History of Economic Thought

Before Adam Smith - ANS - Aristotle - Scholastics - Mercentilism - Pre-classicist: David Hume - Quesnay & Physiocrats Aristotle (384-322 BC) - ANS Examples of reasoning about economic issues: 1. Exchange can only come if there is a potential surplus from the transaction that parties can share o Money simplifies transaction 2. Principle of diminishing marginal returns BUT, no understanding of the economic system as a whole yet Scholastics - ANS - Priests and teachers at medieval universities from the 13th century onwards - Determination of a just price = in the interest of society Natural Price: price emerging under free and effective competition, without monopoly, resource waste or deceitful behaviour o Cost of production o Consumers' perception of utility of good - Although fragmentary theories, this was an attempt to establish a systematic theory based on economic laws Mercantilism - ANS - Positive surplus in balance of trade: o Limited import: ---> Only raw materials ---> Most production domestic o Promote export: ---> Inflow of silver and gold Aim was to promote country's military and economic power relative to that of other countries - Favorable balance of trade as measure for welfare Pre-classicist: David Hume () - ANS - Monetary theory for open economy: o No effect of money stock on real economy (contrary to mercantilists) o Long-run theory o International adjustment following domestic money shock - Contours for later developed theory of money; MV = PT Quesnay () and Physiocrats - ANS - Tableau Economique (1759) o National accounts model o Empirical knowledge about model parameters - Supplements to tables: o Agriculture is basis for economic wealth o Government should promote free competition and free trade: "laissez faire, laissez passer"; contrary to mercantilists! - His followers: Physiocrats Classical School Historical Background - ANS - 2 important revolutions led to start of classical thoughts: 1. Scientific Revolution o Natural laws --> laissez-faire ("let it go") o Period of Enlightenment 2. Industrial Revolution o High growth of industry o Competition o Low-paid labor force Classical School: Main ideas - ANS - Economic liberalism 1. Limited government intervention o Enforcing property rights, public education, national defense 2. Self-interested economic behavior o Profits, wages 3. Harmony of interests o Serve society's interest best by pursuing private interest