Chapter one

1. Economic thought before Adam Smith

1.1. History of Economic Thought as a Discipline
The history of economic thought examines the evolution of economic ideas, theories, and
methodologies over time, tracing how these ideas developed in response to changing social,
political, and historical contexts. As a discipline, it explores the ways in which people have thought
about and addressed economic problems, beginning with ancient civilizations and progressing
through various schools of thought up to the present day. The study of economic thought provides
insights into how economic theories have influenced, and been influenced by, historical events and
intellectual movements.
1.1.1. Early Economic Thought
Economic thought has roots in ancient civilizations, where early thinkers explored fundamental
economic concepts like property, wealth, and trade. In Ancient Greece, philosophers such as
Aristotle discussed issues related to household management, the nature of money, and the just
price of goods. In Ancient China, Confucian and Legalist scholars considered the role of
government in economic management and the distribution of resources. Medieval economic
thought was shaped by religious and moral considerations. These thinkers often debated issues like
the morality of charging interest (usury), the just price (fair or morally acceptable price for goods and
services) and the role of markets within a religious framework.
1.1.2. The Birth of Modern Economic Thought
The emergence of modern economic thought can be traced to the Renaissance and the
Enlightenment, when European thinkers began to challenge traditional ideas and sought to explain
economic phenomena using reason and observation. The 16th and 17th centuries saw the rise of
mercantilism, which advocated for state intervention to promote national wealth through trade
surplus and accumulation of precious metals.

The 18th century marked a significant shift with the advent of classical economics, pioneered by
Adam Smith, whose seminal work "The Wealth of Nations" (1776) laid the foundation for
economics as a separate discipline. Smith's ideas about the division of labor, the invisible hand of
the market, and free trade represented a break from mercantilist thought and emphasized the self-
regulating nature of markets. This era also included important contributions from other classical

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economists like David Ricardo, who developed the theory of comparative advantage, and Thomas
Malthus, known for his population theory.

The Development of Economic Theories in the 19th Century

The 19th century saw the expansion of classical economic ideas and the development of new
theories. John refined classical theories and introduced ideas about utilitarianism and social justice,
while Karl Marx offered a critical analysis of capitalism through his labor theory of value and the
concept of historical materialism, challenging the foundations of classical economics.

During this period, economics began to formalize as a scientific discipline, with increasing
emphasis on systematic analysis and empirical observation. The "marginal revolution" in the late
19th century marked the transition to neoclassical economics, which focused on individual
decision-making(Concepts of marginal utility and consumer behavior) and mathematical modeling of
economic behavior. Figures like William Stanley Jevons, Carl Menger, and Léon Walras played
crucial roles in this transformation.

20th Century and the Rise of New Economic Paradigms

The 20th century witnessed the diversification of economic thought, with the emergence of various
schools and paradigms. The Great Depression of the 1930s led to the development of Keynesian
economics, founded by John Maynard Keynes, who advocated for government intervention to
manage aggregate demand and mitigate economic downturns. Keynesian ideas dominated
economic policy-making in the mid-20th century, particularly in the post-World War II era.

At the same time, alternative approaches like Austrian economics, which emphasized the
importance of individual choice and market processes, and institutional economics, which focused
on the role of social and institutional factors in economic behavior, gained prominence. The latter
half of the 20th century saw the rise of monetarism, led by Milton Friedman, who argued for the
control of the money supply to manage inflation, as well as the development of rational
expectations theory and the New Classical economics that emphasized market efficiency.

Modern Developments in Economic Thought

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In recent decades, economics has continued to evolve, incorporating insights from other disciplines
such as psychology, sociology, and political science. Behavioral economics, which studies the
effects of psychological factors on economic decision-making, has gained attention, challenging
the traditional assumption of rational behavior. The development of game theory, information
economics, and experimental economics has further expanded the analytical toolkit available to
economists.

The history of economic thought as a discipline highlights the dynamic nature of economics,
showing how theories evolve over time in response to new evidence, changing circumstances, and
intellectual challenges. It emphasizes the importance of understanding economic ideas in their
historical context, as this can provide a deeper appreciation of current economic theories and policy
debates. Studying the history of economic thought also reveals how different economic ideas have
shaped and been shaped by society, influencing everything from government policy to everyday
life.

