Volume I.

Economic Thought Before

Adam Smith
0. Introduction
- Economic thought is not an upward development. Rather, it often follows a
zig zag path, therefore not necessarily later thought is better than earlier
thought.

1. The First Philosopher-economists: The Greeks

- One of the main foundations of greek philosophy was the natural law.
Natural law is a philosophy that certain rights or values are inherent by
virtue of human nature and universally cognizable through human reason.
Historically, natural law refers to the use of reason to analyze both social
and personal human nature to deduce binding rules of moral behavior. The
law of nature, being determined by nature, is universal.
- Aristotle and Plato thoughts were essentially statists. For Aristotle, a
moderate political thinker in comparison to Plato, the happiness and wellbeing of the polis was superior than those of the individuals, and only the
first one should be pursued. Yet, even though he was critical of money
making, he opposed Plato by defending private property. For Plato, a more
radical political thinker, the same was true, but he went further to propose,
on his books The Republic and The Laws, a proto-communist society,
without private property (even women and children were considered to be
owned communally) and freedom (marriage should be arranged by the
state).
- Even though there was no proper economics, only oikonomics (which
covered household management), there was some very primitive economics
insights regarding scarcity, subjective value and utility and even timepreference on the writings of philosophers such as Hesiod and Democritus.
- Xenophon, a disciple of Plato, wrote on the already mentioned topic of
oikonomics and on how to increase government revenue. He also had
valuable insights on the division of labor and supply and demand.
- It is remarkable that the great burst of economic thinking in the ancient
world covered only two centuries the fifth and the fourth BC and only in
one country, Greece. The rest of the ancient world, and even Greece before
and after these centuries, was essentially a desert of economic thought.
Nothing of substance came out of the great ancient civilizations in
Mesopotamia and India, and very little except political thought in the many
centuries-long civilization of China. Remarkably, little or no economic
thought emerged out of those civilizations, even though the economic
institutions: trade, credit, mining, crafts, etc. were often far advanced, and
even more so than in Greece. Here is an important indication that, contrary
to Marxists and other economic determinists, economic thought and ideas
do not simply emerge as a reflex of the development of economic

institutions. There is no way that historians of thought can ever completely

penetrate the mysteries of creativity in the human soul, and thus completely
explain this relatively brief flowering of human thought. But it is surely no
accident that it was the Greek philosophers who provided us with the first
fragments of systematic economic theory.
- There was, after Greek philosophy collapsed, some proto-libertarian and
even anarchists on China, such as Lao Tzu and Chuang-Tzu. They developed
the idea of spontaneous order and have written that the government should
not exist as it has no function but to explore the non-rulers.

2. The Christian Middle Ages

- Private property rights and laissez-faire were therefore the fundamental
heritage of the Roman law to later centuries, and much of it was adopted by
countries of the Christian West.
- On the Old or New Testament, scattered economic pronouncements are
contradictory or subject to ambivalent interpretation. The praised work but,
contradictorily, condemned wealth accumulation. Therefore, the Christian
church, mainly catholic, thought wasnt so important for economic thought.
- St. Thomas Aquinas also made some progress based on Aristotles
philosophy. He discussed some basic themes such as trade, value and
property. But perhaps St Thomas's most important contribution concerned
the underpinning or framework of economics rather than strictly economic
matters. For in reviving and building on Aristotle, St Thomas introduced and
established in the Christian world a philosophy of natural law, a philosophy
in which human reason is able to master the basic truths of the universe.

4. The Late Spanish Scholastics

- Atlantic ships headed south and west, and the famous explorations and
discoveries of the late fifteenth century changed the face of world history by
making European countries world powers, and began to integrate Africa and
the New World into the European economy. Spain and Portugal, the leading
explorers of the new continents, became the dominant nation-states and
empires of the sixteenth century. Slowly but surely, the Italian city-states
which had been in the forefront of economic advance and the spearhead of
Renaissance culture, began to be left behind in the advance of economic
and political power.
- Along with commercial expansion came inflation, fuelled by the immense
increase of gold and silver brought to Europe by the Spaniards from the
newly found mines of the western hemisphere. An approximate tripling of
the stock of specie in Europe resulted in a century of inflation, with prices
tripling during the sixteenth century. The new money flowed first into the
main Spanish port of Seville, then into the rest of Spain, and finally into
other countries of Europe, and the geography of price rises followed
accordingly.
- Late scholasticism was the product of the sixteenth century, the century
that ushered in the Protestant Reformation and the Catholic CounterReformation.

