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HISTORY OF

ECONOMIC THOUGHT
by

Carmelo
Ferlito
March-July 2014

HISTORY OF
ECONOMIC THOUGHT
Lecturer:

Carmelo Ferlito
Verona, Italy, 1978
carmelo.ferlito@gmail.com
carmeloferlito.wordpress.com
https://newinti.academia.edu/CarmeloFerlito

LESSON 1
-

ECONOMICS
AND
HISTORY OF ECONOMICS

References:
1. A. Roncaglia (2005) [2001], The Wealth of Ideas. A History of
Economic Thought, Cambridge, Cambridge University Press,
Chapter 1.
2. C. Ferlito (2013), Phoenix Economics. From Crisis to Renascence,
New York, Nova Publishers, pp. 1-9.
3. L. Robbins (2000) [1998], A History of Economic Thought. The
LSE Lectures, Princeton, Princeton University Press, pp. 5-10.

4. J.A. Schumpeter (2006) [1954], History of Economic Analysis,


London and New York, Routledge, pp. 2-45.

WHAT IS ECONOMICS?
A discipline, a region of the world of thought, should seek to know itself. Like an
individual human being, it has received from its origins to stamp of character, to native
mode of response to the situations confronting it. Right responses, responsibility, will
require of the profession as of the individual an insight into the powers and defects of
the tool which history has bequeathed to it. (G.L.S. Shackle).

Today most economists have given up questioning the purposes and the means of their
scientific work, seeking refuge on a second line: algebraic analysis of functional
relationships. Economics has become econometrics. The result is the formulation of
economic theories that are apparently exact but nevertheless not true. Not everything
that can be proven mathematically is also logically valid.

WHAT IS ECONOMICS?
Today economists believe that the method of natural sciences, founded
precisely on the discovery of universally valid functional relationships, can
be applied to economics. This is the result of relegating the question of
methodology to a kind of scientific itching for minor intellectuals and
meticulous scholars with a mania for philosophy..
But The knowledge is universal, when it manages to give us the meaning
of things, before whose magnitude and whose eternity, all that is pathos and
tendency among men disappears: when it leads us to the primordial and
cosmic, to what in the field of the spirit has the same characters of purity
and power as the oceans, deserts and glaciers. (J. Evola).

WHAT IS ECONOMICS?
Every economic theory can be only part of a more general gnoseological
awareness.
The social process is really one whole indivisible. Out of its great stream the
classifying hand of the investigator artificially extracts economic facts. The
designation of a fact as economic already involves an abstraction, the first of many
forced upon us by the technical conditions of mentally copying reality. A fact is
never exclusively or purely economic; other and often more important aspects
always exist. Nevertheless, we speak of economic facts in science just as in
ordinary life, and with the same right; with the same right, too, with which we may
write a history of literature even though the literature of a people is inseparably
connected with all the other elements of its existence. (J.A. Schumpeter).

METHOD for ECONOMICS?


The method is imposed by the object. This does not mean
surrendering to indistinct methodological relativism but
acknowledging that the phenomena of reality are complex and
varied in nature; it is therefore their deepest essence that inspires
the scholar to take one methodological direction rather than
another.
L. Giussani: This means that the method of knowing an object is
dictated by the object itself and cannot be defined by me.

METHOD for ECONOMICS?


Given this assumption, the fundamental step is evidently to define the object of economic
science. In this regard, we would like to declare from the outset that we do not at all share
the canonical definition whereby the economy is the science that studies the management of
scarce resources to satisfy individual and collective needs by minimising expenditure
(costs). We feel that Misess definition is much more appropriate:
Economics is not about goods and services, it is about the actions of living men. Its goal is
not to dwell upon imaginary constructions such as equilibrium. [] The sole task of
economics is analysis of the actions of men, is the analysis of processes. (L. von Mises).
Similarly, Shackle (2010c, pp. 244-245) argues that economics is about human nature,
human conduct and human institutions. The centre of economic analysis, in our view, is
therefore human action. Dealing with real people is very different from dealing with
phenomena in physics or chemistry or natural sciences in general.

METHOD for ECONOMICS?