1.2. Ideology, Science, and Paradigms in the History of Economic Thought

The history of economic thought is profoundly shaped by the interplay between ideology, science,
and paradigms. Each of these elements influences the development of economic theories and their
acceptance within the intellectual and policy-making communities. Understanding how ideology,
scientific methods, and paradigms have interacted throughout the history of economic thought
provides insight into why certain economic theories emerge, evolve, or decline over time.

Ideology in the History of Economic Thought

Ideology refers to a set of beliefs, values, and attitudes that shape how individuals perceive the
world and influence their preferences for particular economic policies. In the history of economic
thought, ideology plays a significant role in shaping economic theories, often reflecting the
prevailing social, political, and cultural values of the time.

For example, classical economics emerged during the Enlightenment, a period characterized by a
belief in individual liberty, free markets, and limited government intervention. The writings of
Adam Smith, David Ricardo, and other classical economists were influenced by these ideals,

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which aligned with the liberal political ideology of the time that favored economic freedom and
minimal state interference. Their theories emphasized the benefits of self-interest, competition,
and free trade as drivers of economic prosperity.

In contrast, Marxist economics emerged as a critique of capitalism, shaped by the ideology of

socialism and communism. Karl Marx's ideas were grounded in the belief that capitalism was
inherently exploitative, leading to class struggle between the bourgeoisie (owners of the means of
production) and the proletariat (working class). Marxist economics argued for the abolition of
private property and the establishment of a classless society, reflecting the ideological struggle
against capitalist modes of production.

Ideology also influenced the rise of Keynesian economics during the Great Depression, as
governments increasingly saw a need for active state intervention to combat unemployment and
economic instability. John Maynard Keynes' ideas about the importance of managing aggregate
demand and using fiscal policy to stabilize the economy aligned with the ideological shift toward
welfare state policies (government has a responsibility to intervene in the economy to ensure stability,
reduce inequality, and promote the well-being of its citizens during times of economic hardship.) in the
mid-20th century.

Science in the History of Economic Thought

The scientific approach to economics involves the use of systematic methods to analyze economic
phenomena, develop theories, and test them against empirical evidence. Over time, economics has
sought to establish itself as a scientific discipline by adopting methods from the natural sciences,
such as mathematical modeling, statistical analysis, and controlled experiments.

The transformation of economics into a more "scientific" discipline began with the classical
economists, who used logical reasoning to explain economic principles. The marginal revolution
of the late 19th century further advanced the scientific nature of economics by introducing
mathematical techniques to analyze individual decision-making and market behavior. Neoclassical
economists like William Stanley Jevons, Carl Menger, and Léon Walras used mathematical tools
to study the behavior of consumers and firms, formalizing concepts such as marginal utility and
general equilibrium.

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In the 20th century, the application of statistical methods to economics gave rise to econometrics,
a field that uses mathematical models and data to estimate economic relationships and test theories
empirically. The work of economists like Milton Friedman, who advocated for the use of empirical
evidence to validate economic theories, emphasized the scientific nature of economic analysis.
The development of game theory and behavioral economics further expanded the scientific scope
of the discipline by incorporating insights from psychology and the study of strategic interactions.

However, the claim that economics is a "science" has been contested, with some arguing that
economic theories often rely on assumptions about human behavior that are difficult to test or may
not hold true in all contexts. Critics of the scientific approach argue that economics should account
for the complexity of social interactions and cultural factors, which cannot always be captured
through mathematical models.

Paradigms in the History of Economic Thought

A paradigm, in the context of economic thought, refers to a dominant framework or model that
shapes how economists understand and investigate economic problems. The concept of paradigms
was popularized by philosopher Thomas Kuhn in his work "The Structure of Scientific
Revolutions" (1962), where he described how scientific fields undergo paradigm shifts when
existing models fail to explain new phenomena.

In economics, paradigm shifts occur when a prevailing economic framework is challenged by new
evidence or alternative theories that better explain current economic conditions. For example, the
shift from classical to Keynesian economics during the Great Depression represents a paradigm
shift, as the classical view that markets are self-correcting failed to address the widespread
unemployment and economic stagnation of the time. Keynesian economics, which emphasized the
role of government intervention in stabilizing the economy, became the new paradigm.

