History of Economic Doctrines

Session 5

The Emergence of Ideas and the Evolution of Intellectual History

“New Ideas” are often merely old wine in new bottles.

Example:

The “Laffer curve” suggests that high tax rates may so discourage productive efforts that less tax revenue is collected than if tax rates were substantially lower. The Laffer curve was named for Arthur Laffer, formerly Chief Economist of President Nixon’s Treasury Department, by Wall Street Journal columnist Jude Wanniski. Laffer drew the curve on a napkin to illustrate the concept when Representative Dick Cheney, Wanniski, and Laffer were dining at a Washington DC restaurant in 1974. Laffer’s assertion that the U.S. was on the right-hand side of the curve became a major assumption underpinning “supply-side” economic policies.

Point? The concepts underpinning the Laffer curve have been traced back to some hieroglyphic writings of advisers to Egyptian pharaohs.

Stigler’s law:

Nobel Prize winner GEORGE STIGLER once observed that when economic laws or principles are attributed to particular people, (e.g., the Laffer curve), the person so attributed is seldom if ever the person who originally expressed the concept. This observation has become known as “Stigler’s Law, which naturally raises the question, “Who was the first thinker to assert Stigler’s Law?”

Economics Prior to Adam Smith

Early China

Guan Zhong (? – 645 BC), an advisor to Chinese Emperor Qi, identified shortages as an explanation for rising prices, and abundance as an explanation for declining prices. Guan favored government efforts to stabilize prices by buying when prices were falling, and selling when prices were rising. Government would perform the function of modern day speculators. Guan also urged the emperor to conduct a regular population census to ascertain total population and the various numbers of people pursuing different occupations in China.

Ancient Greece

Zeno (≈490BCE - ?) and other “stoic” philosophers:

The world of ideas is the proper focus of humankind. People should live simply and try to understand the world through logic (logos).

Protagoras (485 – 410 BCE)

Universal truths [i.e., laws of nature] may not exist. “Man is the measure of all things.”

Xenophon (≈ 430 - 355 BCE)

His book Oeconomicus focused on household management and its title became economics.

Assets have value in use and value in exchange.

Production is increased through a division of labor.

Economic surpluses are enhanced through skilled management.

Plato: (427-347 BCE)

Government should be headed by a “Philosopher King” who would regulate economic activity. Most property should be owned communally. Leaders should attempt to serve the entire community, not their own self-interests. Plato’s notion can be viewed as favoring hierarchical structures, and “top-down” management.

Aristotle: (384-322 BCE)

Discussed intrinsic value. The Diamond-Water Paradox: Why are such frivolities as diamonds so costly, while such necessities for life as water are almost free?

Like Plato, Aristotle believed that government should regulate economic activity, but also perceived needs for private property.

Condemned profit. Exchange should generate no “unjust” surplus. Goods should be traded for goods of equal value. One party to a transaction should not gain more, relative to another.

Requiring payments of interest on loans is unjust because only “true” resources generate production; money is sterile in that it is not, in itself, productive. Unproductive activity should not be rewarded. This opposition to profits and payments of interest is echoed in much of early Christianity, and in Islam, and in Marxism.

Logical syllogisms:

-Ex: If A>B & B>C Then A>C [Some fun counterexamples are at this link.]

Aside: Modern specialists in cognition and linguistics often follow the lead of Alfred Korzybski [Science and Sanity: An Introduction to Non-Aristotelian Systems and General Semantics (1933)] in rejecting much of the abstraction necessary for Aristotelian syllogisms. In the semanticist’s view, everything in the universe is unique … no two snowflakes are identical, and no two molecules occupy the same space. In the non-Aristotelian paradigm of the semanticist, Aristotelian logic is flawed by either-or fallacies categorizing all phenomena as black or white, while the universe displays an infinite array of colors and hues and tones. Note: Abstraction is at the heart of much intellectual discourse, but the most important lesson to draw from semantics may be that we need to be very careful when we abstract – when we lump things together that may be only crudely similar. Racial profiling or other forms of unhelpful stereotyping are examples of problems caused by crude forms of abstraction.

