Timeline of economic thought
There is so much fun in tracking the development of various facets of life that we are at odds to take for granted. It is one of those enriching experiences that enables us to appreciate life even more, and to be thankful for everything we have with us today. Human civilization developed over a long period of time, and there have been numerous milestones that underpin it. At the same time, the development of economics played a key role in enabling people to effectively manage available resources and build complex systems to support life through all the ages. The focus of this article is to recall those major historical periods of time that further enhanced our understanding of economics to help deal with our increasingly complex world.
Origin
The word economics is derived from the Greek word Oikonomia, which can be split into Oikos - which meant ‘house, abode or dwelling’ and Nemo - which meant ‘manage, distribute or dispense’. Evidently, the Greeks were interested in the study of efficient and systematic approach to manage the resources of a household. Today, economics can be broadly defined as the branch of social science concerned with the production, distribution and consumption of goods and services. The contrast between the both throws some interesting insight about what the term meant to ancient Greeks who lived in relatively simplistic societies to the modern and highly complex globalized world.
Ancient Athens
The Golden Age of Athens (480–404 BC) is known for major contributions to the world such as democracy, science, mathematics, philosophy, politics, art and architecture. At the same time, the legendary thinkers who lived during this period also engaged themselves in debates on economics. The debate in question is most vividly captured in the contrasting views presented by Plato’s Republic and Aristotle’s Politics. Although the books were primarily meant for political discourse, they did lay down the foundation for economic thought that are identical to some terms of modern usage. Most of the ideas that originated during this time laid down the roots for the modern economic theories and concepts.
In Republic, Plato wrote about specialization of labor, credit and production. The primary focus of the book, however, was his idea of an ideal city-state which are headed by philosopher kings. Interestingly, Plato also writes about an ideal society with common ownership of resources whereas in Politics, Aristotle writes about the values of private ownership. Aristotle also takes on Plato’s idea of credit theory of money by stating that money derives its value from the commodity upon which it is based (back when coins made of gold and silver were used as currency). He also highlights the importance of diversity within a city by stating that it is necessary for the city to become self-sufficient as it creates the conditions for division of labor based on different skills and aptitudes. These were perhaps the ideas which laid the foundation for the advent of modern-day capitalism, communism, credit based economy and even globalization.
Middle Ages
Historians use the term ‘Middle Ages’ to refer to the time period between 500AD to 1500AD and apply it to various events that had then occurred. It began soon after the decline of ancient empires, and gave rise to new political and social systems such as Feudalism — in which the ruler possessed ownership of all lands of his kingdom, and then distributed parts of it (fiefs) to vassals in exchange for military service or a portion of total revenue. Perhaps due to authority granted to vassals to rule over the inhabitants of their fiefs, there was an imbalance in the society. In these circumstances, philosophers such as Thomas Aquinas became preoccupied with the concept of just price as a way to restore the social order.
Aquinas argued that the prices simply cannot be increased just because the buyer has a pressing need for goods or services. According to him, a just price meant that goods or services should only cost as much as that of its production or service along with the needs of the seller to maintain his livelihood. Later on, Duns Scotus made a case for an accurate way of capturing the just price by observing that expenses involved can be subject to exaggeration and the resulting difference of opinion between the seller and the buyer. However, Jean Buridan perhaps accurately observed the role of aggregate demand in determining fair prices, and that it is the society that collectively determines what should be the just price. It was one of the earlier precursor to the market economics, driven by centralized exchanges and government regulation, which is a fundamental aspect of our world today.
In Summa Theologica, Antonin of Florence wrote an extensive account of the theory of price, justice and capital. He identified that a good can have both a natural value and a practical value with the latter deriving its value through virtuositas (its suitability to satisfy needs), raritas (its rarity) and complacibilitas (its subjective value). According to him, the complacibilitas means that a good can have a range of just prices rather than a single one. Ibn Khaludin is one of interesting thinker who lived during this period, and he is known for his comprehensive account of universal history in his seminal work of Muqaddimat, in which he detailed the theory of lifecycle of civilizations, specialization of labor, the nature of money (as a means of exchange as opposed to a store of inherent value) and the nature of taxes.
