1. INTRODUCTION TO HISTORY OF ECONOMIC THOUGHT
Chapter 1
INTRODUCTION TO HISTORY OF ECONOMIC THOUGHT
2nd Semester, S.Y 2014 – 2015

2. Chapter Outline What is History of Economic Thought
Why Study History of Economic Thought
Three General Beliefs in the Study of History of Economic Thought
History of Economic Thought vs. Economic History
Period/Timeline of History of Economic Thought
What is School of Economic Thought
Different Schools of Economic Thoughts
Etymology of Economics
Definitions of Economics
Wealth Definition
Material Welfare Definition
Scarcity Definition
Growth-Centered Definition
Other Definition of Economics

3. History of Economic Thought
History of economic thought concerns with different thinkers and theories in the discipline of economics from ancient times to contemporary day.
It deals with many disparate schools of economic thought.
It is not a history of what actually happened in the past but rather a history of theories about how the economy works.

4. Why Study the History of Economic Thought?
Aids in the understanding of economics.
Provides an introduction to part of intellectual history.
Provide a perspective of our past in the development of economic thought and relate this past to current economic thought.
Learn about people as well, i.e., we learn about the philosophers and economists who developed economic reasoning, the modeling, and descriptions of economic activity.
Illustrate how ideas develop and change within academic disciplines.
Helps create more critical attitudes and abilities.

5. Three General Beliefs in History of Economic Thought
Theory and historical processes are reciprocally interconnected.
Social and economic change are continuous.
Schools of thoughts in economic area are (and always have been), vitally concerned with social, political, historical, practical, and moral issues.

6. Three General Beliefs in History of Economic Thought
1. Theory and historical processes are reciprocally interconnected. Social theories are based upon, grow out of, reflect, and attempt to explain ongoing events and circumstances. They are the “products” of the social and economic circumstances in which they are conceived. Also social and economic circumstances are the “products” of social theories. But it is equally true that human being act, create, shape, and change their social and economic circumstances on the basis of ideas and social theories.

7. Three General Beliefs in History of Economic Thought
2. Social and economic change are continuous. In numerous respects, today’s Capitalism is substantially different from Capitalism of the late 18th century. In this course there in been a try to illuminate the nature of contemporary controversies in economic theory by examining their historical antecedents.

8. Three General Beliefs in History of Economic Thought
3. Schools of thoughts in economic area are (and always have been), vitally concerned with social, political, historical, practical, and moral issues. Their thoughts have both a cognitive, scientific element and emotive, moral, or ideological element. All theorists have values that significantly interpenetrate all cognitive endeavors. The discussion of the values and ideological aspects of the various theorists’ writings, there is no intention of conveying the notion that the having of values, per se, is a basis for criticizing a thinker.

9. History of Economic Thought versus Economic History
Economic history is the study of economies or economic phenomena in the past. It examines the evolution of the economy and economic institutions, using methods and techniques from the fields of economics, history, geography, sociology, psychology, and political science. Examples: Great Depression, 1997 Asian Financial Crisis, etc.
History of Economic Thought examines history of economic ideas of different thinkers.

10. History of Economic Thought versus Economic History
History of Economic thought is not a history of what actually happened in the past but rather a history of theories about how the economy works.
Nonetheless, we will pay a little attention to economic history, since understanding what was going on in the economy in past times and places helps us to understand how people conceptualized the economy. 

11. Period/Timeline of History of Economic Thought
Ancient Time (776 – 300 BC)
Medieval Time and Islamic Golden Age (5 – 15th Century)
Age of Enlightenment or The Age of Reason (1770 – 1820)
Industrial and Economic Revolution (1820 – 1929)
War and Depressions (1929 – 1945)
Post-War Economics (1945 –1970)
Contemporary Economics (1970 – present)

12. School of Economic Thought
Schools of economic thought describes the variety of approaches in the history of economic theory. While economists do not always fit into particular schools, particularly in modern times, classifying economists into schools of thought is common. Economic thought may be roughly divided into three phases: premodern (Greco-Roman, Indian, Persian, Arab, and Chinese), early modern (mercantilist, physiocrats) and modern (beginning with Adam Smith and classical economics in the late 18th century). Systematic economic theory has been developed mainly since the beginning of what is termed the modern era.

13. Schools of Economic Thought
Ancient School of Economic Thought
Medieval School EconomicThought
Mercantilist School
Physiocratic School
Classical School
Rise of Socialist School
Marxian School
Neoclassical Economic School
Institutionalist School
German Historical School
Austrian School
Marginalist School
Keynesian School
Other Schools of Economic Thought

14. Other Schools of Economic Thought
Public Choice School
Post-Keynesian Economics
Neo-Ricardianism
Neo-Marxist Economics
Chicago School
School of Lausanne
Stockholm School
Evolutionary Economics
Constitutional Economics
Welfare Economics
Mathematical Economics
Econometrics and Experimental Economics

15. Economics
Economics is study of how human beings allocate scarce resources to produce various commodities and how those commodities are distributed for consumption among the people in society.
The field of economics has undergone a remarkable expansion in the 20th cent. as the world economy has grown increasingly large and complex. Today, economists are employed in large numbers in private industry, government, and higher. Many subjects, such as political science and sociology, which were once regarded as part of the study of economics, have today become separate disciplines, although the study of any one generally implies a working knowledge of the others.

