ECO 305: HISTORY OF ECONOMIC THOUGHT

COURSE OUTLINE

1. Nature and significance of History of Economic thought

2. The sociology of knowledge and Economic thought
3. Founders of Economic thought
4. Pre-classical Economists and their Contributions
5. The emergence of Mercantilism and Cameralism
6. The rise of Physiocracy
7. Adam Smith and his contributions to Classical Economics
8. Thomas Robert Malthus and his theory of population
9. The emergence of the Guilds
10. The Renaissance
11. Socialist economic thought and Karl Marx
12. Keynesian economic thought

NATURE AND SIGNIFICANCE OF HISTORY OF ECONOMIC THOUGHT

Definition and Meaning of the History of Economic Thought
History of Economic thought deals with the origin and development of economic ideas and their
interrelations (Jhingan et al, 2003). The authors argued that it is a historical account of economic
doctrines. Schumpeter (1954:208) holds that “economic thought is the sum total of all the
opinions and desires concerning economic subjects especially concerning with public policies of
different times and places.” Schumpeter further says that the history of economic thought traces
the historical change of attitudes. It also speaks about the economic problems and the approaches
to those problems. Bhatia (1978:1) argues that, “Ordinarily economic thought would be taken to
cover the set of theories, doctrines, laws and generalizations, and analyses applied to the study
and solution of economic phenomena and problems.” He further argues that the specific contents
of economic thought have normally commanded an uneven prominence- some attracting more
attention than the others; and the overall composition of economic thought is also subject to a
continuous variation. In the words of Haney (1949:4), the study of economic thought “may be
defined as a critical account of the development of economic ideas, searching into the origins,
interrelations, and manifestations.”
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. Economic thought
deals with different thinkers and theories relating to economics and political economics from
ancient times to present day.
Reynolds (1998) defines the history of economic thought as a study of alternative perspectives
and explanations of how the economic processes function. He believes that 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.

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 economic thought can be fun and reveal many things
about ourselves.
You should note that the History of Economic Thought is different from Economic History and
History of Economics. This is because while History of Economic Thought deals with the
development of economic ideas, Economic History is a study of economic development of a
country. On the other hand, History of Economics deals with the science of economics.
You should also note that even though Economic History and History of Economic Thought
constitute separate branches of study, they are closely related. This is because economic ideas are
directly and indirectly motivated by the economic conditions and environment of the country.
You should also note that ideas and environment are equally important and hence the close
relationship between History of Economic Thought and Economic History.
The Approaches to the Study of History of Economic Thought
You should be aware that the development of economic ideas can be studied under three periods,
namely: 1. Ancient, 2. Medieval and 3.Modern. You should also be aware that the history of
Economic Thought may be broadly divided into two parts. The first part deals with the origin
and the development of economic ideas before the development of economics as a science. The
second part deals with the economic ideas after the development of economics as a science.
According to Jhingan et al (ibid), economic thought can be studied and analyzed by adopting
different approaches such as;
1. Chronological approach
2. Conceptual approach
3. Philosophical approach
4. Deductive (or) Classical approach
5. Inductive approach
6. Neo-classical approach
7. Welfare approach
8. Institutional approach
9. Keynesian approach

We are going to briefly explain each of these approaches as follows:

1. Chronological approach: In this approach, economic ideas are discussed in order of time.
This is to say that the economic ideas of different economists can be presented according to their
year of development for study. You should note that in this approach, we can define continuity in
the economic ideas of different economists.
2. Conceptual approach: It talks about the evolution of different economic concepts (ideas) and
the interdependence of these concepts. You should be aware that another name for conceptual
approach is ideological approach.
3. Philosophical Approach: Plato, the renowned Greek philosopher was the first person to
adopt this approach. The approach studied economic thought through the eye of philosophy. You
should note that in the past, economics was considered as a handmaid of ethics. As expected,
philosophical approach was adopted by the early writers to discuss the economic ideas. Plato
finds the origin of the state in the various needs of people. Nobody is self-sufficient. So, to meet
the various needs men created the political institution. To Plato, in the beginning there was only
one class namely the producing class. Then emerged the guardian class. From the guardian class
emerged the ruling class. In a state the producer class will consist of those people to whom the
bodily appetites are dominant and who live for money. The producer class is made up of farmer,
blacksmiths, fishermen, carpenters shoemakers, weavers, labourers, merchants, retailers and
bankers. The life of the producer class is much easier than the life of the rulers or the guardians.
The life of the produce class follows the old familiar patterns of home and property, family and
children, work, rest and recreation. By nature the producers have money.
4. Deductive Approach: It was the classical economists who adopted this method. They
believed in the universal application of economic laws.
5. Inductive Approach: The Historical School emphasized the inductive method. These
economists believed that the laws of economics are not universal in nature.
6. Neo-classical Approach: This approach aims at improving the classical ideas by modifying
them. Neo-classical approach was first adopted by Alfred Marshall. The Neo-classical approach
believed that “Induction and Deduction are necessary for the science of economics just as the
right and left feet are necessary for walking.”
7. Welfare Approach: This approach aims at providing the basis for adopting policies which are
likely to maximize social welfare.
8. Institutional approach: The institutionalists questioned the validity of classical ideas and
gave importance to psychological factors.
9. Keynesian Approach: You should note that a major development in modern economics is
associated with the name of J.M. Keynes. Of course, his approach is new and different from the
classical school. His approach takes into consideration the operation of business cycles that
affect the entire economic policies. Keynesian approach deals with the economy as a whole.

The Significance of History of Economic Thought

Jhingan et al (ibid) stated that there are two views with regard to the importance of study of
History of Economic Thought. One group of economists believed that there is no need to study
the History of Economic Thought because it is a history of errors. On the other hand, another
group believed that one cannot possess knowledge of any economic doctrine until one knows
something of its history. As a result, a study of History of Economic Thought is important for the
following reasons as given by Jhingan et al (ibid).
1. The study of History of Economic Thought clearly shows that there is a certain unity in
economic thought and this unity connects us with ancient times;

2. The study of History of Economic Thought will help us to understand the origin of economics;
3. Economic ideas have been instrumental in shaping the economic and political policies of
different countries;
4. Economic ideas are conditioned by time, place and circumstances;
5. A study of History of Economic Thought provides a broad basis for comparison of different
ideas. It will enable a person to have a well-balanced and reasonable judgment;
6. Through the study of Economic Thought the student will realize that economics is different
from economists because the former is a subject while the latter is an object;
7. The study of the subject helps us to avoid the mistakes committed by earlier economic
thinkers because we would know the cause of such mistakes and how to avoid them.
8. The study of History of Economic Thought will enable us to know the person responsible for
the formulation of certain important principles.
In summary, the significance of the study of History of Economic Thought can hardly be
overemphasized. It is an important tool of knowledge.
Difficulties in the Study of History of Economic Thought
You should remember that History of Economic Thought is selective and interpretative in nature.
In other words, the authors select those topics in which they are interested. They also explain the
facts in their own manner. If authors leave out certain important facts and emphasize others, their
judgments are biased. For example, the famous book, “A History of Economic Doctrines”-
written by Gide and Rise leaves out discussions on ancient economic ideas, medieval economic
thought and the contributions made by Mercantilists. In addition, complete History of Economic
Thought should deal with modern economic thought also. That means it should include the
contributions made by Marshall, A.C. Pigou, J.M. Keynes, etc. In this respect, it can also be said
that Alexander Gray’s “The Development of Economic Doctrine” is incomplete. In spite of the
above defects, the study of History of Economic Thought enables one to understand the subject
clearly.