Similarly, the rise of monetarism in the 1970s, led by Milton Friedman, represented a shift away
from Keynesian economics. Monetarism challenged the Keynesian focus on fiscal policy and
instead argued that controlling the money supply was the key to managing inflation. This shift was
influenced by the failure of Keynesian policies to address the stagflation (high inflation and
unemployment) of the 1970s.

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The emergence of new paradigms can also be seen in the development of behavioral economics,
which challenges the traditional neoclassical assumption of rational decision-making. Behavioral
economics incorporates insights from psychology, showing that individuals often exhibit biases
and irrational behavior that deviate from standard economic predictions. This shift has led to a
broader understanding of economic decision-making and has influenced policy approaches in areas
such as consumer protection and finance.

The Interplay between Ideology, Science, and Paradigms

The history of economic thought demonstrates how ideology, science, and paradigms are
interconnected in shaping the development of economic theories. Ideologies influence the
acceptance or rejection of certain economic ideas, as prevailing political and social values can
determine which theories gain prominence. The scientific approach helps economists refine and
test theories, although the methods used may be shaped by the dominant paradigm. When existing
paradigms face significant anomalies or fail to address emerging economic issues, shifts in
paradigms can occur, leading to the development of new economic frameworks.

This interplay highlights that economic thought is not a linear progression toward a "truth" but
rather a dynamic process influenced by historical events, intellectual movements, and shifts in
societal values. Understanding these factors provides a richer appreciation of the history of
economic thought and the evolving nature of economic theories.

1.3. The Economics of Mercantilism

Mercantilism was the dominant economic theory in Europe from the 16th to the 18th century,
characterized by a focus on national wealth, power, and the role of the state in economic affairs.
The central belief of mercantilism was that a nation's prosperity depended on its accumulation of
wealth, particularly gold and silver, which were considered the primary measures of a country's
economic strength. Mercantilists argued that the wealth of the world was finite, leading to
competition among nations to control resources and trade to secure a larger share of global wealth.
The theory shaped economic policies in several European countries, influencing trade, colonial
expansion, and government intervention.

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Core Principles of Mercantilism

1. Accumulation of Precious Metals: At the heart of mercantilist thought was the idea that
a nation's wealth was measured by the amount of gold and silver it possessed. Mercantilists
believed that accumulating precious metals was essential for maintaining national power
and ensuring economic security. Since they viewed the global supply of wealth as limited,
nations sought to maximize their reserves by achieving a favorable balance of trade.
2. Positive Balance of Trade: Mercantilism emphasized the importance of a positive balance
of trade, where a country exports more than it imports. By exporting goods, a nation could
bring in more precious metals, thus increasing its wealth. Importing goods was
discouraged, as it was seen as a loss of wealth to other nations. To achieve this,
mercantilists supported policies that promoted exports and restricted imports through
tariffs, quotas, and other trade barriers.
3. State Intervention and Protectionism: Mercantilist theory advocated for active
government intervention in the economy to achieve national economic goals. Governments
implemented protectionist policies to shield domestic industries from foreign competition,
often by imposing high tariffs on imported goods. Subsidies were provided to encourage
domestic production and exports, while monopolies and trade privileges were granted to
specific companies to control trade in valuable commodities.
4. Colonial Expansion and Exploitation: Mercantilism was closely associated with
European colonial expansion. Colonies were seen as essential for providing raw materials
that were either unavailable or scarce in the mother country, and they also served as markets
for finished goods. The economic relationship between colonies and the mother country
was structured to benefit the latter. Colonies were often prohibited from manufacturing
goods that competed with the mother country's products or trading with other nations,
ensuring a favorable balance of trade for the colonizing country.
5. Regulation of Labor and Industry: Mercantilist policies also extended to the regulation
of domestic labor and industry. Governments often sought to increase the labor force and
productivity by encouraging population growth, discouraging idleness, and regulating
wages and working conditions. This regulation aimed to maximize the output of goods for
export while minimizing the costs associated with production.

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1.3.1. Historical Context and Development

Mercantilism developed during the period of early modern Europe, a time of significant political
and economic change. The rise of nation-states, the discovery of new trade routes, and the
expansion of overseas empires created an environment in which countries competed for resources
and wealth. The mercantilist approach provided a framework for governments to consolidate
power and finance military endeavors, as wealth accumulation was directly linked to national
strength and security.

