HISTORY OF ECONOMIC THOUGHT

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 Objectives: At the end of this chapter students will be able
to:
 Understand the definition and concept of History of
Economic Thought (HET).
 Realize the similarity and difference of History of Economic
Thought, Economic History and History of Economics.
 Know the Scope of HET.

 Recognize the school of thought in Economics.

 Appreciate Significance of HET.

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 1. Background of Economics -as an Academic Field
 The development of Economics in the contemporary
form is a continuous process.
 Economics as a separate branch of study has accounted
more 200 years right from the book “The Nature and
Causes of Wealth of Nations (1776)” who regarded
as father of Economics.
 Before the innovative book of Adam Smith, Economics
was not a separate field of study
 Rather, Economic ideas were found in a fragmented
manner coupled with religion and ethics.
 Political Economy was the earlier name for the subject,
but economists in the late 19th century suggested
‘Economics' as a shorter term for 'Economic Science’.
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 What is Economics??
 In fact, the word ‘Economics’ originates from the
Greek work ‘Oikonomikos’ which can be divided
into two parts:
‘Oikos’, which means ‘Home’, and
‘Nomos’, which means ‘Management’.
 Thus, Economics means ‘Home Management’.

The head of a family faces the problem of managing

the unlimited wants of the family members within
the limited income of the family. In fact, the same is
true for a society also.
 Aristotle confined the study of economics to
<<household management and acquiring, guarding and
making proper use of wealth.>>
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  Broadly speaking, the various definitions of economics can be
put together under four categories depending upon the
emphasis of particular aspects.

 Wealth Based
 Adam Smith (1776) defined Economics as “the study of
how wealth is produced and consumed”.
 J.B. Say (1803) 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”.
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  Welfare (Material Well Being ) Based
 Alfred Marshall (1890) extends the analysis
beyond wealth and from the societal to the
microeconomic level:
 “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”.
 The study of mankind and the material requisites
of well-being.
 Marshall excluded all those activities of human
life, which cannot be quantified and which is of
non-material nature.

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 Scarcity or Choice based
 Most contemporary definitions of economics involve the
notions of choice and scarcity.
 Perhaps the earliest of these is by Lionel Robbins (1932),
who defines Economics as” a science which studies human
behavior as a relationship between ends and scarce means
which have alternative uses”.
 Growth Based
 Paul A. Samuelson suggested a better definition of
economics.
 It has been extended to problems of making economic choices
under dynamic setting, i.e., for present as well as for future
 “Economics is the study of how men and society choose,
with or without money, to employ scarce productive
resources which could have alternative uses, to produce
various commodities over time, and distribute them for
consumption now and in future among various people and
groups of society.”
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 2. Definition of History of Economic Thought
 HET consists of the term
 History: systematically records and explains what men
have thought, said, and done.
 Economic thought: according to Schumpeter, is
the total of all the opinions and desires concerning
economic subjects, especially concerning public policy
bearing upon these subjects.

 So, HET:
 It investigates the origin and growth of economic
ideas.
 It is the study of the heritage left by writers on
economic subjects.
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  HET is a historical account (explanation) of the development of
economic doctrines as also of their impact on economic
institutions and activities.
 Economic activities: are set activities carried out by
human beings to satisfy his wants.
 Economic Institution: well-established arrangements
and structures that are part of the culture or society.
 Economic system:: It involves a set of institutions and
their various social relations.
 Generally, HET “deals with different thinkers and
theories in the subject of Economics from the ancient
world to the present day.
 HET “encompasses many disparate schools of
economic thought.”

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 3. Economic Ideas and Environment
 Economic ideas are directly or indirectly motivated by
economic and environmental conditions of a country.
 When Economic ideas become embedded (deep
rooted) and are widely accepted, they begin to
influence economic policies and thus reshape economic
environment.
 Both ideas and environment act and react upon each
other.
It is via their mutual interaction that the growth
and development of a nation takes place.
 Economic conditions can be considered the economic
characteristics that describe the state of an economy.

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 4. History of Economic Thought, History of
Economics and Economic History
 History of Economic Thought should not be confused
with History of Economics and Economic History.
 On one hand, they are all studies of the components
of History and Economics.
 On the other hand, they are separate branches of
study having different subject matters and varying in
emphasis on different aspects of subject matter.

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 Economic History
 Economic History studies the origin and growth of
commerce , manufacture, trade, banking and other economic
phenomena and institutions.

 It is an objective study of the development of economic life of

a particular society.

