BACHELOR OF ARTS IN ECONOMICS Econ 126 – HISTORY OF ECONOMIC THOUGHT Pangasinan State University...

BACHELOR OF ARTS IN ECONOMICS Econ 126 – HISTORY OF ECONOMIC THOUGHT

Pangasinan State UniversitySocial Science Department – PSU Lingayen

Chapter 2EARLY ECONOMIC THOUGHT2nd Semester, S.Y 2014 – 2015



Chapter Outline

A. Early Economic Thought Ancient Economic Thought Medieval Economic Thought

B. Ancient Economic Thought Xenophon and his Economic Ideas Plato and his Economic Ideas Aristotle and his Economic Ideas Chanakya and his Economic Ideas Fan Li and his Economic Ideas

C. Medieval Economic Thought (Scholastic and Islamic) Thomas Aquinas and his Economic Ideas Duns Scotus and his Economic Ideas Abu Yusuf and his Economic Ideas Al-Ghazali and his Economic Ideas Ibn Khaldun and his Economic Ideas



Early Economic Thought

In the history of economic thought, early economic thought pertains to the thoughts, philosophies and economic ideas from thinkers during the ancient and Middle Ages.

Well known economic thinkers of early economic thought include Xenophon, Plato, Aristotle, Thomas Aquinas, Abu Yusuf, Ibn Khaldun, etc.



Ancient Economic Thought

Ancient Economic Thought. This refers to economic thought and ideas from people during the ancient times. These people comprise the Greek, Chinese and Indian thinkers.

Greek Thinkers (Xenophon, Aristotle, Plato)Indian Thinker (Chanakya)Chinese Thinkers (Fan Li, Wang Anshi, Qin Shi Huang)



Medieval Economic Thought

Medieval Economic Thought. This refers to economic thought and ideas from people during the Middle Ages. These people comprise Scholastic and Islamic thinkers.

Scholastic Thinkers (Thomas Aquinas, Albertus Magnus, Duns Scotus)Islamic Thinkers (Abu Yusuf, Al-Ghazali, Ibn Khaldun)



Contributions of the Ancient Greeks

What the ancient Greeks contributed to economics was a rational approach to social science in general.

Greek thinkers were interested primarily in economic and organizational efficiency and their view of the world was anthropocentric, not mechanistic. In other words, man was the center of all things. The ancient Greeks placed great stock in the self-regulating capacities of individuals who sought to maximize human happiness by making rational decisions, but they did not discover the self-regulating marketplace, which is the essence of modern economics.



Because the Greeks concentrated on elements of human control, they developed the art of administration rather than the sCienceof economics. Their economy, after all, was basic and simple. It consisted of primary agriculture and limited palace trade. The production of goods was supervised on large, landed estates and in the halls of military chieftains. As the focal point of religious and military activities, the state had few nonmilitary expenditures. Nevertheless, in the course of elaborating the nature of administration, the ancient Greeks developed analytic structures which have significance for economic theory. In particular, the following components of modern economics originated in Greek thought: efficiency, resource allocation, the notion of subjective value, the hedonic calculus, and the concept of diminishing marginal utility.




In particular, the following components of modern economics originated in Greek thought: efficiency, resource allocation, private property, the notion of subjective value, the hedonic calculus, and the concept of diminishing marginal utility. The major writers of this period who contributed to economic analysis were Xenophon, Plato, and Aristotle.




Ancient Greek Thinkers

Xenophon Plato Aristotle



Xenophon

FAST FACTS

Career Greek historian, philosopher

Born/Died 430 – 354 BC

School of economic thought

Ancient Greek

Notable Economic Thought

Magnum Opus Oeconomicus, Anabasis

Influenced by Socrates

Influences Plato, Aristotle



Xenophon’s Oeconomicus explores the proper organization and administration of private and public affairs, whereas his Ways and Means prescribes the course of economic revitalization of Athens in the middle of the fourth century BC. For this Greek philosopher who regarded the material environment as fixed, the chief element of good administration was human capacity, honed into good leadership.

Economic Thought of Xenophon



Additionally, Xenophon explained the influence of supply and demand on value. He observed that an increase in the supply of commodity causes a fall in prices.

