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The Central Focus of Modern Economic Thought
The Central Focus of Modern Economic Thought
The aim of this work is to chart the development of economics through the ages, primarily
demonstrating how past mainstream thought has contributed to the scope and content of modern
economics, but also discussing deviations from orthodoxy that have helped to shape contemporary
economic thought. The book considers major methodological issues, explains the relationships between
the development of a theory and the prevailing economic conditions, and examines the internal working
of theories that provide particularly useful insights. It also explains the significance of particular ideas to
the development of theory and the broader implications of theory for the formulation of economic and
social policy.
In doing so, it recognizes that economic thought consists of both a vision and a formal theory. The vision
is the broad perception with which individuals look at the world. The theory comprises the specific
models that capture the vision. To understand the thought of individual economists, one must understand
both their vision and their model.
Economics is a social science. It examines the problems that societies face because individuals desire to
consume more goods and services than are available, creating a condition of relative scarcity. Perceived
wants are generally unlimited and apparently insatiable, whereas resources (which are often subdivided
into land, labor, capital, and entrepreneurship) are limited. To meet the problem of scarcity, a social
mechanism is required for allocating limited resources among unlimited alternatives. One aspect of this
process involves restricting individual wants and increasing the willingness to supply resources.
Historically, four mechanisms have been used to deal with the problem of scarcity. The oldest is
brute force, which was common in some early societies and is still used today. Next came tradition,
which emphasized past ways of allocating resources. With civilization came another societal mechanism
for resource allocation: namely authority, in the form of the institutions of government and church. The
fourth resource-allocating social institution is the market, which developed over time. This became the
primary allocator in Western Europe as feudalism waned and industrial, market-oriented societies
developed.
Modern economic theory examines the ways in which contemporary societies cope with the problems
that flow from relative scarcity. It focuses largely on market processes, which have replaced the church,
tradition, and the state as the primary resource-allocating mechanism. However, these mechanisms are not
mutually exclusive, nor has the movement from tradition-state-church economies to market economies been
linear, with all societies in the world participating. Some areas, almost entire continents, are still locked in
economic activity dominated by the past. Some societies have turned from premarket feudal economies to
modern command economies, in which the state allocates resources. For example, in the early 1900s a
number of societies moved toward central planning, which involved governmental control of allocation. In
Eastern Europe one finds movements, whose outcomes are unknown, from command economies toward
market orientation.
To say that the market is the primary allocation mechanism is not to say that it is the only
mechanism. Modern market societies use force, tradition, and authority as well as markets. In Europe
and North America, market allocation is continually being influenced by social and political forces.
Modern economic theory is still trying to come to grips with the interrelationships between
economic, social, and political forces. It has focused on how market forces operate, concentrating on
how markets allocate scarce resources and on the forces that determine the level and growth of economic
output. But economic thought goes beyond such questions. Our study of the antecedents of modern
economic theory starts before markets were highly developed. Beginning with this earlier period enables
us to see approaches to the broader questions. As you will see, many of the questions raised by early
premarket writers addressed broader philosophical and ethical issues that help provide perspective for
modern economic thought.
Regardless of what mechanism society uses to allocate resources, the harsh reality of scarcity requires
that some wants remain unmet; thus, issues of equity, justice, and fairness are embedded in the problem
of scarcity. Resource allocation mechanisms determine who gets, and who does not get, resources.
In modern economic thought, the problems associated with relative scarcity are commonly divided into
micro- and macroeconomics. Microeconomics considers questions of allocation and distribution.
Macroeconomics considers questions of stability and growth. The allocation problem (what to produce and
how to produce) and the distribution problem (how real income is divided among the members of a society)
generally fall under microeconomic theory. Microeconomic theory begins with an analysis of an individual
and builds up to an analysis of society. The major theoretical tools of modern microeconomic analysis are
demand and supply, which are applied at the level of the household, firm, and industry. A primary purpose of
microeconomic theory is to explain the forces that determine relative prices, which economists believe are the
essential forces in allocating resources and distributing income.
