The most interesting part of learning economics is to realize that it is not one person’s idea and theories but a study which has developed over years of thoughts, experiences and discussions. If we learn about the history of economic thought, being not a science subject, we understand how people’s views, opinions, critical view of others’ theories, and different perspectives have led to transition of this subject over centuries.
In this blog, I want to talk briefly about this transition. I always feel that if we relate history to any topic, it becomes more interesting and meaningful:)
Ancient Economics (before 500AD)- We can find evidence in Ancient Greece, India, China and the Greco-Roman world of this thought. Some of the known names are Chanakya from the Mauryan empire and Greek Philosopher Aristotle. Chanakya wrote Arthashastra, a treatise on statecraft, economic policy and military strategy. Many topics discussed by him are found relevant even today in modern economics. Aristotle talked about scarce resources and how ownership of resources should be private and not common and how the ‘wickedness of human nature’ cannot be ignored.
Medeival Economics (500-1500 AD)- Thomas Aquinas brought the concept of ‘just price’ where according to him the price should cover only the cost of production and some amount to cover the maintenance of the workers’ family. It should not be based on the pressing need of the buyer. Ibn Khaldun, Jean Buridan and Antonin of Florence were some of the prominent economists of this time.
16th- early18th century Economics- Era of mercantilism and international trade and the physiocrats who believed that the wealth of nations was derived solely from the value of agriculture.
18th century-The modern era of economic thought began with the publication of Adam Smith's "The Wealth of Nations" in 1776, which is widely regarded as the founding text of modern economics. Smith’s view was that the pursuit of self-interest could lead to economic prosperity as the people are guided by invisible hand of market forces and practising laissez-faire (free from government intervention). There were other classical economists like Fisher, David Ricardo and J. B. Say. Say talked about how supply creates its own demand.
Late 18th & early 19th century-In the late 18th and early 19th centuries, we had Thomas Malthus and Karl Marx who wrestled with the ideas of capitalism and how middle classes had started emerging over the years. Marx gave his ideas in ‘The Das Kapital’ where he questioned the labour theory of value and presented a challenge to laissez-faire.
Late 19th century-Over the next few years, the economists turned their attention to more specific questions about how markets operate and how prices are determined. ‘Marginal revolution’ theory was developed (1870). Some of the prominent economists during this period were Jevons, Karl Menger, Walras. They focused their theories on consumption, utility and demand. Classical theory took a back seat.
But then came Alfred Marshall who synthesized both classical and marginal revolution theories. Marginal revolution looked only at the consumer’s perspective. Market equilibrium is achieved by both demand & supply and therefore, the concept of the supply curve was brought from classicals by Alfred Marshall.
Another significant achievement was by Walras who attempted to mathematize his theory of marginal analysis and over the years many new theories developed in the 20th century along with development of ‘econometrics’. This school of thought was known as neoclassicals.
Early 20th century- John Maynard Keynes became popular. He talked about the economy as a whole, which we all understand as macroeconomics. He talked about problems like unemployment, inflation and how government intervention is very important. During the Great Depression in 1929, his theories became more relevant. He propagated the importance of government intervention by implementing fiscal policies to bring stability and economic growth.
Until 1970’s, Keynesian economics was dominant but then in 1970’s, negative effects like inflation with stagnation started becoming visible which led to the development of another school.
Late 20th century-till date-Nobel laureates Milton Friedman, Paul Samuelson etc. re-established classical economics and exposed Keynesian limitations. They emphasised monetary policy’s role in bringing about stability. But In 2007-08 the monetarist view started getting questioned when we had a major financial crisis. During Covid-19, we again went back to Keynesian Economics when the governments had to stimulate economies by giving free resources to keep stability and economic growth.
Hence, these theories become significant depending on the situation in the economy.
The history of economic thought explains to us how economists keep building on new theories or sometimes rebuilding and improvising on the old ones. Economic thought is a journey of ideas and perspectives and this is what makes it so interesting.
In present times, new theories that are developing are based on the impact of psychological behaviours on the consumers which has led to another very interesting study called ‘Behavioural Economics’, a topic for my next blog, next week :)
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