- If the newly burgeoning liberal Thomism began with Cardinal Cajetan in

Italy, the torch was soon passed to a set of sixteenth century theologians
who revived Thomism and scholasticism and kept them alive for over a
century: the School of Salamanca in Spain. It is no more than fitting that
Spain should be the centre of scholastic learning in the sixteenth century.
That century was pre-eminently the century of Spain. Spain, the leader in
the explorations and conquests in the New World; Spain, the nation that
brought the treasures of gold and silver across the Atlantic to Europe; Spain,
along with Italy and Portugal, the nation in Europe that remained
resoundingly Catholic and proved immune to the spread of Protestantism.

7. Mercantilism: Serving the Absolute State

- As the economic aspect of state absolutism, mercantilism was of necessity
a system of state-building, of Big Government, of heavy royal expenditure,
of high taxes, of (especially after the late seventeenth century) inflation and
deficit finance, of war, imperialism, and the aggrandizing of the nation-state.
In short, a politico-economic system very like that of the present day, with
the unimportant exception that now large-scale industry rather than
mercantile commerce is the main focus of the economy. But state
absolutism means that the state must purchase and maintain allies among
powerful groups in the economy, and it also provides a cockpit for lobbying
for special privilege among such groups.
- The laws and proclamations were not all, as some modern admirers of the
virtues of mercantilism would have us believe, the outcome of a noble zeal
for a strong and glorious nation, directed against the selfishness of the
profit-seeking merchant, but were the product of conflicting interests of
varying degrees of respectability. Each group, economic, social, or religious,
pressed constantly for legislation in conformity with its special interest. The
fiscal needs of the crown were always an important and generally a
determining influence on the course of trade legislation. Diplomatic
considerations also played their part in influencing legislation, as did the
desire of the crown to award special privileges, con amore, to its favorites,
or to sell them, or to be bribed into giving them, to the highest bidders.
Jacob Viner.
- The focus in examining mercantilist thinkers and writers should not be the
fallacies of their alleged economic theories. Theory was the last
consideration in their minds. They were, as Schumpeter called them,
consultant administrators and pamphleteers to which should be added
lobbyists. Their theories were any propaganda arguments, however faulty
or contradictory, that could win them a slice of boodle from the state
apparatus.
- The post-medieval state acquired most of its eagerly sought revenues by
taxation. But the state has always been attracted by the idea of creating its
own money in addition to plundering directly the wealth of its subjects.
Before the invention of paper money, however, the state was limited in

money creation to occasional debasements of the coinage, of which it had

long managed to secure a compulsory monopoly. For debasement was a
one-shot process, and could not be used, as the state would always like, to
create money continually and feed it into state coffers for use in building
palaces, pyramids, and other consumption goods for the state apparatus
and its power lite.
- Before the seventeenth century, loans were generally made by banks, and
banks were institutions in which capitalists lent out funds that they had
saved. There was no deposit banking; merchants who wanted a safe place
to keep their surplus gold deposited them in the King's Mint in the Tower of
London an institution accustomed to storing gold. This habit, however,
proved highly costly, for King Charles I, needing money shortly before the
outbreak of the civil war in 1638, simply confiscated the huge sum of
200 000 pounds in gold stored at the Mint announcing it to be a loan from
the depositors. Understandably shaken by their experience, merchants
began depositing their gold in the coffers of private goldsmiths, who were
also accustomed to the storing and safe keeping of precious metals. Soon,
goldsmiths notes began to function as private bank notes, the product of
deposit banking.
- By the end of the seventeenth century, the states of western Europe,
particularly England and France, had discovered a grand new route towards
the aggrandizement of state power: revenue through inflationary creation of
paper money, either by government or, more subtly, by a privileged,
monopolistic, central bank. In England, private banks of deposit were
inspired to proliferate (especially checking accounts) under this umbrella,
and the government was at last able to expand the public debt to fight its
endless wars; during the French war of 170213, for example it was able to
finance 31 per cent of its budget via public debt.