The other approach used in modern economics is macroeconomic theory. It begins with an analysis
of society as a whole and works downward to the individual. Macroeconomics focuses on the stability
and growth of an economy, utilizing aggregate variables for the entire economy: the level of income and
employment, the general level of prices, and the rate of economic growth.
Modern orthodox economic theory consists of a body of knowledge that includes both micro- and
macroeconomics. A history of economic thought must examine the development of concepts and tools
that culminated in this body of knowledge.
Although mainstream modern economics focuses on the use of markets to cope with the problems
associated with relative scarcity, there have always been economists who are interested in different
aspects of society. A number of these writers are concerned with broader philosophical issues; often their
writings do not fall neatly into any single field of study. Some writers straddle disciplines within the
social sciences (economics and political science, for example); others lie between the social sciences and
the humanities.
Writing a textbook such as this necessitates some classification of economists into groups, or schools.
Classifying is not for the faint of heart or the perfectionist: it requires you to mix what, in a deeper sense,
is unmixable, to blend into composites that which does not blend. What we hope is that, with simplifying
these classifications, those students who don’t go on to further studies will have a better understanding
than they would have had without such classifications, and those students who continue their studies will
become familiar with classification problems, transcend them, and forgive us our compromises.
The classifications that a profession uses often have developed serendipitously. A term is used and
repeated by a couple of people, and suddenly it is “in use.” Such terminology generally is far from
perfect. For example, the term classical economics is not especially descriptive, and in many ways it is
not very helpful. The term neoclassical is similarly nondescriptive and even misleading, since in many
ways neoclassical economics was a major step away from classical thinking rather than a renewal of it
or a smooth progression from it. So while we use classifications, be warned that they often hide subtle
distinctions, and that your understanding of the place of individual works and authors in the history of
economic thought should go beyond simply knowing their central classifications and chief
characteristics.
Many of the problems confronting a historian of economic thought are faced by all historians. A history
of economic thought must be selective; otherwise it would overwhelm the reader and serve little
purpose. Selection requires interpretation; therefore, hidden in the selection process are the historian’s
biases, prejudices, and value system. One of our biases is a love of controversy; we find controversy
more interesting than agreement. Another is a “let 1,000 flowers bloom” approach to life: you never
know what beauty might come from a small seed. These biases are reflected in the book and make it
slightly different from others.
Can one formulate a theory to explain the development of economic theory—a sociology of knowledge
for economics? How does economic theory arise? There are two approaches to answering this question:
the relativist approach and the absolutist approach.
Relativist historians concern themselves (1) with the historical, economic, sociological, and political
forces that brought men and women to examine certain economic questions and (2) with the ways in
which these forces shape the content of emerging theory. They hold that history plays a part in the
development of every economic theory. A relativist would emphasize, for example, the relationships
between the emergence and content of classical economics and the industrialization of England, between
Ricardian economics and the conflict between English landlords and businessmen, and between
Keynesian economics and the Great Depression of the 1930s.
Absolutist writers (in this context called Whigs by some) stress internal forces, such as the increasing
professionalism in economics, to account for the development of economic theory. The absolutists claim
that the progress of theory does not merely reflect historical circumstances but depends on the discovery
and explanation of unsolved problems or paradoxes by trained professionals reacting to intellectual
developments within the profession. According to this view, it is possible to rank theories absolutely
according to their worth; the most recent theory is likely to contain less error and be closer to the truth
than earlier theories.
Prior to the 1950s, the most influential historians of economic theory took a relativist position.
Beginning in the 1950s, the absolutist position was forcefully stated. This provoked discussion of these
issues among historians of economic thought.
In our view, neither the absolutist nor the relativist position is convincing in and of itself. A more
fruitful approach is to view the history of economic thought as a dynamic process of interaction between
forces external and internal to the discipline that bring about new theoretical developments. In some
cases these developments can be explained as proceeding from an intellectual reaction within the
profession, but in others an examination of the economic and political issues of the times will give a
better insight. In a number of cases the mixture of forces bringing about new developments is so
complex that it is difficult to explain the emergence of theory satisfactorily by emphasizing either
absolutist or relativist causes.