History of Economic Thought Study Guide

Plato's Economics Introduction

The Republic is considered the first economics text ever written.
It distinguishes between "what is" and "what ought to be," which in modern economics corresponds to positive and normative statements.
Plato argued that for a society to function, employment must be appropriate, social propriety must be observed, and personal interest must be respected.
Society must navigate a cycle of political systems, stumbling through timocracy, oligarchy, democracy, and tyranny until they are eventually rescued by an enlightened aristocracy.
Critics argue that an aristocracy is imbalanced and unchecked; some observers suggest the modern US resembles an aristocracy due to power imbalances and a detrimental wealth gap.
Plato’s Economic System: Demonstrates a value-creating system where disparate groups live harmoniously "without want."
Note on modern realism: The concept of living "without want" is considered unrealistic in modern economic thought due to the core concept of scarcity.

The Economy in Ancient Athens and Sparta

Athens: - Could not be self-sustaining or thrive under autarky. - The economy was heavily bolstered by slave labor. - Imports typically exceeded exports; the city had no domestic sources of iron or coal. - Athens was a dominant sea power dependent on water trade. - Plato observed that wealth and poverty often split a single city into "a whole collection of cities… all at war with each other."
Sparta: - Focused primarily on education and war training. - Ruled by an oligarchy with no question of power. - Followed a "value added principle"; practiced infanticide because there was no point in something with no value. - Slaves ran the economy while Spartans focused exclusively on warfare. - Social structure included communal food and no private coinage, bearing similarities to communism. - Values of production, consumption, distribution, and exchange were ranked far behind the dominance of the fittest.

The Life and Philosophy of Plato (427\u2013347 BC)

Born into a wealthy aristocratic family.
Pursued a life of scholarship after his education and military service.
Heavily influenced by Socrates, who depreciated excess appetite and interpersonal expense comparison, believing they diverted the truth-seeker from the dispassionate search for knowledge.
Wrote the Republic, a dialogue featuring Socrates discussing justice, balance, gender, education, sense perception, the immortal essence, and political order.
Believed morality must be a "thing of beauty" and intended his work to spark controversy and discussion.
Often referred to as a "dreamer" because he focused normatively on what "ought to be."
Plato's Academy: - Taught knowledge, rhetoric, and skills. - Charged no fees and accepted women. - Aristotle was a student here, eventually passing on Plato's ideas and tutoring Alexander the Great.

Plato's Economic Ideas and the Ideal State

Writing during Classical Greece ( $480\text{ BCE}$ to $323\text{ BCE}$ ).
Pursued a single standard of excellence (perfection) for qualities such as goodness, justice, courage, and beauty.
To discover these standards, one must abstract from reality.
Happiness is found through the cultivation of virtues, which requires knowledge.
Ideal Division of Labor (Utopian Model): - Rulers: City’s philosophers using knowledge to create structure and order. - Guardians/Soldiers: Tasked with defending the city-state. - Common Households: Farmers, tradesmen, blacksmiths, etc.
Property and Wealth: - Plato opposed private property and advocated for collective ownership. - Aimed to avoid social division by preventing extreme wealth and extreme poverty. - Stated that "virtue and great wealth are quite incompatible… to be extremely virtuous and exceptionally wealthy at the same time is absolutely out of the question." - Only a "middle way" can avoid the corruption of the soul caused by excessive wealth.

Aristotle (384\u2013322 BCE)

A student at Plato’s Academy, but held different philosophical views: Plato was a mystic and idealist, while Aristotle was a realist and empiricist.
Believed the purpose of ethics was to help people become more virtuous in daily life, rather than reaching "mortal perfection."
Considered the true father of the scientific method (observation, classification, and discovery).
Vital knowledge comes from experience and focusing on the individual.
Key Economic Concepts: - Eudaimonia: A state of human flourishing; being happy, healthy, and prosperous. - Wealth is a means to an end, not the end itself; there is a natural limit to wealth necessary to reach eudaimonia. - Natural Exchange: Constrained by the needs of the household. - Unnatural Exchange: The unconstrained pursuit of wealth. - Functions of Money: Permitted only as a store of value and a medium of exchange; any other use is condemned. - Property: Advocated for a private property right system. - Usury: Condemned interest as "money made from money."
Four Aspects of Exchange: 1. Two people must have a surplus they are willing to give up. 2. Traders must have different subjective valuations of the worth of surplus goods. 3. Traders must communicate and recognize the potential advantage of the exchange. 4. Disputes must be resolvable by an administrative authority considering the rules of justice.

