History of Economic Thought I

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Chapter One: Introduction

Contents:
Defining HET
Scope of HET
Significance of HET
Methodological Issues

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 1.1. Defining HET
 The world has been going through social dynamics.
 That is:
- The way people live,
- The formal and informal institutions,

- Man’s economic activities, the level of commerce, money &

banking
- The level of civilization and technology,
- Demography, social statuesque, welfare etc
• All have been continuously changing from time to time in
mans history.

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 Cont’d
• The social dynamics is the result of changing man’s ideas
and the environment.
• Whether it is the environment that is shaping man’s ideas
or vise versa has been controversial.
• The old question of “ the hen comes first or the egg”.
• But, it has been agreed that they both interact with each
other. Hence, man’s ideas affected the social dynamics one
way or another.
• Among these ideas, economic ideas played a dominant
role in man’s life specially from since the commercial and
industrial era.

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• In the earliest times, economic thought was held as part of
politics, religion, ethics, philosophy, etc.
• And, economic ideas were limited to serving other goals
and interests, which is naturally the result of the
circumstances of the ancient time.
• Latter, the rise of commercial era and mercantilist states
resulted in the progressive development of well organized
systematic body of economic doctrines.
• Eventually, economics was established as a separate field
of study and economic ideas keep on replenishments and
faster growth.

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• This led to the development of various economic
institutions of the d/t times that have governed human life
and progress to the present day.
• HET is the study of the evolution and development of these
economic ideas that:
– Originate from the minds of the d/t scholars in history
– Go through debates and critics
– Evolve with long process of the latter scholar building on the idea
of the former
– Led to the development of various economic institutions that
affected human life.

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• HET is a probe in to the origin and growth of economic
ideas.
• It is a subject concerned with the discussion of:
– The details of economic ideas of the d/t times by the d/t scholars,
– How they were right or wrong given circumstances of the time,
– How they have been criticized or appreciated,
– How they were progressively replenished,
– Which of them are lasting contributions to economics,
– How they compare with each other,
– How they affected human life (economic, social, …)
– Etc.

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 1.2. The Scope of HET
• HET has a very wide scope. It includes:

i. The study of economic ideas from the time man started

formulating and expressing them to the present time.
– Some economic ideas are still accepted and held important while
others are proved wrong or criticized by latter economists.

– But every idea, right or wrong, deserve to be covered in HET

since they made the foundation for modern economic theories.

ii. The study of the customs, laws and institutions of

economic societies of the d/t times.

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• This is b/se:
– First, the particular circumstances have a bearing on
economic theory of the time. i.e. ideas shall be
evaluated right or wrong based on the particular
circumstances of their time and how ideas have been
criticized and developed in to latter ideas is best
understood this way.

– Second, ancient economic ideas are found scattered in to

other literatures of their time and mostly they are not
presented straight forward. Hence, ancient economic
views should be drawn from such literatures (making
inferences).
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• For eg.:
– Usury was forbidden in ancient times based on religious and
ethical considerations. (Views drawn from religious source)
– Views on private property are also drawn from customary
practices of inheritance.
– The code of Hammurabi on wage embodies the view on just price
and standard wage.
• Ancient economic views are traced from the customs,
institutions, laws, etc of their time.
• So, the scope of HET goes to the extent of penetrating in to
the ancient customs, institutions, laws, etc and examining
their association with economic ideas of the time.
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iii. The study of the approaches adopted by scholars and
philosophers in the study of the science economics. (The
way they illustrate their ideas helps better understanding of
their views).

