BEES3033: HISTORY OF

ECONOMIC THOUGHT

• Lecturer : AMIZAM BIN ARZEMI

• Room no: 1.82
• Tel : 04-9286818
• Email :amiz1112@uum.edu.my

105
 HISTORY OF ECONOMIC THOUGHT
• The period before A.D
1500 represented an epoch
far different from the
1500s to the present.

• Before A.D 1500:

 There was little trade
 Most goods were produced
for own consumption.
 Money and credit were not
widely used
 Strong national states &
integrated national
economies had not yet fully
evolved
 No schools of economic
thought had been formed
106
• After 1500:
 Markets & trade expanded
rapidly with the great
geographical exploration both
resulting from this process &
accelerating it.
 The money economy
superseded the self-sufficient
economy.
 National states with unified
economies became dominant
forces.
 Economic schools arose,
representing systematic
bodies of thought and policy
formation.

107
• In the 1500s, “the age of
political economy” began
to supplant “the age of
moral philosophy”.

• The focus on political

economy brought with it:
 a more coherent
organization of
economic thinking
 Turning fragments of
economic ideas into
systematic theories.

108
 A TIME SCALE OF ECONOMIC IDEAS
• Economic thinking has
displayed a significant degree
of continuity over the
centuries.
• The founders of a new theory:
 may draw on the ideas of
their predecessors &
develop them further
 May react in opposition to
earlier ideas that stimulate
their own thinking in new
directions.
• These relations among
different school of thought are
depicted in the Time Scale of
Economic Ideas 109
• Each rectangle in the Time
Scale represents a major school
or approach
 Mercantilism, Physiocracy,
Classicism, Marxism & Socialism

• The name in each rectangle are

economists who were most
important or most typical in
developing that school or
approach.
 Mercantilism (Mun, Colbert)
 Physiocracy (Quesnay, Turgot)
 Classicism (Adam Smith, Ricardo,
Malthus, Bentham, Say, Mill)

110
• The name immediately
above each rectangle are
forerunners of the school.
 Classicism (North, Cantillon)
 German Historicism (List)
 Marxism & Socialism
(Sismondi)

• A black arrow shows that

the latter group was
antagonistic to or rose in
opposition to the earlier
group.
 Physiocrats were completely
opposed to the doctrines of the
Mercantilist.

111
• A white arrow linking 2
rectangles shows that the later
group was generally friendly
to the group from which it
grew or that it superseded.
 Classical School were friendly
toward the Physiocrats.

• A dashed arrow indicates

groups in which some
contributors were friendly to
predecessors, but others were
antagonistic.
 Some welfare economists
advanced marginalists ideas,
whereas others challenged those
ideas.
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 THE FIVE MAJOR QUESTIONS
• As each school of economic
thought is introduced, 5 major
questions about it will be
considered.
• This method will provide
perspective on the school and
the social background that
produced it.
• This concise summary at the
outset will help clarify the
main points as we study the
ideas on the leading
economists.
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 FIVE MAJOR QUESTIONS
1. What was the historical
background of the school ?
2. What were the major tenets of
the school ?
3. Whom did the school benefit
or seek to benefit ?
4. How was the school valid,
useful, or correct in its time ?
5. Which tenets of the school
became lasting contributions ?

114
1. What was the historical background of the school ?
Relativist Approach
• Some economists assign primary
importance to the social, political
and economic environment for
shaping the nature of the questions
economists ask, and hence the
content of the economic theories
that emerges during a particular
period.
• According to them, what is “true,”
or useful, in one time or place may
or may not be useful in some other
time or place. For example:

115
1. What was the historical background of the school ?
• The Mercantilist school promoted
nationalism, gave new dignity and
importance to the merchant, and
justified a policy of economic and
military expansion because during
that time only a powerful nation
could capture and hold colonies,
dominate trade routes, win wars again
rival and compete successfully in
international trade.
• The Classical School promote private
enterprise and minimal government
interference because they were aware
of the substantial growth of
manufacturing, trade and inventions
brought by industrial revolution. 116
1. What was the historical background of the school ?

