History of Economics
PART 1
Lecture 1 Introduction and Pre-Classical Economics
History of economics the study of historical ways of thinking about
markets
Economic history the study of historical markets
> Understanding the economic historical context in which economists lived will
be helpful to understand their thinking, and thus the history of economics.
Why study the history of economic thought?
1. To appreciate the origins of our current economic thinking
- Grasp the evolution and origins of certain ideas
- Appreciate how historical context influences our perception of economic
concepts
2. Different perspectives than today’s ‘orthodox’ (mainstream) thinking
3. Important in its own right:
- Appreciation of the long history of the discipline and the intellectual
contributions of key economists
Pre-classical economics
Schools of economic thinking
>> Economics before the ‘Classical School’ of economics
A ‘school’ of economic thinking is a mostly theoretical construct, grouping
different economists across time according to similar ways of (economic)
thinking. Not necessarily perceived so by the economists themselves.
Classical School (or economic liberalism)
> Usually considered to start with Adam Smith (1776)
The classical school served all society in the long run, because the application of
its theories promoted capital accumulation and economic growth. But, not all
people shared equally from the concepts of classicism; there were costs along
with the benefits of industrialization.
Key tenets:
- Self-regulating markets
- Laissez-faire
1
, - International trade and specialization
‘Pre-school’ economics
Mercantilism as the first economic school. Was there no ‘economic’ thinking
before this? Of course there was!
Example of economic thinking throughout time: two ways of looking at what
determines prices:
- The costs of providing a good or service -> objective value
theory
- The benefits (utility) the good or service provides -> subjective
value theory
Nowadays, we acknowledge (of course) that both are important, in the shape of
supply (costs) and demand (utility) interactions. This was not always the case
I The Greeks: According to Aristotle (384-322 BC), there are two distinct sources
of value:
1. Use value: “utility”
2. Exchange value: it can fetch a price in exchange
Crucial: usefulness as a source of value
However, he acknowledges the need for the application of labour for value to
emerge
II Roman law: Laesio enormis
Legal principle that punishes violations from a ‘just price’ (iustum pretium). What
was a just price? The judge, often looking at market prices
III Medieval times:
Ethical considerations: greed and striving profits were frowned upon. As
Commerce developed (Commercial Revolution, starting +- 11 th century), more
favourable notions towards profit making emerged. However, the ‘just price
concept’ based on ethical principles remained central. Example: Thomas Aquinas
(1225-1274) “to sell a thing for more than its worth, or to buy it for less than its
worth, is in itself unjust and unlawful”. What determines the value of ‘a thing’?
1. Aristotelian explanation: human wants determine value (use value)
2. New: a second basis, depending (partly) on the cost of production
What determines prices? Conclusion
- Various notions of prices in the form of values or ‘just prices’
- Scattered across time and place
- Often disjointed, and implicit ideas
2
, - No systematic way of thinking about economic interactions
- Often a ‘side quest’ to more general philosophical or theological works
- Different for the mercantilist school!
- Again, cannot be seen separate from the historical context
School 1: Mercantilism (also known as Colbertism)
- Louis XIV (1638-1715)
- Jean-Baptiste Colbert (1619-1683)
Strong central state: need high tax revenues and need high ‘bullion’ (= materials
like gold and silver)
- Wars, imperialism and trade
- Facilitate internal trade (opposition of urban tolls, tariffs, etc.)
- Corvée (feudal compulsory labour)
Mercantilism especially benefited those who were most powerful
Main characteristics
1. Gold and silver (bullion) as the cornerstone of wealth
- Main goal: accumulation of gold and silver
- How? Colonialism, war and trade
2. Nationalism: trade as a zero-sum game
- In favour of exploitation of colonial/imperial resources
3. Trade competition “the fear of goods”
- Protection for manufactured goods and export restrictions for raw goods
- Duty-free import only for raw goods which are not available to nation
4. Strong central government
- Subsidies
- Quality controls
- Monopoly privileges
5. Large, hard-working population
- Army of soldiers, sailors and workers
- High labour supply->low wages = low export prices = more exports =
more gold inflow
- Full employment is key
Main contributions
> There are relatively few lasting contributions from mercantilism, but there are a
few:
- Balance of payments (of a country j) = (inflow money to a country j) –
(outflow money from country j to rest of the world)
- Reappraisal of the merchant (instead of just rent seekers, cf. supra)
3
, - An appraisal of the central role of the government
- Promoting / emphasized importance of international trade (i.e. getting rid
of urban medieval restrictions + national uniformity of regulation)
School 2: Physiocrats
> A direct response to the mercantilist school. It is a nice example of how
different schools of thought develop in relation with each other
Historical context
Started with François Quesnay’s first publication on economics in the ‘original’
Encyclopaedia. (1) Mercantilist France (overblown government, taxes, trade
tariffs, …), (2) Enlightenment (belief in the existence of natural laws, e.g.
Newton)
Main characteristics
1. Natural order
- Natural laws govern the physical world, all human behaviour should
algin with them
2. Laissez-faire
- Natural right of freedom
- By extension, also free trade!
3. Only agriculture (primary sector) produced real labour
- Neither commerce or industry generate value
- Taxation should be on land directly
> first notions on tax incidence
4. Circular
- Quesnay’s Tableau Économique (1758) describes revenue flows
> first notions of multipliers and more generally second-order effects
<- a comparative perspective
David Hume (1711-1776): why were the mercantilists wrong?
