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In some of Western culture's earliest writings, Hesiod defined the basic economic problem as one of scarce resources, a view still held by most economists. Diocletian tried to save the falling Roman Empire with wage and price fixes—a strategy that has not gone entirely out of style. And just as they did in the late nineteenth century, thinkers trained in physics renovated economic inquiry in the late twentieth century. Taking us from Homer to the frontiers of game theory, this book presents an engrossing history of economics, what Alfred Marshall called "the study of mankind in the ordinary business of life."
While some regard economics as a modern invention, Roger Backhouse shows that economic ideas were influential even in antiquity—and that the origins of contemporary economic thought can be traced back to the ancients. He reveals the genesis of what we have come to think of as economic theory and shows the remarkable but seldom explored impact of economics, natural science, and philosophy on one another. Along the way, he introduces the fascinating characters who have thought about money and markets, including theologians, philosophers, politicians, lawyers, and poets as well as economists themselves. We learn how some of history's most influential concepts arose from specific times and places: from the Stoic notion of natural law to the mercantilism that rose with the European nation-state; from postwar development economics to the recent experimental and statistical economics made possible by affluence and powerful computers.
Vividly written and unprecedented in its integration of ancient and modern economic history, this book is the best history of economics—and among the finest intellectual histories—to be published since Heilbroner's The Worldly Philosophers. It proves that economics has been anything but "the dismal science."
"[Backhouse's] very readable history offers economists and interested readers an excellent account of the evolution of economic ideas."—Science
"Useful to those who already have a smattering of economic ideas but want to fill in the historical gaps . . . [this will] also be an eye-opener to specialist economists."—Samuel Brittan, Journal of Economic Literature
"This compact study gives an accomplished and remarkably comprehensive overview of an often arcane field of inquiry."—Kirkus Reviews
"Backhouse explains how world economics reached its present state. He places key figures in an appropriate historical context and then explains the various economic ideas as they emerged, using clear analysis and apt quotations. The result is a well-integrated, thoughtful, accessible text that makes a major contribution to the history and philosophy of economics. Important reading for students, professionals, and anyone interested in learning how economics has evolved."—Library Journal
"A scholarly book that will have appeal to well-read library patrons within the general population."—Mary Whaley, Booklist
"Thinking like a historian, [Backhouse] has tried . . . to explain how economics got to where it is, especially in its interconnections with other disciplines. He has largely succeeded."—The Economist
"A readable and enjoyable volume accessible to a broad audience, and of considerable value and interest to professional economists."—Choice
"Roger Backhouse has written a history of economics that is sweeping in is historical scope, while also being extremely concise. . . . [A] commendable introduction to the historical context of modern economics."—Stephen Kirchner, Policy
"Roger Backhouse's brief survey of the history of economic thought is well written and accessible to non-specialists. . . . [T]his is a fine book for a busy professional economist who wishes to delve into a short history of economic thought."—Robert E. Prasch, Journal of Economic Behavior and Organization
The Ancient World
Homer and Hesiod
Plato suggested that Homer educated Greece, his epic poems providing the values by which life should be lived. In the literary papyri found in Egypt, Homeric scrolls outnumber those by all other authors put together. Even today, stories of Hector, Achilles, Troy and the journeys of Odysseus form part of Western culture. It is not clear whether the Iliad and the Odyssey should be regarded as the work of a single individual or as compilations of the work of many poets, but in either case they represent the writing down, somewhere around 750-725 bc, of a long oral tradition. The Homeric epics, together with the poems of Hesiod (c. 700 bc), are as far back as the written record takes us in Europe.
The society described in the Iliad and the Odyssey probably reflects, in part, the Mycenaean (Bronze Age) world of Troy around 1400-1100 bc, and in part Homer's own time. It was ordered and hierarchical, based not on market relationships, but on the distribution of wealth through gifts, theft, prizes for winning competitions, plunder received in war, and tribute paid by defeated cities to their conquerors. Troy might have fallen earlier, it has been suggested, if the Greek army had not been so intent on pillaging. Trade was viewed by Homer as a secondary, and inferior, way of acquiring wealth. Heroes were aristocratic warriors, rewarded strictly according to their rank. Gifts were governed by a strict code of reciprocity, in which it was important that, when gifts were exchanged, those involved should hold the same rank after the exchange as before. Hosts were obliged to provide hospitality and gifts for their guests, who in turn had an obligation to provide gifts, perhaps to the hosts' families, at a later date in return.
The basis for this economy was the household, understood as the landowner, his family and all the slaves working on an estate. Owners and slaves would work alongside each other. Prosperity was seen by Homer as the result of being in a well-ordered, rich household. On the other hand, there was suspicion of excessive wealth-households should be rich, but not too rich. There were, of course, traders and craftsmen (we read of Greek soldiers exchanging their plunder for provisions, and craftsmen were brought in to do certain tasks on landed estates), but they were less important than landed estates. Even if he gained his freedom, a slave who lost his place on a landed estate might lose his security. The acquisition of wealth through trade was regarded as distinctly inferior to obtaining it through agriculture or military exploits.