THE SOCIOLOGY OF KNOWLEDGE AND ECONOMIC THOUGHT

The Sociology of knowledge
The sociology of knowledge refers to the study of the relationships between systems of ideas and
beliefs and other social and political forces, or between the history of ideas and the history of
events (Hill and Rouse, 1977). It is concerned with the origin and development of ideas and
beliefs and with their influence on social processes and structures (Stark, 1958). Becker and
Dahke define the sociology of knowledge as “the analysis of the functional interrelationship of
social processes of structures on the one hand and the patterns of intellectual life, including the
modes of knowing, on the other.” Mannheim (1964:679-81) argues that “The proper theme of
our study is to observe how and in what form intellectual life at a given historical moment is
related to the existing social and political forces.”
In order to facilitate the study of this sociology of knowledge, Karl Mannheim, a distinguished
German Sociologist, has identified three types of thought. These are practical, ideological and
utopian thoughts. Mannheim’s practical type of thought is accepted as true within a given social
situation. It is the thought of practical men, who know that change is inevitable, and who want to
guide and direct change into constructive rather than destructive. His second type is ideological
thought, which he described as unrealistic because it is determined by a conservative desire to
resist change. It is the thought of the people who have vested interests in the statusquo and who,
therefore, want to resist the change which threatens their interest. His third type is utopian
thought, which he defined as unrealistic or impractical thought dictated by wishful thinking
concerning some imagined future utopian as yet incapable of realization. It is the thought of the
radical reformers who would like to transform the existing socio-economic structure completely
but whose plans for radical reform of the existing system is impossible to achieve at that time
(Mannheim, 1936).
Realistic thought provides a basis for a pragmatic adjustment to the dynamic conditions of reality
and for a solution of practical problems; therefore, realistic thought tends to cause progressive
change in economic history. Ideological thought expresses a conservative desire to defend the
status quo against change; therefore, ideological thought tends to resist change in economic
history. Utopian thought represents an advocacy of ideas that are not currently realizable;
therefore, utopian thought is incapable of influencing the course of current economic thought.
Utopian thought can, however, cause a profound primary influence on current intellectual history
and, through this primary influence, an ultimate secondary influence on future economic history.
The Social environment
Social environment theory attempts to understand how social environments and the individuals
who compose them are interrelated. Social environments can include social groups, institutions,
social hierarchies or even entire societies and cultures. The role of individuals within such
systems and how the collective actions of individuals create and maintain them are of special
interest to social theorists.
According to Flamand (2013), social environment consists of the following elements:
1 Social Determinism
One of the primary debates surrounding social environment theory is how the social environment
determines the goals, desires, personalities and behaviour of the individuals living within it.
While it is generally agreed that an individual's environment affects him to some degree, the
degree and the mechanisms by which such effects take place are a matter of dispute.
2 Roles and Actors
Actors are the individuals who make up any social situation. Roles are the set of goals,
behaviours and norms that actors within certain situations are expected to fulfill. Roles can be
affixed to gender, such as homemakers or breadwinners, or they can be place or situation
specific, such as the roles lawyers, judges, defendants and juries play in the courtroom.
3 Agency
Individuals are considered to have some degree of control over their choices and actions within
any social setting. This is called agency. Agency is a person's ability to take action toward
achieving some end. The amount of agency an individual has within his social environment
might depend largely upon what kind of social environment that person inhabits. For example, a
prisoner has relatively little agency because his social situation is designed to deprive him of
agency.
4 Social Structures
Social structures are the relations of individuals to each other that make up social environments.
They can include institutions, class hierarchies or even things as simple as families. These
structures are partially the result of individuals maintaining them through some combination of
their beliefs and purposive actions.
5 Social Efficacy
Social efficacy is the capacity of individuals to cause changes in their social environments.
While it is generally believed that people are at least partially products of their environments,
this belief does not preclude the possibility that individuals will choose, whether solely or
collectively, to self-consciously resist environmental influences.

Social Order
When we say that man produces himself, it does not imply some sort of Promethean vision of the
solitary individual. Man's self-production is always, and of necessity, a social enterprise. Men
together produce a human environment, with the totality of its socio-cultural and psychological
formations. None of these formations may be understood as products of man's biological
constitution, which, as indicated, provides only the outer limits for human productive activity.
Just as it is impossible for man to develop as man in isolation, so it is impossible for man in
isolation to produce a human environment. Solitary human being is being on the animal level
(which, of course, man shares with other animals). As soon as one deserves phenomena that are
specifically human, one enters the realm of the social. Man's specific humanity and his sociality
are inextricably intertwined. Homo sapiens is always, and in the same measure, homo socius.
Empirically, human existence takes place in a context of order, direction, and stability. The
question then arises: From what does the empirically existing stability of human order derive?
An answer may be given on two levels. One may first point to the obvious fact that a given social
order precedes any individual organismic development. That is, world-openness, while intrinsic
to man's biological make-up, is always preempted by social order. One may say that the
biologically intrinsic world-openness of human existence is always, and indeed must be,
transformed by social order into a relative world-closedness. While this reclosure can never
approximate the closedness of animal existence, if only because of its humanly produced and
thus "artificial" character, it is nevertheless capable, most of the time, of providing direction and
stability for the greater part of human conduct. The question may then be pushed to another
level. One may ask in what manner social order itself arises. The most general answer to this
question is that social order is a human product; or, more precisely, an ongoing human
production. It is produced by man in the course of his ongoing externalization. Social order is not
biologically given or derived from any biological data in its empirical manifestations. Social
order, needless to add, is also not given in man's natural environment, though particular features
of this may be factors in determining certain features of a social order (for example, its economic
or technological arrangements). Social order is not part of the "nature of things," and it cannot be
derived from the "laws of nature." Social order exists only as a product of human activity. No
other ontological status may be ascribed to it without hopelessly obfuscating its empirical
manifestations. Both in its genesis (social order is the result of past human activity) and its
existence in any instant of time (social order exists only and insofar as human activity continues
to produce it) it is a human product. While the social products of human externalization have a
character sui generis as against both their organismic and their environmental context, it is
important to stress that externalization as such is an anthropological necessity. Human being is
impossible in a closed sphere of quiescent interiority. Human being must continuingly
externalize itself in activity. This anthropological necessity is grounded in man's biological
equipment. The inherent instability of the human organism makes it imperative that man himself
provide a stable environment for his conduct. Man himself must specialize and direct his drives.
These biological facts serve as a necessary presupposition for the production of social order. In
other words, although no existing social order can be derived from biological data, the necessity
for social order as such stems from man's biological equipment.

Economic Thought
Normally, economic thought would be taken to cover the set of theories, doctrines, laws and
generalizations, and analysis applied to the study and solution of economic phenomena and
problems. It is worth quoting Bhatia (1978) that the specific contents of economic thought have
normally commanded an uneven prominence, some attracting more attention than the others; and
the overall composition of economic thought is also subject to continuous variation. In addition,
he argued that economic thought is not a given and fixed set of economic theories or tools and
techniques of analysis.
We can consider economics as a dynamic science, a feature that it acquires on an account
of various reasons. It, therefore, follows that economics brings forth a body of generalizations
which, as in other sciences, involve cause-effect relationships. It is stating the obvious that
economic ideas have been there since time immemorial, but it is only recently that they assumed
the form of a system of thought which may be termed economic science or economics. Of
course, references to economic questions abound and are scattered almost everywhere in the old
literature, such that they are found in Plato-Aristotle, and others. But in all cases, we have only
fragments of information and conclusion are not able to adequately generalize on these economic
ideas and economic views with any great significance, we, therefore, cannot claim the emergence
of economic thought since that time.
We can safely conclude that the time when those ideas started getting crystallized into economic
thought is around the time of Mercantilism. The birth of economic science might be said to have
coincided with the rise of physiocracy, because it is in this system that comprehensive economic
theory emerged. According to Imorsi and Sogules (2013), the widely held opinion is that, Adam
Smith’s book “An inquiry into the nature and causes of the wealth of nations” (published in
1776) was the first systematic work of economic problems, while now modern critics have been
more and more persuaded and rightly so, to attribute that priority to Richard Cantillon, author of
“Essai sur la nature du Commerce, published in 1775”.
Arising from the above conversations, it is obvious that economic thought is a body of economic
ideas and generalization which can be seen to belong to each other, and therefore economic
thought is closely related to economic environment and economic development. The growth of
economic science can be traced along with the growing complexity of world economies. The
development of economic science is intimately related to the development of economic
environment, and the two interact with each other. This means that economic ideas of the great
thinkers in economics are needed for the stimulation of economic development of any economy.
This is because the exact nature of responses depends upon the institutional framework of the
society and that is the more reason why the customs and behaviour get crystallized into
institutions. Economic theorizing and investigation, therefore, have to be in the context of and
within the framework of an economy which has a prescription of achieving economic growth and
development. Akpakpan (1999) in this respect observed that in the book of Richard Cantillon, his
contributions to economic thought are organized in three parts namely: (i) the nature of wealth,
social and economic organization of people, wages of labour, theory of value, populations use
and the use of gold and silver; (ii) barter, prices, circulation of money, and interest rate; and (iii)
foreign trade, foreign exchange, and banking and credit. Given the contributions of Richard
Cantillon which covers most significant practices of economics in any country, it therefore
becomes imperative to run the analysis of his economic thought in order to spot out the relevance
of his contributions to the history of economic thought.
Relevant pages of literature and history of economic thought such as (Jhingan et al, 2003;
Marcuzzo, 2008; Akpakpan, 1999; Tamuno, 2006; Okowa, 1996; Kalu, 2001; Todaro and Smith,
2004) have consistently revealed that the adoption and complete application of the doctrines,
ideas, model, philosophy; in fact all the contributions of economists of old (chronology of the
founding fathers) have led to the emergence of the discipline and without doubts equally
accorded for the reason why some economies are said to be developed and others are said to be
underdeveloped. Obviously, the Nigeria economy is categorized in the latter.