16. Etymology of Economics
The word Economics originates from the Greek word ‘Oikonomia’ meaning “household management” which can be divided into two parts:
‘Oikos’, which means ‘Home or household’
‘Nomos’, which means ‘Management’.
Political economy was the earlier name for the subject.
In the latter 19th century, economists suggested 'economics' as a shorter term for 'economic science' that also avoided a narrow political-interest connotation and as similar in form to 'mathematics', 'ethics', and so forth.

17. Definition of Economics
The definition of economics can be classified into four groups:
1. Wealth definitions (Adam Smith’s Definition)
2. Material welfare definitions (Alfred Marshall’s Definition)
3. Scarcity definitions (Lionel Robbins’ Definition)
4. Growth-centered definitions (Paul Samuelson)

18. Adam Smith’s Definition
Adam Smith, considered to be the founding father of modern Economics, defined Economics as the study of the nature and causes of nations’ wealth or simply as the study of wealth. The central point in Smith’s definition is wealth creation. Implicitly, Smith identified wealth with welfare. He assumed that, the wealthier a nation becomes the happier are its citizens. Thus, it is important to find out, how a nation can be wealthy. Economics is the subject that tells us how to make a nation wealthy. Adam Smith’s definition is a wealth-centered definition of Economics.

19. Main Characteristics of Wealth Definition
Exaggerated emphasis on wealth: These wealth centered definitions gave too much importance to the creation of wealth in an economy. The classical economists like Adam Smith, J.S. Mill, J.B. Say, and others believed that economic prosperity of any nation depends only on the accumulation of wealth.
Inquiry into the creation of wealth: These definitions show that Economics also deals with an inquiry into the causes behind the creation of wealth. For example, wealth of a nation may be increased through raising the level of production and export.
A study on the nature of wealth: These definitions have indicated that wealth of a nation includes only material goods (e.g., different manufactured items). Non-material goods were not included. Hence, non-material goods like services of teachers, doctors, engineers, etc., are not considered as ‘wealth.

20. Alfred Marshall’s Smith’s Definition
Alfred Marshall also stressed the importance of wealth. But he also emphasized the role of the individual in the creation and the use of wealth. He wrote: “Economics is a study of man in the ordinary business of life. It enquires how he gets his income and how he uses it. Thus, it is on the one side, the study of wealth and on the other and more important side, a part of the study of man”. Marshall, therefore, stressed the supreme importance of man in the economic system. Marshall’s definition is considered to be material-welfare centered definition of Economics.

21. Features of Material Welfare Definition
Study of material requisites of well-being: These definitions indicate that Economics studies only the material aspects of well-being. Thus, these definitions emphasize the materialistic aspects of economic welfare.
Concentrates on the ordinary business of life: These definitions show that Economics deals with the study of man in the ordinary business of life. Thus, Economics enquires how an individual gets his income and how he uses it.
A stress on the role of man: These definitions stressed on the role of man in the creation of wealth or income.

22. Lionel Robbins’ Definition
In his book ‘Essays on the Nature and Significance of the Economic Science’, published in 1932, Robbins gave a definition which has become one of the most popular definitions of Economics. According to Robbins, “Economics is a science which studies human behavior as a relationship between ends and scarce means which have alternative uses”. A long line of economists after Robbins, including Scitovsky and Cassel agreed with this definition and carried on their analysis in line with this definition. It is a scarcity-based definition of Economics.

23. Main Features of Scarcity’s Definition
Human wants are unlimited.
Limited means to satisfy human wants.
Alternative uses of scarce resources.
Efficient use of scarce resources.
Need for choice and optimization.

24. Paul Samuelson’s Definition
In relatively recent times, more comprehensive definitions of Economics have been offered. Thus, Professor Samuelson writes, “Economics is the study of how people and society end up choosing, with or without the use of money, to employ scarce productive resources that could have alternative uses to produce various commodities over time and distributing them for consumption, now or in the future, among various persons or groups in society. It analyses costs and benefits of improving patterns of resource allocation”. A large number of modern economists subscribe to this broad definition of Economics.

25. Features of the Modern Growth-Oriented Definition
Growth-orientation. Economic growth is measured by the change in national output over time. The definition says that, Economics is concerned with determining the pattern of employment of scarce resources to produce commodities ‘over time’. Thus, the dynamic problems of production have been brought within the pure view of Economics.
Dynamic allocation of consumption. Similarly, under this definition, Economics is concerned with the pattern of consumption, not only now but also in the future. Thus, the problem of dividing the use of income between present consumption and future consumption has been brought within the orbit of Economics.

26. Features of the Modern Growth-Oriented Definition
Distribution. The modern definition also concerns itself with the distribution of consumption among various persons and groups in a society. Thus, while the problem of distribution is implicit in the earlier definitions, the modern definition makes it explicit.
Improvement of resource allocation. The definition also says that, Economics analyzes the costs and benefits of improving the pattern of resource allocation. Improvement of resource allocation and better distributive justice are synonymous with economic development. Thus, issues of development of a less developed economy have also been made subjects of the study of Economics.

27. Other Definitions of Economics
Jean-Baptiste Say (1803), distinguishing the subject from its public-policy uses, defines it as the science of production, distribution, and consumption of wealth.
John Stuart Mill (1844) defines the subject in a social context as: The science which traces the laws of such of the phenomena of society as arise from the combined operations of mankind for the production of wealth, in so far as those phenomena are not modified by the pursuit of any other object.
Gary Becker (1955) describes the subject as combining the assumptions of maximizing behavior, stable preferences, and market equilibrium, used relentlessly and unflinchingly.