The ideas of economists and political philosophers,

both when they are right and when they are wrong,
are more powerful than is commonly understood.
Indeed, the world is ruled by little else. Practical
men, who believe themselves to be quite exempt from
any intellectual influences, are usually the slaves of
some defunct economist.
J.M. Ke yn es , The General Theory , [ p 3 8 3 ]

Chapter 1

AN INTRODUCTION TO THE HISTORY OF

ECONOMIC THOUGHT:
AN OVERVIEW
In every society it is necessary that there be a process to organize and
coordinate choices regarding the production, distribution and consumption of
goods and services. The need for this process arises because:
our resources or inputs are finite at any moment in time,
our technical knowledge constrains our ability to utilize these
resources to produce goods and services,
individuals, organizations, social institutions, business and
governments may constrain output,
in Western societies, wants or desires of individuals or groups are
shaped by cultural or physical forces and often exceeds the availability
of economic goods and services.
Ideally, these relatively scarce resources should be allocated to their highest
valued use. A solitary individual who knows her/his preferences will typically use
resources to satisfy those preferences to the greatest extent possible within
constraints. This requires information, knowledge and choices about which goods
and services should be produced and how to best produce them. Daniel Defoes
[1659 (?60)-1731]

Robinson Crusoe [1719] was a tale of a solitary individual, endowed

with scarce resources, and the challenges he faced. When Friday enters the story,
their lives and the allocation problem are altered. When individuals live in social
groups it becomes necessary to distribute the goods among the individuals as well
as choosing which goods and services to produce. In the jargon of the economist, it
is necessary

to decide
What should be produced?
What is the best way to produce it?
Which individuals should get which goods and services?

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Among the classics of literature are stories of the social and individual effects
of the processes of allocation. Victor Hugos [1802-1885] Les Missrables [1862] and
many of the Charles Dickens [1812-1870] stories are examples.
The method that a society devises to answer these questions shapes the
nature of society and influences the answers to the questions. There are many
possible approaches to organizing economic activities of individuals living in social
systems. Whatever method is chosen, it is necessary to coordinate or integrate the
behavior of individual members of the society. The history of economic thought is a
study of the more important attempts to analyze, describe and explain the
relationships in actual or idealized economic systems. Knowledge of alternative
explanations of economic processes provides a basis for evaluating the performance
of industrial economies. It also provides a basis for critically evaluating economic
theories and models that purport to describe modern industrial economies.

ECONOMICS
Economics is the study of how a society organizes the economic functions or
processes. There are many definitions of economics. Jacob Viner is credited with
defining it as, Economics is what economists do. This is correct but not a very
useful definition. As one of the early architects of modern economics, Alfred
Marshall defined economics as:
Political Economy or Economics is a study of mankind in the
ordinary business of life; it examines that part of individual and
social action which is most closely connected with the attainment
and use of the material requisites of wellbeing.
Thus it is on the one side a study of wealth; and on the other, and
more important side, a part of the study of man. [Marshall, p 1]
More recently, in a popular principles of economics text, economics was
defined (as it is typically defined by most principles of economics texts) as:
Economics is concerned with the efficient utilization or
management of limited productive resources for the purpose of
attaining the maximum satisfaction of human material wants.
[McConnell, p 1]
The contrast of the definitions used by Marshall and McConnell suggest a
difference in emphasis. Marshall focuses on economics as a social science and the
role of the individual in a social system; it is a part of the study of man
[humanity] in a social context. McConnells definition is more narrowly focused on
the allocative mechanism with respect to production, distribution and consumption
of material wants; it seems to imply a study of things with relation to humans
or individuals.
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Human behavior is complex. Human interaction or social behavior is even

more complex. Because of this complexity, it is necessary to abstract from reality.
These abstractions are presented as models, analogies or metaphors. These
models may be presented as narrative stories, mathematical systems [or
equations], graphs or other representations of relationships among the relevant
elements in the social and economic systems.
There are three fundamental reasons that economic behavior may be
studied. First, as an academic discipline there is a desire to understand, describe
and explain the world in which we live. Second, as a practical matter there is the
desire to predict and control economic processes and their outcomes. Third, the
method selected to describe, explain and predict economic processes shapes the
perceptions and values that individuals in societies hold about those processes.
Therefore, the values held by the members of society can be influenced by the
theories, models or stories we believe and use. What we learn, teach and accept
is the nature of our culture. Story telling is a mechanism for transmitting values
and civilization. Economists are storytellers; their theories and models are stories
that contribute to the character of society.

THE ECONOMY
The process of integrating individual behavior has three important elements,
all of which require the collection, interpretation and communication of information;
the identification of objectives of the individual(s) and society,
identification all possible alternatives that are feasible given the finite
resources, social institutions and the current state of technical
knowledge (technology),
criteria to evaluate each possible alternative with respect to the
objectives.
It is necessary to know the objectives or goals in order to make a rational
choice. In a world with finite resources and technological constraints, individuals
must choose among competing alternatives. They must know their preferences and
objectives in order to make appropriate choices. In a social group the problem is
more difficult, not everyone has the same preferences. Therefore, the preferences
among individuals must be prioritized or assigned weighted values. The task is to
establish criteria to identify the appropriate relative weights of values, or priorities,
of the alternative uses of available resources among individuals as well as among
different goods that could be produced. Is it more important for individual A to have
a new car or individuals B, C, D and E each have a new refrigerator? Is it more
important that individual A should have cigarettes or individual B have milk? The
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weighting of values should consider relative scarcity of inputs and technology as

well as social and individual objectives. Each society must devise processes to make
choices about allocation of resources and the distribution of goods and services.
There is a continuum of approaches to the problem of allocation. At one end
of the continuum, is the individualistic free market approach; individuals know their
own preferences and then rely on a system of markets to signal information about
the appropriate weights of individual preferences and establish incentives to
coordinate their voluntary choices. At the other extreme of the continuum, the
allocation process may be centralized and decisions are made through the authority
of an individual or group; individual choices are not allowed. A third possibility is an
economy where decisions are based on tradition; behavioral patterns that have
seemed appropriate in the past become embedded in the system. While markets,
command and tradition may be present in most societies, one approach is usually
emphasized and determines the character of the economy.
In modern, Western, industrial societies, the process is called the economy.
Beginning in the mid 1700s with the Physiocrats and later Adam Smith, there has
been an ideological bias and emphasis toward the use of markets as the primary
allocative mechanism. Traditional solutions to some economic problems are
present. There may be some economic activities and processes that are controlled
by law, regulation or other forms of command. However, the dominant approach to
the coordination of economic behavior and the allocation problem is the market.
The economy is one of many components, or sub-systems that work together
to make up a social system. Using the reductionist approach of Western science,
the social system can be thought of as many sub-systems including politics,
religion, ethics, law, kinship, symbols, values, customs, mores and a variety of
other processes and institutions. Other sub-systems might be identified such as the
health care system, transportation system, educational system, legal system,
industrial system, communications system, telephone system, etc. Each of these
systems can be divided further. The health care system can be viewed as composed
of an insurance system, medical education system, hospital system, and so forth.
The transportation system is composed of a road system, trucking system, airline
system, railroad system, system of navigable rivers, etc. All of these systems are
interrelated and each influences the nature and operation of the others. As one
component, the economy is related to each of the other components in society and
influences and is influenced by each of the other components. The nature of
political beliefs and the political system influences social perspectives and attitudes

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about the operation of the economy. At the same time, the structure and
performance of the economy is an important influence on the political system. This
is true of law, religion, ethics, and other components of the social system.
Individual attitudes about the direction and strength of these influences or
relationships are an important factor that explains the existence of different
approaches and schools of thought in economics.
The economic system has two related functions in all societies. One function
is to contribute to the wellbeing of the individual and to promote the operation of
society; to balance individual autonomy with the commonweal. The other function
is to allocate or ration scarce resources among competing uses and among the
members of society. The attainment of these functions is interdependent. The
allocation process is more obvious and mechanical. Balancing individual wants with
the social welfare is more difficult to observe and depends on an appropriate
allocation process. The identification of two separate functions is to emphasize that
the allocation process is not the end; rather it is a means to an end.

