A history of economic thought?Ernest Aigner / 7.9.2015 / The Global Economy – Environment, Development and Globalisation / CEMUS / Uppsala University

Outline

1. Economics, Economy and histories of economic thoughts

2. Histories of economic thoughts

Why thinking about the economy?

“the history of intellectual efforts that man have made in order to understand economic phenomena” (Schumpeter)

But why should we deal with that?

Schumpeter- Pedagogical Devise- Inspirational Device- Insights into the human mind

But about what should we think?

Economics as …… economics = oikos (House) and nomos (custom) = “rules of the house”

… as a methodology (e.g. Collander)

vs.

… as the study of the economy (Chang)

vs.

‘ The real science of political economy, […] teaches nations to desire and labour for the things that lead to life: and which teaches them to scorn and destroy the things that lead to destruction’ Ruskin (1860)

‘Reframing the economy is a critical step in building community economies. By seeing the economy not as a machine but as the day-to day processes that we all engage in as we go about securing what we need to materially function, it’s clear that the economy is created by the actions we take.’ (Gibson-Graham)

Pluralism?

Calls for pluralism in economic…… education by students

“It is not only the world economy that is in crisis. The teaching of economics is in crisis too, and this crisis has consequences far beyond the university walls. ” (www.ISIPE.com, 2014)

- Theoretical- Methodological- Interdisciplinary

… research by scholars

"We the undersigned are concerned with the threat to economic science posed by intellectual monopoly. […]" (Hodgson, Mäki, & McCloskey, 1992)

But why pluralism?

- abstraction requires pluralism- economics involves value judgements- a more diverse gene pool is more resilient to shocks- call for cross-fertilized (Ha-Joon chang, 2014)

What is pluralism?

1. Pre-classical or prehistory (up to 1776)Aristoteles, Scholastics and Merkantilists

2. Classical (1776-1870s)Smith, Malthus, Ricardo, Mill and Marx

3. Marginal revolution (1870s-1890s)Walras, Jevons & Menger

4. Neoclassical economics (1890s-today)Marshall

5. Keynesian revolution (1936-1960s)Keynes & Neoclassical Synthesis

6. …

Pre-classical or prehistory (up to 1776)Classical antiquity & scholastics

• Classical antiquity, 400BCE • What does it mean to live the good life? What is the fair

price for a good in the market? Is it morally acceptable to earn money?

• Aristotle defined economics

• The scholastics, 12-16TH

• How should good Christian behave in their economic affairs? What is the fair price for a good in the market? Is it morally acceptable to earn money?

Adam Smith (1723-1780)The father of the political economic discipline

Context- How can we account for social life without metaphysical

presuppositions?- Emergence of Newton’s theory- Three classes (landowners, capitalists and workers)

Two main contributions- ”An inquiry into the nature and wealth of the nation” - ”The moral sentiments”

Market and Natural Price

Smith’s three soles- Macroeconomic- Microeconomic- Institutionalist

Value of Exchange and Use

Two prices for each good

Market prices

Depend on the forces of demand and supply

Natural prices

prices that allow the renumeration of capitalists, landowners and workers

reflect the cost of production

Can you think of examples where the natural price differs from themarket price?

Smith: ‚The real price of everything‘…on the example of work

„The real price of everything, what everything really costs to the man who wants to acquire it, is the toil and trouble of acquiring it. Whateverything is really worth to the man who has acquired it, and whowants to dispose of it or exchange it for something else, is the toil of ourown body. That money or those goods save us this toil. They contain thevalue of a certain quantity of labour which we exchange for what issupposed at the time to contain the value of an equal quantity.“ (Smith)

What could the real price of everything be according to Smith?

(Wealth of Nation, p. 133)

Smith: The Macroeconomist…on the example of work

„The real price of everything, what everything really costs to the man who wants to acquire it, is the toil and trouble of acquiring it. What everything is really worth to the man who has acquired it, and who wants to dispose of it or exchange it for something else, is the toil of our own body. That money or those goods save us this toil. They contain[s] the value of a certain quantity of labour, which we exchange for what is supposed at the time to contain the value of an equal quantity.“

Objective theory of value

… value is based on embodied or commanded labour

(Wealth of Nation, p. 133)

Smith: The Microeconomist…on the example of work

„The real price of everything, what everything really costs to the man who wants to acquire it, is the toil and trouble of acquiring it. What everything is really worth to the man who has acquired it, and who wants to dispose of it or exchange it for something else, is the toil of our own body. That money or those goods save us this toil. They contain the value of a certain quantity of labour, which we exchange for what is supposed at the time to contain the value of an equal quantity.“

Subjective theory of value

(Wealth of Nation, p. 133)

Smith: Division of labourImplications of the pin-factory

… between firms

„It is not from the benevolenceof the butcher, the brewer or thebaker that we expect our dinnerbut from their regard to theirown interest“

Equilibriummarket price = natural prices

… within firmsThe Pin Factory

Smith: The Institutionalist… and non-egoistic behaviour

‚How selfish soever man may be supposed, there are evidentlysome principles in his nature which interest him in the fortuneof others and render their happiness necessary to him thoughhe derives nothing from it except the pleasure of seeing it‘ (Moral Sentiments)

What organizes society then?

