FİRST LESSON

1. Inrtoduse myself
2. Why study the History of Economic Thought ?
3. Reasons for studying history of economic thoughts.
4. History of Economic Thought versus Economic History
5. Introduce syllabus
6. Talk about our approach to the history of economic thoughts

SLIDE 1.

Hello children! How are you doing? as you know I will teach you history of economic
thoughts. but first let’s get acquainted!
My name is Gular Aliyeva! Firs I would like to tell a little about myself! I was
graduated from Azerbaijan State University of Economics. Bachelor and master I was
graduated from here. Then I entered Azerbaijan National Academy of Science as pHd
student. Currently I work on my phd. dissertation, on topic impact of foreign trade
policy on economic growth in Azerbaijan Republic.
I participated in several international conferences and trainings, Periodically I taught
introduction to economics at Baku State University and at Azerbaijan Technical
University in Sabah groups. I think this is enough about myself.
Now let me present you to the course syllabus and continue our discussions on the
syllabus. Does everyone have a syllabus? Can everyone watch? Excellent! (But I don’t
have anymore, try to share with each other)
By the way let’s first check attendance for the lesson! Who can help me with this. This
way I will know your names too.
Now I would like to inform you about the lesson methodology that I will use. Actually
this course is very interesting, and it allows us to organize our lessons in different forms.
You will have 2 colloquiums anyway.
How well do you know the language? How do you usually have lessons? Fully English
or for better understanding, are you still discussing in Azeri? I want to repeat that again
the most important thing is for you to learn something! I will do my best to achieve this
result. I think we will be friends with you!
Probably you studied introduction to economics and microeconomics and
macroeconomics! Is not it?
Who can answer what is economics? (Nobody knows?)
Then you are probably familiar with many economic theories and economists! The
names of which economists you have heard, and what theories you know? ( Please
answer one by one! Quiet please! )
Fine you just have unsystematic knowledge! You heard about it. Don’t worry we will
systematically study all economic schools and thoughts throughout the semester.
You studied economics under two divisions, micro and macro economics. Who can
answer what is studying microeconomics and macroeconomics. Do you know why I ask
this question? If we study economics under this two divisions, then the theories also
developed under these divisions too! Some economists studied economics in a
microeconomic level , and others in macroeconomic level!

Lets start!

I want to start with question why study history of economic thoughts and actually
what is it. This is a fair enough question deserving of an answer.

Let’s see how shumpeter answered this question! Maybe you heard about shumpeter,
have you heard of him? if not do not worry, we will discuss his thoughts in our next
lessons. When we will talk about The Development of Modern Heterodox Economic
Thought. He was an Austrian economist. “History of economic analyses” which was
completed and published by his wife after his death, is the most important reference
book in his field.

This is a great answer to this question.

The study of Economic Thought will help us to understand the origin of economics.
The History of Economic Thought is a major branch of both Economics and of the
History of Ideas. It traces the development of economic theories and ideas from earliest
times to the present. 
In this course, we'll look at the history of how economic thought has changed over
time, and the major participants in its development.
One of the tasks of studying the history of economic doctrines is to understand the
patterns of development of economic science, the reasons for the change of some
economic theories by others. For this, it is necessary to study each theory “in time and
space”. Any economic theory arose in a particular country, where at that time there
existed a certain economic and political system, where a certain level of development of
culture and science was achieved.
History of economic thought might be approximately divided into two
stages: 1. Since its origin in the ancient times until the 17 th century 2. Since 17
th century up to our days The first stage may be characterized as the period of
the gradual accumulation of economic knowledge in non-systematic way The
second stage is characterized by the formation of the system of economic
knowledge under the form of separate branch of social science called today
“economics”
You probably studied an introduction to economics and know what economics is?
Who can answer what is economics?
ECONOMICS – is the social science that studies the production, distribution and
consumption of goods and services. the needs are enddless but resources are
limited. Because of this, there are thoughts how to solve this problem.

Slide 2.
But I want to emphasize especially 2 reasons . which I met and wanted to share with
you as it is.
 But apart from that 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.
Second it Gives economist a better understanding and better appreciation of
contemporary economic issues:

 Economics thoughts and economic policies change in response to social and

economic issues
 But many economic problems remain the same.
 Insights and solutions evolved overtime.

Third , the economic theory helps society to reach its economic goals. Society
progresses faster in achieving economic goals through knowledge in economics.

Finnaly, we will learn about the philosophers and economists who developed economic
reasoning, the modeling, and descriptions of economic activity.