He proposed a tendency toward equilibrium in the economy where supply and demand shift and react accordingly.

He discussed the fact that when there are too many coppersmiths, copper becomes cheap and the smiths go out of business and turn to other activities.

Economic Thought of Xenophon



Plato

FAST FACTS

Career Greek philosopher and mathematician

Born/Died 428–427 BC


Ancient Greek


Platonic realism

Magnum Opus The Republic

Influenced by Socrates, Hesiod

Influences Aristotle, Hobbes, etc.



Plato's definition of economics, as suggested by one of the most recent historians of economic thought. “Economics is the science which deals with the satisfaction of human wants through exchange, seeking so to regulate the industries of the state as to make its citizens good and happy, and so to promote the highest well-being of the whole.”

Plato's dialogue The Republic (ca. 380–360 BCE) described the ideal city-state, run by philosopher-kings, and contained references to specialization of labor and production.

Economic Thought of Plato



In the Republic, Plato gives the theory of an ideal state. As far as a state is concerned, Plato gives ideas about how to build an Ideal commonwealth, who should be the rulers of the Ideal state and how to achieve justice in the Ideal state. Plato finds the state as the more suitable to discuss about the morality than an individual, because everything is easier to see in the large than in the small.

For Plato the optimum state is a rigid, static, ideal construct from which any deviation whatsoever is considered to be regressive.

Every state has three parts: Producer class, Military class and Ruling class.




Plato argued that cities owe their origin to specialization and division of labor. He wrote:

A city-or a state-is a response to human needs. No human being is self-sufficient, and all of us have many wants .... Since each person has many wants, many partners and purveyors will be required to furnish them. One person will turn to another to supply a particular want and for a different need he will seek out still another. Owing to this interchange of services, a multitude of persons will gather and dwell together in what we have come to call the city or the state.... And so one man trades with another, each assuming he benefits therefrom. (Republic, II.369b-c)




Plato's first principle in his discourse on justice is that specialization and division of labor establish efficiency and productivity. How then, are the fruits of efficiency and productivity to be distributed? Plato answered that goods and services are distributed through a marketplace, with money as a token' of exchange. But in typically Greek fashion, he did not consider the marketplace capable of self-regulation. The marketplace, like the state, requires administrative control.

Plato was the first to advocate the Credit Theory of Money, that money originated as a unit of account for debt.




Aristotle

FAST FACTS

Career Greek philosopher, polymath

Born/Died 384 BC – 322 BC


Ancient Greek


Logic, syllogism, private property

Magnum Opus Politics

Influenced by Socrates, Plato

Influences Adam Smith, Hobbes, William Petty, Francois Quesnay



The nearest approach made by Greek philosophy to developing a distinct theory of economics came in discussing the elements of household management. Here a distinction was drawn between economics (oikonomik) and chrematistics (chrematistik); the former embraces chiefly wealth consumption in the satisfaction of wants, and the provision of such necessary and useful commodities as can be stored to meet those wants; the latter deals with wealth-getting, including money-making and exchange. Concerning the latter, Aristotle says, “And there is another element of a household, the so called art of money-making (or finance) which, according to some, is identical with household management, according to others, a principal part of it.”



Economic Thought of Aristotle

Aristotle provides a primary meaning of economics. The purpose of economic action is to use things that are necessary for life (i.e., survival) and for the good life (i.e., flourishing). The Good Life is the moral life of virtue through which human beings attain happiness

He based economics on needs, analyzed their nature and proceeded to isolate the economic goods by which economic needs are satisfied;

Aristotle expresses that consumption was the objective of production, and the surplus should be allocated to the rearing of children, and personal satiation ought to be the natural limit of consumption.



In Politics Book I, Aristotle discusses the general nature of households and market exchanges. For him there is a certain "art of acquisition" or "wealth-getting", but because it is the same many people are obsessed with its accumulation, and "wealth-getting" for one's household is "necessary and honorable“.

He also points out that natural pressures of diminishing utility for goods direct remaining human energy toward self-improvement.