4
PART 1
Lecture 1 Introduction and Pre-Classical Economics
History of economics the study of historical ways of thinking about
markets
Economic history the study of historical markets
> Understanding the economic historical context in which economists lived will
be helpful to understand their thinking, and thus the history of economics.
Why study the history of economic thought?
1. To appreciate the origins of our current economic thinking
- Grasp the evolution and origins of certain ideas
- Appreciate how historical context influences our perception of economic
concepts
2. Different perspectives than today’s ‘orthodox’ (mainstream) thinking
3. Important in its own right:
- Appreciation of the long history of the discipline and the intellectual
contributions of key economists
Pre-classical economics
Schools of economic thinking
>> Economics before the ‘Classical School’ of economics
A ‘school’ of economic thinking is a mostly theoretical construct, grouping
different economists across time according to similar ways of (economic)
thinking. Not necessarily perceived so by the economists themselves.
Classical School (or economic liberalism)
> Usually considered to start with Adam Smith (1776)
The classical school served all society in the long run, because the application of
its theories promoted capital accumulation and economic growth. But, not all
people shared equally from the concepts of classicism; there were costs along
with the benefits of industrialization.
Key tenets:
- Self-regulating markets
- Laissez-faire
1
, - International trade and specialization
‘Pre-school’ economics
Mercantilism as the first economic school. Was there no ‘economic’ thinking
before this? Of course there was!
Example of economic thinking throughout time: two ways of looking at what
determines prices:
- The costs of providing a good or service -> objective value
theory
- The benefits (utility) the good or service provides -> subjective
value theory
Nowadays, we acknowledge (of course) that both are important, in the shape of
supply (costs) and demand (utility) interactions. This was not always the case
I The Greeks: According to Aristotle (384-322 BC), there are two distinct sources
of value:
1. Use value: “utility”
2. Exchange value: it can fetch a price in exchange
Crucial: usefulness as a source of value
However, he acknowledges the need for the application of labour for value to
emerge
II Roman law: Laesio enormis
Legal principle that punishes violations from a ‘just price’ (iustum pretium). What
was a just price? The judge, often looking at market prices
III Medieval times:
Ethical considerations: greed and striving profits were frowned upon. As
Commerce developed (Commercial Revolution, starting +- 11 th century), more
favourable notions towards profit making emerged. However, the ‘just price
concept’ based on ethical principles remained central. Example: Thomas Aquinas
(1225-1274) “to sell a thing for more than its worth, or to buy it for less than its
worth, is in itself unjust and unlawful”. What determines the value of ‘a thing’?
1. Aristotelian explanation: human wants determine value (use value)
2. New: a second basis, depending (partly) on the cost of production
What determines prices? Conclusion
- Various notions of prices in the form of values or ‘just prices’
- Scattered across time and place
- Often disjointed, and implicit ideas
2
, - No systematic way of thinking about economic interactions
- Often a ‘side quest’ to more general philosophical or theological works
- Different for the mercantilist school!
- Again, cannot be seen separate from the historical context
School 1: Mercantilism (also known as Colbertism)
- Louis XIV (1638-1715)
- Jean-Baptiste Colbert (1619-1683)
Strong central state: need high tax revenues and need high ‘bullion’ (= materials
like gold and silver)
- Wars, imperialism and trade
- Facilitate internal trade (opposition of urban tolls, tariffs, etc.)
- Corvée (feudal compulsory labour)
Mercantilism especially benefited those who were most powerful
Main characteristics
1. Gold and silver (bullion) as the cornerstone of wealth
- Main goal: accumulation of gold and silver
- How? Colonialism, war and trade
2. Nationalism: trade as a zero-sum game
- In favour of exploitation of colonial/imperial resources
3. Trade competition “the fear of goods”
- Protection for manufactured goods and export restrictions for raw goods
- Duty-free import only for raw goods which are not available to nation
4. Strong central government
- Subsidies
- Quality controls
- Monopoly privileges
5. Large, hard-working population
- Army of soldiers, sailors and workers
- High labour supply->low wages = low export prices = more exports =
more gold inflow
- Full employment is key
Main contributions
> There are relatively few lasting contributions from mercantilism, but there are a
few:
- Balance of payments (of a country j) = (inflow money to a country j) –
(outflow money from country j to rest of the world)
- Reappraisal of the merchant (instead of just rent seekers, cf. supra)
3
, - An appraisal of the central role of the government
- Promoting / emphasized importance of international trade (i.e. getting rid
of urban medieval restrictions + national uniformity of regulation)
School 2: Physiocrats
> A direct response to the mercantilist school. It is a nice example of how
different schools of thought develop in relation with each other
Historical context
Started with François Quesnay’s first publication on economics in the ‘original’
Encyclopaedia. (1) Mercantilist France (overblown government, taxes, trade
tariffs, …), (2) Enlightenment (belief in the existence of natural laws, e.g.
Newton)
Main characteristics
1. Natural order
- Natural laws govern the physical world, all human behaviour should
algin with them
2. Laissez-faire
- Natural right of freedom
- By extension, also free trade!
3. Only agriculture (primary sector) produced real labour
- Neither commerce or industry generate value
- Taxation should be on land directly
> first notions on tax incidence
4. Circular
- Quesnay’s Tableau Économique (1758) describes revenue flows
> first notions of multipliers and more generally second-order effects
<- a comparative perspective
David Hume (1711-1776): why were the mercantilists wrong?
4