However, one of the reasons to study the history of economic thought is to

understand how we have come to believe what we believe and why we interpret some
economic ideas as knowledge.

Slide 3. Ofen confused economic history and history of economic thoughts. But they are
not the same courses, they are completely distinct areas. History of economic thoughts
is not a history of what actually happened in the past but rather a history of theories
about how the economy works. Economic History is a study of the economic
development of a country.
Nonetheless, we will pay a little attention to economic history, since understanding
what was going on in the economy in past times and places helps us to understand how
people conceptualized the economy. Even though Economic History and History of
Economic Thought constitute separate branches of study, they are closely related.
Economic ideas are directly and indirectly motivated by the economic conditions and
environment of the country. Ideas and environment are equally important and hence
close relationship between History of Economic Thought and Economic History.

Slide 4. Approaching the History of Economic Thought

The absolutist tends to believe that there are some objective, absolute “facts or
truths” about the perceptions and patterns of economic behavior that cross cultural,
temporal and social boundaries. These beliefs and patterns of behavior are
perceived as universal. They are believed to apply in every society at all times in
similar ways. From this point of view the study of the history of economic thought
becomes a process of reading the works of economists that have contributed in the
past and sifting out the grains of truth.

The relativist approach to the history of economic thought holds that what is “true,”
or useful, in one time or place may or may not be useful in some other time or
place. Economic theory is a product of its environment. What was “true” for Adam
th
Smith in a “nation of shopkeepers” in the mid 18 century may or may not be
st th
useful or true in the early 21 century or for Alfred Marshall in the late 19 century.
The relativist tends to believe that economic theory is shaped by technology, social
and economic institutions.

Slide 5. Ortodox and heterodox economy

Apart from this there is an arthodox and heterodox approach in economics.

Heterodox economics provides an alternative approach to mainstream

economics that may help give explanation to economic phenomenon that don't
received widespread credence. In addition, heterodox economics seeks to
embed social and historical factors into analysis, as well as evaluate the way in
which the behavior of both individuals and societies alters the development of
market equilibriums.

Today, processes in the world prove that mainstream economics does not prove
itselves. Usually students graduated from university of economics cannot explain
the processes. Because at universities mostly students study about orthodox
economics approaches. For example, a student usually knows that if interest
rates go down then investments are exceeded. But today, despite the fact that
interest has decreased, but investment are not exceeded in adequate.

One way to understand the issues separating orthodox and heterodox writers is by examining the
questions they were trying to answer. Whereas modern orthodox theorists have largely focused
on the four problems of allocation, distribution, stability, and growth, heterodox economists have
studied the forces that produce changes in the society and economy. Whereas orthodox writers
have taken as given (something they are not interested in explaining) the specific social,
political, and economic institutions and have studied economic behavior in the context of these
institutions, heterodox writers have focused on the forces leading to the development of these
institutions. Often what orthodox writers take as given, heterodox writers try to explain; and
what heterodox writers take as given, orthodox economists try to explain. Thus, the differences
between heterodox and orthodox economists are often differences in focus, not diametrically
opposed theories.

Slide 4. Schools of economic thoughts

Jokes about economists, like all stories and jokes, often have a grain of truth and
influence the perceptions of those who hear them. One of the common perceptions
about economists is that they never agree. There is some credibility in this perception,
but there is more agreement than is commonly believed. One of the factors that
contributes to the perception of disagreement is that there are different “schools of
economic thought.
Slide 5. Schools of economic thoughts

So said George Joseph Stigler. he was an American economists laureate in Nobel Memorial
Prize in Economic Sciences and a key leader of the Chicago School of Economics.

A school must have a leader.

The school may be united by substantive scientific views.
If the school is united on methodology rather than substantive doctrines, its life will be longer.
A school may be based on policy views rather than upon economic analysis or scientific
methodology.

The history of economic thought record the development and evolution of many
different schools of thought. One of the first schools was a group of French writers who
were led by François Quesnay [1694-1774] and called themselves “the economists.”
They became known as the Physiocrats. Adam Smith began what is now known as the
Classical economics. Alfred Marshall is often considered the founder of Neoclassical
economics and Karl Marx is the obvious leader of Marxian economics. John Maynard
Keynes’ writings resulted in the Keynesian school emerging during the great depression
of the 1930’s. and so on.

