(idea) by LeoDV Mon Nov 29 2004 at 20:31:05

Economics is the kind of science I love: it touches every aspect of human life, like law, political science or philosophy. Walk into a bar and order a drink. This is clearly a political action: you are a human, who gets served by an other human, and this is normal. In what kind of society does this happen? Why? Political science to the rescue baby. This is also a legal action: ordering something is making an implicit contract with the bartender and the whole bar. And of course, it's also an economic action, since you're paying for goods, and hopefully a bit of service.

This short example proves that what we do, every day, is a social act and that a science like economics really concerns everything we do, are, and live with, and not just how the inflation affects the GDP. This is why I study these sciences, to try and be more perspicacious about the world. Now, philosophy, politics and law, I can read, but I am handicapped when it comes to economics, and learning about it is a lot like climbing stairs with a wheelchair. As you may know, the science of economics relies a lot on mathematical models and formulas and, aside from a few very specific areas, I am totally impermeable to the meaning of the strange mathematical runes.

Thankfully, my mentor, the good Doctor Hannibal Lecter, has the answer: "First principles, Leo. Read Marcus Aurelius. Of each particular thing ask: what is it in itself? What is its nature?" I can't study the details of economic thought, but I can look at what it is, what ideas it is based on. Economic thought is split into theory and doctrine. The theory describes what the economy is, what its conceptual and mechanical frameworks might be. The doctrine, on the other hand, describes what should be done about it. So what I'm going to do is split the history of economics into the major epochs and theories, and then list their major thinkers, what they brought to the theory, and also some of their doctrine.

A N C I E N T   G R E E C E

Few economists acknowledge it, but it was the Greeks who started it all. Greece is a very inhospitable land, and the Greek had nothing to help them but their wits. This was how they became the greatest warriors, thinkers, scientists, mathematicians, etc. of the ancient meditteranean, but also their greatest traders. Whether it was purposeful or fortuitous, Athens was the first political entity in history to achieve a political hegemony through its economic predominance.

It is often said that Plato was a "precursor of communism," because in The Republic he advocates that all goods be shared. People who claim this are commonly referred to as "cretins." Plato's Republic is largely a work of tongue-in-cheek satire. People who think that Plato means it when he says art is evil and useless should remind themselves that he was an avid art lover. Similarily, when Plato claims that not only should the goods but the women be shared, maybe they should consider getting a hint. He was doubtlessly one of the greatest geniuses of history, but his contribution to economics is non-existent, because the science was actually invented by his most famous disciple:

Aristotle was not only the first economic thinker, but also the most important, since the base of his research is still valid today, over two millenia later. The word "economics" comes from the greek words oikos and nomos. The nomos means the laws of something, and by extension, their study: for example, astronomy is the study of stars and the laws that guide them. Oikos means the house. Thus in Greek, economics are the laws of the house, i.e. how to manage a household: the finances, the estate, who does what, etc. The master of the house must therefore be a good economist.

It was Aristotle who extended this notion to the adminsitration of the city state. He makes a definition of the economy, and by extension of economics, which you should learn by heart because it is still valid today and you cannot understand any economic thought without knowing it:

The economy is the system which organizes the activities of the persons inside a community, to best exploit the available resources in order to satisfy the private and collective needs of the community.

Ever since Aristotle wrote this, the science of economics has been about achieving the best, most viable economy according to the criteria above. Aristotle also started a familiar trend among economists: even though the foundation of his thinking is a piece of genius, what he elaborated from it now seems very dated and silly. Most of it is, but you'd be foolish to dismiss it too quickly. After all, the more things change the more they stay the same, and the thoughts of geniuses have a way of turning out to be right in way you never expect them to.

One of Aristotle's ideas that we should pull out of the freezer was the opposition between economics and chrematistics. While a good economist seeks the optimal way to manage the community's resources, activities and needs, a chrematist only seeks the best and fastest way to amass as many riches as he possibly can, whether on behalf on the community or for his own keeping.

T H E   L I B E R A L S

Aristotle's ideas weren't picked up on for a while. This, among other things, is what caused the fall of the Roman Empire. Their mostly military leadership ("Emperor" means general) never tried to understand their economy, which was really the backbone of their power. It was notably the imbalance between their competing currencies and their inability to acknowledge the importance of slave labour which brought the economy down. Read between the lines of the history books and realize that every Empire which fell fell because its economy did.

