CHAPTER 1:

The History of Economics as a Profession

and its Development as a Field of Study
The History of Economics as a Profession

Between 1570 and 1750 quantity of economic literature increased significantly in

Western Europe.

Early writers were mostly businessmen who were

interested on questions of economic policies

Between 1650 and 1750 Economics as an intellectual discipline emerged when

writers wrote pamphlets on particular issues.

Adam Smith Used the literatures and fashioned it into an intellectual

discipline. He named it as, “political economy”, in his
Wealth of Nations in 1776.

1776-1876 increased professionalization of the discipline of political

economy.

1900 Political Economy had a new name, economics. It was

offered as a course in both American and European
Universities. Graduate studies however, were offered in
England and Germany, so Americans have to move in that
place. Thereafter, many schools in US focused its attention
in course offerings in economics.

1930 Political problems in Europe brought the discipline to US,

like the religious persecution by the Nazis. It became
concerned with teaching economics rather than just with
practical business economic affairs.

Pre-classical economic Theory

Why in Europe? Merchant capitalism developed. The chiefly agrarian

societies began to trade among themselves.

Writers divided into three:

1. Scholasticism
2. Mercantilism
 3. Physiocracy

Scholasticism

Most important writer St. Thomas Aquinas based however his writings to
Aristotle.

Aristotle His contribution concerned the “exchange of commodities”

and the use of money in this exchange.

“ man’s needs were moderate, but his desires were

limitless’. Hence, the production of commodities to satisfy
needs was right and natural, whereas, the production of
commodities to satisfy unlimited desires was unnatural.

When goods are produced to be sold in a market, it is often

difficult to determine if this activity is satisfying needs or
desires.

His assumption was, if a market exchange is in the form of

barter, it is made to satisfy natural needs and no economic
gain is intended.

Plato Aristotle’s teacher

Argued that the ruling class of his ideal society, the soldiers
and philosophers, should not possess private property but
should hold their property communally, to avoid conflicts
over property.

Aristotle, however, believed that private property served a

useful function in society and that no regulations should be
made limiting the amount of property in private hands.

Thomas Aquinas He adopted Aristotelian thought that private property is not

contrary to natural law. While it is true that under natural
law, all property is communal, he conceded that the growth
of private property is an addition, not a contradiction to
natural law.

He argued that to be naked was in accordance with natural

law and that clothing was an addition to natural law devised
for the benefit of man.
 Again, following Aristotle, he approved the regulation of
private property by the state and accepted an unequal
distribution of private property.

However, in the spirit of Plato, he still advocated poverty

and communal living as the ideal for those of deep religious
commitment.

He was also concerned with another aspect of the

emergence of greater economic activity, the price of goods.

He combined religious thinking with Aristotle’s views.

When exchange takes place in the market to meet the needs
of the trading parties, no ethical issues are involved. But
when individuals produce for the market in anticipation of
gain, they are acting virtuously only if their motives are
charitable and their prices are just. If the merchants intend
to use any profits for self-support, for charity, or to
contribute to the public well-being, and if his prices are
just, so that the buyer and the seller benefit, the merchant
has acted rightly.

Just price meant simply the prevailing market price. It is an

equivalent in terms of labor cost

Other views from other writers:

Just price is equivalent in terms of utility.

Just price is equivalent in terms of total cost of production

Just price is an integral part of the set of social and

economic forces that maintained the hierarchy of
feudalism.

Usury This is corollary to the concept of just price. It means

charging an excessive rate of interest. There is a biblical
condemnation of usury which rose from the danger that the
strong would take advantage of the weak.

Aristotle argued that the taking of interest on loans was

unnatural, since money is barren.

Summary:
 Scholastic doctrine set religious standards by which to
judge economic conduct. It is called a virtuous life. But
because of the disruptive consequences of changing
technology, economic life posed a greater challenge to
spiritual life.

