I.

Introduction to History of Economic Thoughts & Early Economic Thoughts

1. Economics: Its History and Importance

● Definition of Economics:
Economics is the study of how individuals, businesses, governments, and societies
make choices regarding the allocation of scarce resources to satisfy unlimited wants. It
explores how people respond to incentives and make decisions about production,
consumption, and distribution of goods and services.
● HET concerns with different thinkers and theories in the discipline of economics from
ancient times to contemporary day.
● Economic history is the study of economies or economic phenomena in the past.

Etymology - The word Economics originates from the Greek word ‘Oikonomia’ meaning
“household management” which can be divided into two parts: ‘Oikos’, which means
‘Home or household’; ‘Nomos’, which means ‘Management’.

● History of Economics:
The history of economics dates back to ancient civilizations. Early economic ideas were
embedded in religious, philosophical, and ethical frameworks, evolving over time through
the contributions of thinkers like the Greeks, Arab-Islamic scholars, and European
philosophers.
● Schools of economic thought describes the variety of approaches in the history of
economic theory.

a. pre-modern (Greco-Roman, Indian, Persian, Arab, & Chinese),

b. early modern (mercantilist, physiocrats) and

c. modern (beginning with Adam Smith and classical economics in the late 18th century).

● Importance of Studying the History of Economic Thought:

○ Understanding Economic Evolution: Knowing the historical context helps in
understanding how modern economic theories and policies developed.
○ Appreciating Diverse Perspectives: It provides insight into how different cultures
and eras shaped economic thought and addressed issues like trade, value, and
wealth.
○ Learning from the Past: Analyzing past economic ideas and their outcomes
allows economists and policymakers to learn from previous successes and
failures, helping them make informed decisions for current and future economic
policies.

2. Early Pre-Classical Economic Thought

 ● Early economic thought was influenced by the philosophical, social, and religious beliefs
of different civilizations. Two major contributors were the Greek philosophers and the
Arab-Islamic scholars, whose ideas laid the groundwork for the feudal and scholastic
economic frameworks.
● Greek Philosophers:
○ Key Thinkers: Socrates, Plato, and Aristotle.
○ Contributions:
■ Xenophon (430,354 Bc)- organization & administration of private and
public affairs.
■ Plato discussed the division of labor and the role of the state in economic
activities.
■ Aristotle ( 384-322 bc) introduced the concept of "just price" and the
difference between use value (utility) and exchange value (market price).
Needs & wants, distribution between value use of exchange value.
■ He also critiqued the accumulation of wealth and advocated for the ethical
dimensions of economics.

Chinese thinkers

FAN LI - Twelve Business Golden Rules of Fan Li- He discover seasonality’s

effect on the market demand and supply and their implications on prices.

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

Success"

WANG ANSHI December 8, 1021 – May 21, 1086

-increase currency circulation, breaking up of private monopolies, and early forms of

government regulation and social welfare.

-Reforms had three main components: 1) state finance and trade, 2) defense and social
order, and 3) education and improving governance.

QIN SHI HUANG (First Emperor of China, established the Qin Dynasty)

- - Emperor Qin also unified China by establishing a common currency (money) and
standard units of measure. With everyone using the same money and measurements,
the economy ran much smoother.

Indian thinker

CHANAKYA 370–283 BC- ancient Indian political treatise called Arthashastra (Science
of Material Gain or Science of Political Economy)

- He argues for an autocracy managing an efficient and solid economy.

 B. Medieval Economic Thought - Scholastic Thinkers

St Thomas

-influence on economic thought in at least three broad areas: the theory of private
property, the theory of the just price and the doctrine of usury. St. TA known as moral and
philosophical approach to the study of exchange, value, and ownership within period.

● Private Property - Did not uphold the exclusive and unrestricted rights on
property as stipulated by Roman law : Law of Nature
● Trade - profit received was nothing but the reward for labor.
● Usury - “lend freely hoping nothing thereby”, enriching through lending of money
at interest was regarded as the very worst form of the pursuit of gain.