Slide 6.
History of economic thought can be studied and analysed by adopting different
approaches, for example Chronological approach, Conceptual approach, Institutional
approach and so on. But we will analysed by adopting chronological. Because In this
approach we can find a continuity in the economic ideas of different economists.
The earliest discussions of economics date back to ancient times, such as
Xenophon's (c. 430-353 B.C.E.) Oeconomicus, and continue through the religious-based
ideas of Jewish thought, the Scholastics, and medieval Islamic scholars.

In early times, and until the industrial revolution, economics was not a separate
discipline but part of philosophy. Religious tenets and a concern for morality and ethics
played a significant role in the views of early theorists. As a result, early economic
thinking generally took into account the welfare of the common man, the worker, rather
than seeking ways to benefit a few elite individuals. İn this topic we will examine the
thoughts of the great philosophers such as xenophon, aristotle and plato.

Mercantilism was the economic philosophy adopted by merchants and statesmen

during the 16th and 17th centuries. Mercantilists believed that a nation's wealth came
primarily from the accumulation of gold and silver. Nations without mines could obtain
gold and silver only by selling more goods than they bought from abroad. Accordingly,
the leaders of those nations intervened extensively in the market, imposing tariffs on
foreign goods to restrict import trade, and granting subsidies to improve export
prospects for domestic goods.
However, such a mercantilist policy would hardly have been useful, since it led to
an oversupply of money and, with it, serious infilation.
Physiocrats, a group of 18th century French philosophers, developed the idea of
the economy as a circular flow of income and output. They opposed the Mercantilist
policy of promoting trade at the expense of agriculture because they believed that
agriculture was the sole source of wealth in an economy. As a reaction against the
Mercantilists' copious trade regulations, the Physiocrats advocated a policy of laissez-
faire, which called for minimal government interference in the economy.
The Classical School of economic theory began with the publication in 1776 of
Adam Smith's monumental work, The Wealth of Nations. The book identified land,
labor, and capital as the three factors of production and the major contributors to a
nation's wealth. In Smith's view, the ideal economy is a self-regulating market system
that automatically satisfies the economic needs of the populace. He described the
market mechanism as an "invisible hand" that leads all individuals, in pursuit of their
own self-interests, to produce the greatest benefit for society as a whole. Smith
incorporated some of the Physiocrats' ideas, including laissez-faire, into his own
economic theories, but rejected the idea that only agriculture was productive.
The Marxist School challenged the foundations of Classical theory. Writing during
the mid-19th century, Karl Marx saw capitalism as an evolutionary phase in economic
development. He believed that capitalism would ultimately destroy itself and be
succeeded by a world without private property. An advocate of a labor theory of value,
Marx believed that all production belongs to labor because workers produce all value
within society. He believed that the market system allows capitalists, the owners of
machinery and factories, to exploit workers by denying them a fair share of what they
produce. Marx predicted that capitalism would produce growing misery for workers as
competition for profit led capitalists to adopt labor-saving machinery, creating a
"reserve army of the unemployed" who would eventually rise up and seize the means of
production.
Marginalists. Classical economists theorized that prices are determined by the
costs of production. Marginalist economists emphasized that prices also depend upon
the level of demand, which in turn depends upon the amount of consumer satisfaction
provided by individual goods and services. Marginalists provided modern
macroeconomics with the basic analytic tools of demand and supply, consumer utility,
and a mathematical framework for using those tools. Marginalists also showed that in a
free market economy, the factors of production -- land, labor, and capital -- receive
returns equal to their contributions to production. This principle was sometimes used to
justify the existing distribution of income: that people earned exactly what they or their
property contributed to production.
İnstitutionalist economists regard individual economic behavior as part of a larger
social pattern influenced by current ways of living and modes of thought. They rejected
the narrow Classical view that people are primarily motivated by economic self-interest.
Opposing the laissez-faire attitude towards government's role in the economy, the
Institutionalists called for government controls and social reform to bring about a more
equal distribution of income.
Keynesians. Reacting to the severity of the worldwide depression, John Maynard
Keynes in 1936 broke from the Classical tradition with the publication of the General
Theory of Employment, Interest, and Money. The Classical view assumed that in a
recession, wages and prices would decline to restore full employment. Keynes held that
the opposite was true. Falling prices and wages, by depressing people's incomes, would
prevent a revival of spending. He insisted that direct government intervention was
necessary to increase total spending.

Economic theories are constantly changing

Keynesian theory, with its emphasis on activist government policies to promote high
employment, dominated economic policymaking in the early post-war period. But,
starting in the late 1960s, troubling inflation and lagging productivity prodded
economists to look for new solutions.

