerce made the state more powerful philosophers countenanced it. Yet their unease was equally evident in another of Xenophon's works, Oeconomicus, where he condemns the greed and excesses of those who seek wealth for its own sake.
Aristotle thought virtue and happiness came solely from being self-reliant and leading contemplative life. In so far as wealth furthers this end, it was natural and desirable. 'Chrematistic,' or wealth-getting, is neither; those in its thrall have unlimited appetites and are never satisfied. He took even greater umbrage at the idea of any man's gain coming at the expense of other men instead of from nature. All judgment aside, 'other men' of course excluded the slaves who labored in the fields and mines of Ancient Greece and the Roman Empire, filling the granaries and supplying the metal armourers fashioned weapons from. It was after all the proceeds from both agriculture and conquest that fueled the consumption of goods that trade thrived upon.Spiritual Salvation
Although war remained profitable for the victors and slavery morphed into serfdom, wealth still flowed primarily from the land well into the late middle ages. And Aristotelian thought suffused much of medieval philosophy. But the object now was spiritual salvation, not simply ethical living. St. Thomas Aquinas and other scholastics championed a just price, a just wage and a prohibition against usury (interest) in the belief that what is taken should be equal to what is given (Pribram, 1953). Economic practices beyond the Christian pale were worse than unnatural; they were sinful. And it would take the Black Death, the rise of town and the growing political influence of the commercial bourgeoisie, the Renaissance and the Protestant Revolution to convince people otherwise.Mercantilism
But convinced they were. Echoing classical philosophers, Mercantilists from the sixteenth through the eighteenth century believed the power of the state paramount. At issue was the central question of how to finance the upkeep of very costly standing armies and naval fleets to fend off predatory neighbors. To defend the realm and further its interests, national governments, they argued, had to harness their national economies so that gold and silver flowed into their treasuries. The surest route to achieving a favorable trade surplus was to export more bullion-earning goods than one imports. Towards that end, sizable tariffs should be levied on foreign-made luxury items, the moral virtues of thrift extolled to all, and, when all else failed, sales and excises taxes imposed. Since high quality export products sold better and at higher prices, furthermore, governments should regulate manufacturing and require industry to reinvest the lion's share of profits. They should also forbid colonies from manufacturing goods; forcing them to import them from the mother country in exchange for cheap raw materials.Agriculture
Ironically, it would take a courtier at the epicenter of absolute monarchy, Versailles, to challenge the Mercantilist agenda by advocating a laissez-faire approach in its stead. Louis Quesnay, a physician attending King Louis XV of France and contributor to Diderot's Encyclopedia, called for an end to all government control of the economy. But Quesnay was no anarchist; he believed natural law would subsequently assert itself and the true productive capacity of the economy come to the fore (Pressman 1999). That, crucially, was not manufacturing, not trade in goods, but agriculture. For only there does the innate fecundity of the land create genuine surpluses; in the two other spheres of the economy — manufacturing and land ownership — all earned income is spent in full.
Outputs in other words equal inputs, so there is no net gain. Echoing Aristotle and Thomas Aquinas, the land then was the source of all national wealth. To prove this, Quesnay quantified the flow of funds between the three spheres in a rudimentary economic model, a first, in his Tableau économique of 1758. The proceeds, importantly, could be divvied up among landlords, church and state only after enough was put aside to finance future production. Not all of the ideas like this elementary notion of capital put forth by Quesnay and his colleagues were as original: Their belief in a 'bon prix' or fair price differed little from Aquinas' 'just' price. And some of their ideas contradicted others: Though militantly opposed to government intervention, for example, they nonetheless wanted royal officials to set interest rates.Classical Economics Smith & the Invisible Hand
Political Economics is said to have come into its own as a discipline with the publication of Adam Smith's An Inquiry into the Nature and Causes of the Wealth of Nations in 1776. He draws praise to this day for recognizing the competitive marketplace as the preeminent engine of economic growth. It was, in truth, a brilliant insight convincingly articulated. As was his observation about the agency...
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