DUNS SCOTUS

-Sententiae (1295), he thought it possible to be more precise than Aquinas in calculating

a just price,

● Arab-Islamic Thought:
○ Contributions:
■ These scholars preserved and expanded upon Greek economic ideas,
emphasizing the moral and ethical aspects of economics.
■ ABU YUSUF - Abu Yusuf (731 – 798)Kitab al-Kharaj,-- most famous work, is a
treatise on taxation and fiscal problems of the state prepared for the caliph (chief
Muslim civil and religious rule).
■ AL-GHAZALI– classified economics as one of the sciences connected with
religion, along with metaphysics, ethics, and psychology.

— 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 Ghazali suggests an early version of price inelasticity of

demand for certain goods.“

■ Ibn Khaldun introduced concepts like division of labor and the role of
government in economic prosperity in his Muqaddimah. He also identified cyclical
economic growth and decline, predating modern business cycle theories.
■ The Arab-Islamic thinkers played a crucial role in linking Greek thought to the
later European Scholasticism.
● Feudal and Scholastic Thought:
The Greek and Arab-Islamic contributions influenced the Scholastic economic thought
 during the Middle Ages, which focused on the ethical and moral considerations of trade,
wealth, and interest. Scholars like Thomas Aquinas further developed these ideas within
the framework of Christian doctrine, addressing issues such as the morality of wealth
accumulation and usury.

3. Mercantilism and Physiocracy

● Mercantilism:
○ Mercantilism was the dominant economic theory in Europe during the 16th to
18th centuries. It advocated for a strong role of the state in the economy,
emphasizing national wealth accumulation through trade surplus and colonial
expansion.
○ Core Ideas:
■ Wealth is measured by the amount of gold and silver a nation possesses.
■ Encourage exports and limit imports to achieve a favorable balance of
trade.
■ Government regulation and protectionism were considered essential for
promoting national wealth.
● Physiocracy:
○ Physiocracy emerged in France in the mid-18th century as a reaction to
mercantilism. The Physiocrats believed that wealth came from the productivity of
land and agriculture, not trade or accumulation of precious metals.
○ Core Ideas:
■ The Tableau Économique, created by François Quesnay, illustrated the
flow of wealth in an economy and emphasized the importance of
agricultural production.
■ The Physiocrats advocated for laissez-faire (minimal government
intervention) and the idea that land is the source of all wealth.
■ They introduced the concept of the "natural order" in the economy,
suggesting that economies could self-regulate through natural laws.
● Key Differences:
○ Mercantilists believed in government intervention, trade protectionism, and
accumulating wealth through trade surplus.
○ Physiocrats argued for limited government intervention, prioritized agriculture as
the primary source of wealth, and promoted free trade as a way to ensure
economic prosperity.
1. Introduction to Classical Economics

● Core Principles: Classical economics emphasizes free markets, competition, the idea of
"self-interest" driving economic activity, and the importance of limited government
intervention.

–The market is perfect and self-sustaining

• Government intervention can only be a detriment to the economy

• The market automatically adjusts to boom and busts.

• Supply=Demand

● Emergence: It emerged during the Industrial Revolution as a response to rapid economic

change, advocating for market-driven economies over mercantilism.

– flourished, primarily in Britain, in the late 18th and early-to-mid 19th century

● Free Markets and Decision-Making: Classical economists believed that individuals

making decisions based on their own interests would lead to optimal outcomes for society
through competition.

2. Key Figures and Contributions

● Major Economists:
○ Adam Smith: Known for the "invisible hand" and division of labor.

– World and Father of Capitalism.

— His notable works are “The Theory of Moral Sentiments” and “The Wealth of
Nations”

–From Smith comes the ideas of the “INVISIBLE HAND” that guides the forces
of supply and demand in an economy.

–Smith’s most famous for his 1776 book, Än Inquiry into the Nature and Causes
of the Wealth of Nations”.

– The Wealth of Nations, is considered his magnum opus and the first modern
work that treats economics as comprehensive system and as an
○ David Ricardo (1772 – 1823): Developed the theory of comparative advantage in
trade.

– David Ricardo was a British political economist, one of the most influential of
the classical economists along with Thomas Malthus, Adam Smith and James
Mill.

