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2. Why is it important that students of economics study the history of economic thought in context?

Montpellier University, Faculty of Economics Master 1, Robert Braid HISTORY OF ECONOMIC THOUGHT IN CONTEXT SYLLABUS 1. Moral Economy (Antiquity Middle Ages) 2. Mercantilism (16 th 17 th centuries)
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Montpellier University, Faculty of Economics Master 1, Robert Braid HISTORY OF ECONOMIC THOUGHT IN CONTEXT SYLLABUS 1. Moral Economy (Antiquity Middle Ages) 2. Mercantilism (16 th 17 th centuries) 3. Physiocrats (mid-18 th century) 4. Classical Economics (late 18 th - early 19 th century) 5. Social Economics (early - mid 19 th century) 6. Neo-classical economics (mid - late 19 th century) 7. Keynes and Heterodox economists (early 20 th century) 8. New Liberal Economic Theory (mid-late 20 th century) 9. Welfare/Development Econ., New Institutional Econ., Behavioral Econ (late 20 th cent.) 10. Neo Keynesianism, Wikinomics, Environmental Economics (early 21 st century) OBJECTIVES AND ORGANIZATION This course has been designed to help students gain basic knowledge relative to the history of economic theory, as well as analytical skills to understand it, that are necessary for university students in economics. Each CM course is dedicated to a particular period in the history of economic thought and consists of a brief analysis of the historical context, then a more in-depth study of the economic theories that were developed in that context. At the end of each session, the professor presents students with questions or documents that must be prepared for TD class. EXAMS All students will be required to take two small tests during the semester in TD and one final exam at the end of the semester in CM, to evaluate whether they did the work required, learned the relevant information, and developed the analytical skills taught. These exams could consist of multiple-choice questions, short answer questions, essay questions, or a combination of these different types of question, designed to evaluate your ability to express your knowledge of the class or on your ability to analyze a document. NB - It is the student s responsibility to come to every class. This course book is a guide and does not contain all the information to do well on the exam. Only regular presence and individual reading of the works below will allow students to gain a global understanding of the course. REFERENCE WORKS No one work covers the entire course. It is therefore recommended to consult the references indicated below to reinforce the information given in class, not as a substitution for the class. On-line resources : Histoire de la pensée économique (on-line course material by Jean-Pierre Potier, ENS Lyon), and Wikipedia page History of Economic Thought Wikipedia pages Economic history of (France, Germany, Great Britain, the United States, etc.) to understand the historical context of the intellectual trends in economics. Paper editions (unfortunately, the university library only has texts in French) Bailly (Jean-Luc), Buridant (Jérôme), et al., Histoire de la pensée économique, Collection «Grand Amphi Economie», Rosny : Bréal, Blaug (Mark), Economic Theory in Retrospect, Cambridge: Cambridge University Press, first pub Jessua (Claude) : Histoire de la théorie économique, Paris : P.U.F., Martina (Daniel) : La pensée économique, Paris : A. Colin, coll. Cursus , tome 1, Des mercantilistes aux néo-classiques, 1991, tome 2, Des néo-marginalistes aux contemporains, Poulalion (Gabriel), Histoire de la pensée économique, Paris : L Hermès, Wolff (Jacques), Histoire de la pensée économique. Des Origines à nos jours, Paris : Montcrestien, Schumpeter (Joseph-Alois), History of Economic Analysis, London: G. Allen and Unwin, Introduction Learning the history of economic thought in context 1. What do the following terms mean: history, economic, theory, context? In general, the term history refers to the study of past events, but there are various ways to study the past. Whereas, archeologists use objects to gain an understanding of how humans lived in the past, historians generally base their studies on textual analysis. There are many types of documents available to historians (philosophy, literature, laws, court cases, the press, personal correspondence, etc.). Not all ideas, however, are expressed in documents, and the vast majority of documents produced are lost or destroyed over time. Moreover, interpreting the documents written in ancient cultures is particularly difficult. Historians must be particularly careful to think about why a document was written, why it was preserved, and why it was written in a particular way. Economics is the study of the production, distribution and consumption of goods and services. Producing or otherwise acquiring, sharing and consuming products have always been the primary activities of the vast majority of humans (and even animals!) since the world began. Long before complicated mathematical formulae to understand these