What is Economics?

Economics, as we know it today, was developed almost exclusively in Europe and Anglo-America. There were economic thinkers important in their own time and place, thinkers such as as Chanakya in ancient India, or Fan Li in ancient China, or Ibn Khaldun in Muslim North Africa, but these figures had little or no effect on the development of our economics.

1 Ancient Greece

Etymologically, the word economics stems from the Greek oikos (household) and nomos (law, rule, or -in this context- management). For the ancient Greeks, the household included an extended family, usually with slaves or servants, and with assets in the form of land, tools, animals, and structures. The household was typically under the control of a dominant male, who made decisions regarding the allocation of resources and had the power to impose discipline on other members. Management of the household had the twin objectives of accumulating wealth and doing what is morally correct.

The earliest known Greek literature on oikos nomos is the ca. 700 B.C.E. poem Works and Days by Hesiod. The poem instructs the reader on prudent management practices for a peasant household, and has a strongly moralizing tone. Around 400 B.C.E., Xenophon, a student of Socrates, wrote a Socratic dialogue called Oeconomicus, which dealt with the management of a wealthy estate. The Socratic dialogue contains advice on agricultural practices as well as advice on ensuring the submission of other household members. However, Xenophon makes it clear that the goal of accumulating wealth is not the wealth itself, but the happiness it brings, and that it is possible to be happy with little.

Aristotle, a student of Plato, who was a student of Socrates, was the most influential of the ancient Greek writers on oikos nomos. His book Politics approaches the production, exchange, and consumption of goods from the ethical side. Aristotle finds some practices objectionable that we in our time find perfectly acceptable: he condemns the charging of interest (usury); he objects to trading as a way of making a living. And he accepts some thing that we would find objectionable, such as making ones living from piracy. Much of his discussion of oikos nomos is actually a discussion of slavery, in which Aristotle tries to reason whether it can be justified ethically. His conclusion is not one that we would agree with today: he maintains that it is morally correct to have a slave, but it is not morally correct to enslave a fellow Greek.

The example of Aristotle illustrates that we cannot expect thinkers from the past to share our own moral foundations. Just as we should not assume that our culture stands at the pinnacle of moral development, and look down on other cultures as our moral inferiors (ethnocentrism), so we should not assume our own moral superiority over people from other times (chronocentrism). The goal of studying intellectual history is to understand, not to judge.

2 Medieval Christianity

Most writers and philosophers of Medieval Europe held positions in the Roman Catholic Church. These writers were deeply concerned with the problem of living a righteous life in accordance with holy scripture. Like philosophers today, they often set up puzzles that involved a moral dilemma, and they would use reason to arrive at the morally most acceptable solution.

The Merchant of Malta was a moral dilemma puzzle used by many philosophers. A merchant leaves Sicily with a shipload of grain, and arrives at Malta to discover that the island is in the midst of a famine. Grain prices are therefore sky high, and the merchant would be able to sell his cargo at an enormous profit. However, the merchant knows something the people of Malta do not know: a day or two behind him are several more grain-laden ships coming from Sicily. Should the merchant inform the people of Malta that these ships are coming?

The first philosophers who worked with this puzzle concluded that the merchant was indeed under an obligation to inform the people of Malta of the arriving ships. But as centuries passed, the conclusions changed, and by the end of the Middle Ages, most philosophers accepted that the merchant had no moral obligation to reveal what he knew. We interpret this change as reflecting an increasing acceptance of capitalism and markets in Europe. All through the Middle Ages, economic thought was focused on morality, though the moral foundations themselves changed.

The most important thinker about economics in the Middle Ages was Thomas Aquinas. Sanctified as a Saint, Aquinas’ philosophical musings as expressed in Summa Theologica became the bedrock of Roman Catholic belief. Aquinas read Aristotle, deeply, and much of his economic thought is based upon that of Aristotle. In economics, he is known for his justification of private property, and for his discussion of the just price. The just price is a price fair to both the producer and consumer of a product.

3 Mercantilism

The Hundred Years’ War (1337-1453) was a landmark event for Western Europe. In this war, the French and English kings fought for the throne of France. Neither side could gain a decisive victory. The English king would bring an army across the Channel to France, the soldiers would fight well, but eventually the specie (gold and silver) to pay the army would be depleted. The soldiers would then be given permission to loot the French countryside. Eventually, there would be nothing left to loot, and the army would then melt away, many to take up mercenary jobs in Italy. It became clear to rulers throughout Europe that the only way to win a decisive victory would be to have sufficient specie to keep their own army in the field longer than the enemy army. There thus began an era where European states tried to accumulate as much specie as possible. They also tried to enhance the state’s military potential in other ways: encourage population growth; put every person to work; increase the production of ships and armaments.