His objective wis to answer the question: How can goods of different quality which are exchanged because of these qualitative differences be compared with each other and be equalized?

Economic Ideas in Aristotle’s Politics



Aristotle views labor as a commodity that has value but does not give value, rejecting labor as the source of wealth. He did not formulate the labor theory of value but instead held a theory of the value of labor.

According to him, exchange value is derived from use as communicated through market demand. He created the concept of value in use.

Aristotle discards Plato's credit theory of money for Metallism, the theory that money derives its value from the purchasing power of the commodity upon which it is based, and is only an "instrument", its sole purpose being a medium of exchange, which means on its own "it is worthless as a means to any of the necessities of life".

Economic Ideas in Aristotle’s Politics



Aristotle’s greatest contribution is his recognition of the vital importance of private property. He argued that “property should be private”.

Though Aristotle certainly advocated there be many things held in common, he argued that not everything could be, simply because of the "wickedness of human nature". "It is clearly better that property should be private", wrote Aristotle, "but the use of it common; and the special business of the legislator is to create in men this benevolent disposition."

Aristotle and Private Property



Aristotle and Private Property

Aristotle outlined the common characteristics of private property that solidified his support:

1. Private property is more productive and leads to progress.

2. Conflict is inherent in communal property management.3. Private property is intrinsic to man’s nature. The love of

self, money, and property is tied to natural love of exclusive ownership.

4. Private property has existed always and everywhere.5. Only private property allows for opportunity for moral

action; to practice virtues of benevolence and philanthropy.



Chanakya

FAST FACTS

Career Indian teacher and engineer

Born/Died 370–283 BCE

Major Accomplishment

Economic Thought

Magnum Opus Arthashastra and Neetishastra

Famous Quotation

Influenced Indian philosophers and writers

FAST FACTS

Career Indian teacher and architect

Born/Died 370–283 BCE


Ancient India


Magnum Opus Arthashastra and Neetishastra

Influenced by Socr

Influences Indian philosophers and writers



Chanakya

Authored the ancient Indian political treatise called Arthashastra (Science of Material Gain or Science of Political Economy), an ancient Indian treatise on statecraft, economic policy and military strategy.

He argues for an autocracy managing an efficient and solid economy. The qualities described is in effect that of a command economy.

He focuses on issues of welfare (the redistribution of wealth during a famine) and the collective ethics that hold society together.



Fan Li

FAST FACTS

Career Chinese advisor and businessman

Born/Died


Ancient China


Magnum Opus Twelve Golden Rules

Influenced by

Influences Chinese philosophers and writers



He was probably the earliest economist (politician and strategist) in human history.

He believed that one who understood money and wealth would be willing to abandon it if it became a burden.

He discover seasonality’s effect on the market demand and supply and their implications on prices. This motivated him to stock up during times of low demand supplies at heavy discount on prices and sell at times of high demand at a premium.

He is ascribed with writing a book known in English as "Golden Rules of Business Success"

Fan Li



1. Ability to know people's character. You must perceive evidence of characteristics from experience.

2. Ability to handle people. Never prejudge a prospect.3. Ability to stay focused on the business. Have a definite focus

in life and business and avoid jumping around.4. Ability to be organized. A disorganized presentation is

unappealing.5. Ability to be adaptable. Make sure you are organized enough

to respond quickly.6. Ability to control credit. Do not allow nonpayment. Make sure

you collect what is owed.7. Ability to use and deploy people. Use employees in ways

which bring out their potential(s).

The Twelve Business Golden Rules of Fan Li



8. Ability to articulate and market. You must be able to educate customers on the value of goods.

9. Ability to excel in purchasing. Use your best judgment in acquiring stock.

10.Ability to analyze market opportunities and threats. Know what is selling according to areas and trends.

11. Ability to lead by example. Have definite rules and standards. Make sure they are followed to ensure good relations.

12.Ability to have business foresight. Know market trends and cycles.