activities, and even before the invention of money to facilitate trade, people have been thinking about the ways to eat, stay warm and dry and provide for their families. The overwhelming majority of human thought dedicated to economics was never written, and is therefore impossible for historians to take into account. Not all ideas about economics, even those that were written, are part of economic theory. It is generally considered that economic science began in the 18 th century with Adam Smith, or even with the French Physiocrat movement, when intellectuals began to develop theories and laws that would explain how the economy functioned as a whole. But these authors borrowed lots of ideas from their predecessors who had not integrated their own ideas into a coherent science. Adam Smith and Karl Marx, for example, were first and foremost philosophers, and therefore very familiar with the ideas relative to production and trade developed by ancient and medieval authors. It would be a mistake to examine the works of economists without a proper understanding of their intellectual heritage. But intellectuals are affected by more than the ideas of the authors they read. Their culture and environment have a great impact on how they observe and interpret phenomena. By context, we mean anything that may influence an author that is not explicitly expressed in the text itself. Most importantly, the state of the economy that the intellectual is observing will determine to a large extent his views about economics in general. But political events, social movements, scientific inventions, etc., can all influence an economist s views. Even the personal experience of an author can often explain his point of view. How is it possible to understand Adam Smith s The Wealth of Nations, if one does not consider the fact that, before writing it, he had travelled to France and met with various Physiocrat authors? How can one understand Karl Marx s Capital without taking into account his role in the 1848 Revolution? Would Hayek have been so fanatically against state regulation if he had not grown up in Vienna, a city that was occupied by Nazis shortly after he left? Many aspects of authors context will, therefore, be examined in order to bring light to the works that have shaped modern economic analysis. 2. Why is it important that students of economics study the history of economic thought in context? As an economist, you will be confronted with many different, and often conflicting, ideas about how the economy functions. It is often useful to think about where the ideas come from in order to properly understand the idea itself. But even outside of economic theory, young professionals need to develop their ability to think critically about the views of people they will work with. Even if the information learned in class is quickly forgotten by the student, the professor hopes that the ability to interpret and think critically about ideas received will last. 2 Theory and reality according to J. M. Keynes: The ideas of economists and political philosophers, both when they are right and when they are wrong, are more powerful than is commonly understood. Indeed the world is ruled by little else. Practical men, who believe themselves to be quite exempt from any intellectual influence, are usually the slaves of some defunct economist. John Maynard Keynes, General Theory of Employment, Interest and money, 1936, ch. 24. According to Keynes, the link between economic theory and economic reality if clear: practical men (meaning managers, government regulators, decision-makers) are dependent on the ideas developed by intellectuals, even if they are unaware of it. It is true that many decision-makers often call on economists to give their interpretation of a particular situation or to find a solution to a particular problem. However, it is also obvious that intellectuals are heavily influenced by their context, and therefore by the practical men who shape this context. Is it possible that Keynes gave greater importance to the influence of intellectuals because he was one himself? 3 Quiz (10 minutes) 1. Greek philosopher (ca BC), disciple of Socrates, who is the author of the first use of the word economic, meaning the proper management of a large estate. He was also in favor of the specialisation of labor and explains how Athens could increase its revenues. 2. Scottish economist and philosopher ( ), who published in 1776 The Wealth of Nations, in which he explains how the economy regulates itself autonomously because the acts carried out in the interests of each individual also fulfill the collective interest. 3. French economist ( ) of the classical school, who favored a laissez-faire policy of free trade, he is known for his theory that production creates opportunities, or a market, for exchanges. 4. English economist ( ), considered as one of the founding fathers of the classical school, who began his career as a stockbroker in London, and who became a Member of Parliament in 1819, who is known for his major work On the Principles of Political Economy and Taxation, in which he defended free trade and developed a theory by which the value of a good includes not only the labor required to produce it, but also the labor that was necessary to accumulate the capital (machines, etc.). 