It was Saint Thomas Aquinas who made the greatest contribution to the science along with Aristotle's, reviving it and creating what would be later known as the liberal school of economics. Thomas lived in the 13th century, when the State and globalization were just starting, and the former was already wondering how to react to the latter.

He picked up Aristotle's definition of economy and his opposition to chrematistics, but defining the economy as a system doesn't help you find what that system is or should be based on, and this is what you need to make economic policy decisions. So, Thomas tried to come up with a paradigm that would fit christian moral values while being practically sound, and came up with something that would last for seven centuries: the work value, which states:

The value of goods is equal to the amount of work that has been put into them.

Makes perfect sense: something which took many people and a long time to build is going to be more expensive than something which was done by one craftsman in an afternoon. But more importantly, the work value serves as a reference, a starting point to build an economic system and doctrine on. Every liberal doctrine is based on this theory.

From this, Thomas conceived the first liberal doctrine, the doctrine of commutative justice. Goods should have a just price based on the work that has been put into them, and workers should receive a just salary so that they can provide "decently" for their families, and be treated humanely. The goal is that the economy should reach an equilibrium where everyone earns what they worked for: this is a purely aristotelician and liberal doctrine.

Adam Smith is seen as the first liberal, but as we've seen, it was really Saint Thomas who came up with the idea of work value that liberalism is based on. He is however the first of the three "classic" liberal writers. His main (and still controversial) contribution to the field is the idea that encouraging chrematistics, or rather letting it happen, is the best economic choice. History seems to have proved him right, since this logic gave us modern medicine, the Interweb, and big pretty mushroom clouds.

The arguments he put out in An Inquiry into the Nature and Causes of the Wealth of Nations have become, pun not intended, classic. He postulates that men are greedy and lazy (dead on), and will therefore naturally seek the most satisfaction with the least effort they can, and therefore work optimally, balancing supply and demand, thus satisfying the community's needs. You may think it sounds silly, but The Wealth of Nations supports this with excellent arguments. However, this node is called "A brief history of economic thought" and it's already getting pretty long, so you're going to have to take my word for the fact that one of the most important thinkers in history really isn't an idiot.

Teo-lohi points out my neglect of thinkers like John Locke as influences on Smith, as opposed to Thomas Aquinas. He (or she) is quite correct, historically, even though Smith was quite influenced by the physiocrats, who, in turn, owe a lot to Aquinas. But that's not the point: Smith based his work on concepts developed by Aristotle and Saint Thomas, and this is what is relevent to this w-up.

David Ricardo, the other big classic liberal, basically polished Smith's ideas. He "came up" with concepts such as the work value or the natural salary, i.e. enough for the earner to provide for his family. Ricardo is generally seen as a pessimist liberal because he figured out all the things that can go wrong with a liberal economic policy. However, his answer is even more liberalism: for instance, his answer to major landowners setting high prices for their wheat isn't the State bringing them down, but opening the borders to cheaper foreign wheats, that the landowners will have to adapt to.

I like John Stuart Mill. His education was a lot like mine, and he seemed like an interesting guy. But anyway, he's the last of the three major classical liberal writers, and the one who brought their doctrine to its apex. His book The Principles of Political Economy is a perfect systematization of liberalism and individualism, with an abstract homo œconomicus who is motivated by his hedonistic impulses and lives in a world of perfect competition where the incompetent are removed by the fittest, for the betterment of all. Even though in theory he is completely liberal, he realizes that reality is different, and advocates action by the State or labor unions to prevent excessive poverty.

Karl Marx is a liberal. Frankly, the only reason I built this write-up is so I could write: Karl Marx is a liberal. Karl Marx is a liberal. Damn, it feels good. People to whom I tell this normally shriek at such a preposterous notion, but by now you should see why: socialism, and marxism, which was originally an extension of socialism, is based on the work value. Workers should get all the value out of their work, but the bourgeoisie cheats them out of it because they own the means of production. This is why there must be a class struggle and a revolution. All of the marxist theory can be boiled down to the idea of the work value.

Marx and Smith's doctrines are opposite, but their theories are equally liberal: both logically stem from the work value. For Smith, it is because people want to maximize their work value that they will naturally set the right balance between supply and demand, and optimize the satisfaction of the community's needs ; since this relies on our capacity to do what we want, any State intervension would only hinder this process. For Marx, people should get their the value for their work, but they are being swindled out of it by the establishment, therefore there must be a struggle between the two classes which will lead to a revolution, after which everyone will get the right value for their world, and all will be well that ends well. Different answers, but they are asking the same question.