INDIVIDUAL AND SOCIETY

The most important task for any economy (or for that matter any social
system) is to contribute to a balance between the autonomy of the individual with
the commonweal or social wellbeing. The question about how to best insure the
freedom and wellbeing of the individual within a just, stable and peaceful society is
an issue that has been a common thread that has run through most of the
important contributions to the history of economic thought. There are two extreme
perspectives to this issue. The first is that there is a natural harmony of interests
among the individuals in society or there are natural processes that result in a
harmony of interests. The second view is that there is a conflict of interests among
various individuals, groups or classes. A common element in both Classical and
Neoclassical economics is that voluntary exchanges among individuals in a free
market will resolve all or most conflicts. At the other extreme, Marxist economics is
based on a belief that there are inherent conflicts among classes in the capitalist
system, which result in its inevitable failure.
There are also different views regarding the direction and strength of the
relationships of economics to the social system. At one extreme, the economic
system may be seen as the primary determinant of most or all aspects of the social
system. This view tends to hold that the economy is of greater importance than
other aspects of society. One example of this position is Karl Marx [1818-1883] who
uses the modes or techniques of production to explain the historical stages of
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society and ultimate failure of the capitalist system. Alternatively, Austrian

economists (Karl Menger [1840-1921], Ludwig von Mises [1881-1973], Fredrick
Hayek [1899-1992], Murry Rothbard [1926-1995], et al.), public choice theorists
(James Buchanan [1919- ], et al. ) and Neoclassical economists (Gary Becker [1930], Richard Posner [1939- ], et al.) explain the success of the market system

because the rational decision making of individuals results in an optimal allocation

of resources. Moreover they agree that the rational, individual economic behavior of
individuals in a market setting creates the optimal structure of social institutions;
the legal system, property rights, family and kinship relations and all other social
institutions reflect economic forces and lead to optimal solutions of human and
social problems. From this perspective, the economy is seen as the dominant
aspect of society. As a result, this creates the perception that economics (economic
theory) can explain most if not all human behavior. The belief that economic theory
can be used to explain history, sociology, politics, religion, family life, sexual
behavior and crime is referred to as economic imperialism. [Swedeberg, pp. 3438]
The other view is that the social system determines (or should determine)
the operation of the economy. Karl Polanyi [1886-1964] makes the argument in his
book, The Great Transformation [1944], that there was a shift in mainstream
thought from the perspective that the economy was an element to serve society to
the view that society is an element to serve the economy and economic interests.

ALLOCATION MECHANISM
Modern principles of economics texts typically identify the economy as a
process whose primary function is to allocate or ration resources [the inputs into
the production process] among alternative uses. The allocation mechanism is
required because of relative scarcity. Expanding on the allocation process
mentioned above, there are 5 basic questions to be answered with respect to the
use of resources:
(1)
What goods and services should be produced?
(2)
How many of each should be produced?
(3)
What techniques should be used in the production of the goods and
services?
(4)
When the production or use of the goods and services take place?
(5)
Who should get the benefits of the use of each good or service?
The answers to these 5 questions are determined by a variety of factors
including:

the endowment of resources and the physical nature of the

relationships among them,

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the level and nature of our understanding of those relationships, or

technology,
individual objectives,
the objectives of society, (which reflect the organization of society and
the institutions that coordinate the preferences and behavior patterns
of individuals within society)
information about alternative choices and the probable outcomes of
alternative choices,
perceptions of relationships among the individuals within the society
values held by individuals, and
the methods used to describe, analyze and identify potential
alternatives and outcomes also shape the answers.

There are a variety of mechanisms that can be used by society to allocate

economic resources, goods and services. Exchange, reciprocity, philanthropy,
eminent domain (command), inheritance and theft are examples of rationing
mechanisms that are possible ways of assigning and transferring property rights
to things. These mechanisms may also be categorized as exchange, tradition and
command. [Heilbroner, pp. 6-12] Modern mainstream economic theory tends to
focus on exchange. The exchange mechanism takes place in the context of a social
institution that is called a market. A market is a social institution that allows
(encourages) potential buyers or sellers of a good to engage in voluntary
exchanges with other buyers and sellers. These voluntary market exchanges reflect
the preferences of the individuals involved. Market theory is based on the
assumption that the individuals know their preferences and will not behave in
anyway that is detrimental to their interests (lower their utility). Every voluntary
choice made by an individual in a market then represents an improvement in their
welfare or no decrease in their welfare. Any voluntary choice represents an increase
in individuals welfare (or at least no decrease in welfare) since no one would
voluntarily choose to make himself or herself worse off. Through this selfinterested behavior in voluntary exchanges the interests of the individuals are
brought into harmony and consistency with social wellbeing. The Utilitarianism of
Jeremy Bentham [1748-1832] is the foundation of modern microeconomic theory and
maintains that the utility of society is the sum of individuals utility functions.
The history of economic thought tends to be a study of alternative
explanations about the perceptions of appropriate mechanisms to allocate resources
and the proper relationship of the economy and economic behavior to society.
There are many approaches to the study of any topic. In the instance of economics,
there are two broad approaches; that of the absolutist and that of the relativist.
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ABSOLUTIST AND RELATIVIST POSITIONS