Institutions, but what are institutions? Can you think of examples?

Institutions are frames within which individual behaviour leads to prosperty (Screpanti, 2005)

Smith on markets and institutions• Requires private property• Laws to limit monopolies for their

• power in the market• stronger politicl influence

• Is guided by moral and legal rules• Poverty

• Financial market regulations• Limit on interest rates

Smith on Diamonds and Water…or the value of exchange and use

‘Nothing is more useful than water: but it will purchase scarcely anything; scarcely anything can be had in exchange for it. A diamond, on the contrary, has scarcely any use value; but a very great quantity of other goods may frequently be had in exchange for it.’ (Smith)

Write down five goods with a low exchange value and a high use value

Write down five goods with a high exchange value and low use value

The Classics - continuation

“They contain the value of a certain quantity of labour, which we exchange for what is supposed at the time to contain the value of an equal quantity.”

Three classes, three economists- Malthus

- Ricardo

- Marx

Malthus & RicardoDebating corn laws and ‘abstract’ economics

Debating the Corn Law (1816 to 1846)

Population

Comparative Advantage

Natural Rent

Malthus (1766-1834)Landowners

Ricardo (1772-1823)Manufacturers

Malthus on Population

What are political implications of the argument?

- Help for the poor will pospone the problem

What did he leave aside in the argument?

- Birth control (uneven distributed)- Efficiency increases- Need for children

Economics as the ‚Dismal Science‘

Ricardoon limits and trade

Diminishing returns from land

profits decrease in the long term (limits to growth)

Theory of comparative advantage

each country should produce what they are best and most efficient at and then trade

What are the insights from that?

Karl Marx (1818-1883)Integrating workers

Context

- Rising strengh of the workers movement

- Available reserve armies

Book

• The Capital (1867, ph. 1883, 1894)

Concepts

• Exploitation

• Capitalism in crisis• Overaccumulation• Monopoly Capitalism

• Capitalism is only an intermediate stage before socialism and then communism

Marginal Revolution (1870-1890)The Triumph of Utilitarianism

Léon Walras

(1834-1910)

Carl Menger

(1840-1921)

William S. Jevons

(1835-1882)

Think of other examples where themarginal utility of a good decreaseswith ist availability.

Neutrality of Money!!

“The real price of everything […] is the toil and trouble of acquiring it”

Utilitarianism

Marginal thinking is thinking ‘at the margin’, meaning thinking about the utility of an additional unit.

Alfred Marshal (1842-1924)The first neoclassical economist

Context

- Time of economic growth & optimism forthe industrial society

- reconcile the subjective marginalistapproach with the objective approach

Book

- „Principles of economics“

- foundation of economics and theneoclassical orthodoxie

- standard supply and demand schedule

Classics Neoclassical Economics

Focus on the processes ofaccumulation

Optimal allocation of given scarceresources

Objective Theory of Value Subjective Theory of Value & Utilitarianism

Social aggregates and classes areat the core of analysis

Rational individuals are at the coreof the analysis

Remaining historical elements Historicity of Economics

Keynes (1883 – 1946)Macroeconomics revised

Context

• Between the two wars

• Boom & Busts, Contract of Versailes

Important contributions

- „The general theory of Employment, Interest and Money“

- „A treatise of probability“

- „The economic consequences of the Peace“

Some contributions

- Uncertainty vs. Risk

- Animal Spirits vs. rational agents

- Non-neutrality of money

- Counter-cyclical economic policies

Can you think of examples when government intervened so that they even out processes of boom and bust-cycles?

Paul Samuelson (1915-2009)Neoclassical Synthesis (1949)

Book

„Economics“ 1949

- Formalizes Keynesian Macroeconomics

- Excluding: Historical time, uncertainty

Therby he turns „The General Theory of Employment, Interest andMoney“ into a sub theory of Neoclassical Economics

Environment, Society and Houseworkin economic theory

Margaret Reid (1896-1991)“Economics of Household Production” (1934)

- Work is any activity somebody else could do instead of you from an individual perspective.

Nicholas Georgesco-Roegen (1906-1994)„The Entropy Law and the Economic Process” 1971

- Economics as part of the environment

Karl Polanyi (1886 – 1964)"The Great Transformation“ (1944)

- Double Movement

(Source: Kate Raworth Doughnut Economics)