FOUNDERS OF ECONOMIC THOUGHT

Plato (427-347)
Plato, a Greek philosopher, was born in Athens in an aristocratic family. He was a student of
Socrates. Plato taught mathematics and philosophy in the first great school of philosophers- the
Academy, founded by him. His famous writings, The Republic and The Laws are the most
important sources of his economic thought. We give credit to Plato for paying attention to
economic aspects of social organizations. Roll (1956) says of Plato that “he attempted to offer a
systematic exposition of the principles of society and of the origin of the city state, as well as a
plan for the ideal social structure”. Plato regarded economics as a branch of ethics and politics
(Jhingan et al, 2003). In the following sub-sections, we shall discuss some aspects of Plato’s
economic thought on origin of State, division of labour, size of production, money, interest,
value, agriculture, riches (wealth) and poverty, slavery, communism and education.

Plato’s Idea on Origin of State

Plato traced the origin of the State to economic considerations. According to Jhingan et al
(2003:17), Plato said “a State arises out of the needs of mankind. No one is self-sufficient. All of
us have many wants.” The State in order to supply the necessary commodities to satisfy human
wants gathered together. The partners and helpers of this gathering are called as the State. In
Plato’s ideal State there were two classes, the rulers and the ruled. The rulers were the King and
warriors and the ruled were artisans and unskilled workers. He advocated that the members of
the ruling class must be set apart from early childhood and they should be educated in
philosophy and the arts of war because they will have to protect the State against foreign attack.
At the age of thirty they will have to pass an examination. This examination selects the future
philosopher king and those who cannot pass are concerned with general administrative duties.
Jhingan et al. (ibid.) further added that Plato distinguished five types of government as follows:
1. Aristocracy- rule by the best;
2. Timocracy- rule by the soldiers;
3. Oligarchy- rule by a few;
4. The rule of the wealthy; and
5. Democracy.

Plato’s Idea on Division of Labour

Many authors argue that Plato’s main contribution to economic thought was in his account of
division of labour. By division of labour he simply meant the division of employment as an aid
to social organization. He based the origin of the State on division of labour. According to Plato
the essential needs of mankind are food, clothing and shelter. Therefore a city State must include
a builder, a weaver, a farmer and a shoe maker or a representative of some other similar
occupation. Plato contended that every individual should do the work that is suitable for him. As
a consequence, all commodities are produced more plentifully, easily and of a better quality. The
division of labour into various trades was thus recognized as a necessary condition to economic
welfare even though division of each trade into various tasks was not conceived by him.
Moreover, he did not consider the necessity of a wider market for the application of the
principles. Thus, Plato’s idea of division of labour was different from that of Adam Smith. This
is because Smith’s division of labour is determined by the market, but Plato’s division of labour
determines the market. Secondly, to Adam Smith the advantages of division of labour go to only
the employers, but to Plato it is beneficial to the entire society. Thirdly, the cost of division of
labour according to Plato is the difference in skill and talent. But according to Adam Smith
division of labour leads to differences in skill and talent.

Plato’s Idea on Size of Population

The problem of population was also analyzed by Plato. The size of population in his State was
assumed on the basis of the best results of division of labour. He provided a careful regulation of
population to maintain stability in the economy. The right number of population suggested by
Plato for a State was 5,040. Only such a number provided opportunity for everyone to be familiar
with all the other persons and help the economy to achieve self-sufficiency. It also helps to reap
maximum productive efficiency. If the number showed a decreasing tendency, the State should
offer prizes to encourage the growth of population. But if the number exceeds 5,040 new
colonies must be established.
Plato’s Idea on Money
Plato recognized the value of money as medium of exchange. He did not favour the idea of
allowing gold and silver to be used by the common man. Instead, he suggested the use of
domestic coins for payment of wages and other transactions. He wanted the State to have a
common Hellenic currency for the use of ambassadors, travelers, visitors, etc. Jhingan et al
(2003).

ASSIGNMENT
On your own, study Plato’s ideas on interest, value, agriculture, riches (wealth) and poverty.
Also study his idea on slavery, communism and education.

Aristotle
Many writers are agreed on the fact that Aristotle was the first analytical economist who laid the
foundation of the science of economics. He was the student of Plato and tutor to Alexander, the
great. You should note that he did not produce any economic treatise. Nevertheless, it was from
him the writers of Middle Ages got their main ideas. Though there is no continual analysis, his
scattered ideas especially on private property, usury, and the just price had a greater influence on
subsequent economic thought. Even though Aristotle was a student of Plato, he differed from
him on important issues like the origin of the State, private property, communism, etc. You
should note that Plato was a deductive thinker; Aristotle followed the inductive method and
therefore a more practical
one. While Plato was a radical thinker, Aristotle was conservative one. The reasoning of
Aristotle is less imaginative and more logical and scientific than that of Plato. The main ideas of
Aristotle were found in his publication titled Politics and Ethics, which attempted a more
systematic definition of economics where he maintained that it was a science of household
management. In it, Aristotle exposed how household organizes production and consumption,
exchange and the evolution of a medium of exchange in a society called money. We will now
discuss some of the contributions of Aristotle to economic thought such as:

Aristotle’s Idea of the State

Aristotle believed that the State originates out of the needs of mankind. He explained the origin
of the State in terms of household. To him the household is an association formed to satisfy the
wants of family members. He added that the village grows out of a number of households and
finally the State comes into existence. Man is by nature a social animal, so the State is possible
because all men live together in a society. The aim of the State is promotion of good life. Thus,
Aristotle attributes the origin of the State to economic and political causes. In Aristotle’s ideal
State, there would be two classes- the ruler and the ruled. The former was classified as military
class, statesmen, magistrates and the priest. The ruled were farmers, craftsmen, and labourers.
The members of the ruling class would perform their duties according to their respective age. For
example, they were soldiers when they were young and strong, statesmen in the middle age and
priests in the old age.

Aristotle’s Idea on Private Property

While Plato advocated public property, Aristotle supported the institution of private property.
Aristotle argued that public property would not be looked after as carefully as private property.
To him private property was superior to public property on five grounds- progress, peace,
practice, pleasure and philanthropy. Private property is more productive than public property.
The principle “what is everybody’s business is nobody’s business” can be applied here. Hence,
Aristotle said that property should be private. When there is private property they will make
much progress because everyone will be attending to his own business.