New theories
Monetarism updates the Quantity Theory, the basis for macroeconomic analysis before
Keynes. It reemphasizes the critical role of monetary growth in determining inflation.
Rational Expectations Theory provides a contemporary rationale for the pre-Keynesian
tradition of limited government involvement in the economy. It argues that the market's
ability to anticipate government policy actions limits their effectiveness. Supply-side
Economics recalls the Classical School's concern with economic growth as a
fundamental prerequisite for improving society's material well-being. It emphasizes the
need for incentives to save and invest if the nation's economy is to grow.
These theories and others will be debated and tested. Some will be accepted,
some modified, and others rejected as we search to answer these basic economic
questions: How do we decide what to produce with our limited resources? How do we
ensure stable prices and full employment of resources? How do we provide a rising
standard of living both for now and the future?
 SECOND LESSON

Due to the fact that today is our first lesson, I think I should talk again. but I will ask you
about all this in our next lesson.
Where does the history of economics start? This problem actually concerns the
distinction between the history of economic thought and the history of economic analysis.

Although economic activity has been a characteristic of human culture since the dawn of
civilization, there was little formal analysis of that activity until merchant capitalism developed
in Western Europe during the fifteenth century. At that time the chiefly agrarian European
societies began increasingly to trade among themselves, setting the stage for the birth of
economics as a social study. The economic studies of this time were not systematic: economic
theory evolved piecemeal from individual intellectual responses to contemporary problems. No
grand analytical systems appeared. It was not until the mid- eighteenth century, with the
emergence of “classical economics” under Adam Smith, that economics made significant
movement toward the status of a full-blown social science.

Given this reality, our study of the history of economic ideas could begin with classical Smithian
economics. But there are other approaches. For example, we could begin around 1200, when the
possibilities of economic analysis were first being recognized. Another approach would be to
start with major, later writers of the Middle Ages. Yet another would be to take account of the
fact that possibly the most significant development in the social sciences has been the realization
that it is possible to examine aspects of society analytically. Although the Creek philosophers did
not recognize that the economy was capable of being analyzed (as they clearly did the political
aspects of society), nevertheless their analysis of what were essentially premar- ket societies
gave later thinkers a foundation that made their task easier. The foundations argument suggests
yet another alternative. Earlier societies often passed on their writings in the form of religious
tomes; thus, one could begin an analysis of economic ideas with these very early texts.

Faced with these alternatives, İ have decided to begin with the development of early non-
Western economic thought and Creek thought and then to consider the writings of Arab-Islamic
thinkers, the scholastics, the mercantilists, and the physiocrats, but to keep our consideration of
these writings short.

what did we say in a previous lesson? Just for imagination, let's make a chart that helps you
see this period more open.
History of economic thought might be approximately divided into two
stages: 1. Since its origin in the ancient times until the 17 th century 2. Since 17
th century up to our days The first stage may be characterized as the period of
the gradual accumulation of economic knowledge in non-systematic way The
second stage is characterized by the formation of the system of economic
knowledge under the form of separate branch of social science called today
“economics”
We can also call the first stage the beginning of economic thoughts, but the second stage is the
beginning of economic analysis.

Classical economics is dated from the publication in 1776 of Adam Smith’s Wealth of Nation.
That, of course, is only a rough date; as we will see in the next lessons, the ideas in Wealth of
Nations were being developed during the Two hundred years before 1776.

Thus I would like to draw your attention to the first stage.

We can divide the prior period into two parts: an early preclassical period from about 800BC to
1500, and a preclassical era from 1500 to 1776.

We can also divide the early preclassical period into four sub periods for better understanding

The majority of early Chinese writings on economics fit Schumpeter’s characterization: they
were essentially limited to considerations of public administration within ethical frameworks,
rather than strictly “scientific” studies. Guan Zhong’s book Guan Zi, however, stands out as
going far beyond the administrative mold.2 It includes a number of ideas that are central to
economic thinking. Probably the most important of these is his “light/heavy” theory, an
anticipation of supply/demand theory. Others include his anticipation of the quantity theory, his
discussion of countercyclical fiscal policy, and his appreciation for the workings of the market.
Let’s consider each briefly.