Several European countries adopted mercantilist policies, albeit with variations. In England,
mercantilism was characterized by acts such as the Navigation Acts, which aimed to control trade
by requiring goods imported to England or its colonies to be carried on English ships. France,
under finance minister Jean-Baptiste Colbert, implemented a version of mercantilism that focused
on state-led industrialization and the establishment of manufacturing industries. Spain and
Portugal, on the other hand, relied heavily on extracting precious metals from their colonies in the
Americas to build their wealth.

1.3.2. Contributions and Criticisms of Mercantilism

Contributions: Mercantilism contributed significantly to the economic policies in several ways:

• Development of National Economies: By promoting policies aimed at strengthening

domestic industries and controlling trade, mercantilism helped develop national economies
and contributed to the rise of centralized states.
• Colonial Expansion and Global Trade Networks: Mercantilist policies encouraged
exploration and colonization, leading to the establishment of extensive global trade
networks that facilitated the exchange of goods, people, and ideas across continents.
• Early Industrialization: The focus on manufacturing and industry led to the development
of new production methods, which contributed to the early stages of industrialization in
Europe.

Criticisms: Despite its influence, mercantilism faced significant criticism from later economic
thinkers:

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 • Static View of Wealth: Mercantilists assumed that the world's wealth was fixed, which
led to the idea that one nation's gain was another's loss. This zero-sum view was challenged
by later economists like Adam Smith, who argued that trade could be mutually beneficial.
• Inefficiency and Market Distortion: The protectionist policies and heavy government
intervention associated with mercantilism often led to inefficiencies and distortions in the
market. These policies could create monopolies, stifle innovation, and result in economic
inefficiencies due to lack of competition.
• Exploitation of Colonies: The mercantilist approach to colonialism prioritized the
economic interests of the colonizing nation at the expense of the colonies. This often led
to exploitation, resource depletion, and suppression of local industries, which had long-
term negative effects on the economies of colonized regions.

The Decline of Mercantilism and the Rise of Classical Economics

The decline of mercantilism began in the late 18th century, as new economic ideas emerged that
challenged its principles. Adam Smith, in his landmark work "The Wealth of Nations" (1776),
criticized mercantilist policies for stifling economic growth and argued for the benefits of free
trade and the division of labor. He introduced the concept of the "invisible hand" to describe how
individual self-interest in a free market could lead to the efficient allocation of resources,
benefiting society as a whole.

Smith's ideas laid the foundation for classical economics, which advocated for limited government
intervention and emphasized the role of market forces in driving economic prosperity. The
transition from mercantilist to classical economic thought marked a paradigm shift in economic
policy, leading to the adoption of free trade principles in the 19th century and influencing the
development of modern economic theory.

1.4. The Contribution of Physiocracy

Physiocracy was an influential school of economic thought that emerged in 18th-century France,
advocating for the natural order and the central role of agriculture in generating wealth. The term
"physiocracy" itself is derived from Greek, meaning "government of nature," reflecting the belief
that economic success depended on adherence to the natural laws governing society. Physiocrats

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were the first group of economists to regard economics as a scientific discipline, laying the
groundwork for later economic theories. Their emphasis on agriculture, property rights, and
minimal government intervention significantly influenced the development of classical economics
and the broader history of economic thought.

1.4.1. Core Principles of Physiocracy

1. The Primacy of Agriculture: Physiocrats believed that agriculture was the only true
source of wealth because it was the primary activity that produced a "net product" or
surplus beyond the costs of production. According to them, only agricultural labor could
generate new wealth, as opposed to manufacturing or commerce, which merely
transformed existing wealth.
2. The Concept of the "Net Product": The "net product" was the surplus generated by
agricultural production after covering the costs of inputs like labor and capital. Physiocrats
argued that this surplus was the source of all economic growth and prosperity. They
classified society into three classes:
• Productive Class: Primarily farmers and agricultural workers who generated the net
product.
• Proprietary Class: Landowners who received income through rents, derived from the
agricultural surplus. who do not work the land but receive rent from those who do.
• Sterile Class: All other professions, including merchants and manufacturers, who,
according to Physiocrats, did not add new wealth but merely transformed or distributed
existing wealth.