War is expensive (Battle of La Hougue, 1692)

The transition from the Medieval Christian era to the era of Mercantilism is a transition from a period where thinkers sought to organize the economy according to the will of God to a period where thinkers sought to organize the economy in order to enhance the power of the state.

Some important concepts related to money appeared first during the Mercantilist era: the Quantity Theory of Money and Gresham’s Law. But the main thrust of Mercantilist thought was to use trade as a mechanism for increasing the quantity of specie.

3.1 Accumulating specie via an export surplus

Trade as a mechanism for increasing the quantity of specie

The goal of trade was to run an export surplus, so that a nation would receive more specie from foreign nations than they paid to those nations. In the above example, Britain is exporting wool and importing wine. However, the value of the wool exceeds the value of the wine, and France must make up the difference with specie. The export surplus allows specie to accumulate in Britain.

British Mercantilists understood that an increase in specie implied an increase in the money supply, which would cause prices to rise in Britain. However, they thought that the demand for British wool in France was inelastic, so that the French would continue buying the same amount of wool, but at higher prices, which would increase the inflow of specie. The more specie one had, the more would come. In economics we call this kind of virtuous circle a deviation amplifying process.

\[specie\uparrow\rightarrow M^{S}\uparrow\rightarrow \bar P \uparrow \rightarrow specie\uparrow \] Mercantilists also recognized that higher prices would increase specie inflow through the effect on the labor market and consumption. Output can be used as either consumption or exports: \(Q=C+X\).

As prices rise, real wages fall, leading to a decline in consumption, so that more of production can be diverted into exports. \[specie\uparrow\rightarrow P\uparrow\rightarrow wage/\bar P \downarrow \rightarrow C\downarrow \rightarrow X \uparrow \rightarrow specie \uparrow\]

Again, as real wages fall, workers, who are close to the subsistence level, must work more hours to survive, which increases output, increasing exports. \[specie\uparrow\rightarrow P\uparrow\rightarrow wage/\bar P \downarrow \rightarrow L\uparrow \rightarrow Q \uparrow \rightarrow X \uparrow \rightarrow specie \uparrow\]

In general, Mercantilists looked at common people as resources to be managed, like cattle, and not as whole human beings whose interests should be considered. Common people could be dangerous, were they not tied down to work in a particular place. For this reason the lowering of real wages was considered an attractive feature of an export surplus.

Merchants became valuable assets for European states, since by their activity they brought in the specie that made the state stronger. Most British writers presenting Mercantilist ideas were merchants, and they sought in their writings to advance their own interests.

The East India Company sending specie to China

The British East India Company was a particularly important trading company, involved in the tea trade with China. The tea trade became controversial because the Chinese did not want any trade goods from Britain, desiring only silver. As a result, the tea trade drained specie from Britain. Merchants associated with the East India Company developed a sophisticated argument that the tea trade actually increased the stock of specie in Britain, since tea re-exported from Britain to other European countries increased the total British export surplus. Economic thought during this period evolved primarily through the arguments of self-interested merchants, trying to convince the actual rulers of Britain (the aristocracy and gentry) that allowing merchants to have their way would enhance the power of the British state.

4 Liberalism

The Enlightenment was an intellectual movement that advocated religious toleration, individual liberty, and scientific inquiry. The movement began in the 17th century, and was the foundation for the political and moral philosophy of Liberalism.

Adam Smith, in 1776, published The Wealth of Nations, a book that decisively turned Economics into a branch of Liberal philosophy. These three principles are implicit in Smith’s work, and they remain core principles of Economics today:

• People behave in their own self-interest.
• The objective of economic policy is to increase the well-being of ordinary people.
• Leting people act in their own self-interest is likely to increase individual well-being.

5 Summary

Roughly, we can break the history of post-Roman Economics into three periods. The first is that of Medieval Christian scholars, who sought to order the economy in a way pleasing to God. The second is that of the Mercantilists, who sought to make states strong to prevail in war. The third and final period is that of Liberalism, which seeks to increase the well-being of ordinary people. Today, in arguments about economic policy, winning policies are those that bring more benefits to more people.

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Compiled on 2023-04-19 by E. Anthon Eff