The Twelve Business Golden Rules of Fan Li



Scholasticism (The Schoolmen )refers to the school of economic thought that developed in Europe during the medieval period (500-1500). Scholastic thinkers are known for their moral and philosophical approach to the study of exchange, value, and ownership within period.. Until the arrival of Mercantilism in the 14th century the Scholastics (or Schoolmen as they are commonly referred to today) were at the forefront of the foundations of establishing economic theory within the framework of philosophy. Probably the most influential economic thinker of the Scholastic period was a Sicilian-born Roman Catholic by the name of Thomas Aquinas.

Scholasticism



Thomas Aquinas

FAST FACTS

Career Italian priest, theologian and philosopher

Born/Died 1225 – 7 March 1274


Scholastic School Medieval Period


Just price and usury

Magnum Opus Summa Theologica

Influenced by Socrates, Plato

Influences John Locke and virtually all of western philosophy



In the treatise Summa Theologica Aquinas dealt with the concept of a just price, which he considered necessary for the reproduction of the social order.

Thomas Aquinas argued that it was a moral obligation of businesses to sell goods at a just price. He argued it was immoral for sellers to raise their prices simply because buyers were in pressing need for a product.

Thomas Aquinas and Just Price



Aquinas' formal contribution to Aristotelian value theory was a two-pronged one in which one element conditioned the other. First, he reaffirmed the double measure of goods (value in use versus value in exchange) that Aristotle had established; second, he introduced wants into the price formula. This last contribution is especially important because it marked the earliest root of an analytical demand theory of value. Aquinas argued that price varies with wants. Thus, indigentia became a regulator of value. This contribution, however, was strictly formal.

Thomas Aquinas



Aquinas viewed market forces as antagonistic to justice. It is difficult to reconcile the medieval notion of "just price" with the modern notion of "market price," since the former is generally defended on normative grounds whereas the latter is held to be an objective result of impersonal forces. Certainly Aquinas's language was open-ended on many points, furthering the popular notion that his analysis was wrongheaded.

Thomas Aquinas



Duns Scotus

FAST FACTS

Career Scottish theologian and philosopher

Born/Died 1265 – November 8, 1308


Scholastic School Medieval Period


Magnum Opus Sententiae

Influenced by Thomas Aquinas, Aristotle

Influences Martin Luther, René Descartes, Leibniz



In his work Sententiae (1295), he thought it possible to be more precise than Aquinas in calculating a just price, emphasizing the costs of labor and expenses, although he recognized that the latter might be inflated by exaggeration because buyer and seller usually have different ideas of what a just price comprises. If people did not benefit from a transaction, in Scotus' view, they would not trade. Scotus defended merchants as performing a necessary and useful social role, transporting goods and making them available to the public.

Economic Thought of Duns Scotus

http://en.wikipedia.org/wiki/Sententiae



Albertus Magnus (c. 1206-1280) Henry of Friemar (c. 1245-1340) Jean Buridan (c. 1295-1358), Gerald Adonis (c. 1290-1349)

Other Scholastic Thinkers



Abu Yusuf (1206-1280) Al-Ghazali (1058–1111) Ibn Khaldun (1332 - 1406)

Medieval Islamic Thinkers



Abu Yusuf

FAST FACTS

Career Muslim jurist, writer

Born/Died 731 – 798


Islamic Golden Age


Evolution of Islamic Jurisprudence

Magnum Opus Kitab al-Kharaj

Influenced by Abu Hanifa

Influences Other subsequent medieval economic thinkers



Kitab al-Kharaj, Abu Yusufs’s most famous work, is a treatise on taxation and fiscal problems of the state prepared for the caliph. His book outlined his ideas on taxation, public finance and agricultural production.

He discussed proportional tax on produce instead of fixed taxes on property as being superior as incentive to bring more land into cultivation.

He also advocated forgiving tax policies which favor the producer and a centralized tax administration to reduce corruption.

Abu Yusuf favored the use of tax revenues for socioeconomic infrastructure

He included discussion of various types of taxes, including sales tax and import tariffs.

