Economic History Debunked: Economics Before Adam Smith

There was a rich history of economists long before there was an Adam Smith.  They didn’t necessarily call themselves “economists” or use even the older term “political economy”, but what they were studying was the “dismal” science known as economics.  Despite this, “Smith is widely cited as the father of modern economics and capitalism and is still among the most influential thinkers in the field of economics today” according to many.

Like so many other western sciences, economics has roots in the Greek philosophers of ancient times.  Plato stumbled onto a variation of the advantages of the division of labor.  One of Plato’s greatest students, Aristotle, also touched on the subject of economics.  Just read book I of “Politics” Chapters 8(VIII) through 11(XI).  It is available online.  In it he discusses the “art of acquisition”.  He touches on subjects that modern economists would refer to as “the nature of money”, the concept of a monopoly, and markets.

Skipping ahead a few centuries… we come to Spanish Scholasticism at the University of Salamanca.  Scholasticism is a term usually used to describe a type of learning by medieval monks and scholars.   The University of Salamanca in Spain was founded by a group of scholastic scholars.  Austrian economist Joseph Schumpter did a lot of research to uncover much of the work done on economic thought at the University.

Similarly the Spanish Scholastic Diego de Covarrubias y Leiva (1512–1577) a distinguished expert on Roman law and a theologian at the University of Salamanca, wrote that the “value of an article” depends “on the estimation of men, even if that estimation be foolish.” Wheat is more expensive in the Indies than in Spain “because men esteem it more highly, though the nature of the wheat is the same in both places.” The just price should be considered not at all with reference to its original or labor cost but only with reference to the common market value where the good is sold, a value, Covarrubias pointed out, that will fall when buyers are few and goods are abundant and that will rise under opposite conditions

Schumpter gives a lot of credit to the late medievalearly Renaissance scholars at the school for making advances in economics that were later credited to Austrian economists that came 300+ years later.  Pretty good head start if you ask me.

To read more about these religious scholars struggle with “Just Price” you can read an excerpts from the book, “Modern Catholic Social Documents and Political Economy”.  This link to Google Books should allow you read the whole excerpt “Scholastic Just Price” that starts on the bottom of page 63.  To sum up the excerpt, there was a great debate of whether the “Just Price” of a product was the market price, or the “cost to produce” price.    It is an interesting discussion because what they were discovering without realizing it, I think, was what came to be known as “economic rent”.

The next group to talk about is probably the mercantilists.  For those who do talk about mercantilism, I think the conventional wisdom gets it right.  Mercantilism isn’t so much a complete economic theory as much as it’s a collection of disparate ideas of how to make the ruler of a nation state rich and rival rulers poor.  I won’t rehash what others have said better:

Mercantilism was a reaction against the economic problems of earlier times when states were too weak to guide their economies and when every town or principality levied its own tariffs on goods passing through its borders.

The modern age brought the rise of powerful nation states (Holland, France, Spain and England) and was marked by almost constant warfare. Money (bullion) was needed to support ever-expanding armies and navies. Mercantilist concepts developed from this need.

Underlying this theory was the belief that wealth was finite. If one nation hoped to grow richer, it had to do so at the expense of some other nation.

Mercantilism drove economic and foreign policy during Renaissance Europe.  The reason I mention it is because it’s existence was what our next group was rejecting:  The Physiocrats.  This group came on the scene in the mid 1700s – just a couple decades before Adam Smith published his Treatise.  They started and were based entirely within France.  There physical location is important.  The french economy was under severe distress at the time.  It makes sense that a group would be formed to understand why and come up with ideas of how to fix it.  While this group didn’t come up with supply & demand concepts, they are sometimes still cited for things that they did come up with.  Some things that Smith also discovered and some things that he missed.  There is too much to put in this post, but they were a significant school of economic thought before Adam Smith(It is unclear to me how much Smith was affected by the french physiocrats). After the Physiocrats, finally came Adam Smith’s treatise on the Wealth of Nations.

Here is one more worthy historical note.  My above analysis is extremely AngloEuropean centric.  I’ve completely left out of my above are any non-western thinker.  There were several non-western thinkers that touched on economics that are worth exploring from the middle east, India, China, and probably others that I haven’t found yet.  It’s a shame our natural bias seems to leave out non-European thinkers from the official history.

As you can see he was most certainly not the first economics writer.  I’m not sure why he, historically, gets the credit for being the first.  Maybe because his book was the most complete and accurate tome written at the time.  A worthwhile accomplish no doubt, but not sure why he seems to get credit for “founding” economics.

Investopedia Unabshadly Comes Out in Favor of Keynesian Economics

Investopedia is a really good website to go to for the conventional economic view.  Being that, it is less than favorable to John Maynard Keynes and Keynesian economics in many of it’s articles.  In many cases they state things he  supposedly got wrong or go as far as putting words in his mouth like, “the government can spend your money better than you”(note: he never suggested anything like that).  It’s for that reason I had a good laugh when I read their article on Mercantilism which states(emphasis mine):

This approach assumes the wealth of a nation depends primarily on the possession of precious metals such as gold and silver. This type of system cannot be maintained forever, because the global economy would become stagnant if every country wanted to export and no one wanted to import. After a period of time, many people began to revolt against the idea of mercantilism and stressed the need for free trade. The continued pressure resulted in the implementation of laissez faire economics in the nineteenth century.

The emphasis part is exactly right.  It is impossible for every country to increase exports because those export must go to a country as an import.  If every country tries to do export and bans imports, then overall trade is reduced as nations stop importing.  The hilarious part is that this is one of the fundamental precepts of Keynesian economics.  This is almost exactly the Paradox of thrift.   It is impossible for every person to save money because that money they save must come from someone who is spending.  Your consumption is my Income.

The best part of this is how matter-of-fact it makes the point.  It offers no qualifications on the statement because mercantilism is so universally condemned.  It never occurred to me until recently that it’s universally condemned for the opposite reason that market fundamentalists condemn Keynesian economics.

It’s nice to see investopedia accept such an important keynesian concept.  Now, maybe a Keynesian wrote that article and would explain the apparent contradiction between the overall site and this particular article(probably not, but maybe).  Even so, I bet I could show that article to any market fundamentalist and they would not see anything wrong with that statement simply because it is used to promote “laissez faire”.