CH1. Introduction

• History of Economic Thought deals with the origin and development of economic ideas and their interrelations.
• It is distinct from Economic History and History of Economics. The former studies past material or industrial development, while the latter examines economics as a science.
• Economic ideas are influenced by their environment, as seen in how Plato and Aristotle were shaped by the institution of slavery in Greek civilization.
• The Industrial Revolution and urban working class development in England influenced Karl Marx’s socialist ideas.
• Economics as a science began with Adam Smith’s “Wealth of Nations” in 1776, making Smith the Father of Political Economy.
• Economic ideas existed long before economics became a formal science, seen in the works of ancient Hebrews, Indians, Greeks, and Romans.
• Prof. Bell describes economic thought as a heritage spanning 2,500 years, drawing from various phases of human knowledge.
• Prof. Haney defines it as a critical account of the development of economic ideas, tracing their origins and interrelations.
• The study can be divided into two parts: economic ideas before and after economics became a formal science in the late 18th century.
• Several theoretical approaches exist, including chronological, conceptual, philosophical, classical deductive, historical, neo-classical, welfare, institutional, and Keynesian.
• The chronological approach organizes ideas by time, ensuring continuity and understanding of when they emerged.
• The conceptual approach emphasizes the development of economic concepts like marginal utility and general equilibrium.
• The philosophical approach links economic ideas to ethics and philosophy, as seen in Plato, Aristotle, Adam Smith, Quesnay, and Marx.
• The classical deduction approach uses reasoning from fundamental principles, but was criticized for its abstraction by the historical school, which favored observation.
• The historical approach emphasizes inductive methods, asserting that economic ideas are shaped by time, place, and historical circumstances.
• The neo-classical approach modifies classical theories, balancing induction and deduction, and is exemplified by Marshall’s dual theory of value.
• The welfare approach focuses on maximizing social welfare, shifting the focus from production to utility, demand, and consumption.
• The institutional approach, founded by Veblen, rejects the centrality of the price system and highlights the importance of institutions like habits and customs.
• The Keynesian approach centers on macroeconomic issues like employment, money, and interest, aiming for full employment.
• Philosophical tendencies shape economists’ views, with idealism (e.g., Plato) leading to optimism and materialism(e.g., Hobbes, Locke, Rousseau) tending toward pessimism and laissez-faire.
• Two main methods are used in economics: deductive (from general to particular) and inductive (based on observation and facts).
• There is also a statistical method, combining deduction and induction.
• There are differing views on the importance of studying economic thought; some argue against studying pre-18th century ideas, seeing them as outdated or erroneous.
• However, studying even errors in economic thought helps avoid repeating them in the future.
• The study of history reveals a unity in economic thought and its continuity, connecting us with ancient times.
• Economic ideas are relative, shaped by their specific historical and social contexts, such as Aristotle’s justification of slavery or mercantilist theories.
• It provides a basis for comparing different ideas, enabling a balanced and reasonable judgment, avoiding confusion with new ideas or trends.
• It fosters an objective viewpoint, helping distinguish between economics as a discipline and the differing views of economists.
• Through the study of economic thought, one realizes that old doctrines don’t disappear but resurface in new forms, as seen in how Keynes’ ideas are connected to earlier thinkers like Malthus.
• Finally, it highlights the individuals responsible for key economic principles and the circumstances that shaped their contributions.

CH2. Ancient Economic Thought

Nature and Significance

• The study of ancient economic thought is crucial for understanding the growth of economic theories and institutions.
• In early societies, wants were few and simple, primarily consisting of food, clothing, and shelter.
• Initially, property was communal, not individually owned, and barter was the primary method of exchange.
• Economic activity was limited, and society was characterized by custom and tradition.
• With the development of tribal society, the economic order became more dynamic, introducing the division of laborand exchange of surplus products.
• Early thinkers did not create independent economic theories; their ideas were embedded in religion, philosophy, ethics,and politics.
• For example, usury was condemned and legally prohibited, not on economic grounds, but due to ethical considerations.
• Economic science grew slowly because it was seen as a handmaid of ethics and politics, with more focus on moralsthan on economic life.
• Ancient philosophy was simplistic, lacking differentiation between political, economic, and ethical values, resulting in a pervasive moral tone.
• The emphasis on the negation of material pleasures contributed to the absence of comprehensive economic theories.
• Custom, tradition, and authority limited freedom of choice, economic enterprise, and growth, characteristics of a modern capitalist economy.
• Early thinkers undervalued labour as a factor of production and viewed it as an ignoble function performed by slaves.
• Modern economic speculation is often driven by a desire to improve the conditions of the laboring class.
• Ancient economic communities were largely self-sufficient, with production primarily for consumption.
• The development of economics advanced significantly only after the Reformation and Renaissance.
• There are two main views on the significance of studying ancient economic thought: one claims it is of only historical interest, while the other sees value in understanding the origins and development of the science.
• Prof. Cannan argues that studying ancient economic thought allows readers to grasp the origin, development, and environment of economic science.
• Alexander Gray emphasizes that political economy seeks to explain how contemporary society operates within existing frameworks and assumptions.
• In economics, today’s heresies can become tomorrow’s orthodoxies, indicating that no theory is ever fully discarded.
• Old doctrines may fade but possess a strange ability to resurface in suitable environments.
• It is beneficial to study the economic ideas of early thinkers such as the Hebrews, Greeks, and Romans for insights into the evolution of economic thought.