The absolutist tends to believe that there are some objective, absolute facts
or truths about the perceptions and patterns of economic behavior that cross
cultural, temporal and social boundaries. These beliefs and patterns of behavior are
perceived as universal. They are believed to apply in every society at all times in
similar ways. From this point of view the study of the history of economic thought
becomes a process of reading the works of economists that have contributed in the
past and sifting out the grains of truth. Each generation of economists is seen as
correcting errors made by their antecedents and adding new insights. Adam Smith
corrects errors in the theories of the Mercantilists and Physiocrats and earlier
works, synthesizes them and adds new insights to further economic knowledge.
Alfred Marshall corrects mistakes in Smith and other Classical economists, includes
new developments, tools of analysis and insights about microeconomics and
improves the ability of economic theory to describe economic phenomena.
The relativist approach to the history of economic thought holds that what is
true, or useful, in one time or place may or may not be useful in some other time
or place. Economic theory is a product of its environment. What was true for
Adam Smith in a nation of shopkeepers in the mid 18th century may or may not
be useful or true in the early 21st century or for Alfred Marshall in the late 19th
century. The relativist tends to believe that economic theory is shaped by
technology, social and economic institutions.
Both the absolutist and relativist positions have attractive features. Perhaps a
position somewhere between the extreme relativist and absolutist positions is more
reasonable. There may be universal patterns of economic beliefs and behavior that
span all societies. However, cultural features, technology and other factors
influence our perceptions, values and behavior. Mark Blaug writes;
No assumptions about economic behavior are absolutely true and no
theoretical conclusions are valid for all times and places, but would anyone
seriously deny that in the matter of techniques and analytical construct there
has been progress in economics? [Blaug, 1985, p 3]
The history of economic thought is a critical investigation of the criteria that have
been used to decide which economic ideas are relevant and to identify which
direction progress might lie.
The structure of society, technology and the economy are interrelated: each
influences the nature and structure of the other. The appropriate forms of
technology, society and the economy and their interrelationships have long been
the subjects for debate. Different perspectives about these relationships and the
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relative importance of each element in the social system are the grist for the mill of
history. The direction of causation is one source of debate. Does technology
primarily determine economic or social systems? Or, do the economic and social
forces determine the nature of technology?
Different perspectives regarding the interrelationships of technology,
economy and society also influence the methods used to analyze and describe the
relationships. In turn, the description of the relationship may alter the course of
technology, economic and social systems. The technology of the industrial
revolution and conditions of the workers was an influence on Karl Marx. At the
same time, Marxs analysis and assessment of capitalistic societies was an influence
on the course of history. The economies of China and the former Soviet Union were
influenced by various interpretations of Marxist economics. The very existence of
these systems has influenced, not only those countries, but also the rest of the
world community.
Economic theory is constructed by economists who are members of society.
Their perspectives of relationships and events are products of the society to which
they belong. Some economists construct theories that represent the views of
smaller, sometimes disenfranchised social groups. Generally, only those theories
consistent with the prevailing and/or dominant social values will displace earlier
theories. However, theories that represent the disenfranchised may influence the
mainstream economics that represents the society at large. Economic theory is both
a determinant and reflection of the society of which it is a part.
The methods, theories and perspectives are like lens. As we view economic
behavior and processes through these lenses, our perceptions are shaped. To
critically evaluate the economic processes in society we need to understand the
nature of the lens that influence, focus or distort our interpretation of the facts.

IDEOLOGY, THEORIES AND POLICY

Three fundamental components of human perception and action to be
included in a study of history of economic thought are ideology, theory and policy
choices. The outcomes of the policies is a forth item which should be included since
it interacts with the first three. While outcomes of economic choices and policies are
the subject of applied micro and macro economics, they are also important in a
study of the history of economic thought because they are interrelated to the other
components. It is possible to just study the chronology of economic theories or of
policies and their outcomes. However, one of the reasons to study the history of
economic thought is to understand how we have come to believe what we believe
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and why we interpret some economic ideas as knowledge. The interaction of

ideology, theory, policy and their outcomes contributes to the explanation of our
beliefs.

Ideology
Joan Robinson comments that ideology is much like the proverbial elephant,
it is difficult to define but we know one when we see it. [Robinson, p 2] Ideology is
a complex concept that arises from many sources and takes many forms. It
influences our perceptions of the world about us and alters our behavior patterns.
The word ideology can be used in a variety of contexts. There are political and
epistemological issues associated with ideology. [Eagelton, pp. 8-12] Ideology
consists of values, attitudes, beliefs, and perspectives that are held in common by a
social group. It is often difficult to specify the exact nature of ideology although we
can identify specific ideas that are contained in the ideology. Joan Robinson says;
What then are the criteria of an ideological proposition, as opposed to a
scientific one? First, that if an ideological proposition is treated in a logical
manner, it either dissolves into a completely meaningless noise or turns out to
be a circular argument. (Robinson seems to use ideological and metaphysical
as synonyms) The hallmark of a metaphysical proposition is that it is not
capable of being tested. Yet metaphysical statements are not without
content. They express a point of view and formulate feelings which are a guide
to conduct. [Robinson, pp. 2-3]
This ideology influences what we choose to observe as important and the
interpretations we make of those observations. It also alters the criteria we use to
evaluate phenomena and judge the morality of choices and behavior.
Ideology is a fundamental aspect of a culture. The dominant ideology shapes
the rules that establish what is acceptable and unacceptable behavior patterns. It is
also a guide and the criteria that are used to evaluate right and wrong. It is the
foundation of our system of morality and ethical behavior. From a political
perspective, ideology may establish the distribution of power within a society. The
dominant ideology is typically associated with a system of implicit and explicit rules
and rewards for those whose behavior and views are consistent with those of the
prevalent ideology. Smaller groups within a society may have an ideology that is
inconsistent to the dominant ideology. Ideology is also present in the individual.
Each individual accepts, consciously or unconsciously, a set of values and principles
that shape their perceptions and guide their choices. Adherence to ideologies that
are inconsistent with the principles and values expressed in the dominant ideology
may lead to disenfranchisement of an individual or group.
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From an epistemological perspective, ideology is a strong influence on

perceptions of important phenomena. It identifies which phenomena are relevant to
our values and it shapes the interpretation of those phenomena. A superficial view
of history suggests that the ideology shifts over time. The foundation of the Greeks
ideology (Athenian) included beliefs which valued discourse, rhetoric, democracy,
nature (including a view of the nature of humans), interaction of humans with
nature (or gods) and the appropriate roles for classes and gender. The Romans
ideology stressed many of the aspects of the Greeks but less emphasis was placed
on democracy and more on domination and war. The Scholastics placed value on
the importance of the human mind, and its ability interpret and reconcile the
scripture with Aristotelian philosophy. The renaissance and the rise of science are
related to a shift in of ideology (from an epistemological perspective) to
observation, measurement and categorization of phenomena in order to identify
atomistic, mechanical relationships among all natural and social phenomena. In
recent years, a pecuniary facet has been added. In addition to empirical
observation and quantification of physical phenomena, the market system has
strengthened the importance of the measurement of monetary or pecuniary values.
These monetary, pecuniary or market values are proxies for human values as
demonstrated through the ability to pay in a competitive, market context.
The sources of ideology are varied. Story telling and theory are two
important ways in which ideology is created, transmitted and embedded in a
culture. In most societies, fables and stories are used to express and reinforce
ideology. Aesops fables, fairy tales and nursery rhymes often have ideological
content. A classic example is the story of The Little Red Hen which stresses the
importance of hard work and cooperation. Theories too rationalize and justify
particular choices and behavior patterns. In the words of Joan Robinson,
It was the task of the economist to overcome these sentiments and justify
the ways of Mammon to man. No one likes to have a bad conscience. Pure
cynicism is rather rare. Even the Thugs robbed and murdered for the honour
of their goddess. It is the business of economists, not to tell us what to do, but
to show why what we are doing anyway is in accord with proper principles.
[Robinson, p 21]
A theory of markets that is based on individual pursuit of self-interest
justifies behavior that is based on self-interest. A person living in a society
explained by theories that stress individual self-interest feel justified in pursuing
their self-interest. If the ideology and resulting theories ignore forces (ethics, duty,
morality, sympathy etc.) the individuals feel justified in behavior that ignores or is
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devoid of those same forces. Problems may arise, not so much for what the
ideology includes, but for what it leaves out. John Locke [1632-1704], Adam Smith
[1723-1790],

Jeremy Bentham [1748-1832] and the other philosophers who helped to

frame our individualistic, mechanical market ideology, included sympathy,

empathy, morality, ethics, law and social values as well as self-interested individual
motives. In a more simplistic interpretation of their work, self-interest is often seen
as the isolated motive that guide and justifies human behavior. A study of the
history of economic thought should create an awareness of the richness and
complexity of our ideological heritage.

