LECTURE NOTES ON

HISTORY OF ECONOMIC THOUGHT

LECTURE 1
NATURE AND SCOPE OF HISTORY OF ECONOMIC
THOUGHT
 1. INTRODUCTION TO HET

What is economic thought?

As human knowledge accumulates, it is analyzed and
categorized into different sciences.
• Economic science is also a result of the same process.
• It has gone through various stages of development
Economic science includes doctrines and
generalizations which deal with economic phenomena
of our life.
• Economic science, like other sciences, has had to
undergo a process of evolution and is the result of
innumerable contributions by various thinkers.
 INTRODUCTION TO HET
Economic thought can be defined as:
A set of theories, doctrines, laws, generalizations, and analyses
applied to the study and provide solution of economic
phenomena and problems
• Theory: is an assumption or system of assumptions, accepted
principles, and rules of procedure based on limited information or
knowledge, devised to analyze, predict, or otherwise explain the
nature or behavior of a specified set of phenomena; it is abstract
reasoning.
• Doctrine: A belief (or system of beliefs) accepted as authoritative
by some group or school.
• Economic Phenomena: Every act that involves commerce,
exchange, production, consumption, investment, saving, and etc.
• Economic problems: Inflation, Unemployment, poverty, deficit,
recession, and etc.
 INTRODUCTION TO HET

Note that:
• The overall composition of economic thought or the
ideas or concepts and theories studied in economic
thought is/are subject to continuous variation and
• Specific contents of economic thought have attracted
more attention than others.
• Economic thought is not a given and a fixed set of
theories or tools and techniques of analysis and it is
not also a settled body of principles.
• In fact since an economy and social interaction is a
dynamic phenomenon, economic science is also a
dynamic one.
 INTRODUCTION TO HET
How does Economic thought develop?
In general, economic thought develops along two lines:
• There is always a scope for deeper and intensive investigation
within the basic framework of a given economy and its institutional
set up which provides a basis for further analysis and theorizing.
• At any point in time, there is always a scope for investigation
• The very dynamism of an economy provides a basis for further
investigation.
• In a static and stagnant economy, there is not much space for further
investigation.
• But, a changing economy poses newer challenges which economic
thinkers have to meet.
• Normally, over time, a dynamic economy would increase in
complexity and would thus demand new and better tools and
techniques of analysis, as also a wider coverage of economic issues.
 INTRODUCTION TO HET

• The formation and development of economic thought is

both determined by and determines the prevailing
economic/social environment.
As a result, when studying the history of economic
thought
• The role and growth of each significant theory
• The set of theories and policy prescriptions provided by each
school of thought and
• The significant contributions by individual economists
must be viewed in the context of the prevalent social,
institutional and economic environment.
 2. THE SCOPE OF HET
What differentiates HET from Economic History and History of
Economics?
 Economic History or Industrial History concerns itself with the
history of commerce, manufactures, and other economic
phenomena, dealing objectively with the ways in which men get
their living.
 History of economics deals with ECONOMICS as a science with
a body of classified knowledge;
• it is limited to times in which economic ideas have become
distinct, unified, and organized;
• it is a history of systems of economic thought.
• History of Economics and HET deal primarily with subjective
matters dealing with the ideas men have concerning economic facts
and forces.
 THE SCOPE OF HET

 History of economic thought is broader than the history of

Economics, and may properly be divided into two parts:
• One taking up the origin and development of economic ideas
prior to the existence of any distinct and separate science;
• The other beginning with the rise of Political Economy, or the
science of Economics.
• The subject, the History of Economic Thought, may be
defined as
• A critical account of the development of
economic ideas, searching into their origins,
interrelations, and, in some cases, their results.
 THE SCOPE OF HET
 when summarized;-
 Economic History: The study of economic
aspect of societies in the past ; the history of
use of economic resources, or the examination
of past performance of economies.
 History of Economic Thought: A critical
account of the development of economic
ideas searching in to their origins,
interrelations ,and in some cases, their result.
 History of Economics: the study of the history
of the science of Economics.
 SCOPE OF HET

The scopes of HET and Economic history revisited

• The scope of Economic History does not go back
to the study of ancient economic ideas and
thoughts.
• The history of economic thought goes back to the
remote times
• The unrelated primitive ideas of the earliest times
are full of meaning from the point of view of HET.
 SCOPE OF HET

• Economics as a scientific discipline originated with the

emergence of capitalism.
• Capitalism is the system that solves the problems of
organization of production and distribution through the
generalized functioning of markets.
• The salient/main feature of capitalism is the presence and
the systematic operation of markets for the factors of
production & for final products
• Capitalism was established through a long and slow
process that started in Western Europe in the sixteenth
century and gained momentum with the advent of the
industrial revolution in the mid to late eighteenth
century.
 SCOPE OF HET

• The publication of Adam Smith’s book entitled

The Wealth of Nations in 1776 marks the period
when capitalism dominated (at least in Great
Britain) and at the same time the beginning of
economics as a scientific discipline.
• This is not to say that in the period before the
industrial revolution, there was no economic
thinking.
• The social/political organization and
philosophies of those times did not favor the
growth of comprehensive economic thoughts.
 3. THE CENTRAL FOCUS OF MODERN ECONOMIC THOUGHT

Economics is a social science.