The Economics of Thomas Aquinas (13th Century)

A theologian educated at Monte Cassino monastery and the University of Naples (a rival to the Vatican's university).
Key Economic Foci: Fraud in buying/selling and the sin of usury.
Oikonomia vs. Chrematistike: - Oikonomia: The skill of household management; in harmony with nature and virtuous. - Chrematistike: The pursuit of acquiring riches; morally ambivalent and emerges after society evolves.
Private Property: - Invoked the counterfactual of paradise, where nature provided everything. - Gathering goods and private property became unavoidable after the expulsion from paradise. - Human affairs are more efficiently organized if each person has their own responsibility; chaos results if "everybody cared for everything."
Fairness and Profit: - Argued that while it is fair for some to own more than others, there is a limit. - Profit margins are permissible if trade fulfills a social need and falls within an ethical framework. - Believed prices fluctuate and cannot be fixed. - Regarded interest rates as theft, aligning with Aristotle.

Ancient Chinese Economic Ideas

Confucianism (Confucius, 551\u2013479 BCE): - Ethical system for social order. - Taxes should be based on productive abilities and limited to $\frac{1}{10}$ of the land produce. - Government spending should adjust to revenue, not vice versa. - Living standards should conform to social status and avoid extremes. - The ruler's primary goal is the well-being of the people; government should avoid interference unless needed for equitable income distribution.
Legalists: - Believed people are motivated by self-interest. - Economic progress requires strict, centralized control with rewards and punishments. - Assumed greed is the rule; therefore, Confucian ideas (requiring wise rulers) are impractical. - The sociopolitical system should allow individuals to pursue selfish interests only if they benefit the state (primarily via agriculture and warfare).
Moists (Mo Di/Mozi, 479\u2013438 BCE): - Promoted welfare under existing monarchies but disagreed with Confucius on the method. - Opposed class distinctions, luxury, and displays of wealth. - Favored national wealth, social mobility, and a large population. - Followed an authoritarian spirit with strict military principles and an advanced concept of the division of labor.

Islamic Economic Ideas and Scholasticism

Abu Hamid al-Ghazali (1058\u20131111): - Developed a social welfare function based on utilities and disutilities related to economic variables. - Salvation is the true goal, but economic activity is a necessary part of that goal. - Followed Aristotle's "middle path." - Focused on markets, interest, production, and public finance.
Scholastics: - Boethius (480\u2013524): The "first of the scholastics," translated Aristotle into Latin. - St. Thomas Aquinas: Considered the most important scholastic. - Just Price: A price reflecting what both users and sellers believe a good is worth. It is wrong to sell for more than the just price or to sell defective products. - Natural Law: The way humans participate in God's eternal law.

Mercantilism and the Decline of Feudalism

Feudalism declined amidst high mortality rates: national estimates for England ranged from $5\%$ \u2014 $23.6\%$ among aristocrats, $40\%$ \u2014 $45\%$ for clergy, and over $60\%$ in recent estimates.
Mercantilism emerged as political power shifted to nation-states.
Prompted by the success of the Netherlands, the "first modern economy," which thrived via internal trade (exporting high-value items, importing raw materials) despite limited natural resources.
Thomas Mun (1571\u20131641): - Director of the British East India Company. - Founder of English Mercantilism; published A Discourse of Trade, from England unto the East Indies (1621). - Argued against "bullionists"; believed trade was a zero-sum game. - Set the core mercantilist rule: Sell more to strangers yearly than we consume of theirs in value (\text{Exports} > \text{Imports}).
Mercantilist Trade Regulations: - Restricting imports and subsidizing exports of finished goods. - Restricting exports of raw materials. - Establishing monopolies over colonial trade and providing capital to domestic industries. - Goal: Net inflow of gold and silver.
Van Hornick’s Mercantilist Principles (1648): 1. Utilize all national soil. 2. Use raw materials for domestic manufacturing. 3. Encourage a large population. 4. Prohibit the export of gold and silver. 5. Discourage importation of foreign consumer goods. 6. Match necessary imports with exports rather than cash. 7. Import only raw materials to be finished at home. 8. Export for gold and silver. 9. Prohibit imports of goods available domestically.
The Utility of Poverty: Mercantilists favored keeping wages low to support domestic production. Colbert favored a hard-working, young, and poorly-compensated working class.