5. French economist ( ), professor at the University of Lausanne, co-founder of the neo-classical school, who is known for his general equilibrium theory and for his extremely theoretical approach. 6. British economist ( ), of the University of Cambridge, considered one of the greatest authors of the neo-classical school, who used theories of marginal utility to elaborate a theory of partial equilibrium, all other things being equal ( ceteris paribus ). 7. Austrian economist ( ), defender of free trade, known for his work The Road to Serfdom (1944) in which he demonstrates that the intervention of the State in economic affairs leads to the reduction of individual freedom, he received the Nobel Prize in Economics in 1974 for incorporating social and institutional aspects in his economic analysis 8. British economist ( ), and one of the main actors at Bretton Woods, who is known for his theory that markets cannot always regulate themselves efficiently, requiring State intervention, in particular to replace demand in the private sector which drops off in times of economic difficulty. 9. American economist (1943- ), professor at Columbia University, former Chief Economist at the World Bank, he received the Nobel Prize in Economics and is known for his criticism of liberal economic theory and globalisation. He is the most-cited economist in the world (according to IDEAS/RePEc). 10. American economist (1953- ), professor at Princeton, at the la London School of Economics, Noble Prize winner in 2008 for his work on international trade and the geographic concentration of wealth by examining the economies of scale and consumer preference. NB - If you cannot answer correctly and from memory at least 8 of these questions, you will probably need to spend extra time reviewing the basics of economic theory. 4 Chapter 1. Moral Economy (Antiquity Middle Ages) The only documents that leave a trace of economic ideas that were preserved from this period are laws and philosophical (or theological) treatises. Economic thought at this time is indissociable from morality (or law), and therefore based on the virtuous (or legal) behavior of various agents. It is clear that peasants, artisans, merchants, etc. thought about means of production, supply and demand, efficiency, trade, investment, consumption, budgets, etc., even if they did not transcribe their ideas into texts. The ideas expressed in written documents, it must be remembered, only represent the ideas of a small percentage of the population. Mesopotamia The Hammurabi Code King of Babylon in the 18 th century BC. This is certainly the oldest text preserved (written on a stone tablet) which mentions economic activity. Like all legal codes, this is a document that groups various rules on a wide variety of human activities in order to maintain order in society. This code includes economic regulations (wage fixing, rules relative to lending and renting, professional responsibility, etc.). It is not terribly interesting for our purposes because it was only recently rediscovered and had no impact on our intellectual heritage. It is, however, a vestige of economic thought from a very early period and is worth pointing out. Chinese Antiquity There are two major intellectual traditions in Chinese philosophy: Taoism and Confucianism. Taoism The Old Master, Lao Tseu ( BC) is considered as the originator of ideas expressed in a later work, Tao Te Ching or The Book of the Virtuous Way (4 th 3 rd century BC). This philosophy is based on the principle of a binary universe (yin and yang). As in all philosophies, Taoism seeks to establish a code of conduct to lead human beings to virtue. A fundamental component of Taosim is the non intervention of humans in the universe. Harmony and virtue are attained by accepting the natural world. It is therefore against culture, knowledge, desire, in order to return to a pure and original state. Confucianism The other major current in ancient Chinese philosophy is Confucianism. Contrary to the teachings of Taoism, Confucius ( BC) advocated a philosophy of which man was at the center. Virtue is attained through living with others in society. Confucius therefore gives a major role to education and the State. Some historians of economic theory attempt to read into these philosophies a certain degree of economic reflection. Indeed, the non intervention of Taoism may be associated with liberal economic theory in which markets regulate themselves (Smith, Marshall, Hayek, Freedman, etc.). Confucianism, on the other hand, would support an economic theory that favors State intervention in economic affairs (Marx, Keynes, Stglitz, Krugman, etc.). Unfortunately, these philosophies do not explicitly discuss the economy and it would be dangerous to attribute economic ideas to texts that do not even mention economic activities. Moreover, these philosophical currents had no direct impact on traditional Western philosophy or on the most widely accepted economic theories. 