The Early Origins of Economic Thought

Martin Kragh, PhD

Stockholm School of Economics

Martin.Kragh@hhs.se

A Definition of economics

• Ancient Greek: – oikos, meaning ”household”– nomos, meaning ”law” – Thus, a study of the principles which govern the household

• Definitions have varied throughout history– Adam Smith: ”a branch of the science of a statesman or

legislator”– Alfred Marshall: “a study of man in the ordinary business

of life”– Lionel Robbins: “a science which studies human behaviour

as a relationship between ends and scarce means which have alternative uses”

Some Basic Concepts Economists Use

• The distinction between inductive and deductive methodologies

• The distinction between positive and normative economics

• Make sure you have a grasp of these concepts!

The Long Roots of Economic Thought…

• There exist questions which we have allwaystheorized:– What are the driving forces of man?– What is the role of money?– Should interest be allowed?– How does trade or profit occur?

• Note how the normative and positive aspects have been intertwined:– Economics only recently a ”separate” discipline– Philosophy, theology, law and/or ethics were allways

important

China

• Guan Zhong (725-645 BC)

Guan Zi

• Guan Zi (ca 700 BC) by Guan Zhong first known treatise containing economic thought:

– Supply and Demand: ”light” and ”heavy”

– Price: inflation and deflation

– Profit: ”Whenever there is profit, there is no place man will not go…”

– Wealth: ”To govern a country it is necessary to increase the wealth of the people. When people have plenty, they are easier to govern…”

Jinzi

• Jinzi (ca 400-300 BC), written by a legal scholarand administrator Ji Ran (presumably): – The importance of meritocracy

– Wealth a result of wise governance, low corruption, low taxation and support of strategic sectors (for example, silk production and agriculture)

– Wealthmilitary might of the state

– Business Cycle: Trade and prices fluctuate over the year:• Jupiter in Yin: sell live stock, and buy food

• Jupiter in Yang: sell food, and buy land, house and live stock

Ancient Greece and Rome

• Greek philosophy fundamental for European intellectual history

– Xenophon’s (ca 430-354 BC) Oikonomikus

• Household economy

• Efficiency the outcome of sound leadership in agriculture and (petty) trade

• Specialization increases efficiency

• Xenophon’s definition important for two millenia, untilthe 1700s

Plato and Aristotle

Plato (ca 427-347 BC)

• The Republic

– Written during political turmoil in Greek city states

– Neither democracies (risk for corruption) nor tyrannies (risk for opportunistic behaviour) are stable solutions

– Solution: A republic governed by an elite group of philosophers acting in the interest of society

• Cf. Independent central banks

Aristotle (ca 384-322 BC)

• Student of Plato

• Emphasized the importance of empiricalobservations for scientific discoveries

• Stringent methodology with clear definitions

• Most influential philosopher in European history

• Politics and The Nichomachean Ethics

Aristotle’s Vision of Society

• Polis the sum of all the households

• Household Hierarchy:

– Free individuals, of which:

• The head of the household (a man)

• Women

• Children

– Slaves (property of the household)

Commercial Activity

• Trade to satisfy human needs accepted, while profit motive for trade was not

• Money has two faces:– Money as a means (facilitates trade)– Money as a measure (makes the comparison between

different goods possible)– Goods have both use value and exhange value

• Key concepts in Adam Smith, David Ricardo and Karl Marx

– However, use of money not natural. Money an artificalconvention in order to faciliate trade

– Trade for profit, chremastics, not accepted and usuallyconducted by non-citizens (not members of polis)

Rome

• A political and economical empire• Secular jurisprudence:

– Lucretius (ca 99-55 BC) and De rerum natura – The world can be understood by rational thought

• Tantum religio potuit suadere malorum

– Natual Law (ius naturale) • Principles which exist independently of man

– Civil Law:• Private property• The firm as a separate legal entity• Laws to govern trade and agreements

– Roman jurisprudence tremendously important during the Renaissance and the Enlightenment

Islam

• Highly advanced levels of science duringEuropean ”dark ages”– Mathematics

– Astronomy

– Philosophy (including Greek philosophy)

• Developed systems of trade– Suftajahs (global credit institutions in 9th century)

– Profit accepted in Islam within certain limits

– Interest (riba) controversial though existant• Cf Sharia Banking today

Ibn Khaldun (1332-1406)

• Influential Muslim scholar from Tunisia

• al-Muqaddima (1375-1378) covers law, history, politics, sociology and economics

• Break with theology:

– Rational explanations of phenomena

• ”The universe is governed by an exact system, in whichcause and effect apply.”

– Thus, the economy can also be understood on itsown principles

Khaldun’s Economics

Role of key principles:– Profit– Self-interest– Private Property

Umran, society, developsthrough economic development

• ”The wealth of society, depends on… the efforts peoplemake in accordance with their self-interest. When this no longer applies, civilization declines…”

Self-interest and wealth of society intertwined• Cf Adam Smith

Scholastic Thought

• Christian theology evolved from the 4th centurythrough to the renaissance

• Continous struggle to harmonize teachings from theology and ancient philosophy with changes in society

• Scholastic thought explicitly normative:– How should trade be organized?

– What is allowed? What is a sin?

• Challenge: To identify economic behaviour which is also congruent with teachings of religion

• Thomas of Aquino (1225-1274), Summa theologiae

Interest or Usury?

• Ancient dilemma: What role for money is accepted?• OT: Ezekiel (18:10-13):

“… he even eats at the mountain shrines, and defiles his neighbor’s wife, oppresses the poor and needy, commits robbery… he lends money on interest and takes increase; will he live? He will not live!”

• NT: Luke (6:35):“But love your enemies, do good to them, and lend to them without expecting to get anything back.”

• Changing definitions of usura and intereo over time was crucial for economic development during the Renaissance– Usura (usury) means “to use something” (i.e. capital) Usury not legitimate– Intereo (interest) means “to lose” Interest legitimate as compensation for losses

Concluding Remarks

• Continuity and Change through Time– Understanding of fundamental principles similar over

time, but normative conclusions change

• Role of Philosophy, Theology and Jurisprudence at the Core of Early Economic Thought

• Basic Understanding of Economic Phenomena Remain over Time:– Supply and Demand

– Price (inflation, deflation)

– Money and Interest