Absolutist Approach
• Many other economists, however
disagree with the idea that
environmental are primary shapers
of economic theory.
• They argue that internal factors
within a discipline, such as the
discovery and explanation of
unresolved paradoxes, account for
most theoretical advances.
• Each generation of economists is
seen as correcting errors made by
their antecedents and adding new
insights. For example:
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1. What was the historical background of the school ?
• Adam Smith (Classical School)
corrects errors in the theories of
the Mercantilists and Physiocrats,
synthesizes them and adds new
insights to further economic
knowledge.
• Alfred Marshall (Neo-Classical
School) corrects mistakes in
Smith and other Classical
economists, includes new
developments, tools of analysis
and insights about
microeconomics and improves
the ability of economic theory to
describe economic phenomena.
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 2. What were the major tenets of the school ?
• Provide broad generalizations
about the ideas of successive
economic schools.
• Strength: enables a concise
presentation of the essence of the
school (uniformity of ideas of
groups of economists).
• Weakness: there are always
exceptions to the generalization
of ideas.
• Example: Classical School
believe in free trade among
nations; yet Malthus, a classical
economist, favored tariffs on
imported goods 119
 3. Whom did the school benefit or seek to benefit ?
• In this section, we will try to
identify the groups that supported
each school of thought and the
groups to which each school
appealed for support, either
successfully or unsuccessfully.
Example:
• Mercantilist doctrine obviously
benefited the merchant capitalists,
the king and government
officials.
• The Physiocrats especially
favoured capitalists farms
employing wage labor and
advanced techniques. 120
4. How was the school valid, useful, or correct in its time ?
• Ideas irrelevant to society at the
time they are presented tend to
wither & die.
• Ideas that are useful in solving
some problems are disseminated
and popularized.
• For example: Keynes’s ideas
were given added impetus by the
Great Depression of the 1930s.
• Demand that something be done
about business fluctuations grew
more insistent, and Keynes
provided both an explanation of
fluctuations and a program to
mitigate them. 121
 5. Which tenets of the school became
lasting contributions ?
• Concepts that are widely accepted
today may become inappropriate in
the future.
• This section identifies the ideas
presented by a school that have
been of lasting significance and
thus can still be found in current
economic textbooks.
For example: Keynesian concept
such as the saving function, fiscal
and monetary policy, IS-LM
analysis and so forth are now
standard fare in economics
textbooks.
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 WHY STUDY THE HISTORY OF
ECONOMIC THOUGHT ?
• Enhances one’s understanding
of contemporary economic
thought.
• “Contemporary theory wears the
scars of yesterday’s problems
now resolved, yesterday blunders
now corrected and cannot be
fully understood except as a
legacy handed down from the
past.”
Mark Blaug, Economic Theory
in Retrospect, 4th ed. (London:
Cambridge University Press,
1985)
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 WHY STUDY THE HISTORY OF
ECONOMIC THOUGHT ?
• Enable us to make fewer errors
than in the past when making
personal decisions and when
formulating national and local
economic policies.
• Yet numerous unsolved problems
and unanswered questions remain
in economics.
• Our understanding of past
successes, errors, and dead ends
will be useful in solving economic
problems and answering economic
questions.

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 WHY STUDY THE HISTORY OF
ECONOMIC THOUGHT ?
• Provides perspective and
understanding of our past, of
changing ideas and problems, and
of our direction of movement.
• A study of the evolution of
economic thought & the changing
social background associated with it
can illuminate changes in other
areas of concern to us, such as
politics, art, philosophy and science.
• It help us appreciate that no group
has a monopoly on the truth and that
many groups and individuals have
contributed to the richness and
diversity of our intellectual, cultural
and material inheritance. 125