Aristotle’s Idea on Scope of Economics

You should note that the word economics is of Greek origin and it means management of
household. Aristotle developed the theory of economics while discussing the elements of
household management. There were two elements, namely, economics and chrematistics, the
former concerned with the art of consumption of wealth in the satisfaction of wants and the latter
with the art of acquiring wealth either by making money or by exchange. Aristotle spoke two
types of exchange-natural and unnatural. Natural form of exchange satisfies the human wants.
The un-natural form of exchange aims at momentary gains. Aristotle spoke about two kinds of
uses. One is the proper use which is similar to economy proper or value-in-use. The other is
similar to science of supply. For example, a shoe can be used for wearing and for exchange. Both
are uses of the shoe. The first type of use is economic proper and second one is value-in-
exchange or chrematistics. By saying this, Aristotle laid the foundation for value-in-use and
value-in-exchange, which were later popularized by Adam Smith. You should note that barter is
also a natural branch of chrematistics. Thus, natural chrematistics concern the satisfaction of
natural wants by natural uses of a commodity while exchange is an unnatural process of money
making because man goes on undertaking this activity even after he has reached the point of
satiety.

Aristotle’s Idea on Money

Aristotle’s theory of money explains “what money is and what money does”. Aristotle explained
the necessity of money while Plato explained only one important function of money namely
‘medium of exchange,’ Aristotle explained the other functions of money, namely, store of value
and measure of value.
Aristotle advocated a non-communist society. In such a society there would be barter, then the
difficulties of barter would result in the introduction of money. He believed that money came
into existence through legislations.
Aristotle’s treatment of money is said to be the best part of his economic thought. He said that
money came to be introduced to facilitate commercial dealings. In the opinion of Schumpeter,
Aristotle’s theory should be called the Metalist theory of money in contrast with Cartel theory of
money propounded by Plato.

Aristotle’s Idea on Interest

According to Aristotle, interest taking was the most unnatural of all the methods of getting
wealth, said Schumpeter. Money served only as a medium of exchange, it cannot be regarded as
productive. As one piece of money could not produce another, interest was unjust. Money had no
business to increase from hand to hand. In those days money was borrowed by the poor persons
for consumption purposes and therefore interest taking was considered unjust.

Aristotle’s Idea on Slavery

Aristotle’s views regarding division of labour, inheritance, population and slavery were more or
less similar to that of Plato. Aristotle supported the institution of slavery. He however divided
slaves into natural slaves and legal slaves. The natural slaves were inferior to others, both in
body and mind. Those conquered in war were treated as legal slaves.

PRECLASSICAL ECONOMISTS AND THEIR CONTRIBUTIONS

Mercantilism reflected the mutual relationship that existed between merchant class and the state.
The mutual dependence sustained the relationship for both parties. However, with the passage of
time, the need for industrial development grew, spurring a transition from commercial capitalism
to industrial capitalism. The new era therefore required less of state intervention over economic
matters. The new scenario emerged first in England, with a parallel development emerging in
France, where the physiocrats put forth a rival approach.
The need to adjust an emergent industrial era was driven by economic thinkers of the time. The
state was increasingly seen in a different light, more as a hindrance rather than a help with all its
regulatory function. Importation of raw materials and cheap food from abroad were needed to
feed the growing industries and keep labor cheap. Also, the power of the guilds and other
hindrances in the path of the development of the domestic economy therefore were to be
removed.

The manifestation of the new development was accompanied on the political front in the form of
an increasing power of parliament, which in 1688, discontinued with the royal right of
dispensation in England, marking the end of the absolute rule by the monarchy. This
development exemplifies general dislike of authority which exercises control over tax, wages
and prices. It should be equally noted that throughout the emergent period, economic thought
was driven mainly by the intellectual elite of the society, many of which left a legacy through
their contributions as important preclassical thinkers.

SIR WILLIAM PETTY (1623-1687)

Sir William Petty is often referred to as the founder of political economy. He belonged to the
group of men who founded the Royal Society. He is credited with the founding of the science of
statistics and empiricism, with his logical and coherent theories of value and wages, as well as
that of profit, interest and foreign exchange.

An important contribution attributed to Sir William Petty was in the theory of public taxation. He
was of the opinion that the state should never try to tax the people too much because taxation has
a depressing effect on the productive and other economic activities of the country. While
agreeing that members of the society ought to pay towards the maintenance of the state, their
willingness to pay must be equally conditioned by the expenditure policy of the state and their
views regarding the equitable distribution of the tax burden. However, in order to judge the
relative tax capacity of tax payers, the state needs relevant tax date, where statistics plays an
important role. Hence, the contribution of Sir William Petty in the field of empiricism becomes
important in this regard.

Sir William Petty was also noted for his theory of labor. The contention that labor is the source
of all wealth lies at the bottom of Petty’s theory of value. He viewed production as a result of
cooperative efforts on the part of labor and gave an example of making a watch as a detailed
account of division of labor.

On the interest paid on loan, Petty considered usury as rent of money. Therefore, the rate of
interest was determined by the rent of land. In the case of risk-free loans, the rate of interest is
equated with the value of land which the money can purchase. In the case of risky loans, the rate
of interest will be higher.
Regarding international payments, Petty’s views were considered mercantilist in nature. He
considered treasure the most desirable form of wealth.

RICHARD CANTILLION(1685-1734)

Richard Cantillon remained in relative obscurity for well over a century even though Adam
Smith and others knew about his work. He was a pioneer in political economy. His contributions
to the history of economic thought were acknowledged by his contemporaries. Cantillon was
recognized as the greatest economist before Adam Smith. His book titled, The Nature of General
Commerce, was divided into three parts. The first part contains seventeen chapters and covers
the introduction to political economy, the nature of wealth, the social and economic organization
of people, wages of labor, the dependence of all classes upon the landed proprietors, the
population problem and the use of gold and silver. Part 2 of the book deals with barter, prices,
circulation of money and interest. The third and final part covers foreign trade, foreign exchange,
banking and credit.

This position is a marked contrast to the one taken by mercantilists in which money is often
compared with wealth, and the source of wealth was not well understood. Throughout the work
of Richard Cantillon, his analytical framework is developed on the basis of demand and supply,
and the labor theory of value supplemented by the cost of production.

In the theory of value, Cantillon brings to the fore the distinction between intrinsic value and
market value. Intrinsic value of a good is determined by the amounts of labor and land that go
into production, though in some cases labor may account for almost all the cost of production
( e.g., watch making) and in others, it would be the land ( such as in wood cutting). The intrinsic
value of a commodity, however, may be different from its market value.

The divergence would depend upon the relative strength of demand and supply forces. In the
market, if the supply of any good exceeds its demand, its price would be lowered. An excess of
demand, on the other hand, would push up the price of the commodity. The intrinsic value, on
the other hand is determined by the cost of production, which includes the wages of labor and the
cost of material. Cantillon emphasized that agricultural produce would sell at prices different
from its intrinsic value, depending upon its supply in relation to demand.

Cantillon also analyses the effect of changing money supply within the country in terms of what
may now be called employment and real income multiplier. An increase in money supply within
the country increases the flow of purchasing power all round,

MERCANTILISM

Mercantilism originated from Great Britain and evolved from about 1500 A.D. to the end of the
eighteenth century. Mercantilism as the term applies is closely associated with trade and
commercial activities of the economy. Many writers claim that mercantilism was the economic
counterpart of political nationalism and was most prevalent during the days when nation states
gradually emerged. Mercantilists did not anchor their philosophy on any theoretical
underpinnings. Indeed, there are a lot of disagreements in mercantilist writings. However, there
is always an agreement on some basic fundamentals.

The common features of mercantilism include: an absorbing interest in foreign trade and through
the acquisition of precious metals, which in turn were key to the military strength of a country
and the power of a state in ancient times. Mercantilists posited that there was need for a strong
state to protect them and they needed capital for trade, which in those days consisted of gold and
silver. In the opinion of mercantilists, only a wealthy state could have and maintain strong armed
forces and the nation’s unity is a prerequisite for state power.