Theories
A theory is an intellectual construct that consists of a set of consistent,
coherent propositions that explains a particular class of phenomena. This set of
propositions cannot include all aspects of a phenomenon. A theory must, of
necessity, abstract from the real world and identify the most relevant features and
aspects of a phenomenon. It is a simplified perception of reality. It provides a
framework to identify which facts are relevant and a guide to interpret what the
facts might mean. Without theory, facts are simply data without context or
meaning.
Theories are expressions about expected or perceived relationships among
things or phenomena. There is frequently a causal relationship that is expressed in
a theory; event A causes event B. Causation is difficult to access, as we shall
see in the chapter, A Problem of Knowing. A more precise statement is that events
A and B are correlated, or event B tends to happen when event A happens
and there is some reason to believe (theory of a relationship) that events A and
B are causally related.
Theories are typically presented as models. The word, model, has many
meanings. In one sense, it is an abstract or simplified representation or standard
that can be used to demonstrate, judge or compare phenomena. In economics, a
model can be thought of as an abstract, simplified system that identifies and
characterizes a set of phenomena and their relationships. A model usually begins
with a set of axioms that provide the foundation for the relationships among the
phenomena.
Models may be constructed and presented in several different formats. A
model may be presented as a story or narrative. It may be a visual model that
takes the form of a picture, sculpture or graph. Models that express causal
relationships in economics often are mathematical models that are expressed as
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equations, systems of equations or graphs that represent mathematical

relationships between a dependent variable and a set of independent variables.
Our expressions about perceived relationships are influenced by our ideology
and in turn, influences our ideology. The axioms, that are truths that are accepted
as self-evident propositions or are assumed true without testing, are determined
largely by our ideology. These axioms then become the foundations and
determinants of theories. Peter Lichtenstein comments;
It is essential, therefore, to point out at the very outset that economic theory
has a very subjective, ideological aspect to it. [Lichtenstein, p 4]
A theory or set of theories that is accepted as the way the world works, or
as true, rationalizes the ideology that provides the axioms and foundation of the
theories. In economics, an ideology that includes human behavior that is
mechanical, individualistic, reductionist, and self-interested, contributes to a system
of theories that explain the operation of individual choice in the context of a market
system. This system of theories about the market system then justifies and
reinforces the ideology of individualistic, self-interested behavior. An economy
explained by market theories that are based primarily on individual, self-interested
behavior justifies and encourages self-interested behavior.
These theories and models are an image of how the world works. The
function of science is to develop and test the validity of these theories. The testing
of these theories provides knowledge about the relationships and phenomena in
the real world. Theories are not the real world; they are representations of reality.
The issue of what we know depends on the methods we use to test the validity of
theories and the confidence that we place in the methods and tests of theories. The
evolution of Western approaches to knowing and epistemology are discussed in
more detail in the chapter A Problem of Knowing.
Theories represent what we think we know about the relationships among
relevant phenomena. The more confident we are about the certainty of the
knowledge expressed in the theories, the more likely we are to use our presumed
knowledge as a basis for making choices and policy.

Policies
Individuals living in societies must make decisions about their interaction
with nature and other humans. One of the most important functions in any society
is the coordination and integration of individuals behavior in a manner consistent
with the operation of a society. Policy may be implicit or explicit. At the social level,
policy is an agreed upon course of action encouraged by a set of rules that
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constrain or encourage particular actions within a social setting. In a sense, policy

is an important part of the rules of the game. Individuals make choices within the
social policies. Traditions, customs, mores and culture form implicit rules or policy.
Social institutions define and enforce these implicit rules. Noncompliance with these
implicit rules will (or may) result in social sanctions. Laws, orders and both private
and public regulations constitute much of explicit policy. Generally, explicit rules
can be thought of as the rules or policies that are consciously created and explicitly
stated by social groups, corporations, organizaitons and governmental units.
Mark Blaug describes the relation of policy and theory:
It may be granted that, even in its purest form, economic theory has
implications for policy and in that sense makes political propaganda of one
kind or another. This element of propaganda is inherent in the subject and,
even when a thinker studiously maintains a sense of Olympian detachment,
philosophical and political preferences enter at the very beginning of the
analysis in the formation of, as Schumpeter would have it, his 'vision': the
preanalytical act of selecting certain features of reality for examination.
[Blaug, 1985, p 5]
Polices are the result of what a society or individual thinks they know about their
natural, social and built environment. The notion of rational behavior suggests that
policies must be consistent with theory. Rationality may be thought of as using
knowledge to choose among alternatives to best achieve desired objectives. To
make choices counter to what we think we know would be irrational.

Outcomes
Choices have consequences. The Newtonian, mechanical perspective that
forms the model for science in Western industrial societies is based on the notion
that events are causally related; for each choice there is an outcome or set of
outcomes. Modern Western economics is predicated on the idea of a finite world
with limited resources that may be used to satisfy unlimited human wants. The
selection of any alternative implies that other alternatives were not selected. The
alternative selected has effects on other variables; if an institution in society chose
to increase the money supply, there are effects of that choice. The effects that flow
from that choice might include an increase in monetary prices that include interest
rates. An increase in interest rates may have the effect of reducing expected
returns from endeavors that use borrowed money; this in turn, may have the effect
of reducing the willingness to borrow money to invest in such endeavors. This
expected chain of causes and effects depends on our theory and observations of

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previous events. The actual chain of causes and effects may (or may not) be
independent of our expectations that were formed based on our theories.
Policies and choices are made on the basis of our expectations of specific
outcomes of particular actions. Modern economic theory maintains that choices are
made based on opportunity cost; a comparison is made between the effects that
will result (or we expect to result) from a choice and the expected outcomes of the
next best choice. Theories form the expected results of each alternative action. In a
modern, scientific, rational world, theories and knowledge, are the bases for our
choices. Choices may be made based on intuition, feelings and emotion, however
these are not regarded as scientific in Western industrial societies.

CONSISTENCY OF IDEOLOGY, THEORY, POLICY AND OUTCOMES

The relationships among ideology, theory, policy and outcomes are multidirectional and multifaceted. Each influences and is influenced by the others. In an
ideal world, the relationships might be viewed as a flow diagram. Ideology is the
foundation that provides the axioms and nature of the theories that are used to
explain the ways that the world works. At an individual level, the ideology is
influenced by a variety of forces; peer groups, family, religion, social position,
education, training, ethnicity, gender and a multitude of other factors contribute to
an individuals ideology. At the social level, the ideology consists of the values,
principles, attitudes, beliefs and perspectives that are held in common by a group.
At this level, ideology is integrally related to religion, education, the legal system,
philosophy, and all the other components of society. Ideology is transmitted and
reinforced by stories and the theories that are accepted by the group. The theories
and ideology must be consistent. The theories, based on ideology, are expressions
and explanations about the nature of things and their relationships. Theory provides
the framework to interpret observed facts about the real world. This knowledge
about things and relationships among things provides a basis for making choices
and establishing policy. Each policy and choice have outcomes. These outcomes are
evaluated against the expectations that theory suggested. If the outcomes are not
consistent with theory and policy then it may be necessary to reevaluate the theory
and the accompanying policies. Outcomes may also be evaluated by comparing
outcomes with the values, attitudes and beliefs expressed by the prevailing
ideology. If outcomes are inconsistent with the expectations of theory or the
values expressed within the ideology, it may be necessary to modify the theories
and/or the ideology. The theories may change with greater ease and speed.