Of the two poems attributed to Hesiod, the one that is seen as having the most substantial economic content is Works and Days. He starts with two creation stories. One is the well-known story of Pandora's box. The other, undoubtedly influenced by Mesopotamian creation stories, tells of a descent from the golden age of the immortals, 'remote from ills, without harsh toil',1 to a race of iron, for whom toil and misery are everyday realities. Hesiod offers his readers much advice about coping with life under these conditions. Works and Days is a poem within the tradition of oriental wisdom literature, moving seamlessly between advice that would nowadays be seen as ritualistic or astrological and practical advice on agriculture and on when to set sail in order to avoid being lost at sea. Though they fall within the same tradition, however, when compared with the Babylonian and Hebrew creation stories, Hesiod's stories (like those of Homer) are comparatively secular. It is Zeus who provides prosperity, and Hesiod regards morality and pleasing Zeus as the main challenges that men have to deal with, but the stories are the product of the author's own curiosity, not the work of priests.
Hesiod can be read as having realized that the basic economic problem is one of scarce resources. The reason men have to work is that 'the gods keep men's food concealed: otherwise you would easily work even in a day enough to provide you for the whole year without working'.2 Choices have to be made between work (which leads to wealth) and leisure. Hesiod even suggests that competition can stimulate production, for it will cause craftsmen to emulate each other. However, though these ideas are clearly present in Works and Days, they are not expressed in anything like such abstract terms. Hesiod describes himself as a farmer, and says that his father was forced to emigrate owing to poverty. The virtues he sees as leading to prosperity are thus-not surprisingly-hard work, honesty and peace. His ideal is agricultural self-sufficiency, without war to destroy the farmer's produce. This is far from the aristocratic disparagement of work and support for martial virtues that can be found in Homer, but the two poets share the idea that security is bound up with land.
Hesiod's poetry provides a good illustration of the earliest writings on economic questions. Economic insights are there, but nothing is developed very far and it is difficult to know how much significance to attach to them.
Estate Management-Xenophon's Oikonomikos
The period from the seventh to the fourth centuries bc saw great literary, scientific and philosophical achievements. Thales (c. 624-c. 546 bc) proposed the idea that water was the primal substance underlying all forms of life, and the notion that the earth was a disk floating on water. Anaximander (c. 610-c. 546 bc) drew the first map of the known world and composed what is believed to be the first treatise written in prose. We know little of their reasoning, for very little of what they wrote has survived, but the important point is that they were trying to reason about the nature of the world, liberating themselves from mythology. Towards the end of the sixth century Pythagoras (c. 570 -c. 490 bc) used theory and contemplation as means of purifying the soul. Though he was engaged in what we would now see as a form of number mysticism, in which numbers and ratios have mystical properties, he and his followers made enduring contributions to philosophy and mathematics. The fifth century saw the emergence of playwrights, Aeschylus (c. 525-456 bc), Sophocles (c. 495-406 bc) and Euripides (c. 480-406 bc), and historians such as Herodotus (c. 485-c. 425 bc) and Thucydides (c. 460-c. 400 bc).
These developments form the background to the world of Xenophon (c. 430-354 bc) and Plato (c. 429-347 bc). For this period there is virtually no economic data. Our knowledge of it therefore comes solely from political history. But we do know that the economy of this period was, like that of Homer's day, still based on agriculture, with landed estates as the main source of wealth. There had, however, been enormous political and economic changes in the intervening centuries. Among the most important of these were the reforms introduced in Athens by Solon, appointed archon, or civilian head of state, in 594 bc. These curtailed the power of the aristocracy, and laid the basis for democratic rule based on the election, by the property-owning classes, of a council of 400 members. Land was redistributed, laws were codified, and a silver currency was established. The Athenian merchant fleet was enlarged, and there was an expansion of trade. Specialized agriculture developed as Athens exported goods-notably olive oil-in return for grain. The old ideal of self-sufficiency began to break down.
Though intended to bring stability, Solon's reforms resulted in class divisions and political upheaval. Athens and the other Greek cities also became involved in a series of wars with the Persians. In 480 bc Athens itself fell to the Persians, but the Persian fleet was defeated at Salamis. The following year the Persian army was defeated by the Spartans at Plataea and hostilities came to an end. The legacy of the Greek naval victory was that Athens became the leader of a maritime alliance of Greek states, exacting tribute from them. In effect, Athens was the centre of an empire, her great rival being Sparta. The strengths of Athens were trade and sea power; Sparta's position was based on agriculture and its army. War eventually broke out between the two states in 431 bc-the start of the Peloponnesian War that ended with the defeat of Athens, in 404 bc, and the dissolution of the naval league.