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 1.3. The Significance of HET
• The significance of HET comes to light when we see the benefits of
studying it.
• Precisely, the study of HET provides us an insight in to the
evolution of economic theory, help us better understand today’s
economic theories and be a proper economist.
• When we study HET, we understand that:
– That there is great continuity of ideas in the dev’t of economics,
– That there are new ideas contributed in all periods,
– That economic idea can only be correctly evaluated based on the
particular context of their time,
– How economic ideas and the resulting policies affected economic life of
their times.
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– etc.
• A primary reason for studying the history of economic thought
is to become a better economist.
• With few exceptions, the important economists of past and
present have been well acquainted with the theoretical history
of their discipline.
– Reading the history of economic thought strengthens theoretical and
logical skills by providing opportunities to relate assumptions to
conclusions.
• Social scientists also need to be aware of their methodologies.
– An effective means of achieving this awareness is to study historical
controversies—such as those b/n the deductive and inductive
approaches,—and to note the gains and losses to be realized by using
each methodology. 13
• The history of economic theory can also teach us humility.
– When we see great minds make important theoretical errors or fail to
pursue what appear from historical hindsight to be obvious paths, we
realize that our own theoretical paradigms may be faulty in ways that
are difficult for us to perceive, because we are blinded by our
preconceptions.
– Ernest Hemingway once said that it is counterproductive for a writer
to live in New York City, where the writers are like earthworms living
in a jar.
– Our culture, with its sometimes narrow values and preconceptions,
can be seen as the jar in which we live.
– Although it is difficult to get outside the jar and view our society and
its economy with perfect objectivity, a study of the dev’t of economic
theory can make us more aware of the importance of trying to do so 14
• Yet another reason for studying old ideas is to foster new
ones. Study of past economic theory is often the source of
inspiration for a new idea.
• Theories sometimes get lost in the past and are not carried
forward to the future, or they may become linked to specific
applications.
– A good example of this is the development around 1815 of the
concept of diminishing returns and rent. Until about 1890, when
their applicability to factors of production was finally recognized,
returns and rent were applied only to land.
• Also, fruitful ideas may be discarded along with an outworn
or otherwise objectionable ideology to w/h they are linked.
– Orthodox theory largely ignored the work of Marx until the Great
Depression of the 1930s necessitated a search through past
economic theory for an explanation of the causes of depression in15 a
• Generally, it makes us a proper economist capable
of understanding and interpreting economic
models, use them to solve current economic
problems, making research and economic analysis
to cope up with new problems that may arise with
the dynamics of economic life and circumstances.

• What do we do if current theories fail to address a

new current or future problem?

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 1.4. Methodological Controversies and Evolution
• What do economists know and how do they know that they
know it?
• Such questions, in the philosophy of science, are included
in the subject “methodology.”
• Because methodological issues will appear throughout this
course and they significantly influences what economists
do, we shall briefly consider the evolution of
methodological thinking and its influence on economic
thought.