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Ideology is slow to change. The changes in ideology may be in response to changes

in theories.
The classic example of theory changing faster than ideology is the story of
the Copernican Revolution. The Copernican Revolution began as a change in the
theories that explained the observed orbits of planets. The theory evolved over
time through the work of Nicholas Copernicus [1473-1543], Tyco Brahe [1546-1601],
Galileo Galilei [1564-1642] and Johann Kepler [1571-1630]. The Copernican theories
were published in 1543. The heliocentric theory of the system of planets and their
relation to the sun were in conflict with ideology that was primarily an expression of
the Church. The observations and predictions of the Copernican model were more
consistent with the new theories than the Ptolemaic system. The theory changed
quite rapidly; in 1543 Copernicus system was published, in 1609 Kepler published
New Astronomy, and in December of 1610 Galileo verified that Venus orbits the
sun, thus showing that the Copernican system was a more accurate theory
(explanation) than the Ptolemaic system.
By 1611, the Jesuits at Collegio Romano had verified Galileos astronomical
observations and honoured him. The ideology related to the theories of planetary
movement changed more slowly. It is also in 1611 that the Inquisition decided to
investigate Galileo. In 1613 Galileo responded by writing a letter on the relationship
of his findings to the scripture, and by 1615 Galileo went to Rome to defend
himself. In 1633 he was questioned by the Inquisition, detained, and threatened
with torture and imprisonment. Ultimately he was placed under house arrest and
died in 1642, almost 100 years after Copernicus publication. The basic ideology
had resisted change in the face of empirical evidence. Overtime however, the
ideology was modified to produce a consistency with the theory and observed
outcomes.
The evolution of economic thought is also a story of ideology, theory, policies
and outcomes. Neoclassical microeconomic theory of the late 19th and early 20th
centuries focused on explanations of a self equilibrating market economies that
always returned to full employment equilibrium. The policies it fostered were free
market polices. Yet the outcomes of the great depression [1929-1941] were
inconsistent with the theories and the ideological values that were held. The result
in this case was a shift in the theories; Keynesian economic theory replaced, at
least for a time, the neoclassical models.

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Economics as an Academic Discipline

While the economic process is an integral part of society and the social
system, economics as an academic discipline, like most disciplines, has become
more and more specialized.
The Greek philosophers and medieval scholars who pondered and wrote
about economic problems did not see economics as separate from other issues in
society. Questions of ethics, social and natural phenomena were interrelated. The
Mercantilists in the 1500s and the Physiocrats in the mid 18th century began to
distinguish between economic events and phenomena and other aspects of society.
Economics, however, was seen as a part of the natural order of things and a
component of society. Adam Smith [1723-1790], writing in the last half of the 18th
century was a moral philosopher. Moral philosophy was what we might now call
social science. Smith tried to explain economic relationships [An Inquiry into the
Nature and Causes of the Wealth of Nations, 1776] within the context of a society
with a moral system [The Theory of Moral Sentiments, 1759] and a legal system
[Lectures on Jurisprudence, 1762-3 and 1766].
The term political economy appears in the title of David Ricardos [17721823] Principles of Political Economy and Taxation [1817] and later in John Stuart

Mills [1806-1873] Principles of Political Economy, With Some of Their Applications to

Social Philosophy [1848]. David Ricardos work was an important factor in the
development of economics as an abstract, analytical discipline.
During the middle of the 19th century the discipline of economics began to
focus more exclusively on economic behavior. The writers were aware of the social
context of economics but were unable to consider all aspects of social behavior. The
titles of the major contributions chronicle this trend. In 1838 Augustin Cournot
[1801-1877] published Researches into the Mathematical Principles of Wealth.

William Stanley Jevons [1835-1882] in his 1871 Theory of Political Economy used
the term political economy. In the same year Karl Menger [1840-1921] used the title
Principles of Economics and Leon Walras [1834-1919] contribution was titled
Elements of Pure Economics. It is Alfred Marshall [1842-1924] who provides the
foundation for Neoclassical economics with Principles of Economics [1890]. From
the Greeks to the end of the 19th century, the trend was from philosophy to social
analysis to political economics to economics. The changes in the titles of
important works reflect the development of economics as a separate, distinct
discipline. It is a move from an element in philosophy that considers ethics as well

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as humans relationship to technology and the natural environment to a concern

with the pecuniary implications of an allocation of things within a market system.
Marshall reflected on the importance of ethics and social institutions in
understanding economic process [Marshall pp. v, 17, 21] and warned about the
improper use of mathematics [Ibid. p ix]. The construction and understanding of
economic theory and explanations requires the use of mathematics, but as a tool to
understand the relationships. In a reference to the works of Augustin Cournot,
Marshall states that:
And though Cournots genius must give a new mental activity to
everyone who passes through his hands, and mathematicians of
calibre similar to his may use their favourite weapons in clearing a
way for themselves to the centre of some of those difficult
problems of economic theory, of which only the fringe has been
touched; yet it seems doubtful whether any one spends his time
well in reading lengthy translations of economic doctrines into
mathematics, that have not been made by himself. A few
specimens of those applications of mathematical language which
have proved most useful for my own purposes have, however been
added in an Appendix. [Marshall, p ix]
However, modern economic theory has increasingly used more sophisticated
mathematical methods to construct and communicate models. As economic
methods have evolved, the discipline has also become increasingly more
specialized. The use of mathematics has encouraged this specialization. To express
economic ideas as equations or systems of equations requires simplification and
abstraction. Mainstream economic theory is more concerned with purely economic
behavior rather than the relationships of economic behavior to the social system.
It is difficult to measure and quantify many social relationships.
By the late 1800s economics had emerged as a separate academic
discipline. It was during the Victorian era and the early 1900s that many of the
other social sciences such as anthropology, sociology and psychology, emerged and
matured as separate disciplines.

Fields in Economics
Not only has economics become more specialized as a social science, but
within economics there is greater specialization. Currently, economics is a discipline
that covers a large and growing number of topics or fields. The Journal of
Economic Literature, a major journal in the field of economics lists 17 categories
used to classify new books. These include: General Economics and Teaching;
Methodology and History of Economic Thought; Mathematical and Quantitative
Methods; Microeconomics; Macroeconomics and Monetary Economics; International
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Economics; Financial Economics; Public Economics; Health, Education and Welfare;

Labor and Demographic Economics; Law and Economics; Industrial Organization;
Business Economics; Economic History; Economic Development, Technological
Change, and Growth; Economic Systems; Agricultural and Natural Resource
Economics; Urban, Rural, and Regional Economics; and Other Topics. Each of these
categories is then divided into more specialized fields. As an example, Urban, Rural,
and Regional Economics is divided into General, General Spatial Economics,
Household Analysis, Production Analysis and Firm Location, Transportation
Systems, and Regional Government Analysis. Within each of these divisions there
may be further specialization. The practicing economist may specialize in a narrow
topic such as the economics of railroads, trucking, health insurance or the
economics of the pharmaceutical industry.

Nature of Work in Economics

James Cochrane suggests that the work of economists can be divided into
three categories: [Cochrane, p 1-2]
descriptive economics,
analytical economics, and
applied economics.

Descriptive Economics
In descriptive economics one collects together all the relevant
facts about particular topics; for example, the agricultural system
of Basutoland, or the Indian cotton industry. [Ibid.]
The descriptions are often narratives about particular features of the
institutions or descriptive statistical measures. William Petty [1623-1687] is an
example of an early writer that tried to describe economic phenomena. In his
Political Arithmetik [completed about 1676; see Spiegel, p 124] he tried to estimate
national wealth and national income. In a complex world it is impossible to
categorize and measure all phenomena. Consequently, it is necessary to make
choices. The choice of which variables to describe determines the nature of the
story that is told.

