History of economic thought part I

Economic issues have occupied people's minds since ancient times. The Greek philosophers Aristotle and Plato wrote about problems of wealth, property, and trade. Both felt that to live by trade was undesirable. The Romans borrowed their economic ideas from the Greeks and showed the same contempt for trade. During the Middle Ages, the Roman Catholic Church condemned usury (the taking of interest for money loaned) and regarded commerce as inferior to agriculture.

The development of modern nationalism during the 16th century shifted economic attention to increasing the wealth and power of the various nation-states. The economic policy of the time was known as mercantilism. Mercantilists valued gold and silver because with these metals a ruler could hire and outfit mercenaries, thus increasing the country's power. Many European nations began colonizing other parts of the world and siphoning precious metals and raw materials from their colonies.

A school of thought known as physiocracy arose in France during the second half of the 18th century. The physiocrats believed that all wealth originates in agriculture; wealth is then distributed from farmers to other groups. The physiocrats promoted free trade and laissez-faire. The British economist Adam Smith met the leading physiocrats and developed their doctrines in his writings.

As a coherent economic theory, classical economics starts with Smith, continues with Thomas Robert Malthus and David Ricardo, and culminates with John Stuart Mill. Classical economists agreed on several major principles. All believed in private property, free markets, and the benefits of competition. They shared Smith's suspicion of governmental involvement in the economy and his belief that the individual pursuit of private gain increased the public good. From Ricardo, classicists derived the notion of diminishing returns, which held that as more labour and capital were applied to land, a point was reached after which yields steadily diminished.

One debate was in regard to population growth. Malthus maintained that human population growth would eventually outstrip food production, leading to famine, war, epidemics, and plague. Mill believed that human population could rationally be limited. He also thought that government could play a role in the economy and favoured worker ownership of factories. Mill thus represents a bridge between classical laissez-faire economics and an emerging welfare state.

The German political philosopher Karl Marx provided the most important opposition to classical economics. Marx's historical studies convinced him that profit and other property income result from force and fraud inflicted by the strong on the weak. Thus, the central social conflict is between capitalists who own the means of production-factories and machines-and workers who possess nothing but their bare hands. Exploitation is measured by the capacity of capitalists to pay no more than subsistence wages to their employees and extract for themselves as profit the difference between these wages and the selling price of market commodities. Marx argued that the internal contradictions within capitalism-its social inequities-would eventually end its existence.

According to Marx, the crises of capitalism would manifest themselves in falling rates of profit, mounting hostility between workers and employers, and ever more severe depressions. Class warfare would lead to revolution and progress towards, first, socialism and, ultimately, communism. Once communism was achieved, the state would wither away, and each individual would be compensated according to need.

1. What were the main ideas of mercantilism?

2. What did the physiocrats promote?

3. What did classical economists believe in?

4. Where was the central social conflict according to Karl Marx?

5. How would the crises of capitalism manifest themselves in Marx’s opinion?