Epicurus: (341-271 BCE)

Seek pleasure and avoid pain as you live honorably and justly. Enjoyment drives desires. “Maximize jollies” [Epicurus anticipated the “utilitarian” philosophy espoused by Jeremy Bentham.]

Epictetus (55-135 BCE)

Stoic and aesthete: Honor, justice, and the world of ideas should be the focus of humankind.

Arab and Persian Theorists:

For several centuries, strands of Greek philosophy survived primarily in the Middle East. [The leaders and thinkers of the Roman Empire largely ignored Greek philosophy.] Arab and Persian thinkers refined ideas from Greeks and were, in turn, inspirational to medieval scholastics. For example, per Abu Hamid al-Gazali (1058-1128), Aristotle’s dislike of usury (interest) was viewed as consistent with the Koran, and prohibitions against interest continue to exist in Islamic cultures. Al-Ghazali recognized that barter is awkward and advocated money as a medium of exchange. Al-Ghazali’s recognition that exchange across national boundaries can be beneficial was also a point reflected in some medieval writings.

Medieval Scholasticism:

Such medieval scholastics as Albertus Magnus (1200-1280) and Thomas Aquinas (1225-1274) believed society should be governed in accord with their interpretations of writings in the Bible. Albertus Magnus emphasized “natural law.” Aquinas (who was an inspiration for Ignatius Loyola, founder of the Jesuit order) relied heavily on logical syllogisms, and accepted many of Aristotle’s economic ideas, including his arguments against the payment of interest [usury].

Issue: Is the medieval concept of a “just price” roughly equivalent to the price established in the long run in a competitive market? [marginal social benefit = Price = Marginal Cost = marginal social cost].

The Enlightenment and the Age of Reason

The idea of democracy was reborn as growth of the market economy occurred. Thinkers increasingly recognized that people want “stuff” per Epicurus and other early “hedonists.”

Issue: Are demands for civil rights and democratic governance income elastic? [Reconsider Maslow’s “Hierarchy of Needs.”] Perhaps people in less-developed countries need to have some measure of economic prosperity before they will value democracy. If so, protectionist policies triggered by concerns about “outsourcing” may be inconsistent with achieving a calmer world. Globalization and free trade may be crucial for achieving a world that most of us would view as more just.

Perspective: Alternatives to Markets as Allocative Mechanisms

Scarcity: The Basic Economic Problem

The potential quantity of good available is less than the quantity of goods people want.

Scarcity àDecisionsàCostsàEconomics

Efficiency (Discussed informally by Hesiod, and formalized by Pareto)

Maximize(utility or profit or output) or minimize(cost) The “economic dual.”

If someone can gain without anyone else losing à current state is inefficient.

Don’t want to waste resourcesà no idle resources that, if used, would increase output

Allocation mechanisms: Ways to deal with economic problems

Many allocative mechanisms are inefficient in most of current uses, but all can be efficient in some instances. Inefficiency exists if potential gains to someone do not require a loss to someone else.

Tradition

Passing down a family business

Monarchy

Caste system

Efficient: Most of the world drives on the right hand side of the road.

Random selection

Example: the draft – Elvis could have hired a company of martial arts experts.

Can always find deals to better one’s life and reduce costs.

Queuing

Example: A student waits at the front of a line and a lawyer waits at the end (worth $300/hr). Both can gain if lawyer pays student for spot in line

Efficient: Trade-off between queues of cashiers and queues of check-out lines.

Brute force

Example: Resources wasted in the “Cold War” before the USSR collapsed.

Merit

May conform to market system. Examples: grading system or Olympic medals.

Government

Problem? Dividing GDP by population or need may yield few incentives to work.

Efficient: If correcting market failures.

Markets: The focus of much of economic inquiry.

Based on private property and freedom to trade.

Inefficient: Public goods, monopoly power, externalities, asymmetric information.

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These web pages are significantly edited and elaborated versions of student notes based on lectures by Ralph Byrns, 2002-2005.