Lecture 1: The relation between economics and history
Thematic course: Economic History, Richard Paping
Economic Science
Economic history comprises the history of:
- Different economies: countries, provinces, regions, cities and villages in specific
periods
- Economic governmental policies of a country, province or city →
crisis policy, environmental policy, policy on transport and infrastructure
- Organizations: corporate history (VOC, Shell, Campina) or institutional history (water
boards, governmental departments); industries: banks, textiles, agriculture;
technology; consumption: advertisements, food, clothes, use of cars; economic
behaviour of people at an individual level: motives, choices, and strategies (gender);
labour: tasks, working hours, labour conditions, wages; standard-of-living, prosperity,
and well-being and economic aspects: credit, housing, living, education.
Central question: How - while having only limited (scarce) resources at disposal - to
satisfy unlimited needs and wants people have? → What is produced? How is it produced?
How is production divided among the population?
The study of economics happens at two levels: (1) microeconomics → about specific markets of
products (2) macroeconomics → total production (GDP, unemployment, investments)
Economic method
- Descriptive, but above all explanatory
- Positivism: objective knowledge is possible (method originated from the natural
science)
- Try to find general laws; not interested in unique, individual cases
- Model-based approach: model is a simplification of reality, it is abstracted
- Deductive method: using assumptions to come to conclusions
Economic assumptions
- Homo economicus (1) rational (2) self-interested (3) unlimited (materialistic) wants and
needs (and limited resources)
, - Ceteris Paribus clause: all variables which are not included (exogenous) are assumed
to be constant (and not liable to change)
- Adam Smith (1723-1790): in a free market, an invisible hand takes care of the perfect
coordination of supply and demand (production and consumption)
Historical School → Methodenstreit: Description vs. Models (Positivism)
‘Methodenstreit’ (1850-1900)
- Neoclassical economists: Alfred Marshall (1842-1924), Carl Menger (1840-1921); they
were the successors of the classical economists: Adam Smith (1723-1790), Thomas R.
Malthus (1766-1834), David Ricardo (1772-1823)
- (1) Positivism (=knowledge is objective) (2) Deductive (3) General laws (4) Development
of theoretic models
- ‘Historical School’: Friedrich List (1789-1846), Gustav Schmoller (1838-1917)
- (1) Historicism (=knowledge is subjective) (2) Inductive (3) searching for general patterns
in the past (4) general laws are bound to time and place
Traditional Economic History
- Focus on the narrative (description) of historical events and developments
- Explanations are often found outside the economy, for example in culture or politics
- Numbers are usually only used as an illustration of the story
- No model-based approach
- Collecting information and facts
Herbert Heaton, “Economic History of Europe” (1936)
Neoclassical perspective on economics
- ‘Market’ works perfectly. Supply and demand adjust via price mechanisms resulting in
an optimal equilibrium.
- All actors only focus on self-interest → profit maximization for firms and maximization of
utility/benefits for consumers
- Unemployment leads, through a lowering of wages, to an increasing demand for labour
(under the condition of a flexible labour market)
- When the economy slows down, the price-level decreases due to a surplus of supply,
and consequently the quantity of goods demanded increases again: movement to
equilibrium
, - An economic crisis will ‘solve’ itself if you do not intervene in the market (‘laissez-faire’)
- The most important function of a government: the protection of public order, property
rights, and contracts (providing a reliable well-functioning legal system)
Neoclassicism
- Free market → only the ‘best’ (most productive/efficient) firms survive, providing the
lowest possible prices (note: not in the case of guilds or ‘traditional’ succession)
- Darwinian “survival of the fittest process” → the costs are low and the production is high
in an economy
- Perfect competition between firms (so many firms): no monopolies (VOC) or cartels
(cooperation/collusion)
- The objective of the corporation (profit maximization) is also the objective of the daily
management (management-owners). For example, small and medium-sized enterprises
in the Netherlands in 1800-1950
- Neoclassical economists stress the short run (profit maximization) and neglect long-
run continuity/survival of firms. They assume these two aims to be identical. So,
stock exchange rates are based on dividends (business profits paid to shareholders),
and not on the hope for speculative stock market profits, nor on the fear of stock market
losses.
- Market actors are perfectly rational, and consequently process all the market
information adequately. So, no market panic caused by new information and no irrational
management fashions.
- In the short run, the free market can adjust perfectly to all changed conditions.
Neoclassics do not have many ideas about the economic situation during the adjustment
process to a new equilibrium: see “Evolutionary Economics” in Drukker.
John Maynard Keynes (1883-1946): Keynesian perspective on economics
- The market does not always function properly
- Unemployment is persistent due to insufficient wage adjustments (inflexible labour
market) → demand for labour remains low
- Downfall of the economy due to decreased demand. Consumers start with saving
money instead of spending. The decrease of the price-level stimulates further
postponement of consumption, and strengthens the economic crisis.
, - In the short-run, the economic crisis is not solved by the market itself; and the long-run
market equilibrium is never/rarely reached.
- The government can stimulate the economy by increasing the government
expenditures (G) → higher demand → firms increase investment (more demand) →
hire more workers → wage incomes and consumption of employees increases
Econometrics (since 1930s)
- Keynesianism: government intervention is effective (conflicting with Neoclassical
laissez-faire perspective)
- Next to explaining, economic predictions become more and more important (what are
the effects of government policies?)
- Construction of complicated models based on recent historical data
- Growing demand for (historical) statistical data
New Economic History (since 1950s)
- Based on neoclassical theory, using econometric models for historical cases
- Other names: cliometrics, economic history, historical economics
- Question-based historical research, and not source-based
- Comprehensive use of (neoclassical) economic theory, from which concepts, models
and hypothesis are derived
- Necessary condition is the ‘measuring/quantifying’ of economic-historical variables: very
quantitative approach
- Robert Fogel: The construction of railroads was not crucial for economic growth in the
USA. A system of canals and boats would approximately have had the same economic
outcome → counterfactual-analysis!
- Conrad and Meyer (1958): before the American Civil War, slavery was an efficient and
a profitable system. Reconstruction of an average slave plantation; slaves are
considered as reproducible investment goods (!)
- Fogel and Engerman (1974): confirm outcomes; slaves were better nourished than
ordinary labourers.
Flowchart
Classical economics (Adam Smith, 1776) → Neoclassical economics (Marshall, 1885) →
Keynesians (from 1930s) + Econometrics (from 1930s) + New Economic History (from end