Analytical Economics
In economic theory, or economic analysis as it is often called, one
gives a simplified explanation of the way in which an economic
system works and of the important features of such a system.
[Cochrane, p 2]
Analytical economics is the process of trying to explain general relationships
between events. It is based in the notion of cause and effect. (Cochrane refers to

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this estimation of causes as applied economics. For purposes of this manuscript we

will define applied economics differently.) A key characteristic of analytical
economics is the use of theory and models. These models may be narrative in form,
but in modern economics they are most frequently expressed as equations or
systems of equations. Graphical representations of these models are typically used
for heuristic purposes.

Applied Economics
Here we are defining applied economics as the application of descriptive and
analytical economics to the process of identifying problems and selecting among
alternative solutions. Applied economics is the use of analytical economics to select
among alternatives, it is used for policy purposes. If the elements of the monetary
system are described and the general relationships among the various elements are
known, this knowledge can be used to suggest or prescribe policies. What is the
money supply? What is the interest rate? What is the level of employment (or
unemployment)? What is the level of prices? How are these elements related? If we
can describe these elements and know the relationships it may be possible to alter
one variable to achieve desired changes in another.

Microeconomics
The methods of economics may focus on the relationships and behavioral
patterns of individuals, firms, or industries. Modern, orthodox microeconomics
tends to focus on exchange relationships in a market setting. These exchange
relationships are simplified and are usually related as monetary costs and benefits.
More specifically as marginal costs and marginal benefits measured in monetary
terms. Each agent, acting in its self-interest, attempts to optimize some objective
or goal. Consumers are usually characterized as utility maximizers while firms are
often profit or sales or market share maximizers. This focus on the market as a
mechanism to coordinate individual choices and behavior is called methodological
individualism. The interactions of the agents in markets, exchange relationships,
are usually summarized and represented as price and quantity relationships. As a
result of the concern with monetary prices, non-market values are often omitted or
considered only in a tertiary way.
The general structure of microeconomic analysis involves three steps:
identify the objective,
identify all feasible alternatives (choices that are feasible),
develop a criteria to evaluate each feasible alternative with respect to
the objective.

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Microeconomics emerged as a separate branch of economics in the late

1800s. Alfred Marshalls Principles of Economics [1890] is the foundation of
microeconomics as it is currently structured. His work is a synthesis and extension
of the earlier ideas of the Classical School and the marginalists. Neoclassical
economics is the core of modern microeconomics. Most economists believe that the
theories in Neoclassical microeconomics are universal; they are applicable among
all cultures at any time. Because of this perception, there is a dominant ideology
expressed in the methodology of microeconomics. Modern microeconomics tends to
support the ideology of market systems.
Greek philosophers were among the first to develop microeconomics.
Xenophon [430-355 BCE] was soldier, historian and student of Socrates. Among his
writings he expresses views on the division of labour and the allocation of resources
within the latifunda. He referred to the management of these large, self-sufficient
estates as oeconomicus. Plato [427-347 BCE], another student of Socrates
developed the notion of specialization as a criteria of justice and the basis for the
existence of the city-state. He believed that justice was each person doing that for
which they were best suited. Once each person specializes, there is a mutual
dependence that requires exchange, hence, the growth of the city-state. [Plato, pp.
165-232] Aristotle [384-322 BCE] divides economics into oikonomiks and
chrematistiks. Oikonomiks is much the same as Xenophons oeconomicus. Aristotle
limits oikonomik to the provision of real and necessary goods and services.
Chrematistiks is the process of moneymaking and exchange to accumulate
monetary wealth. His was interested in value and justice of exchange. Aristotle
regarded oikonomiks as natural and necessary while chrematistiks was unnatural
behavior.
During the period of the Roman Empire and middle ages, much of the
thinking about economics dealt with justice, exchange, usury, just price and other
microeconomic topics. During the Renaissance [approximately 1350 or 1450 to
1700], economics began to include more macroeconomics. During the period of the
Mercantilists [approximately 1500-1776] there was an interest in the development
of nations and the growth of national economies. Classical economics continued the
emphasis on macroeconomic issues. Microeconomics was of interest primarily
because of its relation to the growth of national wealth. From about 1850 until the
Great Depression in 1929 microeconomics, [primarily Neoclassical economics]
was fashionable.

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Macroeconomics
Macroeconomics is the branch of economics that focuses on the whole
economy. The overall performance of the national [or world] economy is the
primary concern of macroeconomics. In macroeconomics, the role of descriptive
economics is to measure or quantify National income accounts [Gross Domestic
Product, National income, etc.], overall levels of employment [or unemployment],
price levels and interest rates. Economic stability [or instability] and economic
growth are also important issues in macroeconomics.
Analytical macroeconomics develops models to explain and/or predict the
forces that affect the aggregate measures of economic activity. The conclusions and
models developed in macroeconomic theory are used to design and defend policy
prescriptions. Because of the close relationship of macroeconomics to policy
choices, competing ideologies offer different solutions to the perceived problems.
Like microeconomics, the approach and nature of macroeconomics depends
on the objectives. In the case of macroeconomics, the objective may be an
economic variable [level of employment, inflation, growth, etc.] or the policy that
theory seeks to support or defend [free markets, intervention, planning, etc.]. At
one level macroeconomic policy may be to achieve particular levels or changes in
employment, incomes, income distribution, interest rates or price levels. At another
level, macroeconomics may be used to defend or attack ideological perspectives.
As mentioned in the previous section [Microeconomics], the development of
macroeconomic theory was related to the growth of the nation state. While the
Greeks experience was with city-states, Xenophon [430-355 BCE] did consider ways
to increase the revenue of Athens. However it was the Mercantilists, Physiocrats
and Classical economists who speculated on forces that would increase the wealth
of particular societies or nations. Their focus was on macroeconomic relationships.
Microeconomics was considered primarily as it related to macroeconomic goals.
Macroeconomics became somewhat less important during the period from
about 1850 to 1929. Neoclassical economics had discovered equilibrium and
believed that markets would tend toward full employment equilibrium. The
macroeconomy was a self-equilibrating mechanism that optimally allocated
resources. Mainstream, Classical economists regarded unemployment, panic,
recessions and depressions as temporary aberrations. It was the Great Depression
that began in 1929 that generated a renewed interest in macroeconomic theory and
policy. John Maynard Keynes [1883-1946] published the General Theory of

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Employment, Interest and Money in 1936 beginning the Keynesian revolution that
reconsidered macroeconomic theory and policy.
In a recent years, both micro and macro theory have been included. Usually
an economist will focus on either microeconomic theory or macroeconomic theory.
Some work has been done on the microeconomic foundations of macroeconomics.
Other economists have worked on the macroeconomic foundations of
microeconomics.