Mercantilism

Characteristics:
 Increase in economic activity.
 Feudalism, with its economically, socially, politically self sufficient manor, was
giving way to increasing trade, growth of cities and the nation states.
 Individual activity was less controlled by the custom and tradition of the feudal
society and by authority of the church.
 Production of goods for the market became more important
 Land, labor and capital began to be bought and sold in markets.

Laid the groundwork for the Industrial Revolution.

Economic literature of mercantilism were produced and written by merchant

businessmen ( economic literature of scholasticism were written by monks ) which
were connected to questions of economic policy.
From 1650 to 1750, economic literature of the mercantilists scattered, on which
Adam Smith based his “ Wealth of Nations”.

Note: During the period of the decline of the manor and the rise of the nation state, the
mercantilists tried to determine the best policies to promote the wealth of nations.

Assumption: Total wealth of the world was fixed.

Application: For the scholastics, when trade took place between individuals, the gain of
one was necessarily the loss of another.

For the mercantilists, any increase in the wealth and economic power of
one nation was necessarily at the expense of others.

Emphasis: a. International trade as a means of increasing the wealth and power of a

nation.

b. Balance of trade between nations.

Goal of economic activity: production and not consumption.

Wealth of nation defined:

It is not in terms of the sum of individual wealth, but based on the poverty of the
many.

Advocacy: a. Encourage production,

b. Increase exports
c. Hold down domestic consumption
d. Low wages

in order to give the domestic economy competitive advantage

in international trade and because they believed that wage
levels above a subsistence level would result in a reduced labor
effort. Higher wages would cause laborers to work for fewer
hours per year, thus national output would fall.

Conclusions: Poverty for the individual, therefore, benefits the nation when
the goal of economic activity is defined in terms of national
output and not in terms of national consumption.

It laid great stress on production because high levels of

production would permit increased exports and through trade
the nation’s wealth and power could be increased.

The Balance of Trade:

a. The country should encourage exports and discourage imports by tariffs, quotas,
subsidies, taxes and like means. To achieve balance of trade.
b. Production should be stimulated by governmental interference in the domestic
economy and by the regulation of foreign trade.
c. Protective duties should be placed on manufactured goods from abroad.
d. Importation of cheap raw materials to be used in manufacturing goods for export
should be encouraged.

Many historians disagreed on this doctrine.

The wealth of the nation is not in terms of its production or consumption of goods,
but rather in terms of its holdings of precious metals argued for a favorable balance of
trade because it would produce a flow of precious metals into the domestic economy
to settle the trade balance.
This led to their concern on money and its role in the economy.
 Jean Bodin recognized the relationship between the quantity of money and the
general level of prices. One of the reasons is:

a. increase in the quantity of gold and silver resulting from the discovery
of the new world.

John Locke discovered the role of money that the level of economic activity depends
upon the quantity of money and its velocity.
David Hume presented the interrelationships among a country’s balance of trade, quantity
of money and the general level of prices. In international trade, theory, this has become
known as the price specie-flow mechanism.
Hume pointed out that it would be impossible for an economy to continuously maintain a
favorable balance of trade.

Analysis of Hume: a. A favorable balance of trade would lead to an increase in the

quantity of gold and silver within an economy.

b. An increase in the quantity of money would lead to arise in the level of

prices in the economy with the favorable balance of trade.

c. If one country has a favorable balance of trade and the other do not
have such, the latter may have a loss of gold or silver and a fall in the
general level of prices.

d. Exports will decrease and imports will increase.

e. This process will ultimately lead to self-correction of the trade

balances.

J.M. Keynes “ Notes on Mercantilism”

 He credited the mercantilists with their insight on acceptable policy to stimulate

economic development.
 He declared as sound the belief of the mercantilists that increases in the quantity of
money would increase output.
 He held on the belief of the mercantilists that a favorable balance of trade would increase
investment spending and thus raise the level of income and employment.
Theoretical contributions of the mercantilists:

1. Explicit recognition of the possibility of analyzing the economy.

2. Legislation if wisely enacted could positively influence the course of economic events.
3. Economic analysis would indicate what forms of government intervention would effect a
given end.
4. Government intervention must not be haphazard
5. Specie is not a measure of the wealth of nation.
6. All nations could not have a favorable balance of trade.
 7. Trade could be mutually beneficial to nations.