Guan Zhong argued that when a good was abundant, it became light, and its price would fall.
When it was “locked away,” it became heavy, and its price would rise. There would be
movements of goods into and out of markets based on their lightness and heaviness, with a
definite tendency toward one price—equilibrium. Thus the light/heavy theory is a statement of
the law of supply and demand. Guan Zhong also used this light/ heavy theory to develop a
quantity theory of money, asserting that when money was heavy, its price should rise (prices of
goods would fall), and when money was light, its price would fall (prices of goods would rise).
To stop that fluctuation, he advised that the state should buy goods when money was heavy
(thereby holding the price level up) and sell goods when it was light (thereby holding the price
level down). This would not only help stabilize the price level, but also make money for the
government.

The most striking feature of ancient societies was their focus on agriculture.
What distinguishes these agricultural societies from today's farmers is that they
have limited power to feed the non-agricultural population.
The efficiency of traditional agriculture was very low. All these ancient
societies were village economies. In other words, they were closed societies
producing at subsistence economy level. The peasant of antiquity was a producer
that produced and consumed for his own needs, with weak or even no bond to the
market. When we consider the slaves, most of them had nothing to do with money.
The peasant of the antiquity is a poor person living largely on the border of misery,
who is crushed under taxes and rents. As such, the phenomenon of market in
ancient societies relates to a limited area and community.
 On the other hand, the peasant of antiquity was not the owner of the land that
he cultivated. Land, as a rule, is in the hands of large landowners, aristocrats,
soldiers or the state, as in the East.
In ancient societies, there was no direct relationship between obtaining wealth
and economic production. In pre-market societies, wealth was usually made as a
result of power and strength. The aristocratic free sector of antiquity
underestimated the study and all kinds of economic activities. The most valued and
rewarded activities of the societies were political management, military service,
heroism and religious status.

Hesiod’s economic ideas are presented in Works and Days, in which he initiates a pursuit of
economic questions that continued for two centuries. Being a farmer, Hesiod was interested in
efficiency. Economists use the concept of efficiency in a number of contexts. It is measured as a
ratio of outputs to inputs. Maximum efficiency is taken to be achieving the largest possible
output with a given input.

The early writers were not interested in efficiency at the level of society because they had no real
insight into the concept of scarcity, its implications, and an economy. The word economics,
derived from Greek, was used by Xenophon as the title of his book Oeconomicus. As used by the
Greeks, however, the term refers to efficient management at the level of the producer and/or the
household.

Xenophon, writing some four hundred years after Hesiod, took the concepts of efficient
management much farther than Hesiod and applied them at the level of the household, the
producer, the military, and the public administrator. This brought him insights into how
efficiency can be improved by practicing a division of labor. Attention to the division of labor
was continued by other Greek writers, including Aristotle, and, later, by the scholastics. We will
see that at the level of the economy and society, Adam Smith gave special recognition to this
influence on the wealth of a nation.

Aristotle is important not only for his contributions to philosophical thinking but for the impact
he had on economic ideas during the period of scholasticism. It was to Aristotle’s views that St.
Thomas Aquinas and other churchmen reacted in the period 1300 to 1500.

Aristotle’s main contributions to economic thinking concerned the exchange of commodities and
the use of money in this exchange. People’s needs, he said, are moderate, but people’s desires
are limitless. Hence the production of commodities to satisfy needs was right and natural,
whereas the production of goods in an attempt to satisfy unlimited desires was unnatural.
Aristotle conceded that when goods are produced to be sold in a market, it can be difficult to
determine if this activity is satisfying needs or inordinate desires; but he assumed that if a market
exchange is in the form of barter, it is made to satisfy natural needs and no economic gain is
intended. Using the medium of money, however, suggests that the objective of the exchange is
monetary gain, which Aristotle condemned.

The most important difference of Aristotle from his teacher Plato is that he gives importance to
analytical thinking. In Aristotle's works, there is a strong logic and reason - effect relation.

Aristotle differs from his teacher on private property. In contrast to Plato's collectivismist
understanding, Aristotle advocates private property. Partnership in property is against human
nature. It is also against social peace. Aristotle emphasizes the importance of property in terms of
home economies. According to him, property is part of the family. good life is possible by
owning property.

Plato's dialogue The Republic (ca. 380–360 BCE) described the ideal city-
state, run by philosopher-kings, and contained references to specialization of
labor and production.

The main principle is that: that nobody, male or female, should be left without control,
nor should anyone, whether at work or in play, grow habituated in mind to acting alone
and on their own initiative, but he should live always, both in war and peace, with his
eyes fixed constantly on his commander and following his lead.

The domestic economy was to be rigidly determined and regulated by the rulers.

All trade, commerce, and manufacturing, both within the city-state and with other city-
states would be controlled and regulated by the rulers of the State. There would be no
free movement of people from city-state to city-state.