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HISTORY OF ECONOMIC THOUGHT I (Eco 307)
Lecture Notes
Introduction and Definitions
History of economic thought deals with different thinkers and theories in the subject that became political
economy and later economics, from the ancient world to the present day. It encompasses many
different schools of economic thought.
History of economics thought deals with the origin and development of economic ideas and their
interrelations. It is a historical account of economic doctrines.
According to H.L. Bhatia history of economic thought includes the doctrines and generalizations of various
thinkers which deal with the economic phenomena of our life. It went through a lot of evolution with specific
contributions from various thinkers that had great impact upon the future of economic thought.
Prof. Schumpeter defines Economic thought as the sum total of all the opinions and desires concerning
economic subjects especially with public policies of different times and places. He stated further that the
history of economic thought traces the historical change of attitudes. It also speaks about economic
problems and various approaches to those problems.
Prof. Haney defines history of economic thought as a critical account of the development of economic ideas,
searching into their origin, interrelations and manifestations.
Prof. Bell says the history of economics thought is the study of the heritage left by the writers on economic
subject.
History of economc thought is different from Economic History and History of economics.
While History of Economic thought deals with the development of economic ideas; Economic History is the
study of the economic development of a nation or country. On the other hand, History of economics deals
with the science of economics.
Even though Economic History and History of Economic Thought constitute separate branches of study they
are closely related. Economic ideas are directly or indirectly motivated by economic conditions and
environment of a country. Ideas and environment are very important hence the close relationship between
History of economic thought and Economic History.
The History and development of economic ideas can be studied under three (3) periods, namely;
- Ancient 2. Medieval and 3. Modern
Ancient Greek writers such as the philosopher Aristotle examined ideas about the art of wealth acquisition,
and questioned whether property is best left in private or public hands.
In medieval times , with its root medi – meaning “Middle”, and ev – meaning “Age” that is the period in the
history of Europe , the middle Age period from the 5th^ to the 15th^ (500 to 1500) century. It started with the
fall of the great Western Roman Empire and merged into the Renaissance and the Age of discovery. That is
after the “rebirth” of culture that we call Renaissance. Scholastics such as Thomas Aquinas argued that it
was a moral obligation of businesses to sell goods at a just price.
The history of economic thought can further be broadly divided into two parts;
- The Origin and the development of economic ideas before the development of economics as science.
- The second part deals with economic ideas after the development of economics as a Science.
The history of economic thought can be studied and analyzed by adopting different approaches;
- Deductive or Classical approach
- Inductive approach
- Chronological approach
- Conceptual approach
- Philosophical approach
- Neo-Classical approach
- Welfare approach
- Keynesian approach
- Institutional approach
There are a variety of modern definitions of economics. Some of the differences may reflect evolving
views of the subject itself or different views among economists.
The earlier term for 'economics' was political economy. It was adapted from the French Mercantilist usage
of économie politique , which extended economy from the ancient Greek term for household management to
the national realm as public administration of the affairs of state.
Economics is one of several disciplines that apply the scientific method to the study of human behavior in social science. The social part of this phrase means the study of society, human behavior, and social interactions. The science part means the use of the scientific method to describe and explain the world. Economics stands apart from other social sciences because it is the scientific study of human behavior related to the problem of scarcity.
SCIENTIFIC METHOD:
A structured way of investigating and explaining the operation of the world by testing and verifying hypothesized relations. The scientific method is a process of discovery, a method of explaining the way the world operates. Positive economics is the application of the scientific method to economic analysis.
The scientific method is a body of techniques for investigating phenomena, acquiring new knowledge, or correcting and integrating previous knowledge. To be termed scientific, a method of inquiry is commonly based on empirical or measurable evidence subject to specific principles of reasoning
The Oxford Dictionaries Online define the scientific method as "a method or procedure that has characterized natural science since the 17th century, consisting in systematic observation, measurement, and experiment, and the formulation, testing, and modification of hypotheses". Experiments need to be designed to test hypotheses. The most important part of the scientific method is the experiment.
The scientific method is a continuous process, which usually begins with observations about the natural world. Human beings are naturally inquisitive, so they often come up with questions about things they see or hear and often develop ideas (hypotheses) about why things are the way they are. The best hypotheses lead to predictions that can be tested in various ways, including making further observations about nature.
In general, the strongest tests of hypotheses come from carefully controlled and replicated experiments that gather empirical data. Depending on how well the tests match the predictions, the original hypothesis may require refinement, alteration, expansion or even rejection. If a particular hypothesis becomes very well supported a general theory may be developed.
The scientific method is the process used to study, explain, and analyze economic phenomena. It helps make sense of the seemingly chaotic events of economic life. The price of gasoline rises. Why? A local factory lays off a hundred employees. Why? The President proposes a tax cut to stimulate the economy. Why?
Answering these questions, and thousands of others, is what the scientific method is all about.
Explaining Things:
The scientific method seeks to explain the mechanisms of the world and how things work. Science seeks to identify the basic laws of nature that govern the world. More to the point, economic science, or positive economics, seeks to explain how the economic world works, to identify the economic laws of nature.
It is one thing to attribute the daily movement of the sun across the sky to the efforts of a Greek god. It is quite another to explain this movement using gravity and planetary orbits.