 It deals with ideas men have concerning economic facts

and forces.

 In short, it is a treat of facts while History Economic

Thought and History of Economics treat of the theory of
these facts.
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 History of Economics – History of Economic Analysis
 History of Economics is “a systematic record of the
development of the science of Economics.”
 History of Economics is history of intellectual or
scientific aspects of economic thought.”
 Economics in ancient and medieval did not have an
independent existence.
 But with publication of Adam smith’s wealth of
nations that Economics could be freed from the
shackles of politics and religion and given the status of
science.
 So, the History of Economics can be said to have
developed during the course of last two centuries.

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 History of Economic Thought
 History of Economic Thought has a wider scope.
 It begins with the records of ancient national theocratic states.

 Economic thought may be roughly divided into three

phases:
 Pre-modern (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).
 HET deals with economic thought irrespective of its unscientific
characters.
 History of Economic Thought and History of Economics are
closely related.
 History of Economics is only a part of History of Economic
Thought .
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 5. Scope of History of Economic Thought
 The scope of History of Economic Thought is very wide.
 it
includes the study of human ideas from the time man
started formulating and expressing them down to the
present times.
 From the point of view of History of Economic Thought,
all these practices and ideas are important theories propounded
by the later Economists.
 Many of the modern doctrines are but a
reinterpretation of or refinement of ancient theories.
 And no History of Economic Thought would be
complete if it leaves out of consideration the bridges and
bulbs.
 Alexander Gray pointed out that “old doctrines never
die; they only fade away….”.
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 6. School of Economic Thought
 The history of economic thought records the development
and evolution of many different schools of thought.
 Hence, HET attempts to determine the forces that
contribute to their creation, evolution and ultimate
“success” or “failure” an intellectual construct that
explains, predicts or justifies the world we have created.
 The expression "a school of thought" is used to refer to
several people who think alike about some matter.
 It refers to “group of people who share common characteristics
of opinion or outlook.”
 According to George Stigler, defined is “a collection of
affiliated (united/joined) scientists who display a considerably
higher degree of agreement upon a particular set of views
than the science as a whole displays.”
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  Some of the most important School of Thought in
Economics are:
 Physiocrats- called themselves “the economists.” One
of the first schools was a group of French writers
who were led by François Quesnay [1694-1774] .

School: founded with publication of Adam

 Classical
Smith’s WN by 1776.

 Marxian school: Karl Marx [1818-1883] is the

obvious leader of Marxian Economics.

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  MarginalistSchool: William Stanley Jevons, Leon
Walras and Carl Menger.

 Neo-classicalSchool: Alfred Marshall [1842-1924] is

often considered as the founder.

 Keynesian school: J. M. Keynes’ [1883-1946]

writings resulted in the Keynesian school emerging
during the great depression of the 1930’s.

 Monetarist or Chicago School: Alfred Marshal.

 New Classicism School and New Keynesian

School
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  There are other schools that are important. In many cases
the schools may overlap on many issues.
 Some of the characteristics of a school that are identified
by Stigler are;
1. “A school must have a leader.”

2. The school may be united by “substantive scientific

views”.
3. “If the school is united on methodology rather than
substantive doctrines, its life will be longer.”
4. A school may be based on policy views rather than upon
economic analysis or scientific methodology.”
 The reason behind the existence of different schools of
thought in economics is the differences in ideology.
 One of important differences between different
schools is their view of “human nature”.
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7. Significance of Studying History of Economic Thought
 History Economic Thought is an indispensable tool of
knowledge.
 It shows the alternative views/perspectives and
explain how the economic processes function.
Identifying the factors that create different views
of the economy.
Investigate the evolution of the tools used for
analysis
 An understanding of the different approaches to
economics: This critical approach has the following
advantages.
First, it provides a more complete understanding
of the current state of economic analysis

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  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.
 HET also
 Helps to illustrate how ideas develop and change within
academic disciplines.
 Helps create more critical attitudes and abilities.
 This helps us to explain and teach the ideas of economics
 The thoughts of brilliant people are always worth studying –
even their mistakes are insightful.
 Leads to a change in the outlook of the reader.
 Provides the reader the basis for comparison which proves to be
great value
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 8. The Three General Beliefs
 Theory and historical processes are reciprocally interconnected.
This is because:
 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.
 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.
 Social and economic changes are continuous.
 Schools of thoughts in economic area are, vitally concerned
with social, political, historical, practical, and moral issues.
 Their thoughts have both a cognitive, scientific element and emotive,
moral, or ideological element.
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