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 Economics as an Art and as a Science
• Perhaps the most important distinctions in economic thought are those b/n
the art of economics, positive economics and normative economics.
• Positive economics concerns the forces that govern economic activity. It
asks such questions as: How does the economy work? What are the forces
that determine the distribution of income?
– Such inquiry is solely for the sake of understanding. Normative judgments should
enter into the analysis as little as possible.
• Normative economics explicitly concerns questions of what should be. It is
the philosophical branch of economics that integrates economics with
ethics.
• The art of economics concerns questions of policy. It relates the science of
economics to normative economics.
– Asks questions like: If these are one’s normative goals, and if this is the way the
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economy works, then how can one best achieve these goals?
• The distinction is important bse positive economics and the art of economics have
quite d/t methodologies.
• The methodology of positive economics is formal and abstract; it tries to separate
economic forces from political and social forces.
• The methodology of the art of economics is more complex bse it concerns policy
and must address interrelationships among politics, social forces, and economic
forces.
– In it one must add back all the dimensions of a problem that one abstracted from in
positive economics.
• Whether positive economics or the art of economics should be the primary focus
of economics has prompted unending debate in the history of economic thought.
– The German historical school and English Marshallian school advocated primary attention
given to the art of economics. They draw strength in this advocacy from the work of A.
Smith.
– Modern orthodox economists focus on positive economics and find support for this 19
 The Importance of Empirical Verification
• How we go about answering the questions “What do we know?” and “How
do we know that what we know is right?” depends on the answer to the
question “Is there an ultimate truth that scientists are in the process of
revealing (an absolutist view), or is there no underlying truth (a relativist
position)?”
– If there is ultimate truth, how do we find it? If there is none, are some propositions
more truthful than others?
• Methodologists past and present have failed to reach consensus on these
problems.
• The means by which the growing scientific world strove to discover the
truth involved trained empirical observation as exemplified in the scientific
method. This entailed the integration of reason with empirical observation.
• There are three terms that have played an important role in the subject:
inductive, deductive, and abductive. 20
• Inductive reasoning is empirical, proceeding from sensory perceptions
to general concepts; and deductive reasoning (logic) applies certain
clear and distinct general ideas to particular instances.
• Because most philosophers believe that knowledge derives from a mix
of these, the debate usually centres on the nature of the optimal mix.
• “Abductive” is the name Charles Peirce gave to a particular mix of the
inductive and deductive approaches.
• The abductive concept is important for economics and other studies of
complex systems.
• Abductive reasoning uses both deduction and induction to tell a
reasonable story of what happened. It combines history, institutions,
and empirical study to gain insight; however, it does not claim to
provide a definitive theory, bse, when we are dealing with a complex21
 The Evolution of Methodological Thought
• Let us now consider the evolution of methodological thinking and how it
influenced economics.
The Rise of Logical Positivism
• The methodology of science moved into the 20 th C with the dev’t of logical
positivism, w/c provided the scientific method with philosophical foundations.
• It established a working methodology expressing the empirical and non-
empirical, or rational, aspects.
• Logical positivism linked with deductive reasoning a positivist desire to let the
facts speak for themselves.
• It originated with a group known as the Vienna Circle, w/c attempted to
formalize the methods of scientists by describing the methods scientists
actually followed.
• The logical positivists argued that scientists develop a deductive structure (a
logical theory) that leads to empirically testable propositions. 22
• A deductive theory is accepted as true, however, only after it has been
empirically tested and verified.
• The role of the scientist, they said, is to develop these logical theories and then
to test them.
• Although there was debate among the logical positivists as to what constituted
truth, all concurred that it would be discovered through empirical observation.
• Logical positivism reigned in the philosophy of science only from the 1920s
through the 1930s, but its influence in economics continued much longer.
• It was logical positivism that formalized the distinction b/n normative and
positive economics, first made by N. Senior in 1836 and later by J. S. Mill and
J.N. Keynes.
• This distinction is still retained in most introductory textbooks, which describe
economics as a positive science whose goal is to devise theories that can be
empirically validated.
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 From Logical Positivism to Falsificationism
• Logical positivism represented a culmination of the belief that the purpose of
science is to establish “truth’’.
• The methodology of science has since progressively removed itself from that
view.
• The first departure resulted from a concern about the “verification” aspect of
logical positivist theory.
• This concern is best expressed in the writings of Karl Popper, who argued in the
1930s that empirical tests do not establish the truth of a theory, only its falsity—