3. Natural Order: Physiocrats emphasized a “natural order” in society, governed by natural

laws and best left undisturbed by government intervention. They argued that if individuals
pursued their self-interests within this natural order, it would lead to the welfare of society
as a whole.
4. Laissez-Faire: Physiocrats were early proponents of the laissez-faire approach, advocating
for minimal government interference in economic matters. They argued that the economy
would achieve optimal outcomes if left to follow its natural course. The government's
primary role should be limited to protecting private property, enforcing contracts, and
ensuring that natural economic laws were not violated

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 1.4.2. Contributions of Physiocracy
1. The Concept of Economic Modeling: The "Tableau Économique" was one of the earliest
attempts to construct an economic model, illustrating the flow of goods and money within an
economy. The Tableau Économique illustrates the circular flow of income among these three
classes through a simple sequence of transactions, designed to represent how wealth or surplus
from agriculture moves through the economy:

A. Creation of Agricultural Surplus:

o The process begins with the productive class, who cultivate crops and livestock,
generating an agricultural surplus. This surplus, after covering production costs, is
the economy’s net product, which becomes the primary source of wealth.

B. Rent Payment to Proprietary Class:

o Farmers (productive class) pay a portion of this surplus to landowners

(proprietary class) as rent. The rent symbolizes the landowners' entitlement to the
surplus due to their ownership of the land.

C. Expenditure by Proprietary Class:

o The proprietary class spends its income (received as rent) on goods and services,
buying agricultural products from the productive class for food and raw materials,
and non-agricultural goods from the sterile class for manufactured items and
services.

D. Circulation of Wealth:

o As the proprietary class spends its income, it directs the funds back into the
economy, supporting both the productive and sterile classes. This spending
generates demand that keeps production going in both sectors, leading to further
agricultural production, which reinitiates the cycle.

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2. Influence on Classical Economics: Physiocracy provided a bridge between earlier mercantilist
ideas and classical economics. The Physiocrats' advocacy of laissez-faire policies and minimal
government intervention influenced Adam Smith's "The Wealth of Nations" (1776). Although
Smith disagreed with the Physiocrats' view that only agriculture produced wealth, he shared their
belief in the natural order and the benefits of limited government involvement in economic affairs.

3. Advocacy for Land and Property Rights: The Physiocrats emphasized the importance of
private property rights as a foundation for economic prosperity. They argued that secure ownership
of land and resources would incentivize productivity and investment. This emphasis on property
rights as essential to economic progress became a cornerstone of classical economics and continues
to be significant in modern economic thought.

4. Early Ideas on Taxation: Physiocrats proposed a single tax system, known as the "impôt
unique," which would tax landowners based on the value of their land. They believed that since
only agricultural land produced a net surplus, it should be the sole source of tax revenue. This idea
influenced later debates on taxation, particularly those concerning land and property taxes.
Although the single-tax proposal was never widely adopted, it provided a foundation for
discussions on fair and efficient tax policies.

5. Critique of Protectionism and Government Intervention: Physiocrats criticized the

protectionist policies prevalent during the mercantilist era, arguing that tariffs and trade restrictions
distorted the natural economic order. They advocated for free trade, especially in agricultural
goods, believing that markets should be left to operate without artificial barriers. This anti-
protectionist stance helped shift economic thought away from mercantilism toward more liberal
economic policies that favored open markets.

Limitations and Criticisms of Physiocracy

Despite its contributions, Physiocracy faced several criticisms and limitations:

1. Overemphasis on Agriculture: The Physiocrats' focus on agriculture as the sole source

of wealth was soon challenged by later economists who recognized the value of industry
and commerce. Adam Smith, for example, argued that all productive labor, including

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 manufacturing and services, could contribute to a nation's wealth. The industrial revolution
further highlighted the importance of non-agricultural sectors in economic growth.
2. Simplistic Economic Model: While the "Tableau Économique" was groundbreaking for
its time, it oversimplified the complexities of an economy by neglecting the roles of
industry and services. The model's focus on agriculture did not account for the diversified
economic activities that characterize modern economies.
3. Limited Practical Application: Many of the Physiocratic policies, such as the "impôt
unique" or the push for extensive deregulation, faced resistance and had limited success in
implementation. Turgot's attempts to reform France's economy according to Physiocratic
principles encountered significant opposition from vested interests, leading to the
abandonment of many of his policies.

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