– Contributions: RICARDIAN EQUIVALENCE, LABOR THEORY OF VALUE,

“COMPARATIVE ADVANTAGE” , LAW OF DIMINISHING RETURNS,
RICARDIAN SOCIALISM, ECONOMIC RENT

–He is also known because of his Principles of Economy and Taxation

○ Thomas Malthus: Focused on “ theory in population growth” and its economic

impact.

– His book An Essay on the Principle of Population

– A key portion of the book was dedicated to what is now known as the
Malthusian Law of Population. The theory claims that growing population
rates contribute to a rising supply of labor and inevitably lowers wages.
Malthus feared that continued population growth lends itself to poverty.

– He called this the Malthusian Trap—a scenario where population pressure

creates constant shortages of resources, pushing society into a subsistence level.

○ Jean-Baptiste Say (1767-1832): Promoted the idea that supply creates its own
demand (Say's Law).

– French economist and businessman who argued in favor of competition, free

trade and lifting restraints on business.
 – SAY’S LAW & LAW OF MARKET – The Law states that an income generated
by past production and sale of goods is the source of spending that creates
demand to purchase current products. And law arguing that the ability to purchase
something depends on the ability to produce and thereby generated income.

▪ "Aggregate supply creates its own aggregate demand"

▪ "Supply creates its own demand”

○ John Stuart Mill(1806-1873): Contributed to theories on “Principle of utility” and

free markets.

• English/British philosopher, economist and political theorist

•He believes in Betham’s principle utility.

•His famous contribution/works: Critique of the Labor Theory of Value, Support

for Government Intervention and Utilitarianism.

• Mill expanded on the utilitarian philosophy originally developed by

Jeremy Bentham. While Bentham defined utilitarianism as "the greatest happiness
for the greatest number," Mill introduced the concept of qualitative differences
in pleasures.

– He argued that some pleasures (such as intellectual or moral satisfaction)

are inherently more valuable than others (such as physical pleasure). He is
famously quoted as saying, "It is better to be a human being dissatisfied than a pig
satisfied; better to be Socrates dissatisfied than a fool satisfied."

● Invisible Hand: Smith’s concept that individuals seeking their own gain inadvertently
benefit society, promoting market efficiency.
● Comparative Advantage: Ricardo’s theory that countries benefit from specializing in
producing goods where they have a lower opportunity cost, boosting global trade.

3. Laissez-Faire Policy

● Meaning: "Laissez-faire" means letting markets operate with minimal government

interference.
 ● Advocacy for Minimal Intervention: Classical economists believed government
meddling would distort the natural efficiency of markets.
● Downsides: Critics argue laissez-faire can lead to monopolies, inequality, or poor labor
conditions (e.g., the 19th-century labor market).

4. Supply and Demand

● Foundation of Classical Economics: Supply and demand determine prices and

production levels. The "invisible hand" helps markets adjust.
● Market Equilibrium: It is the point where supply equals demand, balancing prices.
● Effects of Changes: Increased demand raises prices and production, while increased
supply lowers prices.

5. Classical Views on Labor and Wages

● Wages and Employment: Wages are determined by the supply and demand for labor.
Higher supply of labor reduces wages.
● Iron Law of Wages: Ricardo's idea that wages naturally stabilize at subsistence levels
due to population pressures.
● Unemployment: Classical economists believed unemployment would be temporary as
markets self-adjust.

6. Government’s Role in the Economy

● Argument Against Intervention: Classical economists feared government intervention

would lead to inefficiencies.
● Exceptions: They acknowledged some government roles, such as in defense and
maintaining legal structures for property rights.
● Modern Calls for Intervention: They might resist modern welfare and regulation
policies, arguing markets should address issues like healthcare and pollution.

7. Long-Run Growth and Stability

 ● Long-Run Growth: Classical economists believed in steady long-term growth driven by
capital accumulation and free markets.
● Self-Correcting Economy: In economic crises, they believed markets would naturally
stabilize without intervention.
● Modern Issues: Critics argue Classical theory struggles with inequality and
environmental issues, as it relies on long-term market forces rather than active policies.