The great thing about the ability to explain is the resulting ability to predict. Knowing that the sun's movement is guided by the law of gravity which makes it possible to predict its position tomorrow, next week, or next year. This information helps when doing things like flying to the moon.
Components of the Scientific Method
A little more insight into the scientific method with an overview of several key components ; Model, Theory, Principles, World view, Hypothesis, and Verification.
Model is a theoretical construct representing economic processes by a set of variables and a set of logical and/or quantitative relationships between them. The economic model is a simplified framework designed to illustrate complex processes, often but not always using mathematical techniques. Frequently, economic models posit structural parameters. Structural parameters are underlying parameters in a model or class of models.
A model may have various parameters and those parameters may change to create various properties. Methodological uses of models include investigation, theorizing, and fitting theories to the world.
Theory: The starting point, but also the end result of doing science is the theory. A theory is a scientifically accepted, interrelated body of general principles used to explain and understand some aspect of the world. A theory creates a framework for investigating and explaining the world. It helps make sense out of what might appear to be random events. A theory offers an explanation for these events. It explains WHY things happen.
Principles: Principles are generally accepted, verified, fundamental laws of nature. As a house is constructed from concrete, lumber, and nails, a theory is constructed from principles. To be a fundamental law of nature, a principle must capture a cause-and-effect relation about the workings of the world. One example might be something like, "people seek the greatest benefit at the lowest cost." The scientific method is essentially the process of building theories by identifying and verifying these fundamental laws of nature.
World View: A world view contains fundamental and unverifiable axioms, beliefs, and values about how the world works. Religious beliefs, political philosophies, and cultural conditioning are just a few of the components that go into a person's world view. These components are largely "accepted on faith" and cannot be tested or verified directly.
Without a doubt, the best example of a world view component is the belief in God - a supreme, omniscient, omnipotent being. Another example is the presumption that human beings are basically good (as opposed to basically evil). These beliefs cannot be directly verified and must be accepted on faith.
Hypotheses: Principles are the end result of a long, scrutinizing process that starts with hypotheses. A hypothesis is a reasonable proposition about the workings of the world that is inspired or implied by a theory and which may or may not be true. Hypotheses are generated from informed ignorance. Informed, because they are implied by a theory that has been previously subjected to a great deal of scrutiny, but ignorance, because no one yet knows if the hypothesis is right.
Verification: This gives rise to the fifth and last part of the scientific method, verification. It seeks know if a hypothesis is right or wrong. Comparison is made with data, empirical observations drawn
The steps of the scientific method are to:
Ask a Question.(Problem) Do Background Research. (Observation) Construct a Hypothesis. (Formuate Hypotheses) Test Your Hypotheses. (By Doing an Experiment) Analyze your Data .(Analyze Your Results) Communicate Your Results. (Conclusion)
Thus systematic thought process is usually broken down into induction and deduction both of which are used in the scientific method. They are:
Inductive and Deductive Method of Reasoning:
In logic, we often refer to the two broad methods of reasoning as the Deductive or Classical and Inductive approaches.
1. Deductive or Classical Reasoning Approach: It works from the more general to the more specific. The classical believe in the universal application of economic laws. They adopted the deductive approach. Sometimes this is informally called a "top-down" approach. We might begin with thinking up a theory about our topic of interest. We then narrow that down into more specific
hypotheses that we can test. We narrow down even further when we collect observations to address the hypotheses. This ultimately leads us to be able to test the hypotheses with specific data
- a confirmation (or not) of our original theories.
Example;
All birds have wings……. 1st^ premise (major or general rule)
Eagles are birds………… 2nd^ premise (Specific or minor rule)
Therefore eagles have wings ….. 3 rd^ premise (conclusion)
2. Inductive Reasoning Approach : The Historical school emphasized on the inductive method. These economists believe that the laws of economics are not universal in nature. Inductive reasoning works the other way, moving from specific observations to broader generalizations and theories.
Informally, we sometimes call this a "bottom up" approach (please note that it's "bottom up" and not "bottoms up" which is the kind of thing the bar tender says to customers when he's trying to close for the night!). In inductive reasoning, we begin with specific observations and measures, begin to detect patterns and regularities, formulate some tentative hypotheses that we can explore, and finally end up developing some general conclusions or theories.
These two methods of reasoning have a very different "feel" to them when you're conducting research. Inductive reasoning , by its very nature, is more open-ended and exploratory, especially at the beginning.
Deductive reasoning is more narrow in nature and is concerned with testing or confirming of hypotheses. Even though a particular study may look like it's purely deductive (e.g., an experiment designed to test the hypothesized effects of some treatment on some outcome), most social research involves both inductive and deductive reasoning processes at some time in the project.
In fact, it doesn't take a rocket scientist to see that we could assemble the two graphs into a single circular one that continually cycles from theories down to observations and back up again to theories. Even in the most constrained experiment, the researchers may observe patterns in the data that lead them to develop new theories.
- Chronological approach: The Chronological approach discusses economic ideas in order of time. The economic ideas of different economists can be presented year wise and can be studied. In this approach we can find continuity in the economic ideas of different economists. 4. Conceptual approach: This approach speaks about the evaluation of different economic concepts (ideas) and the interdependence of these concepts. Conceptual approach can also be called ideological approach.