Meanwhile, the economy was experiencing an increasing degree of monetization with expanding
trade. The productive organization was changing from self-consumption to a system in which
workers and artisans were paid in cash. At the same time, two important intersecting forces were
taking place, which were reinforcing each other. On the one hand, there were discoveries of gold
and silver mines in America and through Spain, precious metals were flowing into Europe. This
development allowed these economies to experience increasing monetization. At the same time
however, increased flow of precious metals led to rising prices, translating into additional
revenue needs of the governments.

Gold had been a scarce commodity since the beginning of human civilization and the love of
gold bordered on its worship. Also, expanding foreign trade, discovery of new routes of new
colonies, led to the opening of international trade opportunities. The trend led to the machinery
for achieving the mercantilist objectives.

1. Balance of Trade and Specie Flow

Given the objectives of acquiring precious metals, the mercantilists were preoccupied in
searching for ways in which a country (which does not have its own gold and silver
mines) should acquire these metals. They found that the only way to acquire them was
through trade .i.e. by selling more and purchasing less, thereby getting paid for the
surplus exports in terms of precious metals. Accordingly, mercantilism assigned a
favorable balance of trade a primary place of importance.

2. Quantity of Money and Rate of Interest

 Mercantilists viewed increased money supply in terms of its role as working capital
for their increasing trade activities. A steadily increasing money supply is not in its
self a harmful thing. Indeed, for a growing economy, it is essential that money supply
should keep pace with its increasing requirements to finance the monetization and
expansion of production, trade and other activities. Therefore, mercantilists viewed
increased money supply in terms of its role as working capital for their trading
activities. Therefore, mercantilists sincerely believed in the need for abundance of
money supply and a low rate of interest. They failed to perceive the possible effects
of a low rate of interest on savings. They were mainly concerned with funds needed
for commerce and trade and for that additional money supply which was necessary.

3. Other Regulations

Mercantilism did not confine itself to itself to foreign trade and specie on flow. There
was realization that for a successful foreign trade policy to take place, it was essential
to have compatible and complementary domestic economic policy as well. The
balance of trade, to be favorable, needed help. In order for this to happen, there was
need to regulate foreign trade itself. It had to be in terms of tapping those additional
sources of income to the country which incidentally flow from foreign trade.
Examples include insurance and freight charges.

MERCANTILISM AND ECONOMIC DEVELOPMENT

The highlight of mercantilism is as follows:

1. In the pursuit of state power and security, mercantilists promoted trade and
precious metals as key to the development of state power.
2. The pursuits of trade spurred merchants in sponsoring trade mission across the
world, leading to economic growth and wealth across Europe.
3. The pursuit of trade led to the discovery of territories across the world including
Africa, Asia and the Americans. This development later led to the colonization of
these territories by European states.
4. The discovery of precious metals in the new territories brought wealth to Europe
and rekindled interest in foreign adventure as well as trade.
5. Merchants collaborated with European states for security of their goods across the
vast oceans in return for payment of taxes on profits to the European states.

CAMERALISM
Cameralism was the German counterpart of mercantilism. Cameralists practical their economic
philosophy in the German states of Europe, covering a period of 300 years. Cameralism derived
its name from the word Kammer or Camera, which denotes the royal treasure room. Therefore,
the obligation of Cameralists were generally concerned with filling the ‘chamber’ or treasury of
the Prince. They were to ensure that the sources of the treasure required filling the royal chamber
never declined. For this reason, Cameralists were also advocating for the prosperity of the people
which determined the revenue of the prince. Therefore, it was incumbent on the prince to provide
a good livelihood for his subjects if he must take anything from them. Consequently, the
objective of Cameralists was to fill the public treasury, which was only possible by making tax
payers prosperous as well as through the circulation of money and capital. Thus, in a wider
sense, the cameralists were concerned with the economic affairs of the country. The philosophy
was a combination of ideas- political, juristic, technical and economic.

Like Mercantilism, Cameralism is difficult to define comprehensively as a body of thought. The

philosophy underpinning Cameralism was however more detailed than that of mercantilism.
Cameralists wrote comprehensive volumes as against the pamphlets of the English Mercantilists.
In the historical and political contexts in which cameralism grew, it was deeply involved in
bringing about remedial measures for the economic ills from which most German states suffered
on account of their economic underdevelopments and mutual enmity. The cameralists had a great
faith in government regulation over economic matters. They also emphasized the need for
diligent and hard-working population having skilled artisans, entrepreneurs and trainers. To
cameralists, a dense population and an abundant supply of money were essential and critical to
the prosperity which in turn would enable the state to have a strong-armed forces and enough
public revenue.

While cameralists were advocating all manners of regulations, they were in favor of a free
market economy. At the same time, cameralists want the right of the state preserved, particularly
as regard to public revenue. On balance, they gave less attention to the question of balance of
trade and more to promoting royal revenue.

Public expenditure was very extravagant and wasteful. The result was increasing indebtedness of
the government and the need to levy extra taxes to finance public expenditures. This led to ever
increasing burden of taxation on the economy. However, the taxes were inequitable and unjust.
The nobility and clergy owned two thirds of the country’s land, but were hardly levied with any
taxes, while the poor and peasants were being crushed under all sorts of tax obligations, in
addition to the extortionist land rents. The manner of tax collection was also highly deplorable.
Tax collection was contracted out to farmers of the revenues at fixed prices. Any collection
exceeding the contracted sums was retained by these tax collectors. Usually, farmers were hardly
left with any surplus, which they could use for improvement of land or improving their own
consumption standards. The peasants also had to bear the burden of providing services to the
feudal lords. There were several other oppressive taxes which were equally burdensome for the
poorer sections of the community. These include salt tax, poll tax, the tithe, etc.

THE RISE OF PHYSIOCRACY

The French economy was in a state of stagnation, undermined by the negative policies of the
monarchy against the poor and peasants. Under the prevailing circumstances, trade and industry
had gained preeminence at the expense of agriculture which was still the predominant source of
national income in France. This was in sharp contrast to Britain where to fruits of agricultural
revolution were being reaped. Therefore, the prevailing thoughts aimed at reviving the French
economy were focused on agriculture. Physiocracy did not just emerge in France, its emergence
was the culmination of a sprite of coherent writing in line with the trends in the middle of the
eighteenth century. The physiocratic philosophy was based upon the concept of a natural order,
coupled with optimism, individualism, self-interest and a blending of the ideal and material
aspects of social life. Leading thinkers were quite impressed by the advancements in the physical
and other sciences made at the time and were of the opinion that the sciences would provide
humanity with the basic knowledge to address all of his problems. The capacity would be further
supported by “rational” thinking and activities of human beings, leading people to the right kind
of moral and social behavior. Some of the important characteristics of the natural order are as
follows:

Firstly, the term ‘natural order’ stands in contrast to a social order which might be the creation of
man himself. However, the natural order is not equivalent to the state of nature, it includes
elements of civil life. For example, property, security and liberty constitute the whole of social
order. Secondly, the concept of natural order maintains that the human society is also subject to
the same natural laws as the physical world. It therefore implied that the different sections of
society were interdependent and must act and cooperate for their individual interests and
common benefit. Since society itself was dependent upon physical nature, it must comply with
natural attributes.

Thirdly, what are then the contents of this natural order? How is its knowledge acquired? The
natural order described by physiocrats included a number of existing institutions. These included
the institution of private property, landed classes, peasant, and an absolute, though enlightened
monarchy. This was also to be complemented by freedom of contract, free competition,
acknowledged as industrial rights of man that flows inevitably from the operation of natural law.
The benevolent but absolute monarch would have a limited role to perform: maintaining internal
law and order, providing defense against foreign aggression, arranging for public education and
providing social overheads, including roads, bridges and other public works.
Fourthly, the physiocrats were so optimistic about the natural order they sang praises of it. The
‘order’ was able to secure the greatest amount of pleasure with the least amount of sacrifice for
everyone. This, in the opinion of physiocrats, guaranteed a perfect harmony of interests between
individuals and between individuals and society as a whole.