Richard Cantillon (1680\u20131734)

Economic Geography: - The price of raw produce is higher near the capital due to transport costs and risks. - Water transport is cheaper than land carriage. - Perishable/bulky products are cheaper far from the capital because they are expensive to transport. - Developed a model of "Circular Zones of production" based on market price minus transport costs.
Intrinsic Value vs. Market Price: - Intrinsic value is the measure of land and labor required for production. - Market price depends on "people's moods and whims and on their consumption."
Money Supply and the Entrepreneur: - Investigated how changes in money supply (e.g., discovering a silver mine) impact the economy through higher demand and relative price increases. - Short-run: Money is non-neutral (real effects occur). - Long-run: Money is neutral. - Defined the entrepreneur as the central player whose key function is bearing risk (arbitrage: buying at a known low price to sell at an uncertain high price).

Francois Quesnay and the Physiocrats

"Physiocracy" means "Rule of Nature."
Emphasized natural law and the dominance of agriculture; agriculture is uniquely productive because it produces value exceeding production costs.
Industry and trade are considered "sterile" because they only alter materials.
Three classes: Productive (farmers), Sterile (merchants/artisans), and Proprietary (landowners).
Advocated for a laissez-faire approach and used the "Economic Table" to analyze income flows (income turning into expenditures with a multiplier effect).

David Hume (1711\u20131776)

Part of the Scottish Enlightenment which focused on moral philosophy, history, and economics.
Influenced by Isaac Newton’s methods and John Locke’s epistemology.
Believed humans are driven by a love of action, desire for gain, vanity, and pride.
Commercial society acts as a social contract to redirect passions into socially productive forms.
Sympathy: The process by which we experience what other people are thinking and feeling.
Price-Specie-Flow Mechanism: - Opposed mercantilism; argued trade balances through the movement of gold and silver. - Based on the Quantity Theory of Money: $MV = PT$ . - A balance-of-trade surplus leads to a net inflow of gold, which raises domestic price levels (including export goods), eventually eliminating the surplus.

Adam Smith’s Theory of Moral Sentiments (1759)

Lays the philosophical and psychological foundation for the Wealth of Nations.
Sympathy (Fellow Feeling): We observe others, imagine ourselves in their place, and if our imagined reaction equals their observed reaction, we sympathize (approve).
The Impartial Spectator: An internal "imaginary friend" or conscience that bestow moral approval. We desire the sympathy of others and seek a harmony of sentiments.
Self-interest must be combined with moderation and restraint.
Morality is a matter of social psychology; nature endowed humans with conscience because it helps society survive.
A truly virtuous person possesses prudence, justice, and beneficence.

Adam Smith’s Wealth of Nations (1776)

Division of Labor: The primary source of national wealth. It improves productive power through dexterity, time-saving, and invention. This allows increased output without increasing inputs, avoiding higher costs.
Propensity to Exchange: Humans have a natural "propensity to truck, barter, and exchange one thing for another."
Self-Interest: "It is not from the benevolence of the butcher, the brewer, or the baker, that we expect our dinner, but from their regard to their own interest."
Value: - Value in use vs. Value in exchange. - "Labor commanded" is the real measure of exchange value (how much labor a good can be exchanged for).
Prices and Wages: - Natural Price: Ordinary/average cost of production (wages, profits, rents). - Market Price: Prevailing price, which may differ from the natural price. - Wages depend on economic growth; higher productivity is good for workers.
Capital: - Primitive economy uses capital for consumption smoothing. - Advanced economy uses capital to generate revenue. - Re-investing surplus (profit and rent) is the driving force of growth.
Government Role (Book V): 1. Provide for common defense. 2. Administer justice (protect private property). 3. Provide public works (infrastructure) that are not profitable for individuals.
Taxation Principles: - Proportional to income received under government protection. - Certain, not arbitrary. - Levied at a convenient time. - Inexpensive to collect and not high enough to encourage evasion. - Avoid taxing profits (compensation for risk) or the produce of land (discourages improvement).