10. Mercantilism and freedom in England

- One of the most influential philosophers of this age was the prophet of
empiricism: Sir Francis Bacon. He claimed to have invented a new logic,
the only correct form of material knowledge induction by which
enormous masses of details could somehow form themselves into general
truths. This sort of accomplishment is dubious at best. Not only was it a
prolegomenon to knowledge rather than knowledge itself; it was completely
wrong about how science has ever done its work. No scientific truths are
ever discovered by inchoate fact-digging. The scientist must first have
framed hypotheses; in short, the scientist, before gathering and collating
facts, must have a pretty good idea of what to look for, and why. Once in a
while, social scientists get misled by Baconian notions into thinking that
their knowledge is purely factual, without presuppositions and therefore
scientific, when what this really means is that their presuppositions and
assumptions remain hidden from view.
- Francis Bacon was also in tune with the Zeitgeist of his day. Since Bacon's
thought fitted well into the spirit of the age, it is not surprising that he
developed enthusiastic followers. The leading Baconian in political economy,
who was also fittingly a pioneer in statistics and in the alleged science of

political arithmetic, was the fascinating opportunist and adventurer Sir

William Petty (162387). Petty's own contribution, political arithmetic, or
statistics, he saw as the application of the empiricist Baconian programme
to the social world.
- True to Petty's goal of empirical science, each of his studies was designed
to promote his own economic or political advancement. His major
publication, a Treatise of Taxes and Contributions, was published in 1662,
and went into three further editions in his lifetime. Petty, however, was
disappointed, since the tract did not lead to his hoped-for public office or
political influence. Petty's later tracts were written, but not published, in his
lifetime, the others being published in 1690 or later, after his death. This
was because, in the words of a generally admiring historian, they were
written not for publication but for circulation in the corridors of power or
with a view to acquiring influence and jobs which he never managed to
obtain.
- His major work, the Political Arithmetic, was written in the 1670s and
published posthumously in 1690. The goal was to show that England, far
from suffering from a decline as commonly believed, was actually wealthier
than ever before. In the Political Arithmetic, Petty claimed to eschew mere
words and intellectual arguments, and state only arguments of sense
that is, derived from sensate facts of nature, which could all be boiled down
to number, weight, and measure a slogan which he enjoyed repeating on
many occasions. Thus, at the end of an essay on algebra, Petty
grandiloquently maintained that he had at last applied algebra to other
than purely mathematical matters, viz: to policy, by the name of Political
Arithmetic, by reducing many terms of matter to terms of number, weight,
and measure, in order to be handled mathematically.
- In fact, there is virtually no mathematics in Petty; what there is are
statistics, loosely gathered, and arbitrarily asserted, employing many hidden
assumptions, to arrive at preordained ideological conclusions. At one point,
Petty actually submits the justification for his arbitrary figures and
assumptions that they make no difference anyway since the figures are not
totally false, and therefore can illustrate the method of arriving at
knowledge. But fake illustrations, of course, are scarcely an advertisement
for the method of political arithmetic. Thus Petty tried to come to
conclusions pleasing to the king that England was gaining not declining in
wealth by borrowing the spurious precision of numbers and the prestige of
science. Sometimes his conclusions were so wildly optimistic as to abandon
all sense: as when he claimed that it was a very feasible matter, for the
King of England's subjects, to gain the universal trade of the whole
commercial world. In the course of his discussions, Petty delivered himself
of some economic theories qualitative not quantitative theories we might
add in violation of his stated programme. They were either not very
remarkable urging the king not to levy taxes that are so high that they will
lead to severe declines in output or employment or incorrect, such as
attributing the value of goods not to the demand for them but to their costs
of production.