THE HEBREW ECONOMIC THOUGHT

• The Hebrews represent one of the ancient civilizations, dating back to 2500 B.C. Some scholars believe that Western civilization originated from Hebrew and Greek civilizations.
• The primary sources of information about the Hebrew period are the writings of Hebrew prophets and the Old Testament.
• The economic philosophy of the Hebrews was simple and not complex, with economic, political, ethical, and philosophical ideas intertwined.
• Their writings were dominated by religion and ethics, which regulated the life of the common man through a powerful priestly class.
• Ethico-religious ideas hindered economic progress, characterized by a lack of individualism and materialism.
• The Hebrews held a relative indifference towards wealth, promoting a passive and fatalistic attitude, making a great industrial civilization impossible.
• There was a focus on maintaining social equilibrium, with static ideals influencing social regulation, including the caste system and isolated national life.
• Hebrews had some notions of social welfare, but lacked a dynamic plan for its implementation, showing no active social planning.
• Key economic ideas included concepts of interest and usury, agriculture, property rights, taxation, weights and measures, adulteration, monopoly, and concern for the poor.
• Usury: The economically weak were protected through laws against lending at interest. The Mosaic Law prohibited “Usury of money, Victuals, or anything lent.” The law applied only to fellow Hebrews; lending at interest to strangers was permitted.
• Commerce and Just Price: The prophets condemned false weights, measures, and adulteration. Legislation existed to curb monopolistic tendencies, and the export of essential food was forbidden, promoting the concept of “just price.”
• Labour: Unlike the Greeks, Hebrews recognized the dignity of labour, especially in agriculture, with payments often made in kind and laws to protect workers’ interests.
• Agriculture and Industry: The Hebrews’ civilization was primarily rural and agrarian, with agriculture held in high esteem. A maxim stated, “Although trading gives greater profits, never hesitate to buy land.”
• The Seventh Year: Observance of the Sabbatical year was a unique feature, allowing land to lie fallow every seventh year to conserve soil fertility. It also applied to slaves and debts, promoting liberation and cancellation of debts.
• The Jubilee Year: The Jubilee year (50th year) mandated the return of sold land to its original owner, preventing wealth concentration and supporting family and tribal property preservation.
• Money: The Hebrews understood the functions of money, using bullion, ingots, or rings for transactions, with no stamped coins until around 700 B.C..
• The Sabbath: The Sabbath was a significant aspect of social legislation, a weekly day of rest enjoyed by everyone, including slaves, establishing a unique social practice absent in other ancient civilizations.
• The social philosophy of the Hebrews was characterized by a tribal society with intertwined religion, ethics, law, economics, and philosophy, where morals were central to education.
• Their society showed minute regulation of daily life, with religion dominating and a lack of individualism and materialism, hindering economic progress.
• Biblical provisions protected the poor from exploitation and permanent debt, with prophetic critiques of injusticeagainst the poor by the rich.
• While Moses aimed to prevent inequality of wealth, this did not equate to socialism or social democracy. It might resemble a periodically enforced communism had the Mosaic law been fully executed.
• The economic thought of the Hebrews featured scattered and fragmentary statements about economic ideas.
• Despite their lack of coherence, these ideas had a disproportionately greater power to influence people compared to more recent, refined scientific theories.
• Eric Roll notes that the views of the Hebrew Prophets, integrated into the ethical and metaphysical framework of patriarchal society, may seem primitive to modern economists.
• However, the influence of these views on people’s minds is not necessarily inferior to that of contemporary refined theories and can often be greater.
• The philosophical systems containing these isolated economic statements continue to persist and remain relevant over time.

