Economic Thought, Lecture 1

●Greek and Medieval Economic Thought

Rothbard’s Perspective

●Rothbard opposes what he sees as an older standard view of economic history.●In this view, economics began with Adam Smith, The Wealth of Nations. (1776)●Before Smith, economics didn’t really exist. Smith refuted the fallacies of the mercantilists.

The Older View

●After Smith, there were a succession of great figures: David Ricardo, John Stuart Mill, the marginalists ( Menger, Jevons, and Walras), Alfred Marshall, and Lord Keynes.●A problem for people who hold this view is who follows Keynes?

Rothbard Rejects the Older View

●Rothbard rejects this view of economic history.●He says it is a Whig Interpretation of History. This expression comes from Herbert Butterfield. In the Whig Interpretation, things are always getting better until we reach the present.

The Whig Interpretation

●Applied to economics, the WI holds that knowledge has continually increased.●What are Rothbard’s criticisms of the WI?●Knowledge can be lost. Rothbard thinks that basic knowledge of value theory was lost after Adam Smith.●Rothbard was very much influenced by Thomas Kuhn, The Structure of Scientific Revolutions (1962)

Rothbard and Thomas Kuhn

●Rothbard accepts Kuhn’s view of competing paradigms. Different scientific theories have fundamentally different assumptions. A new theory isn’t the old theory + improvements.●Rothbard disagrees with Kuhn about whether a paradigm is better than the one it replaces. Rothbard does believe you can say this. He thus accepts progress in economics.

Another Rothbard Criticism

●Rothbard also criticizes the older view because it concentrates on just a few great thinkers.●He says that a history of economic thought has to concentrate not just on the top figures, but less important members of each economic school as well. Rothbard was influenced by Quentin Skinner here.

Greek Economic Thought

●The Greeks were the first to use reason to investigate the world. ●Rothbard argues that things have fixed natures or essences. It is by investigating these that knowledge advances. This is the basis of praxeology and was developed by Plato and Aristotle.●This contrasts with the view that science just notes regularities.

Limits of Greek Thought

●The Greeks lived in city-states. Individuals were supposed to live for the city-state (the polis). The Greeks didn’t have the concept of individual rights. ●Note the “Whiggish” element in Rothbard’s thought. He is evaluating Greek thought by a later standard.

Plato

●Plato’s key insight in economics was that he realized the importance of the division of labor.●Imagine that you had to grow all your own food, build your own house, and do everything yourself. Very few people would survive. People are much more productive if they specialize. Plato recognized this.

Limits of Plato’s Thought

●Rothbard criticizes Plato on several points.●Most obviously, the society discussed in the Republic gives the guardians control over everything. It is not a free society.●It is also a static society. Plato wants to control change rigidly.

More Limits

●Plato thinks that “true” reality is not in the ordinary, empirical world but is in world of forms or universals.Man in history has fallen from an ideal state. Rothbard thinks this theme is very important in later thought.●The Stoics, e.g., Zeno, also had the idea of retreat from the world. Hegel calls the “unhappy consciousness.”

Aristotle

●The Greek author that Rothbard devotes most attention to is Aristotle.●Aristotle made an important criticism of Plato. In the society described in the Republic, the guardian class holds property in common.●Plato thought this would decrease jealousy, but Aristotle understood the tragedy of the commons problem.

Problems with Aristotle

●Aristotle helped lead economics on the wrong track with a wrong premise.●Aristotle thought that in a just exchange, there must be an equality. If I trade you one apple for one orange, then one apple = one orange.●If one apple does not equal one orange, then someone is taking unfair advantage.

Problems with Equality

●In an exchange, there isn’t an equality. Each person prefers what he gets to what he gives up. If I trade you one apple for one orange, I would rather have an orange, and you would rather have an apple. Otherwise, we wouldn’t make the trade.●This seems like an obvious point, but the equality view has been extremely influential. It’s basic to classical economics, Smith and Ricardo, and also to Marxism.

A Case For Equality?

●How could someone who defends Aristotle respond? ●He could admit that every exchange requires a double inequality, But he could contend that this fact doesn’t determine why the goods traded exchange at a certain rate. Why one apple for one orange? Why not two or three?

Case Continued

●To explain this, we have to assume that the goods exchanged are somehow equal in value. ●To see what is wrong with this, we have to develop a theory of price that doesn’t make the equality assumption. This is the subjective theory of value. The Greeks didn’t have this insight.

Aristotle on Reciprocity

●Aristotle thought that an exchange requires an equality. But how do we decide, in a particular, case, what the equality consists of? ●Rothbard thinks that Aristotle was totally confused in his view on this

Reciprocity Continued

●“Aristotle's famous discussion of reciprocity in exchange in Book V of his Nicomachean Ethics is a prime example of descent into gibberish. Aristotle talks of a builder exchanging a house for the shoes produced by a shoemaker. He then writes: `the number of shoes exchanged for a house must therefore correspond to the ratio of builder to shoemaker. . . .' Eh? How can there possibly be a ratio of `builder' to `shoemaker'?"

“Money is Barren”

●Aristotle also defended another view that has bad consequences in economics.●He sometimes recognized that money has valuable functions in society, e.g., by promoting exchange.●Nevertheless, he said that money is barren. If you have a productive asset, such as tools, you can use it to increase your goods. But money doesn’t produce anything. He also thinks that exchanges for monetary gain are unnatural.

Interest and Usury

●The claim that money is barren was used during the Middle Ages as an argument against usury.●“Usury” at that time didn’t mean excessive interest but any interest at all.●It isn’t clear why the Church was opposed to interest, but there was a general suspicion of money-making.

Aquinas on Interest

●The most important thinker of the Middle Ages, Thomas Aquinas, had an interesting argument against interest on a money loan.●He claimed that interest is a double charge. The lender has transferred ownership of the money for the period of the loan to the borrower. The borrower pays for the money when he returns the original amount.But he also charging the borrower for the use of the money during that period. Imagine that one person sells someone else a bottle of wine. He couldn’t also charge the person for drinking the wine.

Rothbard’s Criticism

●Rothbard says, even if this is a double charge, what is wrong with it?●Aquinas’s argument fails on its own terms. He assumes that there is a double charge because he takes the price of the money to be the same sum of money, when the loan is repaid. This begs the question.

The Just Price

●The Church lawyers, who were called canonists, were influenced by the concept of property in Roman law. ●Roman law gives the property owner absolute rights. He has rights of “use and abuse”.●This led the canonists to equate the just price with the market price.

Just Price Continued

●There is a complication. The Code of Justinian, one of the main Roman law codes, allows sales to be overturned in case of great loss ( laesio enormis) This allowed a contract to be overturned if the seller didn’t receive half the prevailing market price.●In general, though, the canonists didn’t impose external requirements on the prices people arrived at. This interpretation of the just price goes against the opinion of R. H. Tawney .

Olivi and Subjective Value

●The Franciscan Pierre de Jean Olivi developed in the thirteenth century a subjective theory of value.●He thought that the price of a good depends on the usefulness the good has for them. This is determined by their subjective preferences.●Olivi recognized the paradox of value. Goods with high utility, like water, have low utility. Olivi saw that the reason for the low piece was water’s abundance