8. Criticism and Limitations of Classical Economics

● Main Criticisms: Classical economics is seen as overly idealistic, assuming perfect

competition and ignoring market failures.
● Keynesian Challenge: Keynes argued that during downturns, government intervention is
necessary to boost demand, challenging Classical laissez-faire.
● Outdated Aspects: In today’s global economy, the lack of consideration for inequality
and environmental issues makes some Classical ideas seem less relevant.

9. Classical Economics in Modern Context

● Relevance Today: Principles of free markets and minimal intervention remain influential
in modern capitalism, especially in trade and deregulation policies.
● Comparison to Modern Theories: Classical ideas focus on market efficiency, while
modern theories like Keynesianism prioritize stabilization during recessions.
● Modern Examples: Free trade agreements and deregulation policies in sectors like
technology reflect Classical ideas in action.

10. Personal Reflection

● Self-Regulating Markets: Reflect on whether you agree that markets work best on their
own or if government intervention (e.g., in healthcare, housing) is necessary.
● Influence on Views: Consider how Classical ideas shape your stance on free trade, tax
policy, and economic fairness.
● Policy Approach: Would you adopt Classical ideas, or would you mix them with modern
approaches (e.g., Keynesian, environmental regulation) to address today’s challenges?
"Against Classical Economics: Karl Marx (1818–1883)"

Key Contributions and Ideas:

1. Who Was Karl Marx?

○ Karl Marx was a German philosopher, economist, journalist, and revolutionary
whose ideas have deeply influenced political and economic thought.
○ Known for his critical theories on capitalism and the advocacy for socialism and
communism.
○ His major works, “The Communist Manifesto” (1848) and “Das Kapital”
(1867–1883), are cornerstones of Marxist theory.
2. Key Theoretical Contributions:
○ Historical Materialism:
■ Marx argued that material conditions (the economic structure of society)
shape historical development more than ideologies.
■ He proposed that all human societies pass through stages defined by
modes of production, which determine the social relations of each era.
○ Theory of Alienation:
■ Described the alienation of workers in a capitalist society where labor is a
commodity, leading to estrangement from the product, the production
process, their own essence, and other workers.
○ Labor Theory of Value:
■ Expands on classical economics' labor theory, stating that the value of a
commodity is determined by the socially necessary labor time required to
produce it.
■ Introduced the concept of “surplus value,” which is extracted by capitalists
from the labor of workers.
○ Class Struggle:
■ Saw history as a series of class struggles, which would culminate in the
overthrow of capitalism and the establishment of a classless, communist
society.
3. Influential Works:
○ “The Communist Manifesto” (1848): Co-authored with Friedrich Engels, the
manifesto calls for the working class to rise against the bourgeoisie and abolish
capitalist structures.
○ “Das Kapital” (Volumes I-III, 1867-1883): An in-depth critique of political
economy, analyzing capitalism’s inherent contradictions, such as the tendency of
falling profit rates, crises of overproduction, and exploitation of labor.
4. Economic Theories:
 ○ Surplus Value and Capital Accumulation:
■ Marx argued that the capitalist system is based on the extraction of surplus
value from labor, which results in unequal wealth distribution and social
inequalities.
○ Theory of Money:
■ Money, for Marx, serves multiple functions such as measuring value,
facilitating exchange, and acting as a store of value, but also embodies the
power dynamics and contradictions of capitalism.
5. Criticisms and Missteps:
○ Many of Marx’s predictions, such as the collapse of capitalism and the emergence
of a proletariat-led socialist revolution, have not materialized as expected.
○ His view of the inevitable demise of capitalism has been critiqued, especially in
light of the system’s adaptability and the failure of various communist regimes.
6. Legacy and Impact:
○ Marx’s ideas have shaped modern sociology, political theory, and economics.
○ His concepts of class struggle and alienation continue to inform debates on social
justice, labor rights, and the nature of economic systems.

Precise Details to Note:

● Marx's historical materialism offers a framework for understanding societal changes

through the lens of economic conditions.
● The concept of alienation underpins his critique of capitalism, highlighting the
psychological and social effects of capitalist production on workers.
● "Das Kapital" remains a crucial text for understanding the dynamics of labor, value, and
capital accumulation.
● Marx’s theory of class struggle underlines the conflict-driven nature of societal progress,
contrasting sharply with the consensus models of classical economics.