Saturday, June 22, 2013

A Brief Outline of the History of Economics

This outline is taken from Faustino Ballve's Essentials of Economics, Chapter 1 - What is Economics About?

1. From ancient Greece to 16th century

"...Plato concerned himself with the DIVISION OF LABOR and of the various occupations; Xenophon dealt with the increase in rents in Attica and formulated a THEORY OF MONEY; Aristotle...expressed the hope that SLAVE LABOR might be replaced by MACHINERY,...Rome made the PROTECTION OF AGRICULTURE an economic policy—one that was supported in the Middle Ages by the Catholic Church’s CONDEMNATION OF TRADE, its prohibition on the charging of interest, which it characterized as USURY,...St. Thomas Aquinas advocated A KIND OF COMMUNISM that was later, from 1610 to 1766, to be practiced by the Jesuits of Paraguay. The French bishop Nicholas Oresmius published a TREATISE ON MONEY, and Gabriel Biel of W├╝rttemberg made investigations into the NATURE OF MONEY and the FORMATION OF PRICES. Humanism, with Erasmus, esteemed COMMERCE as honorable. Martin Luther, the founder of Protestantism, postulated that “man was born to work,” studied the DIVISION OF LABOR, and stressed the IMPORTANCE AND UTILITY OF TRADE, recommending the FREE MARKET even though he continued to condemn “usury.” On this last point Calvin disagreed with Luther and was, besides, the first to advocate the INTERVENTION OF THE STATE in economic life—an intervention that already existed in his age and, to a greater or lesser degree, has always existed and in the last thirty years has been considered as an economic panacea" (Faustino Ballve, "Essentials of Economics",1963, pp.2-3).

2. The rise of mercantilism from 16th to 18th centuries


Causes

  • Establishment of absolute monarchies in the 16th and 17th centuries

  • Emergence of modern nations and nationalism

  • Control of economic activity, and

  • Theoretical justification of such control


Results

  • Strangulating general economic life

  • Fragmentation of economic and political groups

  • Internal misery, and

  • External war

3. Transition from mercantilism to classical school of economics during the later part of 18th until the middle of 19th century


Major Proponents

  • Usually connected to Adam Smith's "The Wealth of Nations" (1776)

  • David Ricardo and John Stuart Mill in England

  • Jean-Baptiste Say and Frederic Bastiat in France

  • Thomas Malthus. However, His Malthusian Theory of Population ended with protectionist proposal

Height of Classical School
  • Introduction of machinery (Industrial Revolution)

  • Improvement of communication

  • Increase in production

  • International exchange

Causes of the Decline of Classical School

  • The discovery that the classical's idea of economic laws are not really infallible laws

  • The feeling of inferior competitive position of younger countries such as Germany and the US on world market

  • The idea embraced by both intellectuals and the middle class that the free market does not benefit the poor. 

  • Three Counter Movements - nationalist protectionism, socialism in diverse forms, and distrust of individual initiative and emphasis on national interest over and above the individual interest as a result of the influence of Historical school. Distinguishing marks of counter movements - economics not as man's universal struggle for well-being, but as national political economy, failure to grasp the unity and totality of economy, disconnection between distribution and consumption and existence of laws that control the economic process 

4. From classical school to neo-mercantilism. It was formed out of the three counter movements during the end of 19th century until the beginning of 20th century

Fundamental Principles

  • Direction of economic life by public bureaucrats

  • Idea that money is true wealth

  • Concern with a favorable balance of payments with the object of obtaining more money in international exchange

  • Protection of industry for the purpose of having articles of export in order to bring money into the country

  • Subsidies and privileges for exporters and for industries producing for export or avoiding imports

  • Increase in the population in order to augment the productive forces of the domestic economy

  • Competition with and isolation of foreigners by means of tariff barriers

  • Belief that the prosperity of one country is possible only at the expense of the others

Results

  • Destruction of international division of labor 

  • The two world wars 

  • Omnipotent state 

  • Planned economy justifying it as a defense of national interests against foreign competition and the poor against domestic oppression 

  • Retreat of democracy and liberty 

5. Two schools of economics also emerged during the later part of 19th century due to the theory of marginal utility developed by Carl Menger (1870), Stanley Jevons and Leon Walras.

Two Types of Mathematical School

  • The development of econometrics. Economics as an exact science and the chief bulwark of the ideology of central economic planning.

  • Use of mathematics in economics without claiming it as an exact science


The Austrian or the Critical School 

Carl Menger, Bohm-Bawerk, Wieser, Ludwig von Mises, Friedrich von Hayek, Henry Hazlitt and others.


PERSONAL COMMENTS


Coming from Reformed tradition, reading John Calvin as the first to advocate the intervention of the state surprised me. Theologically, Calvin is considered superior compared to both Erasmus and Luther, but from a free market perspective, his interventionist advocacy was a major threat both to personal and economic liberty. In this regard, I prefer the economic position of both Erasmus and Luther.

Moreover, the long quotation from Ballve of economic history from ancient Greece to 16th century made me realize that theologians cannot escape voicing out their economic point of view. In fact, if Gustavo R. Velasco was right that the center of conflict today is in economic problems (pp.xi-xii), can we consider it responsible for today's theologians not to study this very critical subject?

Furthermore, the reader will notice that our outline of history covers only until early 20th century and it ends with neo-mercantilism. I suspect that many people today just like me, do not have any idea about what neo-mercantilism is. So the question is, what is the dominant school of economics from the later part of the 20th century to the early 21st century. In short, what is the dominant economic idea in our time?

If Ballve's identification of neo-mercantilism as the dominant school of economics until the early part of 20th century was accurate, I suspect that perhaps neo-mercantilism has undergone a transformation and is now hiding under a different name. Would this name be interventionism, Keynesian inflationism, neo-Keynesian inflationism, crony-capitalism and corporatism? 

Among the identified schools of economics in our outline, I favor the recovery of classical school through the Austrian school.