BC30903

DEVELOPMENT OF ECONOMIC THOUGHTS

(PERKEMBANGAN PEMIKIRAN EKONOMI)

THE ANCIENT SCHOOL OF

ECONOMICS
(WASIAT LAMA)
WHO’S WHO IN ANCIENT
ECONOMICS?

TOP LEFT TO RIGHT: Aristotle, Plato, Homer, Hesoid 2

BOTTOM: Xenophon
 The ancient world
• Homer and Hesiod
• Xenophon
• Plato
• Aristotle
– Economic justice
– Acquisition of wealth
• Rome

3
 Homer and Hesiod
• Homer
– The Iliad and the Odyssey
• Tales from a long oral tradition, finally written down
c. 750-725 BC
• Hesiod
– Works and Days
• Poems, c. 700 BC
• Earliest written record in Europe

4
 Homer
• Describes the Mycenaean (Bronze Age) world of
Troy around 1400–1100 BC
• This society was not based not on market
transactions
• Wealth was acquired through gifts, theft, prizes
for winning competitions, plunder received in
war, and tribute paid by defeated cities to their
conquerors.
• Compared to agriculture and war, trade was
viewed by Homer as an inferior way of acquiring
wealth.
5
 Homer
• Most economic activity took place in the
household, understood as the landowner,
his family, and all his slaves
• Prosperity came from efficient
management of the household

6
 Hesiod
• Hesiod realized that the basic economic
problem is one of doing one’s best with
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’.

7
 Hesiod
– There is in Hesiod an intuitive understanding of the
need to be inventive, and that
– 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.
– But these ideas are not explicitly stated; one has to
infer them
– In Hesiod, the virtues that lead to prosperity are hard
work, honesty and peace.
– This is far from the aristocratic disparagement of work
and support for martial virtues in Homer

8
 Xenophon (c. 430 – 354 BC)
• Oikonomikos, the title of Xenophon’s work, is the origin
of the words ‘economist’ and ‘economics’.
– Taken literally it means Household Management
– The book is in fact about the management of an agricultural
estate.
• Efficient management required effective leadership (of
slaves).
• Effective leadership required knowledge of the
production technology and an understanding of the
importance of order and organization
• Xenophon extended these notions to the administration
of a state
• The emphasis was on top-down administration, and not
on decentralized markets
9
 Xenophon: division of labor
• Xenophon is important for two crucial insights:
1. Division of labor leads to higher productivity, and
2. The extent of division of labor is determined by the extent
of the market
• Xenophon saw 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.
• In large cities, however, demand is so large that
men can specialize in each of these tasks,
becoming more efficient.
• Turning back to the household, Xenophon argues
that division of labor can be practiced in the kitchen.
Food prepared in a large kitchen will be superior to
food prepared in a smaller kitchen where one
person has to perform all tasks.
THE ANCIENT WORLD 10
 Xenophon: division of labor
• But in Xenophon’s writings, trade and
markets are peripheral.
• He does not connect division of labor to
the market mechanism
• He takes the extent of the market as
given, and not as something that can be
expanded through the expansion of trade

11
 Plato (c. 429 – 347 BC)
• Republic, blueprint for an ideal state
• In a democracy, leaders would do only what was
popular, not what was just
• In a tyranny, the tyrant would do only what was good for
himself
• Plato proposed a middle ground.
– Some people would appoint themselves to the role of guardians
or philosopher kings.
– They would be trained by the state for their roles.
– They would be forbidden to own property.
– The state would pay them a wage to cover their needs.
– Therefore, they would put the state above their own interests

12
 Plato
• Like Xenophon, Plato noted the
importance of division of labor
– Men should specialize in those activities for
which they were naturally suited, and should
be trained accordingly.
– The origins of cities (states) lay in
specialization and the dependence of people
on one another.

13
 Plato
• Though he saw a role for trade, the role for
markets in his ideal state was very limited.
– Consumer goods might be bought and sold,
but not property, which was to be allocated by
the state (on mathematical principles)
– There would be no profits or payment of
interest.

14
 Aristotle (384 – 322 BC)
• His writings dominated Western thought in
most areas for nearly 2,000 years.
• His thoughts on economic issues are
found in
– Book V of the Nichomachean Ethics, which
was on justice, and in
– Book I of the Politics, which was about the
household, the state, and wealth acquisition.

15
 Aristotle: Economic justice
• In organized, modern markets, the scope
for disputes between buyers and sellers is
limited
• However, in Aristotle’s days, markets were
not widespread, and products were not
standardized.
• This led to legal disputes between buyers
and sellers.
• Aristotle sought to set out the principles for
the settlement of such disputes
16
 Aristotle: Economic justice
• Aristotle considered three concepts of
justice
– Distributive justice: how should the spoils of
war be shared
– Rectificatory justice: how should one be
compensated for past injustice
– Reciprocal justice: when is an economic
exchange between a buyer and a seller just

17
 Aristotle: Distributive justice
• How should, say, the spoils of war be shared?
• Aristotle felt that when concrete cases of such
disputes are considered, the just share for each
person usually becomes obvious.
• The sharing must be done according to each
person’s ‘merit’
• In concrete cases, the ‘merits’ of the people
involved in the joint acquisition of wealth are
clear and the wealth should then be shared in
proportion to ‘merit’

18
 Aristotle: Rectificatory justice
• Rectificatory justice restores equality by
compensating those who had suffered
from past wrongs

19
 Aristotle: reciprocal justice
• If two people exchange goods, how do we assess whether the
transaction is just?
• One idea, commonly understood in ancient Greece, is that if an
exchange is voluntary it must be just.
– Xenophon cited the example of two boys – one tall and with a short
tunic, the other short and with a long tunic – who exchanged tunics. The
conventional view was that this was a just exchange, for both boys
gained from it.
• Aristotle recognized, however, that voluntary exchange does not
determine a unique price, but merely a range of possible prices in
between the lowest price the seller is prepared to accept and the
highest price the buyer is prepared to pay.
• Within this range, what is the just price?
• Aristotle’s answer was the harmonic mean of the two extreme
prices.

20
 Aristotle: Acquisition of wealth
• Getting rich by identifying and pursuing a
profitable productive activity was fine
• Exchange of one’s surplus product for the
surplus of another was fine
• But getting rich through commerce and
usury was unnatural and unacceptable
• It was assumed that there was a socially
acceptable level of consumption
• Anything in excess was frowned upon
21
 Aristotle
• Aristotle was suspicious of trade
• He felt that commerce and usury enabled people to
make huge amounts of money, without doing any hard
work and far in excess of normal needs
• This implied that money was being made simply for the
sake of making money, and not for the needs of the
good life
• This implied that commerce and usury were unnatural
• Aristotle did not see markets as a social regulatory
mechanism
• He saw the running of society as basically a top-down
administrative issue

22
 Aristotle on money
• Money had three basic functions
– Means of exchange
– Measure of value (unit of account)
– Store of value
• As the metallic content of money is a
convention determined by the state, the
ruler was entitled to profit by reducing the
metal content of money

23
 Rome
• The Greek glorification of agriculture and
suspicion of commerce and usury
continued
• War and conquest remained the major
source of wealth acquisition
• Most wealth was held in the form of land
• Legal protection of property (land) became
an important contribution to subsequent
eras
24
 Conclusions
• The Greeks and the Romans asked the
fundamental questions
• They established the methods of thinking
that we still use today
• Their emphasis was on logic, and not on
revealed knowledge
• They were far more suspicious of market
activity and the acquisition of wealth than
we are today
25