ADAM SMITH AND HIS CONTRIBUTIONS TO CLASSICAL ECONOMICS

Adam Smith was a distinguished scholar and philosopher. His contributions to the development
of economic science cannot be overestimated. The origins of his contribution to economic
thought are traceable to his voluminous book titled, An Inquiry into the Nature and Causes of the
Wealth of Nations; published in 1776. Adam Smith was acknowledged as the true founder of
economic science. His book covers a vast theoretical and empirical field, including mercantilism
and physiocracy, the problems of productions, value, distribution, money, taxation, trade, capital,
etc.

Adam Smith was born in Scotland in 1723 and studied from 1737 to 1740 at the University of
Glasgow. From 1740 to 1746, he studied at the University of Oxford. Upon his return to
Scotland, he taught for some time at Edinburg. In 1751, he became a professor of logic at
Glasgow. In 1759, he published his Theory of Moral Sentiments, a work of great merit which
brought him widespread acclaimed recognition. According to Smith, human actions are guided
by certain desires and instincts. These motives may be self-love, sympathy, and desire to be free,
a sense of propriety, a habit of labor and the propensity to barter for one thing for the other. Of
these motives, Smith gave more weight to self-love than to sympathy and a very prominent role
to the propensity to barter. It is this propensity, according to Adam Smith that prompts human
being to specialize and have a division of labor.

While noting the natural wants of mankind, Smith pointed out that man is ever after a change,
variety and greater perfection. This leads to the division of labor which increases production due
to three factors: the dexterity of labor, the saving of time lost in passing from one group of labor
to another and the invention of machinery.

ANALYSIS OF THE WEALTH OF NATIONS

Smith began his work with a note on the origin of the national wealth, which according to him,
lies not in foreign trade or in land but in labor and its contents are the produce of labor. He
asserted that a society’s material well-being will depend upon the per capita income (the
domestic supplies plus imports in exchange of exports divided by the total consuming
population). Smith further asserted that the process was regulated by two different
circumstances; first, by the skill, dexterity and judgment with which its labor is generally
applied, and second, by the proportion between the number of those who are employed in useful
labor, and those who are not so employed. Thus, Smith asserted that the origin of wealth lies in
labor, maintained that this wealth would depend upon efficiency of labor, on the one hand and
the division between productive and unproductive, on the other.

Of the two determinants, the efficiency factor is of greater relevance and importance. The
evidence abounds in developed economies where the proportion of productive labor is smaller,
though the total and per capita output is much larger.

DIVISION OF LABOR

Division of labor is not as a result of any planning or an inherent difference in the natural
abilities of people. Acquired skills and talents, however, may emerge or get strengthened through
the division of labor. Adam Smith, both in his lectures and in the Wealth of Nations gave
examples of pin-making and pointed out the effects of increased productivity is similar in all
types of division of labor. Adam Smith ascribes labor efficiency to three factors. The first in the
improvement in school which workers acquire through this division. Repetition brings
improvement and practice makes a man perfect. The second reason is the saving of time which
the worker is able to accomplish. The third, and most important is the fact that division of labor
increases the chances of invention and increases the use of machinery.

THEORY OF VALUE

Smith’s theory of value stems from his analysis of the economic system as a whole. This theory
covers relative values and prices of commodities as well as the process of adjustment of supply
and price to their appropriate levels. Under Smith’s framework, the “components” of price
include wages, rent and profits. Therefore, his theory of value incorporates the determination of
the “natural” rates of the three components as well. According to Adam Smith, the theory of
value assumes significance on the ground that market mechanism is one of the media through
which a natural harmony in the working of a laissez- faire economic system is achieved. It is
through the pricing of products and inputs that the production and resource allocation decisions
are arrived at and implemented. In the process of achieving opulence or prosperity, therefore,
market mechanism plays a central and important role.

THEORY OF DISTRIBUTION

Adam Smith had no direct interest in the theory of distribution. This theory therefore follows
from his discussion of the components of a price i.e. wages, rent and profit. His treatment was
based upon the institution of private property and that of money in terms of working capital.

Another institution which is implied in Adam Smith’s theory of value is the institution of money.
It is the form of money that owners of capital advance their capital for different employments
and get a return on same. This is particularly true when working capital is considered. Adam
Smith maintained that in case the rate of return on capital is inadequate, the suppliers of capital
would withdraw it.

THEORY OF WAGES

In both of his lecture and up to chapter VII of the Wealth of Nations, Adam Smith studied wages
as price. However, in chapter VIII of book I, he considers wages as value secured by selling
labor. While earlier wages are shown to be governed by the cost of labor, now the element of
demand is also featured. Smith admitted that wages were dependent and were determined by the
contract between the employers and the workers. He however, pointed out that workers were at a
disadvantage. While there were no overt moves by employers to collude against labor, in reality,
the collaboration between employers was always there and they worked in concert to push wages
down to the extent they could by taking advantage of the weak bargaining power of workers.
According to Adam Smith, wages may go above subsistence and may stay there. This is the case
with an expanding economy. In a stationery economy on the other hand, the increasing
population would soon be catching up with the high wage demand and wage levels would
gradually come down. In order to keep the wage rate high, it was therefore essential to have an
expanding economy, Adam Smith asserted. He was not against high labor wages, unlike some of
his contemporaries. Indeed, his position on high labor wages was anchored on the idea that
higher wages are found on the workmen who are more active, diligent and expeditious than other
workers. Therefore, Adam Smith justified higher wages on both greater efficiency and greater
welfare.

THEORY OF RENT

With regard to rent, Smith proffered more than one opinion and his ideas were grounded on three
issues:

1. Monopoly
2. Differential fertility and location of land, and
3. The bounty of nature.

Smith was of the opinion that land was private property and that with progress in society as well
as an increase in population, the demand for agricultural commodities will rise. Therefore, this
development would lead to a greater demand for land and gradually land pieces which are less
fertile and less accessible would be brought into production.

In his Wealth of Nations, Smith asserts that where all the land in a country has been
appropriated, the landlords have the capacity to withhold supply unless they are paid rent.
According to Smith, rent paid on land may not lead to its improvement. He therefore considered
rent paid on land as a monopoly price. The payment was hardly proportional to what the landlord
may have invested on the land, but usually tied to what the farmer can afford to pay. Therefore
rent, considered as the price paid for the use of land, is naturally the highest which the tenant can
afford. Therefore, the natural rate of rent will leave the farmer with only his wages and profit.
Some lands may be more fertile than others on account that their produce may be valued higher.
When that happens, the rent differential is attributable to land fertility. However, location may
also be a factor on the rent paid for land. If the land is distant from the place of market, the rent
paid is therefore small, leaving the landlord with smaller income.

PROFIT

Adam Smith addressed the pertinent question: why should the capitalist be entitled to profit? The
answer, according to Adam Smith, lies partly in his peculiar position as the supplier of capital.
The capitalist maintains the welfare of workers during the period of manufacturing commodities
prior to sale their sale. Therefore, the entrepreneur should be entitled to a share of the sales
proceeds on account of his specialized service of entrepreneurship and not as a supplier of
capital.

THOMAS ROBERT MALTHUS AND HIS THEORY OF POPULATION (1766-1834)

Thomas Robert Malthus was born in England. He studied philosophy, mathematics and theology
at Cambridge. A few years later (1805), he was appointed a professor of history and political
economy. He retained his position until his death in 1834. Malthus studied events of his time,
with concern. For example, while Adam Smith was ignoring the severe impact of rising food
prices, Malthus did not do so. During the period immediately preceding Malthus, agricultural
prosperity in England had been at its peak, but by the turn of the century, there emerged a
shortage of food, leading to high prices. In neighboring Ireland for example, there was a
recurrence of crop failure, precipitating famine conditions. At the same time, the ill
consequences of industrial revolution were gradually manifesting, unleashing riots, diseases,
unemployment and endemic poverty. Malthus therefore was of the opinion that given the state of
the economy, a drastic solution was needed to correct the emergent economic downturn. On the
one hand, there was an imbalance between the population and the means of subsistence and on
the other, there was a need the shortage of effective demand.