• It examines the problems that societies face because
individuals desire to consume more goods and services
than are available, creating a condition of relative
scarcity.
• Perceived wants are generally unlimited and apparently
insatiable (limitless), whereas resources (which are often
subdivided into land, labor, capital, and entrepreneurship) are
limited.
• To meet the problem of scarcity, a social mechanism is
required for allocating limited resources among unlimited
alternatives.
• One aspect of this process involves restricting individual
wants and increasing the willingness to supply resources
 THE CENTRAL FOCUS OF MODERN ECONOMIC THOUGHT

• Historically, four mechanisms have been used to deal

with the problem of scarcity.
• The oldest is brute force (strength), which was common in
some early societies and is still used today.
• Next came tradition, which emphasized past ways of
allocating resources.
• With civilization came another societal mechanism for
resource allocation: namely authority, in the form of the
institutions of government and church.
• The fourth resource-allocating social institution is the market,
which developed over time.
• This became the primary allocator in Western Europe as
feudalism waned and industrial, market-oriented societies
developed.
 THE CENTRAL FOCUS OF MODERN ECONOMIC THOUGHT

• Modern economic theory examines the ways in which

contemporary societies cope with the problems that flow from
relative scarcity.
• It focuses largely on market processes, which have replaced the
church, tradition, and the state as the primary resource-allocating
mechanism.
• However, these mechanisms are not mutually exclusive, nor has the
movement from tradition-state-church economies to market
economies been linear, with all societies in the world participating.
• Some areas, almost entire continents, are still locked in economic
activity dominated by the past.
• Some societies have turned from premarket feudal economies to
modern command economies, in which the state allocates resources.
• For example, in the early 1900s a number of societies
moved toward central planning, which involved
governmental control of allocation.
 THE CENTRAL FOCUS OF MODERN ECONOMIC THOUGHT

• To say that the market is the primary allocation mechanism is not

to say that it is the only mechanism.
• Modern market societies use force, tradition, and authority as well as
markets.
• In Europe and North America, market allocation is continually
being influenced by social and political forces.
• Modern economic theory is still trying to deal with the
interrelationships between economic, social, and political forces.
• It has focused on how market forces operate, concentrating on how
markets allocate scarce resources and on the forces that determine
the level and growth of economic output.
 THE CENTRAL FOCUS OF MODERN ECONOMIC
THOUGHT
• Regardless of what mechanism society uses to
allocate resources, the harsh reality of scarcity
requires that some wants remain unmet; thus,
issues of equity, justice, and fairness are
embedded in the problem of scarcity.
• Resource allocation mechanisms determine who
gets, and who does not get, resources
 4. WHY THE LACK OF AGREEMENT IN ECONOMIC
THOUGHT?
Disagreements (controversial issues) are inevitable in
economic thoughts for the following reasons:
i. The subject matter of economics, which is the economy, is
dynamic.
ii. Economics is a social science in which controlled experiments
are almost impossible.
iii. Differences would exist with reference to the assessment of
facts, especially when they are mixed with other ones.
iv. Economic analysis admits of a wide variety of methods
v. Differences arise on account of the purpose for which an
economic investigation is being undertaken
vi. Divergence of opinion arises on account of the materialistic
and idealistic attitudes of the economists
 5. SCHOOLS OF THOUGHT IN ECONOMICS
 Definitions of schools of thought:-
• George Stigler defined a school of thought as;
 “A school within a science is a collection of affiliated (united)
scientists who display a considerably higher degree of agreement
upon a particular set of views than the science as a whole
displays”.
• It is essential to a school that there be many scientists outside it or the school
would have no one with whom to argue.
• It is differences in ideology that produce different schools of thought in
economics.
• HET attempts to identify these schools and to determine the forces that
contribute to their creation, evolution and ultimate “success” or “failure” as
intellectual construct that explains, predicts or justifies the world we have
created.
 SCHOOLS OF THOUGHT IN ECONOMICS
 Types of school of economic thoughts

I. “Mainstream economics thought” :- is the term used to describe

the body of theory that is most widely accepted at a given time.
 The modern body of mainstream economics is represented by Neoclassical
and Classical economics.
• In addition to these “mainstream” schools, some of the others that
are important include:
 Austrian school, Old and New Chicago schools, Monetarists, Old
Institutionalist and New Institutionalist, Public Choice, Keynesian and Post-
Keynesian
II. Heterodox economists:- are economists with different views or
philosophical and methodological perspectives from the mainstream
economists.
• The mainstream economists also called Orthodox Economists
see little or no value in the works or ideas of the heterodox
economists
 SCHOOLS OF THOUGHT IN ECONOMICS