For the fifty years from the end of the Persian Wars till the start of the Peloponnesian War, Athens was essentially at peace. The result was a period of great prosperity known as the Periclean Age, after Pericles, who led the more democratic party from 461 to 430 bc. Piracy was removed from the eastern Mediterranean, trade flourished, and commercial agriculture and manufacturing developed, along with many of the activities now associated with a commercial society: banking, credit, money-changing, commodity speculation and monopoly trading. One historian has written of Athens being 'a commercial centre with a complex of economic activities that was to remain unsurpassed until post-Renaissance Europe'.3 The resulting prosperity was the basis for great building projects, such as the Parthenon.
Athenian democracy was direct, involving all the citizens-i.e. adult males of Athenian parentage. Even juries could involve hundreds of citizens, and the fondness of Athenians for litigation-in which plaintiffs and defendants had to speak for themselves-meant that it was important for people to be able to defend their own interests, and argue their case. There was thus a demand for training in rhetoric, which was provided by the Sophists. The Sophists were itinerant, travelling from one city to another, and, though the main requirement was for skills in public speaking, many of them believed that their pupils needed to know the latest discoveries in all fields. The Sophists were thus the first professional intellectuals in Greece-professors before there were universities.4 The first and greatest of the Sophists was Protagoras (c. 490-420 bc), who taught successfully for forty years before being banished for his scepticism about the gods.
Socrates (469-399 bc) emerged against this background of 'professional intellectuals'. Because they travelled, they could stand back from the laws and customs of individual cities. They engaged in abstract thought, and, though many paid respect to the gods, they looked for non-religious explanations of the phenomena they saw around them. What stands out about Socrates is his method: relentlessly asking questions. It was this that attracted to him pupils as able as Plato and Xenophon. He was, however, the butt of Aristophanes' satire in The Clouds, in which his questioning of the gods' responsibility for rain and thunder is ridiculed. As he wrote nothing himself, our knowledge of Socrates stems only from Aristophanes and, above all, from the dialogues of Plato and Xenophon. We can be confident about much in their accounts; however, it is often hard to know precisely which ideas should be attributed to Socrates himself and which come from Xenophon or Plato using him as a mouthpiece.
Xenophon came from the Athenian upper classes and, like all Socrates' pupils, was well off. For some reason (maybe linked to his association with Socrates, who was tried and executed in 399 bc) he left Athens, and in 401 bc he joined a military expedition to Persia, in an attempt to help Cyrus the Younger take the throne from his brother. The attempt failed, and Xenophon, if we are to believe his account of the event, was responsible for leading the troops back to Greece. From 399 to 394 bc he fought for Sparta, after which he lived, under Spartan protection, on a country estate, till he returned to Athens in 365 bc. Most of his writing was done in this more settled period of his life.
Oikonomikos, the title of Xenophon's work, is the origin of the words 'economist' and 'economics'. It is, however, better translated as The Estate Manager or Estate Management. Taken literally it means Household Management, 'oikos' being the Greek word for 'household', but by extension the word was used to refer to an estate, and Xenophon's Oikonomikos is in fact a treatise on managing an agricultural estate. Familiar Socratic themes such as an emphasis on self-discipline and training people to wield authority are found in the book, but its main theme is efficient organization. Given the Greeks' emphasis on the human element in production (perhaps a feature of a slave society), efficient management translated into effective leadership.
The prime requirement of an effective leader was to be knowledgeable in the relevant field, whether this was warfare or agriculture. Men would follow the man they saw as the superior leader, Xenophon claimed, and willing obedience was worth far more than forced obedience. Though he illustrated this with examples taken from war, Xenophon saw the same principles as applying in any activity. The other requirement for efficiency was order. Xenophon used the example of a Phoenician trireme (a ship propelled by three banks of oars) in which everything was so well stowed that the man in charge knew where everything was, even when he was not present. This was how an efficient estate should be run-with stores efficiently organized and accounted for. It was commonly believed that good organization could double productivity.
Seen from this perspective, Xenophon's emphasis on efficiency seems simply an exercise in management, applied to an agricultural estate rather than to a modern firm. His conception of the 'administrative art',5 however, was much broader than this, extending to the allocation of resources in the state as a whole. He makes this clear when he discusses the way in which Cyrus the Great organized his empire, with one official in charge of protecting the population from attack and another in charge of improving the land. If either failed to do his job efficiently, the other would notice, for neither could perform his task properly if the other was not doing so. Without defence the fruits of agriculture would be lost; and without enough agricultural output the country could not be defended. Though officials were given the right incentives, it was still necessary that the ruler took an interest in all the affairs of the state-agriculture as well as defence. Administrative authority, not the market mechanism, was the method by which resources would be efficiently allocated and productivity maximized.