ROBERT MALTHUS AND THE THEORY OF POPULATION

Malthus was not the first thinker to concern himself with the challenges of population, but he
was the first to weave his ideas into a full subject by writing on the subject of population. He was
able to synthesize the growth of population with the effects of same. In his theory of population,
Malthus took the position that there was something like a natural law that forced the increase in
population at a rate faster than the rate of food supply. His core thesis may be summarized as
follows:

i. Sex instinct is a powerful process in human beings. Unless checked through a “moral
restraint”, it leads to a high rate of procreation. The process increases population in
geometrical progression.
ii. The means of subsistence (the action of maintaining and supporting oneself), which are
equated with supply of food and which are extracted from the soil cannot increase that
fast. He acknowledged that while an increase in the level of subsistence is possible, at the
most, such an increase is in an arithmetical progression.
iii. Irrespective of the exact rate at which population and the means of subsistence were
respectively increasing, population was bound to outstrip the supply of subsistence.
iv. Unless the population was controlled through “preventive checks” by man himself, the
outcome would be disastrous. Preventive checks include late marriage, celibacy and
moral restraint within marriage.

The Malthusian theory of population evoked a great interest through criticism and disagreement.
On the positive side, his theory was instrumental in introducing the English census system in
1801. Robert Malthus’ theory of population was affirmed in the middle of the nineteenth century,
with the failure of Irish potato, which was caused by a disease known as blight of potato. The
resulting crop failure resulted in widespread famine in Ireland which wiped out a quarter of the
population and forced a significant proportion of the nation to emigrate to the United States of
America.

THE MERCHANT GUILDS

The merchant guilds or association of business men, emerged in the middle ages or medieval
times, which lasted from the fifth to fifteenth century. The guilds are association of skilled men,
rather than nobility, the clergy, or peasant workers. The association of merchants in Europe rose
in power and numbers towards the late medieval period. They became highly specialized and
rigidly organized in major cities. The merchant guilds emerged to protect the integrity of
businessmen. Setting standards on various goods and services, the merchant guilds set out to
protect the interest of consumers by eliminating unfair trade practices by bad businessmen. The
guilds were identified with organizations enjoying certain privileges, such as letters of patent,
usually issued by the king or state and overseen by local business authorities.
European guilds imposed long standardized periods of apprenticeship and made it difficult for
those lacking capital to set up for themselves or without the approval of their peers to gain access
to materials or knowledge or to sell into certain markets. The guilds were responsible for the
vocational education of young children. At an early age, parents may decide that their children
should take up a vocational training as an apprentice with a craftsman of the appropriate guild.
For the next seven to nine years, the child would be engaged in menial labor for the craftsman. In
return for his labor, the craftsman would teach the child the necessary skills to succeed in the
crafts of his choice, including pottery, masonry, carpentry, stone-cutting, glen-making or other
types of skilled labor.

The guilds also prevailed on members to abide by rules set to protect the sanctity of business.
Erring members are prohibited from engaging in business, tried and if found guilty, appropriate
sanctions are applied. This may include banning such erring member from engaging in the trade
for life. Later, the guild system developed an elaborate judicial system that served as the roots of
the modern European judicial system. For example, the guilds were the first to develop a system
whereby erring members were locked up as a measure of punishment.

THE FALL OF THE GUILDS

With time, the guilds became very powerful, enjoying the monopoly control of business and
handicraft activities. In many European cities, only members of merchant guilds were allowed to
engage in business activities. This development provoked resentment and criticism as the guild
system became a negative publicity towards the end of the 18 th and the beginning of the
nineteenth century. They were believed to oppose free trade and hinder technological innovation,
technology transfer and business development. Critics of the guild systems alleged extensive rent
seeking behavior by members on the society. The systems persisted for so long because members
of the guild redistributed resources to politically powerful merchants. This social capital
benefited guild members even as it hurt outsiders. Eventually, with the rise of industrialization
and modernization of trade and industry, as well as the rise of powerful nation states in Europe,
the power and authority of the guilds faded.

After the French revolution, the guild system collapsed across Europe and was disbanded and
replaced by free trade laws. Over time, many former handicraft workers had been forced to seek
employment in emerging manufacturing industries, using not closely guarded techniques but
standardized methods controlled by corporations.

THE RENAISSANCE
The renaissance was a cultural rebirth in Europe that spanned the period roughly from the 14th to
the 17th. The term renaissance literally means “rebirth” and is the period in European civilization
immediately following the Middle Ages, conventionally held to have been characterized by a
surge of interest in classical learning and values. The renaissance also witnessed the discovery
and exploration of new continents, the decline of feudal system and the growth of commerce and
the application of such potentially powerful innovations of paper, printing mariner’s compass
and gunpowder. To the scholars and thinkers of the day however, it was primarily a time of the
revival of classical learning and wisdom after a long period of cultural decline and stagnation.

As a cultural movement, the renaissance encompassed innovative flowering of Latin and

vernacular literatures, beginning with the 14th century resurgence of learning based on classical
sources.

In politics, the renaissance contributed to the development of the conventions of diplomacy, and
in science, an increase in observation. Historians often argue this intellectual transformation was
a bridge between the Middle Ages and the modern era. There is a consensus that the renaissance
began in Florence, Italy in the 14th century. Various theories have been proposed to account for
its origins and characteristics, focusing on a variety of factors, including the social and civic
peculiarities of Florence at the time.

The renaissance was a cultural movement that profoundly affected European life in the early
modern period. It eventually spread to the rest of Europe by the 16th century, with its influence
mostly felt in literature, philosophy, art, music, politics, religion and other aspects of intellectual
issues. The great achievements of the renaissance were the discovery of the world and the
discovery of men. Under these two phenomena, the discovery of the world lends itself into two
classifications: the exploration of the globe and that systematic exploration of the universe,
which is called science. For example, Christopher Columbus discovered America in 1492; the
Portuguese rounded the cape in 1497, and Copernicus explained the solar system in 1507.

ADAM SMITH’S THEORY OF PROFIT

Adam Smith apparently devoted only a brief movement for the discussion of the nature and
source of profits. Smith generally accepted without question the legitimacy of profits as a
payment to the capitalist for performing a socially useful function i.e. to provide labor with the
necessities of life and with the materials and machinery with which to work. According to Smith,
labor permits this deduction of profits from its output because it has no materials to work with
and no independent means of support. Therefore, profit in Adam Smith’s opinion is comprised of
two parts: a pure interest return and a return for risk.

Smith believed that the economic growth of a nation depended on accumulation of capital. While
he paid little attention to the nature and source of profits, he was extremely in changes in the rate
of profit over time. He predicted that the rate of profit would fall over time for three reasons:
 1. Competition in the Labor Market: The accumulation of capital will result in
competition among capitalists in the labor market, with the result that wages will
rise, bringing about a fall in profits.

2. Competition in the Commodity Market: Smith reasoned that as output increased,

so would competition among producers, with the consequences that commodity
prices would fall and profits decline. (Causes: overproduction).

3. Competition in Investment Market: Smith apparently believed in the existence

of only a few viable investment opportunities and that increased capital
accumulation would lead to falling profits.

THE SOCIALIST ECONOMIC THOUGHT AND KARL MARX

Karl Marx may be regarded as one of the most influential thinkers of all time. His revolutionary
ideas about the power of the working class inspires a large followership during his time. At the
time, Europe had a very overpowering upper-class and a very poor and oppressed working class.
Many people in his time were eager to listen to Marx’s message of the power that could come
about if the working class were to unite as one and fight for a simple cause. Therefore, the
emergence of Marxism law greatly influenced the development of socialist thought and practice
in government. Indeed, many scholars consider Karl Marx to be one of the great economic
theorists, and a founder of an economic policy and sociology.