which is why his approach is sometimes called falsificationism.
• According to Popper, it is never possible to “verify” a theory, since one cannot
perform all possible tests of the theory.
• For example, assume that a theory predicts that when the money supply
increases, prices will increase by an equal percentage. Then assume that in an
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• According to Popper, this indicates only that the theory has not
yet been proved false.
• The theory may or may not be true, since the next experiment
may produce a result that is not consistent with the theory’s
prediction.
• Popper asserts, therefore, that the goal of science should be to
develop theories with empirically testable hypotheses and then to
try to falsify them, discarding those that prove false.
• The progression of science, according to Popper, depends upon
the continuing falsification of theories.
• The reigning theory will be the one that explains the widest range
of empirical observations and that has not yet been falsified. 25
 From Falsificationism to Paradigms
• It would be nice if methodological problems could be resolved as neatly as
Popper’s approach suggests, but methodological debates are anything but neat.
• More recent developments have moved methodology progressively away from
such neat distinctions.
• The modern rejection of Popper’s theory is not without grounds:
falsificationism has several serious problems.
• First, empirical predictions of some theories cannot be tested because the
technology to test them does not exist. What should one do with such theories?
• Second, it is difficult to determine when a theory has or has not been falsified.
• For example, if an empirical test does not produce the expected results, the
researcher can and often does attribute the failure to shortcomings in the
testing procedure or to some exogenous factor. Therefore, one negative
empirical test often will not invalidate the theory. 26
• A third problem arises from the mindset of researchers, who may fail to
test the implications of an established theory, assuming them to be true.
• Such a mindset can block the path to acceptance of new and possibly
more tenable theories.
• Partly in response to these problems, Thomas Kuhn, in The Structure of
Scientific Revolutions (1962), moved methodology away from
falsificationism by introducing the concept of the paradigm into the
debate.
• A paradigm, as Kuhn uses the word, is a given approach and body of
knowledge built into researchers’ analyses that conforms to the accepted
textbook presentation of mainstream scientific thought at any given time.
• Kuhn argued that most scientific work is normal science, in which
researchers try to solve puzzles posed within the framework of the
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existing paradigm.
• This work often leads to the discovery of anomalies that the
paradigm fails to account for, but the existence of such anomalies is
not sufficient to overthrow the reigning paradigm— only an
alternative paradigm that is better able to deal with the anomalies
can do so.
• Once such a superior paradigm is developed, a scientific revolution
becomes possible.
• In revolutionary science,
– First, the existing paradigm is rejected by part of the scientific community,
– And, then the old and the new paradigms begin to compete and
communication between researchers in the opposing camps becomes
difficult.
– Ultimately, if the revolution is successful, new questions will be posed
within the new framework and a new normal science will develop. 28
• Whereas in Popper’s view “truth” (or the closest we can get to truth)
will win out, in Kuhn’s view a superior theory might exist but not be
adopted because of the inertia favouring the existing paradigm. Hence
the reigning theory is not necessarily the best.
• Those who disagreed with mainstream theory quickly adopted Kuhn’s
analysis, because it suggested that the paradigm they preferred might
prove to be superior to, and thus able to supplant, the mainstream
view.
• Moreover, Kuhn’s work suggested that changes occur by revolutions;
it offered hope that change, when it came, would come quickly.
• Although Kuhn focused on the natural sciences, he had a significant
influence on the social sciences, such as economics. Methodological
discussions throughout the 1970s and 1980s were peppered with the
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 From Paradigms to Research Programs
• The view that the existing theory might not embody the truth was extended by
Imre Lakatos during the late 1960s and 1970s.
• He tried to grasp and articulate the procedures good scientists were actually
following.
• He observed that scientists are engaged in the development of competing research
programs, each of which involves analyzing and attempting to falsify a set of data
but also involves unquestionably accepting a set of hard-core logical postulates.
• Each study derives a set of peripheral implications from the hard core and then
attempts to falsify them.
• Falsification of a single peripheral implication will not require rejection of the
theory but will occasion a reconsideration of the logical structure and, perhaps, an
ad hoc adjustment.
• Only if “sufficient” peripheral implications are falsified will the hard-core
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assumptions be reconsidered.
• Lakatos called research programs progressive if the
process of falsifying the peripheral implications was
proceeding, degenerative if it was not.
• Lakatos’s work has two significant features:
1. It recognizes the complexity of the process whereby a theory is
falsified; and
2. Whereas earlier analyses required that one theory predominate,
Lakatos provides for the simultaneous existence of multiple
workable theories whose relative merits are not easily
discernible .