5 Greek Antiquity Contrary to Babylonian laws or traditional Chinese philosophy, the ideas articulated in ancient Greek texts had a significant and direct impact on Western philosophy, and in particular on modern economic theory. One must not forget that Adam Smith was a professor of philosophy and taught Plato and Aristotle at university. Karl Marx wrote his doctoral dissertation on ancient Greek philosophy. Until relatively recently, all university scholars, including economists, had to learn Latin and Greek and were familiar with the fundamental texts of Western Civilization. Aristotle in particular had a profound impact on medieval philosophy and many of his ideas were also transmitted from generation to generation to the present day. Context Before studying the ideas of any given period, it is important to understand the context in which they were formulated. Ancient Greece is considered the cradle of democracy, yet it should be remembered that the Greek economy was based on the labor of slaves. Slaves worked on agricultural estates and in urban trades, and the notion of democracy expounded in ancient Greece had no intention of eliminating forced labor. One should also remember that Greek philosophy could develop because the Greek economy was prosperous. International trade was made possible by the advanced techniques in navigation. Greek ships sailed across the Mediterranean, bringing goods, people and ideas. One will notice throughout this course that new ideas were often developed during periods of economic expansion based on international trade. For our purposes here, however, there is no real need to examine the Greek context in depth. It is sufficient to be familiar with the economic ideas that were learned by scholars in all fields in the West. Authors Thales of Miletus ( BC) Thales did not leave any written record of his ideas, but Aristotle related and anecdote about this philosopher which suggests that he had mastery of fundamental economic principles. According to Aristotle, Thales was criticized for the uselessness of his philosophy. Indeed, as a philosopher, he was interested in living virtuously, gaining knowledge and understanding, not in seeking wealth. However, in order to demonstrate how his knowledge could be useful, Thales calculated the movement of the stars and planets to predict agricultural cycles. Then he invested in oil presses at a moment when olive harvests, and therefore the demand for oil presses and their prices, were low. Then he rented them out when harvests were abundant and the demand was high. His profits soon turned into a fortune. He eventually managed to gain a monopoly on oil presses, and consequently could charge any price he chose. Whether this anecdote is true or not, it shows us that at this early period certain people were familiar with the basic economic concepts of supply, demand, return on investment, economic cycles, profits and monopolies. Socrates ( BC) Socrates is one of the best known Greek philosophers, despite the fact that he did not write any of his own ideas. His philosophy is known to us through the writings of his students, Xenophon and Plato. Socrates, however, did not dwell on questions of economics. On the contrary, he demonstrated a particular disdain for material gain and the accumulation of wealth. His students, however, further developed Socrates methods to highlight a certain number of economic ideas. Xenophon ( BC) Socrates student Xenophon is the author of two works dealing with economic activity: Economics, andways and Means. He was the first known author to use the term economics. In this work - which comes from the Greek words oikos (house) and nomos (order) - he explains the most rational method of organizing an agricultural estate. His other work, Ways and Means, he expands his analysis to the entire region, discussing the best methods of public investment in infrastructure and production, taxation and redistribution, in order to enhance the collective wealth. Although he very clearly supported government intervention in markets, and had a firm grasp on the economic benefits of such intervention, he did not develop the analysis of economic activity into a science. This work could have been the basis for a new economic philosophy, but this line of reasoning was not taken up by other authors. At best, most other authors in Antiquity wrote works similar to his manual on the proper management of agricultural estates. Xenophon s Economics does, however, attest to the fact that complex economic ideas could and did exist, indeed it is hard to imagine City-States or even empires as vast as those that existed in Antiquity without some thought to economic activity, even though philosophers were generally more interested in writing about moral virtue. 6 Plato ( BC) Also a student of Socrates, Plato is best known for his work entitled The Republic. In Greek society, ind
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