T H E   M A R K E T   T H E O R I S T S

Toward the end of the 19th century, there was a dramatic paradigm shift (yes, I hate the expression too, but it is justified here) in economic theory, which ended the liberal era. However, most breeze over it, probably because there isn't one specific thinker who provoked it, and because this shift in theory wasn't followed by a shift in doctrine: the market theorists who followed the liberal economists were still ardent advocates of laissez-faire—but for different reasons.

Vilfredo Pareto was one of several who caught on, and I picked him because he caught on faster and better; and also because he isn't British, which is a change of pace. The first paradigm shift is the end of the work value (gasp), which is replaced by a very familiar idea:

The value of goods (and services) is determined by the laws of supply and demand.

Obviously, the liberals did know about supply and demand, but to them it was an accident, and the point of their economic doctrines was to make supply and demand reach a balance point where the value of the goods being exchanged reached their work value. The market theorists, on the contrary, disregarded the work value and only focused on observing the market, where the goods and services are exchanged according to the laws of supply and demand, and making it the center of the economy and the focus of economics.

It was at that time that studying economics started to require a degree in math: they theorized the market by creating an abstract market, on paper, mapped by mathematical models, and using it to analyze and predict how the evolution of the real market. This is the other big paradigm of market theory: the idea that the economy can and should be rebuilt with abstract mathematical models, and that these models can be used to predict how the real economy will behave.

I know it seems silly to think you can theorize the market, a fundamentally human construct, with math, but don't think that the market theorists don't know that. It's the whole point: the economic models teach us more when they get it wrong than when they get it right. Besides, they are very useful. The great post-1929 and every post-war economic policy decision was based on the discoveries made by market theories.

Pareto and the other early market theorists all reached basically the same doctrinal conclusion: the market is made up for forces which all affect the others and all evolve together. What this means is that you just need to let the market evolve on its own and, with time, the forces will balance each other out, and the market will eventually reach the economic optimum.

After the 1929 economic crisis, John Maynard Keynes responded to the idea that on a long enough timeline everything would work out, with the often mis-attributed rebuttal that On a long enough timeline, the survival rate for everyone drops to zero. In economic theory, he was a classic market theorist, but his contribution to economic doctrine was revolutionary. Unlike what the politicians who instrumentalize his memory say, he didn't just advocate interventionism, he basically invented macroeconomics as we know them today.

Milton Friedman isn't who you'd think he is: the great anti-Keynes ogre of modern economics: he has said that "We are all keynesians." However, he's a classic supporter of laissez-faire, both out of classic American worship of freedom, and his study of the unexpected effects of keynesian economics, notably on growth and inflation. He therefore advocates emphasis on production and investment: revitalize the supply side instead of the demand side of the market like Keynes advocated.

The French economists call Maurice Allais "our Nobel Prize winner," and I will leave determining why as an exercise to the reader. He's a good man, and an innovative thinker in more areas than economics. Market theorists had speculated that people sold goods and services when they received equal compensation for them; he pointed out that this is not true: people sell when they get more money than it cost them. The previous theorists were not oblivious to this, but replacing the ='s in their equations by >s and <s evidently complicates matters a lot. Allais did it, dramatically improved the science of economics, and got the Nobel for France. Yay.

And that's about it. The latest grand development of economic theory or doctrine has yet to come, and right now the debate is pretty much limited to the doctrinal battle between the "keynesians" and the "friedmanians." If there is to be an addendum to this list, in all likelihood it's not going to come from either of these schools but from a third one. Or maybe someone will come up with a new economic theory and I will create a new section for this w-up.

Please bear in mind that the ideas I've expressed in this write-up are mine and, more importantly, they don't reflect much of anything you'd learn in a school of economics. If you read this for research and you write that Thomas Aquinas invented liberalism and this school included Karl Marx, you're going to get an F. It's not useless if you're studying economics, on the contrary: stuff that goes against what you're taught is the most useful. But bear in mind that this isn't prepackaged knowledge. You have to hammer my ideas with your ideas to get the real interesting stuff out of it. I've also neglected many theories, such as mercantilism, physiocratism, socialism, or the social christian economic theories, which are often overlooked, but are historically important.

But this is the point after all: to sketch, with very broad strokes, the history of one of the large areas of human thought.

 

I like it! 6 C!s

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