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 From Research Programs to Sociological & Rhetorical Approaches to
Method
• In one way, the developments we have just outlined move progressively away
from logical positivism, but in another way they are refinements of it that
recognize the limitations of empirical testing.
• A much more radical departure from previous methodology can be found in
Paul Feyerabend’s Against Method: An Outline of an Anarchistic Theory of
Knowledge (1975).
• Feyerabend argues that the acceptance of any method limits creativity in
problem solving and that the best science is therefore to be confined to no
method—in other words, anything goes.
• Though his radical argument at first seems crazy, he has provided some new
perspectives on knowledge that throw light on the rhetorical and sociological
approaches that have influenced recent developments in the methodology 32of
• Although earlier approaches acknowledged the difficulty of discovering truth,
they did not question the Platonic vision of truth as absolute. The rhetorical &
sociological approaches do just that.
• Since they refuse to assume the existence of an ultimate and inviolable truth,
they search out other reasons to explain why people believe what they believe.
• The rhetorical approach to methodology emphasizes the persuasiveness of
language, contending that a theory may be accepted not because it is inherently
true but its advocates succeed in convincing others by means of their superior
rhetoric.
• The sociological approach examines the social and institutional constraints
influencing the acceptability of a theory. Funding, jobs, and control of the
journals may have as much influence on which theory is accepted.
• Those who adhere to the sociological approach contend that most researchers
are interested less in whether the theories they advance are correct than in
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whether they are publishable.
• What these two theories most notably share is a skepticism about one’s ability to
discover truth, or even whether truth exists at all.
• According to these approaches, a theory has not necessarily evolved because it
is the closest to the truth; it may have evolved for a variety of reasons, of which
truth—if it exists—is only one. rhetorical
Post-rhetorical Methodology
• Where does this leave us with respect to methodology? In a somewhat muddled
state, but being muddled is not unusual for methodology.
• Following the progress of epistemology in the past few decades, we have seen
the answers to questions about how and what we know become progressively
vaguer until methodology is all but annihilated: the most persuasive researchers
win out regardless of the value of their work.
• Fortunately, however, we need not accept such a view as total reality. Although
such extreme viewpoints provide interesting insights, they clearly need to be34
tempered by common sense.
• Even admitting the social and rhetorical influences on the direction of
science, one need not accept that Feyerabend’s “anything goes” attitude
necessarily follows.
• Methodology, moreover, is not going to end here.
• A post-rhetorical methodology will probably combine insights such as
Feyerbend's with more workable approaches and emphasize abduction
rather than deduction or induction.
• Although researchers may never know with certainty whether a given
theory is true or false, they must accept the most promising ideas as
tentatively true working hypotheses.
– They may revert to certain elements of logical positivist and falsificationist
methodology to do this.
– They may even accept all the arguments of the rhetorical and sociological
schools and still behave as they always have toward the truth or falsity of 35their
• The difference will be in perspective:
– Post-rhetorical economists will be more skeptical of their knowledge, less
likely to dismiss an argument as false before they have closely considered it,
and more likely to “let 1,000 flowers bloom.”
– A postrhetorical economist will scrutinize the incentives of researchers to study
particular theories and will view with skepticism the results of studies that
coincide with the researcher’s own interests or preconceived beliefs.
– Finally, a postrhetorical economist will be much more likely than a logical
positivist or a falsificationist to follow Bayesian, rather than classical, statistics.
• Bayesians believe one can discover higher or lower degrees of truth in
statements, but not ultimate truth.
• The Bayesian influence will engender a reinterpretation of classical
statistical tests, rendering them less exact, less persuasive, and not
independently representative of a specific confidence level. 36
• In the methodology of the future, information about the
researcher as well as the research will probably be a
necessary component of statistical reporting.
• For both the Bayesian and the rhetorical economists,
understanding ultimately rests on faith.
• Recognizing that, one must proceed cautiously in the
search for understanding, realizing that too skeptical a
mindset stymies creativity.
• Thus, rhetorical methodology should provide only a meta
methodology that, once accepted, little affects the day-to-
day work of economists. They do what they do.

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