Mercantilism
Unlike most other schools of economic thought, mercantilism did not have its origin in any popular book written by an author, was not a part of coherent discourse in any university and was not even formally recognized as such during all of its existence. It is purely a retrospective view offered by Adam Smith himself as a motivation for producing his seminal work — The Wealth of Nations as a response to the mercantile system. Likewise, it was more of a common knowledge or a set of commonly held ideas or beliefs about national progress among the people in those days, and was indeed antithetical to Smith’s free-market economics as it championed the role of governmental intervention in securing the national interests. Yet, it became the launching pad for several concepts that are integral to modern economic discourse. One such concept is the idea of full-employment of labor force as a way of achieving national progress, and the importance of increasing spending to improve labor participation. In those days, it was one of the key rationales employed by the policy makers, along with their well-known concern for balance of trade and money supply. However, it is still very distinct from the notion of bullionism that gave prominence to the nation’s total gold-reserves as the only true measure of its wealth. It prompted actions that curbed imports in favor of exports to preserve the country’s gold (and silver), along with the enactment of policies to protect commerce in the country’s shipping routes and colonies. It is very likely that these trends were immediate aftermath of the age of exploration in which major European nations fiercely competed for resources and economic opportunities over the seas. John Hales, Nicholas Barbon, Sir William Petty and Barthélemy de Laffemas were some of the prominent thinkers of mercantilism. In fact, Sir William Petty is often regarded as one of the first economists who was responsible in formalizing it as a distinct area of study.
Age of Enlightenment
Between the 16th and the 17th centuries in Europe, there were radical changes brought about in the society by the Enlightenment movement. The proponents of this movement were driven by their unparalleled beliefs in the power of human reason for building a balanced world. The old systems of government backed monopolies, the persistent war between powerful nations and deteriorating social conditions were casting doubts over the merits of a mercantile system of trade. Also, the dawn of industrialization and the need to keep pace with rapid technological advancements called for an era of transformation in almost all walks of life. As a result, the major European nations and also their colonies were beginning to adopt new political views in which the government’s role was diminished and the political participation was open to all.
In that climate of back-to-back cultural and political revolutions that brought about enormous changes in traditional institutions, economists such as David Hume and Adam Smith — the father of economics, proposed their ideas to liberate the nations from the devastation left in the wake of the mercantile system. Like Hume, Smith too stood in support of free-trade and gave strong opinions about the need to reduce the government interference in trade and commerce, to remove subsidies for monopolistic companies, to remove tariffs and duties on imported goods, and to demystify the balance of trade. One of their key arguments is that balance of trade need not be a matter of primary concern in a world of free-trade as it is compensated by increase in foreign investments and stock of labor.
The book Wealth of Nations by Adam Smith contained many such ideas that became the cornerstones of the Classical Economics and gave rise to the system of Capitalism as we know it today. Along with Smith, the key proponents of free-trade or laissez-faire believed in the rational market theory and argued that markets are efficient when businesses, industries and consumers are allowed to make rational economic decisions on their own. The philosophical groundwork for this particular school of thought was provided by John Locke’s theory of natural order. The Ricardian Economics, founded by David Ricardo and James Mill, put forth the concepts of comparative advantage (which says that nations can benefit by specializing in one area of production), the law of diminishing returns (a point at which the level of profits or benefits gained is less than the money or energy invested)and the labor theory of value (which states that the value of a commodity can be objectively measured by the number of labor hours required to produce it). The other schools of thought which emerged during this period were Marxism (public ownership of the means of production, distribution and exchange) and Physiocracy (which was based on the idea that wealth of nations truly depends on their agricultural productivity). While some of the concepts put forth by Classical Economics such as labor theory of value and complete freedom of markets didn’t stand the test of time, the philosophies of both Marxism and Physiocracy have been completely rejected by most modern economists as they are impracticable and detrimental to economic growth. Although there has been no nation that completely embraced Physiocracy as a dominant economic system, the Communist nations like Soviet Union and much of Eastern Europe which were inspired by Marxism were forced to do away with such a system after a series of crises in 1980s and 1990s. Some countries like Cuba and China, however, are still with communism — although in case of the latter, only the political system is communist whereas the economic system resembles that of a free-market.