• Some of the characteristics of a school that are identified by

Stigler are;
 A school must have a leader.
• François Quesnay [1697-1774] leader of Physiocrats.
• Adam Smith [1723-1790] began the Classical economics.
• Alfred Marshall [1842- 1924] founder of Neoclassical
economics
• Karl Marx [1818-1883] is the leader of Marxian economics.
• John Maynard Keynes [1883-1946] leader of Keynesian
school.
 The school may be united by “substantive (practical) scientific
views”
 If the school is united on methodology rather than substantive
doctrines, its life will be longer.
 A school may be based on policy views rather than upon economic
analysis or scientific methodology.
 7. THE SIGNIFICANCE OF STUDYING THE HISTORY OF
ECONOMIC THOUGHT

• An understanding of the different approaches to economics, the

causes for those differences and how they have evolved over time
provides a historical and philosophical context that encourages a
more critical analysis of current economic tools and their
applications.
This critical approach has three advantages.
• First, it provides a more complete understanding of the current state
of economic analysis and
• Second, it may suggest alternative perspectives that will extend,
improve or alter the tools and analysis.
• Third, through an increased awareness of our own perspective of
the economic process, it encourages a degree of humility and
respect for others.
 Most importantly, the study of the history of economics thought can
be fun and may reveal many things about ourselves.
 THE SIGNIFICANCE OF STUDYING THE HISTORY
OF ECONOMIC THOUGHT
Studying HET can be justified for the following reasons as well:
• It helps us to explain and teach the ideas of economics
• The thoughts of brilliant people are always worth studying – even their
mistakes are insightful.
• We will understand our own thoughts better by observing the
development of thought
• The problems and methods that are in use at any given time embody
the achievements and carry the scars of work that has been done in the
past under entirely different conditions. The significance and validity of
both problems and methods cannot be fully grasped without knowledge
of the previous problems and methods to which they are in response.
• The highest claim that can be made for the history of any science or of
science in general is that it teaches us much about the ways of the
human mind.
• The economics of different epochs deal with different sets of facts and
problems. This fact alone would suffice to lend increased interest to
doctrinal history.
• Another reason for studying old ideas is to foster new ones
 7. MAJOR QUESTIONS WE SHOULD BE IN MIND IN
STUDYING THE VARIOUS SCHOOLS OF THOUGHT

The questions are:

1. What was the historical background of the school?
2. What were the major tenets(principles) of the school?
3. Whom did the school benefit? Or seek to benefit?
4. How was the school valid, useful, or correct in its time?
5. Which tenets of the school became lasting contributions?
 MAJOR QUESTIONS WE SHOULD BE IN MIND IN
STUDYING THE VARIOUS SCHOOLS OF THOUGHT

1. What was the historical background of the school?

• The historical background of the school will be analyzed:
• To ascertain whether it may have nurtured a particular system of
thought.
• Economic theory often develops in response to changes in the
environment that draw attention to new problems.
• Some knowledge of the times is essential to understand why people
thought and acted the way they did.
 MAJOR QUESTIONS WE SHOULD BE IN MIND IN
STUDYING THE VARIOUS SCHOOLS OF THOUGHT

2. What were the major tenets of the school?

• Tenets are Doctrines, principles or assumptions
• Broad generalizations about the ideas of successive economic
schools are provided under this heading.
• The strength of this procedure is that it enables a concise
presentation of the essence of the school.
• The weakness is that there are always exceptions to the
generalization that cannot be examined in detail until later.
• A brief summary presents patterns of uniformity in ideas of
groups of economists, but the exceptions may contain the seeds
of ideas that eventually will triumph.
 MAJOR QUESTIONS WE SHOULD BE IN MIND IN
STUDYING THE VARIOUS SCHOOLS OF THOUGHT

3. Whom did the school benefit? Or seek to benefit?

• We will try to identify the groups that supported each school of
thought and the groups to which each school appeal for support,
either successfully or unsuccessfully.
• To be popularized, a system of ideas must either fit the needs of all
of society or at least be acceptable to an element of society that will
defend, extend, and apply it.
• There are religious, political, aesthetic, social, and economic groups,
each of which represents a unified outlook and program in its sphere
of special interest.
• Individuals unite into groups because of social pressures, common
interests and ideas, and natural sociability
 MAJOR QUESTIONS WE SHOULD BE IN MIND IN
STUDYING THE VARIOUS SCHOOLS OF THOUGHT

4. How was the school valid, useful, or correct in its time?

• In studying past economic thoughts:
• Every dominant idea of the past should be seen as right, just, and
good in its time.
• The possible validity of economic theories must be related to
their time and place.
• We should note that concepts that are widely accepted today
are often inapplicable to earlier times, and they may become
inappropriate in the future.
• Society progresses and new theories emerge to explain new
developments.
• Also noteworthy is their place and significance in nurturing and
contributing to the contemporary thought
 MAJOR QUESTIONS WE SHOULD BE IN MIND IN
STUDYING THE VARIOUS SCHOOLS OF THOUGHT

5. Which tenets of the school became lasting contributions?

• This section identifies the ideas presented by a school that have
been of lasting significance and thus can still be found in current
economics textbooks.
• Here those contributions that “have stood the test of time” will be
sorted out from those that, although perhaps valid in their day,
outlived their usefulness as new evidence emerged or as social
conditions changed
Thank You!