Physiocrats:

 The correct formulation of economic policy presupposed a correct understanding of the

economy. Economic theory therefore, is a pre-requisite of economic policy.
 Natural laws governed the operation of the economy and that, although these laws were
independent of human will, humans could objectively discover them as they could the
laws of natural sciences.
 Wished to discover the nature and causes of wealth of nations and the policies that would
best promote economic growth.
 Their economy produced more goods than were needed to pay their real costs to society
of producing these goods. This meant that a surplus was generated.
 Had the idea of “ net product”

After various factors of production are paid like seed, labor, machinery
etc., the annual harvest leaves an excess resulting from the productivity of
nature.

Production from land therefore created the surplus and termed as net
product. Hence, land rent is the measure of the society’s net product.

 Manufacturing and other non agricultural economic activities were considered sterile
because they created no net product.
 They were focused on physical productivity rather than value productivity.

 Based their theories on Quesnay’s Economic Table.

He divided the economy into three sectors:

farmers, landlords and non farm sector
 They believe on the interdependence of these sectors
Physiocratic Economic Policy

 Basic motivation for economic activities of human beings was the desire to maximize
gain.
 Free competition would lead to the best price and that society would benefit if
individuals follow their self-interest.
 The only source of a net product was agriculture. The burden of taxes would
ultimately rest on land. A tax on labor would be shifted to land since competition had
already assured that the wage of labor was at a subsistence level.
 The proper role of the government was to follow a policy of laissez faire- to let things
alone.
 Classical Economics

 Adopted the seeds of concepts of the scholastics, mercantilists and physiocrats.

Three major writers;

1. Adam Smith
2. David Ricardo
3. John Stuart Mill

A. Scholastics- the church to adjudicate morality of economic activities.

B. Mercantilists-advocated government intervention.
C. Physiocrats- “ market provide harmonious solutions to the conflicts , hence, the policy of
laissez faire, “ to let things alone”.

Like the classicals:

1. Free, unregulated markets and maximum individual freedom. This might provide means
by which economy might function most efficiently.

 Individual and businesses should be free to trade without government

interference.

2. Discover forces that determine the rate of economic growth. ( cultural, political,
sociological and historical factors ).
3. Study of markets and price system as an allocator of resources giving an impact to
economic growth.
4. Departure from mercantilists’ thinking.
 Ability to uncover laws governing operation of economy.
 After uncovering these laws, they remedy defects
 They remedy defects by changing the institutional structure or allow
government intervention

a. Productivity of labor
 It depends upon the division of labor or specialization.
 Example is a measured output per worker in factory producing straight pins.
When each man performs every operation required to produce a pin, output per
worker is very low, but if the production process is divided into number of
separate operations, each worker specializing in one of these operations, a large
increase in output per worker occurs.
 One disadvantage is that workers are given repetitious tasks that soon become
monotonous. Human beings become machines and are dehumanized by the
simple, repetitive, boring tasks they perform.
  The division of labor depends upon the “ extent of the market”, and upon the
accumulation of wealth. The larger the market, the greater the volume that can be
sold, and the greater the opportunity for division of labor.
 A limited market permits only limited division of labor.
 The division of labor is limited by the accumulation of capital because the
production process is time-consuming. There is a time lag between the beginning
of production and the final sale of the finished product.

b. Productive and unproductive labor

 The accumulation of capital, also determines the ratio between the number of laborers
who are productively employed and those who are not so employed.
 Labor that produces vendible commodity is productive labor, whereas, labor
producing a service is unproductive.
 The activities of the capitalists, each resulted in an increased output of real goods,
were beneficial to economic growth and development while the expenditures of the
landowners for servants and other intangible goods were wasteful.
 “ A man grows rich by employing a multitude of manufacturers; he grows poor by
maintaining a multitude of menial servants”.