SCHOOLS OF ECONOMIC THOUGHT

Economists and critics of economics have all heard the story that President
Harry Truman wanted a one armed economist; so that after rendering an opinion or
recommendation they couldnt say, On the other hand! Other one liners about
economists include:
If all the economists in the world were laid end to end they still
wouldnt reach a conclusion.
If all the economists in the world were laid end to end they wouldnt
point in the same direction.
If you ask four economists a question you will get five (or six) different
answers.
Jokes about economists, like all stories and jokes, often have a grain of truth
and influence the perceptions of those who hear them. One of the common
perceptions about economists is that they never agree. There is some credibility in
this perception, but there is more agreement than is commonly believed. One of
the factors that contributes to the perception of disagreement is that there are
different schools of economic thought. George Stigler defined a school of thought
as;
A school within a science is a collection of affiliated scientists who display a
considerably higher degree of agreement upon a particular set of views than
the science as a whole displays. It is essential to a school that there be many
scientists outside it or the school would have no one with whom to argue.
[Stigler, p 116]
The history of economic thought record the development and evolution of
many different schools of thought. One of the first schools was a group of French
writers who were led by Franois Quesnay [1694-1774] and called themselves the
economists. They became known as the Physiocrats. Adam Smith [1723-1790]
began what is now known as the Classical economics. Alfred Marshall [1842-1924] is
often considered the founder of Neoclassical economics and Karl Marx [1818-1883] is
the obvious leader of Marxian economics. John Maynard Keynes [1883-1946] writings

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resulted in the Keynesian school emerging during the great depression of the
1930s.
Mainstream economics is the term used to describe the body of theory that
is most widely accepted at a given time. The modern body of mainstream
economics is represented by Neoclassical and Classical economics. In addition to
these mainstream schools, some of the others that are important include:
Austrian school
Old and New Chicago schools
Monetarists
Old Institutionalist and New Institutionalist
Public Choice
Marxian
Keynesian and Post-Keynesian
This list is not exhaustive. There are other schools that are important. In many
cases the schools may overlap on many issues.
Some

of the characteristics of a school that are identified by Stigler are;

A school must have a leader. [Stigler, p 116]
the school may be united by substantive scientific views
If the school is united on methodology rather than substantive
doctrines, its life will be longer. [Ibid.]
A school may be based on policy views rather than upon economic
analysis or scientific methodology. [Ibid.]

In A Modern Guide to Economic Thought, Mair and Miller present a summary

statement about several important schools of thought. The summaries are divided
into topics such as world view, values, goals, methodology, criteria (to evaluate
theories) hard core, concepts, agenda and themes. [Mair, pp. 68-69]
One of important differences between different schools is their view of
human nature. There are two important ways of classifying human nature that
influence perspectives of different economic schools of thought. First, is whether
humans are viewed as basically good or evil. If humans are basically good
there is little need for social institutions to constrain behavior. William Godwin
[1756-1836]

is an example of an anarchist who believed that humans were basically

good and social institutions encouraged them to be bad.1 Alternatively, if humans

are basically bad, it is necessary to constrain their behavior. Much of Western

Godwins daughter, Mary Wollstonecraft Shelly wrote Frankenstein [1816] that tells
the tale of technology and individuals relationship to society in which a man created by
Frankenstein, who was basically good, became bad after mistreatment by society.
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religion accepts the doctrine of original sin. Humans are by nature born with evil
tendencies and some method of altering behavior is necessary.
The second, is whether human nature is fixed by nature (genetics or) or is the
result of the environment. Thomas Malthus [1766-1834], the first person employed as
an economist, is well known for his view of the nature of humans with respect to
population growth. Human behavior is the result of natural traits and cannot be
altered by welfare, working conditions or other factors. Alternatively, Robert Owen
[1771-1858]

risked his fortune investing in New Lanark and later New Harmony to

show that individuals who are treated well will change.

It is the ideological underpinnings that shape perceptions of economic
processes. It is differences in ideology that produce different schools of thought in
economics. The history of economic thought attempts to identify these schools and
to determine the forces that contribute to their creation, evolution and ultimate
success or failure an intellectual construct that explains, predicts or justifies the
world we have created.

REASONS FOR STUDYING THE HISTORY OF ECONOMIC THOUGHT

The economic process that evolves in any society is a complex matrix of
individuals, organizations, rules, and relationships. This matrix is the product of
perceptions, values, beliefs, knowledge and technology. The economic process is
embedded in society and is related to all aspects of the culture. An understanding
of the economic system and economic theory requires an awareness of the social,
historical and philosophical context in which they are developed. It is possible to
train individual economists to apply economic tools, such as benefit/cost analysis
without an understanding the historical and philosophical context of the tools. It is
also possible to train an individual to fire and clean a firearm without considering
the context of its alternative uses. This is the difference between training and
education, between knowledge and wisdom. Both are needed.
The history of economic thought is a study of alternative perspectives and
explanations of how the economic processes function. An important aspect of the
study of economic thought is to identify the factors that encourage different
perspectives of the economy. It is also important to trace the evolution of the tools
used for analysis and understand how the different perspectives and conditions
encourage the use of different tools. Mark Blaug writes:
The task of the historian of economic thought is to show how
definite preconceptions lead to definite kinds of analysis ant then
to ask whether the analysis stands up when it is freed from its
ideological foundation. It is doubtful whether Ricardo would have
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developed his theory of international trade without a strong

animus against the landed classes; but this theory survives the
removal of his prejudices. [Blaug, 1985, pp. 5-6]
An understanding of the different approaches to economics, the causes for
those differences and how they have evolved over time provides a historical and
philosophical context that encourages a more critical analysis of current economic
tools and their applications. This critical approach has three advantages. First, it
provides a more complete understanding of the current state of economic analysis
and second, it may suggest alternative perspectives that will extend, improve or
alter the tools and analysis. Third, through an increased awareness of our own
perspective of the economic process, it encourages a degree of humility and respect
for others.
Most importantly, the study of the history of economics thought can be fun
and reveal many things about ourselves.

Chapter References
Blaug, Mark. Economic Theory In Retrospect, 4rth edition, Cambridge University
Press: Cambridge, 1985.
Cochrane, James L. Macroeconomics Before Keynes, Scott, Foresman and Company:
Glenview, Illinois, 1970.
Eagleton, Terry. Ideology, Verso: London, 1991.
Heilbroner, Robert and William Milberg. The Making of Economic Society, Tenth
edition, Prentice Hall: Upper Saddle River, NJ, 1998.
Lichtenstein, Peter M. An Introduction to Post-Keynesian and Marxian Theories of
Value and Price, M.E.Sharpe, Inc.: Armonk, New York, 1983.
Mair, Douglas and Anne Miller, editors. A Modern Guide to Economic Thought,
Edward Elgar: Aldershot, 1991.
Marshall, Alfred. Principles of Economics, 8th Edition, MacMillian Press, Ltd., 1920,
Reprinted by Porcupine Press: Philadelphia, 1990.
McConnell, Campbell R., and Stanley L. Brue. Macroeconomics, McGraw-Hill
Publishing Company: New York, 1996.
Plato. The Great Dialogues of Plato; The Republic, Mentor Book: New York, 1956.
Polanyi, Karl. The Great Transformation, Becon Press: Boston, 1944, 1957 reprint.
Robinson, Joan. Economic Philosophy: An Essay on the Progress of Economic
Thought, Anchor Books: Garden City, NY, 1962.
Spiegel, Henry William. The Growth of Economic Thought, Third Edition, Duke
University Press: Durham & London, 1992.
Stigler, George. The Economist as Preacher, Basil Blackwell: Oxford, 1982.
Swedberg, Richard. "The New Battle of Methods," Challenge, Vol. 33, no. 1, Jan/Feb
1990, pp 33-38.