Neoclassical & Alternative Schools
The neoclassical school of economics emerged in late 19th century in order to explain certain economic phenomenon which was not captured by the classical economics. Alfred Marshall, William Stanley Jevons, Carl Menger and Leon Walras were some of neoclassical economics’ main proponents. It was based on three main assumptions that — the supply and demand were the main driving forces of production, price or consumption, the people make rational choices and the price of goods or services are determined by consumer perception. It also includes that the information required to make the rational choices is available to the people. The difference between the cost of goods or services and their perceived price was referred to as economic surplus. In that scenario, the benefit to the consumer was the utility of that product/service and to the producer it was a profit. Neoclassical economics is also sometimes referred to as marginal economics due to several marginal concepts it introduced to explain the specific change in the quantity of goods and services used. Some of those marginal concepts are: marginal utility, marginal cost, marginal benefit and marginal rate of substitution.
On the other hand, alternative schools of thought like the Austrian school of economics proposed that the value of a commodity is determined by its utility to the consumer. The models and concepts introduced in neoclassical economics are still widely studied and applied in the modern world. However, its critics point out to a flaw in its assumption about rational choice since they believe human beings can also be vulnerable and susceptible to emotions. The capitalist system which flourished in the United States in the late 19th century owes its existence to both classical and neoclassical schools of thought. The marginal concepts were instrumental in promoting the need for rapid advancements in science and technology in order to maximize industrial output in a short span of time. However, the Great Depression in the 1930s brought an end to the idea that markets are capable of functioning efficiently on their own without government intervention.
Modern Schools of Thought
The first half of 20th century was a very turbulent time in history that saw two devastating wars, economic depression, fall of the imperial European empires, emergence of new nations and the formation of a new world order. After the end of Second World War in 1945, and up until the fall of Soviet Union in 1991, the Cold War between the liberal democracies of the west and the communist nations of the east became a predominant theme of the world. During these rapidly changing political and social dynamics, various schools of economic thought emerged to tackle several overwhelming challenges in achieving economic progress.
After the Great Depression in 1930s, the prevailing ideas of laissez-faire, as proposed in classical economics — that the free markets and lack of government intervention leads to high employment or even that markets are capable of self-correction, were dealt with a massive blow. The rapidly increasing rates of unemployment, economic decline and chaos across the world called on for a new economic theory — and the one offered by British economist John Maynard Keynes became widely accepted. Keynes argued that the main driving force of economy is the aggregate demand — which is a total sum of household, government and business spending. He further argued that government intervention is needed to maintain stability in the economy through the inevitable phases of booms and busts — which came to be known as business cycles. Additionally, he stated that both prices and wages are slow to respond to the changes in supply and demand. He also noted that while prices remain rigid, any change in aggregate demand bears a short-run effect on both output and employment. As of today, the Keynesian economics remains the most widely accepted model.
Alongside, another school of thought known as Chicago School of Economics came to be established in the 1940s in response to the prevailing Keynesian economics. It shared its beliefs of laissez-faire with classical economics, and proposed that the ideal way to best allocate resources is by having a free-market economy with minimal or no government intervention. Milton Friedman is one of the key proponents of this theory, and is also known for his quantity theory of money which states that the overall levels of price are determined by the total amount of money in circulation. Other proponents like Eugene Fama were instrumental in putting forth the Efficient Market Hypothesis (EMH) to explain the unpredictable nature of stock markets and the value of insider-information in generating excessive risk-adjusted returns. It is because the share prices reflect all information and it is impossible to have a consistent alpha generation. Apart from these schools, others such as international economics, development economics, new economic history (cliometrics), impossible trinity, constitutional economics, market design theory, laffer curve etc. have also emerged to explain the various aspects of the 20th century economics.
The timeline of economic thought presents an intriguing account of how the modern economic theories came into existence, and how the seeds for most of the prevailing concepts were sowed in the past. While the world has moved on from the tyrannical and oppressive rules of the ancient and middle ages, and also from the clutches of self-serving monopolistic organizations, the economic debate still remains widely opened in order to tackle several contemporary challenges such as recession threats, global economic slowdown, economic disparity, climate change and other systemic problems with regulation of markets.