Because it is something to which subsequent economists and historians have paid great attention, it is necessary also to mention Xenophon's account of the division of labour. He observes that in a small town the same workman may have to make chairs, doors, ploughs and tables, but he cannot be skilled in all these activities.
Excerpted from The Ordinary Business of Life by Roger E. Backhouse Excerpted by permission.
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The History of Economics 1
What is Economics? 3
Viewing the Past through the Lens of the Present 6
The Story Told Here 8
1. The Ancient World 11
Homer and Hesiod 11
Estate Management—Xenophon's Oikonomikos 13
Plato's Ideal State 18
Aristotle on Justice and Exchange 19
Aristotle and the Acquisition of Wealth 22
2. The Middle Ages 29
The Decline of Rome 29
Early Christianity 33
From Charles Martel to the Black Death 39
The Twelfth-Century Renaissance and Economics in the Universities 41
Nicole Oresme and the Theory of Money 47
3. The Emergence of the Modern World View—the Sixteenth Century 51
The Renaissance and the Emergence of Modern Science 51
The Reformation 54
The Rise of the European Nation State 56
The School of Salamanca and American Treasure 60
England under the Tudors 62
Economics in the Sixteenth Century 64
4. Science, Politics and Trade in Seventeenth-Century England 66
Science and the Scientists of the Royal Society 67
Political Ferment 73
Economic Problems—Dutch Commercial Power and the Crisis of the 1620s 76
The Balance-of-Trade Doctrine 77
The Rate of Interest and the Case for Free Trade 79
The Recoinage Crisis of the 1690s 84
Economics in Seventeenth-Century England 87
5. Absolutism and Enlightenment in Eighteenth-Century France 89
Problems of the Absolute State 89
Early-Eighteenth-Century Critics of Mercantilism 91
Cantillon on the Nature of Commerce in General 94
The Enlightenment 99
Economic Thought under the Ancien Régime 109
6. The Scottish Enlightenment of the Eighteenth Century 110
Sir James Steuart 117
Adam Smith 121
Division of Labour and the Market 123
Capital Accumulation 126
Smith and Laissez-Faire 127
Economic Thought at the End of the Eighteenth Century 130
7. Classical Political Economy, 1790-1870 132
From Moral Philosophy to Political Economy 132
Utilitarianism and the Philosophic Radicals 136
Ricardian Economics 137
Alternatives to Ricardian Economics 141
Government Policy and the Role of the State 147
John Stuart Mill 153
Karl Marx 156
8. The Split between History and Theory in Europe, 1870-1914 166
The Professionalization of Economics 166
Jevons, Walras and Mathematical Economics 167
Economics in Germany and Austria 173
Historical Economics and the Marshallian School in Britain 177
European Economic Theory, 1900-1914 182
9. The Rise of American Economics, 1870-1939 185
US Economics in the Late Nineteenth Century 185
John Bates Clark 187
Mathematical Economics 190
Thorstein Veblen 195
John R. Commons 198
Inter-War Pluralism 201
Inter-War Studies of Competition 202
The Migration of European Academics 207
US Economics in the Mid Twentieth Century 209
10. Money and the Business Cycle, 1898-1939 211
Wicksell's Cumulative Process 211
The Changed Economic Environment 214
Austrian and Swedish Theories of the Business Cycle 217
Britain: From Marshall to Keynes 219
The American Tradition 224
Keynes's General Theory 228
The Keynesian Revolution 232
The Transition from Inter-War to Post-Second World War Macroeconomics 235
11. Econometrics and Mathematical Economics, 1930 to the Present 237
The Mathematization of Economics 237
The Revolution in National-Income Accounting 240
The Econometric Society and the Origins of Modern Econometrics 245
Frisch, Tinbergen and the Cowles Commission 248
The Second World War 252
General-Equilibrium Theory 254
Game Theory 262
The Mathematization of Economics (Again) 265
12. Welfare Economics and Socialism, 1870 to the Present 269
Socialism and Marginalism 269
The State and Social Welfare 271
The Lausanne School 274
The Socialist-Calculation Debate 275
Welfare Economics, 1930-1960 279
Market Failure and Government Failure 282
13. Economists and Policy, 1939 to the Present 288
The Expanding Role of the Economics Profession 288
Keynesian Economics and Macroeconomic Planning 290
Inflation and Monetarism 295
The New Classical Macroeconomics 298
Development Economics 301
14. Expanding the Discipline, 1960 to the Present 309
Applied Economics 309
Economic Imperialism 311
Heterodox Economics 313
New Concepts and New Techniques 317
Economics in the Twentieth Century 321
Epilogue: Economists and Their History 325
A Note on the Literature 329