Abu Yusuf (731 – 798)



FAST FACTS

Career Muslim priest, theologian and philosopher

Born/Died 1058 – Dec 19, 1111


Islamic Golden Age


Evolution of Islamic Jurisprudence

Magnum Opus Revival of Religious Sciences,

Influenced by Al-Juwayni

Influence Fakhruddin Razi, Maimonides, Thomas Aquinas

Al-Ghazali



Al-Ghazali classified economics as one of the sciences connected with religion, along with metaphysics, ethics, and psychology

He developed what might be called a social welfare function based on consideration of utilities (masa/ih) and disutilities (mafasid).

He recognized three sources of wealth: individual earnings; profit from exchange, and acquisition by bequest or discovery.

Ghazali made specific contributions to four major areas of economic thought: (1) voluntary exchange and markets; (2) the nature of production; (3) money and interest; and (4) public finance

Economic Thought of Al-Ghazali



FAST FACTS

Career Arab Tunisian historian and economist

Born/Died May 27, 1332 A – March 19, 1406


Medieval Golden Age


Magnum Opus Prolegomenon

Influenced by Muhammad ibn Zakarīya Rāzi

Influences Ibn al-Azraq, Al-Maqrizi

Ibn Khaldun



Ibn Khaldun is the first person who has systematically analyzed the functioning of an economy, the importance of technology, specialization and foreign trade in economic surplus and the role of government and its stabilization policies to increase output and employment

Specialization meant the coordination of different functions of factors of production where, “ what is obtained through the cooperation of a group, of human beings satisfies the need of a number many times greater (than themselves)”.

Businesses owned by responsible and organized merchants shall eventually surpass those owned by wealthy rulers.

Economic Thought of Ibn Khaldun



When civilization [population] increases, the available labor again increases. In turn, luxury again increases in correspondence with the increasing profit, and the customs and needs of luxury increase. Crafts are created to obtain luxury products. The value realized from them increases, and, as a result, profits are again multiplied in the town. Production there is thriving even more than before. And so it goes with the second and third increase. All the additional labor serves luxury and wealth, in contrast to the original labor that served the necessity of life.

Ibn Khaldun on Economic Growth



On supply and demand: Ibn Khaldun, again centuries ahead of his time, postulated that prices of goods and services are determined by supply and demand. When a good is scarce and in demand, its price is high. The merchant will buy the goods “where they are cheap” and plentiful and “selling them at a high price” where they are scarce and in demand. Naturally, when a good is plentiful, its price is low: “the inhabitants of a city have more food than they need. Consequently, the price of food is low, as a rule, except when misfortunes occur due to celestial conditions that may affect (the supply of) food”

Ibn Khaldun on Supply and Demand



On fixed prices: Ibn Khaldun was not only against state involvement in commercial and agricultural activities, he was also against government’s involvement in fixing the prices of goods and services. When the government employs force “by buying things up at a cheapest possible price”, the ruler “will be able to force the seller to lower his price” and “forces the merchants or farmers who deal in these particular products to buy from him”. The rulers “undertake to buy agricultural products and goods from their owners who come to them, at prices fixed by them as they see fit. Then, they resell these things to the subjects under their control, at the proper times, at prices fixed by them.

Ibn Khaldun on Fixed Prices



Ibn Khaldun’ Economic Prescriptions for A Civilized Society as given in his Moqaddimah or Introduction to History: The Rise and Fall of Nations (1350). Given political stability and solidarity for the rise of the nations, there must be:

1. A firm of establishment of private property rights and freedom of enterprise

2. Rule of law and the reliability of judicial system for the establishment of justice

3. The security of peace and the security of trade routes4. Lower and less taxation in order to increase employment,

production and revenues5. Less bureaucracy and much smaller efficient army

Economic Prescriptions of a Civilized Society



6. No government involvement in trade, production and commercial affairs

7. No fixation of prices by the government8. A rule that does not give monopoly power to anyone in the

market9. Stable monetary policy and independent monetary authority

that does not play with the value of money10. A larger population and a larger market for greater

specialization11. A creative education system for independent thinking and

behavior12. The collective responsibility and internal feeling for the setting

up of a just system to encourage good deeds and prevent vice.

Economic Prescriptions of a Civilized Society

BACHELOR OF ARTS IN ECONOMICS Econ 126 – HISTORY OF ECONOMIC THOUGHT Pangasinan State University...

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