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Glossary
Chapter 2
Introduction to History of Economic Thought
allocate- the act of identifying a resource, thing or place for a specific use.
axiom- is an unproven proposition that is accepted as true for the purposes of
studying the consequences that would follow from it if it were true. Axioms
are accepted as self evident truths.
Capitalism, capitalist system- an economic system that is characterized by (strong)
property rights that are held by individuals or corporations. Of particular
importance is the ownership and control of the means of production.
Because property rights are held (or tend to be held) by individuals and
corporations, markets tend to be the dominant allocative mechanism. The
social, political and legal systems must be consistent with the needs of the
capitalist system.
Command- command is defined by Heilbroner as the method of imposed
authority. The authoritarian method of resource allocation requires some
person or group of persons to be in command. The basis of the person or
groups authority may be based on religion, military position, business
position, political power, nobility, technical expertise or wealth. It might be
expected that the political system would correlate to the economic system;
a theocracy [based on religion], fascism [industrial leaders], oligarchy
[few], aristocracy [nobility], technocracy [technical knowledge], plutocracy
[wealth]
consumption- the process of using existing goods and services to satisfy wants.
These goods and services may be altered in the process of consumption;
they may or may not be used up completely; there may be residuals that
remain.
corporation- a hierarchical organization given, by government, limited liability in
addition to the rights of an individual. As a creation of the state, the
corporation is unlike an individual in that it has a continuous life, limited
liability, and there may be a separation of ownership and management.
distribution- is the process of dividing or apportioning a good, service, or resource
and giving rights to use or ownership among the members of a group.
economic growth- in its most simplistic form, economic growth is an increase in the
aggregate measures of an economys performance; gross or net domestic
product, national income, etc. It is an increase in the output of goods and
services. Economic development is an improvement in the standards of
living for the members of an economy. Economic growth and economic
development may be an increase of output levels of currently produced
goods and services or a change in the nature and mix of goods and
services produced.

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economic stability- is a condition where significant economic variables that reflect

the performance of an economy are not subject to undesired change. The
variables may be price levels, interest rates, employment, investment
(capital formation), output levels, etc. If the representative variables are
changing gradually in a desired direction, the economy may still be
regarded as stable. Stagnation implies something different from stable.
exchange- an agreement between two (or more) agents (people or organizations)
giving a specified item in return for some item of equivalent value; a quid
pro quo. The items exchanged are clearly specified and the agreement has
characteristics of a contract. In a market setting it is important that all
exchanges be voluntary actions of the parties involved and that there be
exclusive property rights to avoid non-market effects on others (third
parties, externalities, etc.) The persons engaged in an exchange might be
strangers; in fact, the market may work better if the participants do not
know each other. Some exchanges, where trust is important (diamond
trade), will have lower transaction costs when there are significant
customs, mores, or social connections among the participants.
goods- are regarded as things that satisfy wants of humans, things which have
positive utility. Economic goods are goods that are scarce relative to the
desires, i.e. people would prefer more to less. Good can be used to
represent both goods and services.
ideology- is the set of values, beliefs, myths or doctrines common to a group or
movement.
marginal benefits- the change in benefits associated with a change in the level of
consumption or activity. In calculus the change in the level of consumption
or activity approaches 0; it can also be the change in benefits associated
with a one-unit change in consumption. Typically, but not necessarily,
most marginal benefit functions decline as the activity is increased or are
negatively sloped when graphed.
marginal costs- the change in costs associated with a change in the level of
production or other activity. In calculus the change in the level of
production or activity approaches 0; it can also be the change in benefits
associated with a one-unit change in production. Typically, but not
necessarily, most marginal cost functions increase as production is
increased, or are positively sloped when graphed.
market- is a social institution that facilitates the interaction of potential buyers and
sellers of a good (or related goods) for the exchange of property rights to
goods. A market may be represented by demand and supply functions; the
demand function represents the set of equilibrium conditions for the
potential buyers given incomes, preferences, etc; the supply function
represents the equilibrium conditions for the potential sellers given
technology, factor prices, taxes, etc. The nature of the goods exchanged,
geography, the nature of buyers, etc may determine the boundaries of
markets.
market system- or market economy is an economic system that relies
predominately on the use of interrelated markets to allocate resources,
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goods and services. A free market system is one characterized by

allocation by an almost exclusive use of markets where individuals engage
in voluntary exchange with little or no interference by government.
Mercantilism- an economic system grew out of the rise of the nation states.
Mercantilism is a collection of ideas that were developed in the period from
the late 1400s to the late 18th century that is associate with statecraft and
the rise of a merchant class. The ideas were diverse but tended to be for
the purpose of justifying policies that benefited the state and the
merchants. Gold and silver (specie, bullion) was regarded as wealth,
therefore the policies of the states were to use all manner of activities and
regulations to increase the inflow of specie into the country. In economic
activity the regulations were intended to promote a favorable balance of
trade (the value of goods exported was to be greater than the value of
the imports). These ideas and policies were called mercantilism in
England, kameralism in Germany, and Colbertism in France. The
Netherlands, Spain and Portugal were other nations that followed
mercantilist policies.
model- a representation, formal or informal, that abstracts and simplifies a process,
relationships, system or thing in the real world for the purpose of
understanding and/or communicating. In economics models are usually
representations of processes or relationship between relevant economic
variables, e.g. a model of a demand relationship would include the price
of the good, prices of related goods, income and number of buyers and the
quantity that will be purchased.
opportunity cost- opportunity cost is the cost associated with making a choice. It is
defined as the value of the next best alternative that was sacrificed as the
result of a choice of another alternative.
Physiocrats- a school of economic thought (perhaps the first school of thought in
economics) that emerged in about 1750. Franois Quesnay [1694-1774],
personal physician to Lois XV, became the intellectual leader and published
an article on economics in 1756 and the Tableau conomique in 1758. The
Physiocrats ceased to exist as an active school by about 1776 when Anne
Robert Jacques Turgot [1727-1781] was dismissed as the Minister of Finance
under Louis XVI. Smiths Wealth of Nations included some of the ideas and
the spirit of the Physiocrats was published in 1776. They believed that
man made law should be consistent with the law of nature, emphasized
individual rights, opposed Colbertism, were system builders but, tended to
advocate laissez-faire, laissez-passer [phrase attributed to Jean Vincent de
Gournay [1712-1759]]
production- the process of altering inputs (or resources, land) to increase their
ability to satisfy human wants. The alteration may be a change in physical
characteristics, place, time available for use, or ownership.
ration- is the process of allocating or distributing resources, goods or services on
the basis of a relevant characteristic. The price mechanism in a market
system rations goods and services on the ability to pay. Discrimination is

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an allocation process based on irrelevant characteristics such as race,

gender,or
reciprocity- a transfer of property rights based on obligatory gift giving. Farmer
Brown helps farmer Smith or gives her a bale of hay; farmer Smith then is
obligated to repay Brown in some way. Unlike an exchange, the payment
is not specified and depends on a personal relationship, society or sense of
community
relative scarcity- is the result of two factors; first, the good or resource is finite and
second, the desire or want for the good exceeds the available finite
amount. Relative scarcity may also be used to characterize the amounts of
one good relative to another; diamonds have a greater relative scarcity
than emeralds. Prices in Neoclassical microeconomic theory are supposed
to reflect relative scarcity.
services- the word service is used in economics to denote tasks or activities that
provide utility are performed for a price.
tradition- the economic decisions of what to produce, how to produce and who gets
it are based on habitual patterns of behavior that are enforced by social or
community connections.
Victorian era- The Victorian era is the period from 1840-1900 and is related to the
reign of Queen Victoria.

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