THE GREEK THOUGHT

• Greek thought, Roman Law, and Christian religion form the foundation of European culture; Henry Maine noted Greek origins of contemporary thought.
• By the 8th century B.C., private property in land, division of labour, and trade were established in Greece.
• Money was also used, and society transitioned from tribal bonds to class divisions ruled by a landed aristocracy.
• Greeks lived in city-states and practiced direct democracy, although real power was held by landowners and the hereditary ruling class.
• Slavery was prevalent, with productive work primarily performed by slaves and resident foreigners, who could not own land and mostly became traders or craftsmen.
• Greek philosophers focused on the city-state, discussing concepts such as the good life, the just state, and the happy man, intertwining ethics, politics, and economics.
• The term economics originates from Greek, meaning “management of the household.”
• Plato (427-347 B.C.) and Aristotle (384-322 B.C.) were significant thinkers of ancient Greece.
• Plato, writing during the decline of Athenian democracy, criticized commercialism and the excesses of democracy, reflecting a spiritual revolt against the prevailing societal trends.
• He systematically explained the division of labour and the origin of the city-state, arguing that states arise from human needs and the resulting division of labour.
• According to Plato, natural inequalities among humans lead to specialization, making production more efficient.
• Division of labour is central to Plato’s thought, which influenced later economists like Adam Smith, though their emphases differ—Plato focused on social organization while Smith emphasized productivity.
• Plato’s ideal state consists of a small city-state with a fixed population of 5,040 citizens, emphasizing strict regulation of all activities.
• In Plato’s ideal state, there are two classes: the rulers (guardians and auxiliaries) and the ruled (artisans), with education tailored for future rulers.
• Rulers are selected from early childhood, educated in philosophy and military arts, ultimately becoming philosopher kings through rigorous examination.
• Plato advocated for rule by an elite, suggesting a communistic lifestyle for guardians, prohibiting private property and family life among them.
• This communism was limited to the ruling class, and while Plato rejected private property, he did not exclude it for lower classes.
• Regarding money, Plato viewed it as a symbol for facilitating exchange, advocating for token money instead of gold and silver to prevent wealth accumulation.
• Crafts and trades were reserved for resident foreigners, with strict controls over foreign trade; retail trade was forbidden, and lending at interest was prohibited.
• Plato’s economic views reflected his time, accepting slavery as part of society, and aligning with aristocratic ideals, though advocating for peace and a rule of reason.
• His vision of the ideal state diverged from both Athenian democracy and Spartan aristocracy, representing an Utopia.
• Despite practical challenges in implementing his ideas, Plato inspired later Utopians and Romantics, and he was the first to apply an economic interpretation of history.

ARISTOTLE (384-322 BC)

• Aristotle was the first analytical economist, laying the foundations of economic science.
• Aristotle differed from Plato on key issues such as the origin of the state and private property vs. communal property.
• The State originates from economic and political causes, evolving from households to villages, then to the state.
• Aristotle viewed man as a social and political animal; the state aims to promote the good life.
• He opposed Plato’s communism of wives and property, supporting the continuation of family and private property.
• Aristotle’s ideal state has a ruling class divided by function (military, statesmen, priests), and those ruled include farmers, craftsmen, and laborers.
• Aristotle’s support for private property is based on its superiority over communal property due to:
  • Progress: Private property encourages care and productivity, avoiding the neglect associated with communal ownership.
  • Peace: Communal property causes disputes, especially when rewards are not equally distributed for equal work.
  • Pleasure: Ownership of property provides personal satisfaction.
  • Practice: History shows the benefits of private property.
  • Philanthropy: Private property allows for charity and sharing among friends.
• Slavery is seen as a natural phenomenon by Aristotle, where some people are “slaves by nature” and are meant to be ruled.
• He argued against enslaving Greeks, suggesting slavery should be limited to non-Greeks.
• Aristotle’s economic analysis covered Economy Proper (household management) and the Science of Supply(acquisition and exchange).
• He identified two forms of exchange:
  • Natural exchange: For satisfying basic needs.
  • Unnatural exchange: For monetary gain, which he disapproved of.
• Aristotle distinguished between value-in-use (usefulness) and value-in-exchange (exchange for money).
• His theory of just price advocated fairness in transactions, where each party receives equal value for what they give.
• Aristotle condemned monopoly as unjust.
• His theory of money explained money’s functions, including medium of exchange, store of value, and measure of value.
• Aristotle believed money might have originated from state legislation, foreshadowing Knapp’s State Theory of money.
• He opposed interest, viewing it as unnatural since money is barren and should not “beget” more money.
• Aristotle’s argument against interest was rooted in the belief that money was often borrowed for basic needs, making it unethical to charge interest.
• Modern economics critiques Aristotle’s theory, noting that money today can be used for productive investments.