Karl Marx was born in Russia, on May 5th, 1818 to a Jewish family which later converted to
become Protestants in 1824. The years 1830 and 1831 were revolutionary years, which saw
revolution beginning in France in 1830. It swept all over Europe and Russia, bringing a profound
influence on Marx’s life. His youth was also influenced by two great events: The industrial
revolution in England and the Great Revolution in France. In 1841, he earned his doctorate
degree writing on materialism and atheism of Greek atomists. In September 1844, Marx moved
to Paris where he devoted himself to the study of political economy and the history of French
revolution. It was in Paris that he met a contemporary, Fredrick Engels and both became intimate
friends, collaborating on a variety of intellectual works.

The two men found a common ground in articulating the nature of revolutionary problems. They
both wrote the foundation of Marxism. The subversive nature of his activities led the French
government to expel Karl Marx from France in 1845. He was considered a dangerous
revolutionary and he moved to Brussels, where he studied. He was subsequently expelled from
Belgium and eventually migrated to the United Kingdom where he lived till he died in 1883.
THEORY OF VALUE

The Marxian theory of value adopted an approach that avoided undue deviations and stating the
whole theory in a more precise manner. Karl Marx believed that every commodity has both a use
value and exchange value. Use value is essential for a commodity to have an exchange value.
However, the two concepts are not identical, since a good may have use value without exchange
value. To have an exchange value, according to Marx, a good becomes a commodity. And to
become a commodity (i.e. to have an exchange value), it must have labor imbibed into it.
Commodities are produced with the help of labor, land and capital.

THEORY OF RENT

Marx revealed that the concepts of price production and value leads to the concept of rent.
According to Marx, if any particular capitalist is able to produce a commodity at a price of
production lower than its value, he is able to make an extra profit. The profit is however subject
to being offset under severe competition. However, if the capitalist is able to retain this
advantage in cost of production, retaining extra profit along the way, the process is
acknowledged as rent. The situation is exemplified through the monopoly of ownership of land,
where the landlord is able to obtain rent on account of land leased to landless farmers. Therefore,
the Marxian theory of rent explained the existence of rent which accrues from surplus profit
which is able to survive the competition. It arises on account of the fact that a difference between
the price of production and value is maintained in the case of an individual producer, or a
commodity sells above its value for all producers.

THEORY OF CAPITALIST DEVELOPMENT

Marxian theory of growth emphasizes the role of capital accumulation. As in other components
of his thought, it is exciting to separate his theory of development from the rest of his analytical
work. Karl Marx viewed capitalism as characterized by an inherent dynamism. The urge for this
dynamism is provided by the desire of capitalists to secure as much of surplus value as possible
on the one hand and a competitive character of capitalism on the other. Also, he acknowledged
that the capitalist mode of production is driven by private ownership of means of production.
Every capitalist is interested in increasing the mass of surplus value which he gets. In order to
accomplish this, the capitalist looks for a number of outlets, including longer hours of work,
employment of women and children. He however posited that these sources of surplus value will
sooner or later dry up and the capitalist has to look for other avenues of surplus. As the
employment of labor expands, the inner contradictions of the capitalist system begins to
manifest, in the opinion of Marx. Once full employment is reached (the reservoir of
unemployment is depleted), wage rates tend to rise with the tendency for surplus value to fall.
This process also manifests in the falling of profit. At the same time, a condition of excess
production or crisis develops. Once the crisis grips the market, a struggle starts to overcome it.
The response of capitalist is to shift to a higher composition of capital whereby the rate of
surplus value is raised. This step is not possible for every capitalist however as some capitalists
are more ahead of the others. The result is that quite a number of them go bankrupt and have to
join the working class. Then, the means of production gets concentrated in fewer hands. At the
same time, when the organic composition has been raised through competition, the rate of profit
falls.

Therefore, in the opinion of Karl Marx, the process of capitalist production is through cycles and
is prone to incessant economic crisis.

JOHN MAYNARD KEYNES (1833-1946)

John Maynard Keynes was one of the most influential economists in the twentieth century. So
influential was the economist that a school of thought bears his name, serving as a yardstick that
can define virtually all economists that came after him.

Keynes was born in Cambridge and attended Kings College, Cambridge, where he earned his
degree in Mathematics in 1905. After leaving Cambridge, Keynes took a position with the civil
service in Britain, where he collected the material for his first book in economics, “Indian
Currency and Finance”, in which he described the workings of India’s monetary system. He
quickly worked up through the bureaucracy and by 1919 was the Treasury’s principal
representative at the peace conference at Versailles. He gained popularity because his predictions
about the ineffectiveness of the Versailles Treaty came true, as it became an unsustainable
burden against the Germans.

Keynes became a celebrity before becoming one of the most respected economists of the
twentieth century, when his popular book, “The Economic Consequences of the Peace” was
published in 1919.

However, it was Keynes ‘General Theory of Employment, Interest and Money, that
revolutionized the way economists think about the discipline. The book was a path breaking
endeavor in several ways, in particular because it introduced the notion of aggregate demand, as
the sum of consumption, investment, and government spending. It also showed that full
employment could be maintained only with the help of government spending. In order to
accomplish these, the General Theory advocated deficit spending (when spending exceeds
revenue over a particular period of time) during economic downturns to maintain full
employment. Although the idea initially met with some resistance, as the practice prevailing was
to maintain balanced budgets, the Americans accepted Keynes’ idea and succeeded in putting
millions of people back to work through deficit spending.

KEYNESIAN ECONOMICS

Keynesian economics is a theory of total spending in the economy, called aggregate demand and
its effects on both output and inflation. Although the term has been used to describe many
things over the years, six principal tenets are central to Keynesianism, with the first three
describing how the economy works.

1. The Keynesian school of thought believes that aggregate demand is influenced by a host
of economic decisions – both by the public and private sectors. The public decisions
include monetary and fiscal policies (i.e. spending and tax issues). There is consensus
that both fiscal and monetary policies affect aggregate demand.
2. According to Keynesian theory, changes in aggregate demand, whether anticipated or
not, have their greatest short-run effect on real output and employment, not on prices.
The theory holds that if government spending, for example, and the other components of
spending remain constant, then output will increase. Keynesian models of economic
activities also include a so called multiplier effect: that is, output increases by a multiple
of the original change in spending that caused it. Thus, a ten billion dollar increase in
government spending could cause a total output rise by fifteen billion dollars (a multiplier
of 1.5) or by five billion (a multiplier of 0.5).
3. Keynesians believe that prices, particularly wages respond slowly to changes in supply
and demand; resulting in periodic shortages and surpluses, especially of labor.

While no policy prescriptions are generated from the above principles alone, many
economists who do not regard themselves as Keynesians would nevertheless accept the list.
What distinguishes Keynesians from other economists is their belief in the following three
tenets about economic policy:

4. Keynesians do not think that the typical unemployment level is ideal partly because
unemployment is subject to the caprice of aggregate demand and partly because they
believe that prices adjust only gradually. Indeed, Keynesians typically acknowledge
unemployment as both too high on average and too variable, as well as usually associated
with recessions and depressions, which are both economic maladies.
5. Many, but not all Keynesians advocate activist stabilization policy to reduce amplitude of
the business cycle, which they rank among the most important of all economic problems.
However, fine-tuning with economic policy is problematic. First, there is a lag between
the time that a change in policy is required and the time that the government recognizes
it. Second, there is a lag between when government recognizes that a change in politics is
required and when it takes action.
 Third, the lag comes between the time that the policy is changed and when the
changes affect the economy.

6. Finally, some Keynesians are more concerned about combating unemployment than
about conquering inflation. They have concluded from the evidence that the costs of low
inflation are rather small. However, there are a lot of anti-inflation Keynesians. For
example, most Central Bankers belong to this group. In general, Keynesians typically
advocate more aggressively expansionist policies than non-Keynesians. Keynesians’
belief in aggressive government action to stabilize the economy is based on value
judgments and on the belief that :
a. Macroeconomic fluctuations significantly reduce economic well-being and
b. The government is knowledgeable and capable enough to improve on the free
market system.