THE ROMAN THOUGHT

• Rome did not contribute much to economic thought; their ideas were largely borrowed from Greece.
• While Greece produced thinkers and philosophers, Rome focused on warfare and statecraft, producing warriors and statesmen.
• Understanding Roman ideas is important for following the continuity of economic thought.
• Rome started as an agrarian city-state and grew into an empire through warfare.
• Economic dislocation and conflicts between rich and poor were common due to wars and conquests.
• Wealthy landowners, money-lenders, and traders grew richer, while small farmers suffered.
• Roman thinkers focused on practical affairs, and their economic thought emerged from civil service and legal discussions rather than theoretical works.
• Romans valued agriculture highly, considering it the most profitable, respectful, and delightful occupation.
• Cicero condemned many occupations like money-lending, retail trade, and manual labor as vulgar, but he approved wholesale trade and praised agriculture.
• Roman philosophers like Seneca saw money as the root of many evils, but also recognized the comparative advantage in trade between nations.
• Pliny condemned gold, saying it led to the ruin of mankind.
• Roman writings on agriculture focused on practical issues like slave labor and the size of farms.
• Small farms were praised for efficiency, while large estates (Latifundia) were seen as inefficient, especially due to the use of slave labor.
• Roman philosophers began to question the institution of slavery, viewing slave labor as inefficient and uneconomical.
• Roman Law is Rome’s greatest legacy, playing a crucial role in the development of economic analysis.
• The Roman legal system had two sets of laws: Jus Civile (Civil Law) for citizens and Jus Gentium (laws for foreigners or between citizens and non-citizens).
• Jus Gentium later evolved into Natural Law (Jus Naturale) and influenced the development of the Law of Nations.
• Roman Law strongly supported the institutions of private property and freedom of contract, granting individuals nearly absolute rights over their property.
• The emphasis on separation of personal from non-personal elements in law is a key contribution of Roman legal thought.
• The doctrine of the corporation can be traced to Roman law, separating corporate assets from the owners’ assets.
• Modern legal concepts like reasonable price and reasonable value have origins in Roman Law.
• Roman Law provided definitions for concepts such as price, money, purchase and sale, loans, and types of deposits, laying the groundwork for future economic analysis.
• Roman Law influenced the legal doctrines and institutions of capitalism.
• The Romans’ main contribution to economic thought was the development of jurisprudence as a science, rather than economic theory.
• Though lacking in speculative originality, Roman writings are essential for understanding the continuity of economic thought through history.

THE ISLAMIC THOUGHT

• The key to Islamic economic philosophy lies in man’s relationship with God, the universe, and other human beings.
• Religion is the basis of Islamic economic thought.
• Tawhid defines man’s relationship with God, emphasizing total submission to Him.
• Man is considered a vicegerent of God on earth, accountable for the use of natural resources.
• Man’s relationship with others is based on brotherhood and equality.
• Islam rejects asceticism, promoting a good life of sufficiency and peace.
• Equal opportunity must be given to all for earning life necessities, but differences in rewards are possible due to abilities and inheritance.
• Private ownership is temporary, as God is the real owner of everything, and wealth is considered a trust from Him.
• Proper use of resources is a test of faith, and they must be used to meet the essential needs of all human beings.
• Moderation in personal consumption is emphasized, while saving for future needs is encouraged.
• Zakat (religious levy) redistributes wealth from the rich to the poor, preventing concentration of wealth and ensuring subsistence for all.
• Investment is encouraged to discourage hoarding and promote economic growth.
• Interest is forbidden in Islam, and interest-free financial methods are adopted, leading to the rise of Islamic banks.
• Islamic banks operate on a profit-loss sharing model, avoiding interest (riba).
• Popular services like Mudaraba allow profit-sharing between depositors and banks based on agreed-upon ratios.
• Rent (ijara) is permitted, and Islamic banks can earn income through leasing.
• Interest-free financial institutions such as Islamic banks, investment companies, takaful (insurance) companies, and development banks have emerged, competing successfully with traditional interest-based institutions.
• Islamic economic development emphasizes that economic growth and social justice go hand in hand.
• The State plays a positive role in ensuring adherence to the Islamic economic code, through education, persuasion, and sometimes coercion.
• The State also helps regulate the market, redistribute resources, and accelerate economic growth with social justice.
• The State controls money supply, and central banks may offer interest-free loans to commercial banks to maintain liquidity.
• The Islamic Development Bank fosters economic development in line with Shariah principles, participating in projects and providing assistance to member countries.
• Islam emphasizes the dignity of labor, fair wages, and cooperation between labor and management.
• The majority of Islamic scholars oppose family planning, suggesting resource augmentation and better utilization as a solution to population growth.
• Islamic economic development focuses on increasing production, distributive justice, environmental balance, and improving the quality of life.
• Some Islamic economists criticize the use of money as a store of value, suggesting that zakat and the abolition of interest will restore economic equilibrium.
• Monopoly, hoarding, and speculation are considered un-Islamic.
• There is disagreement on the nature of profit, with some not viewing it as a reward for risk-taking. Instead, profits in contracts like Mudaraba are shared between capital suppliers and entrepreneurs.
• Islamic economics is normative rather than positive, dealing with economic problems of a society guided by Islamic values.
• Economic laws in Islamic economics are seen as relative and not universally applicable, except for the Laws of Returns.