It is evident that the proper perspective for studying economic phenomena is subjective.
Understood in this way, methodological individualism does not lend itself to any kind
of misinterpretation. It has nothing to do with presumed individualistic egoism. The
first fact to be noted as regards studying individuals and their actions is that every
gesture is guided by a principle of finality. It is the purpose, the expectation that
determines the action and precisely the opposite of what happens in natural sciences.
G. Menegazzi reaffirms, as a characteristic principle of life, the principle of finality []. It appears that this
thinking the links to the finality outlined by the Aristotelian-Thomistic school, revealing [] how the vital
phenomenon involves a reversal of the causal relationship: in physical phenomena, the result follows in
accordance with an automatic need for the facts that preceded it; in organic phenomena, on the contrary, the
final result, although not yet accomplished, determines the preceding phenomenon. In the physical-chemical
world, there is nothing that would even remotely resemble this self-regulating capacity of living beings. In a
mechanism, the result depends on the process; in an organism, on the contrary, the process depends on the
result: a guiding and unifying entity is manifested that transcends every possible experiment: it is the
principle of life.

METHOD for ECONOMICS?


Scientific evolution has ignored two fundamental characteristics of human
action, i.e. unpredictability and freedom. These aspects impose serious limits on
possibilities for theorising and prediction in the sphere of economics. The
desire to apply the methods of natural sciences to human sciences generates the
perverse effect of identifying presumed functional relationships of a
mathematical nature.
Yet this is not possible: it is, as defined by Hayek, an abuse of reason.
This faulty belief gave rise to the theoretical artifice of general equilibrium
theory, a constructivist tool that is actually rather pointless for economists
having a sincere interest in reality. What, on the other hand, can we ask of
economic science?

METHOD for ECONOMICS?


Economists are faced by qualitatively very well defined elements: man and reality.
The essence of an economists work lies in observation of reality, without seeking to put
it in a cage. Observation of reality helps identify certain dynamic trends that represent
constants in human action. For example, as we have seen, the human action has a
finalistic nature. That is not to say, as in the rationalist terms of the general equilibrium
theory, that every subject maximizes units of utility in accordance with mathematical
models. This is not what happens in reality. It is true, however, as a dynamic trend, that
man acts to achieve goals, to achieve desires. This sees the onset of relationships with
the surroundings, people, things and complex society in general. Economists may
certainly analyse everything that individuals do within the dynamics of enterprise in the
search to attain their objectives. True means much more than rational.
The fragments of what he believed to be his most general happiness.

MATHS, STATS AND HISTORY


In a methodological sphere, there has been considerable discussion about the role of
mathematics, history and statistics in support of economic analysis.
Economic history which issues into and includes present day facts is by far the most important. I
wish to state right now that if, starting my work in economics afresh, I were told that I could study only
one of the three but could have my choice, it would be economic history that I should choose. And this
on three grounds. First, the subject matter of economics is essentially a unique process in historic time.
Nobody can hope to understand the economic phenomena of any, including the present epoch, who has
not an adequate command of historical facts and an adequate amount of historical sense or of what may
be described as historical experience. Second, the historical reports cannot be purely economic but
must inevitably reflect also 'institutional' facts that are not purely economic: therefore it affords the best
method for understanding how economic and non-economic facts are related to one another and how
the various social sciences should be related to one another. Third, it is, I believe, the fact that most of
the fundamental errors currently committed in economic analysis are due to lack of historical
experience more often than to any other shortcoming of the economists equipment (Schumpeter).

MATHS, STATS AND HISTORY


Why does history matter? The study of history gives us a preferential observatory
for the analysis of human action that, obviously, took place in a given historical
time. In addition, historical periods have unitary elements and typical
characteristics which define them and enable us, albeit artificially, to isolate them
from other periods in order to study their specific features. However, even history
cannot be used in ideologically to identify laws of inevitability.

History is made by men. The conscious intentional actions of individuals, great


and small, determine the course of events insofar as it is the result of the inter
action of all men. But the historical process is not designed by individuals. It is the
composite outcome of the intentional actions of all individuals. No man can plan
history. All he can plan and try to put into effect is his own actions which, jointly
with the actions of other men, registered the historical process (Mises).

MATHS, STATS AND HISTORY


So, although with a certain degree of abstraction and with all the nuances of
the case, we can identify some general features of human action, which
relate to the individual as such. The isolation of these features allows us to
locate anything that may be of a universal as part of our science. An
example is, as seen, the body of the character action. Another example is the
theory of the origin of the currency and price formation in the market.
But, on the other hand, there are other phenomena that are typical only of
some certain historical periods and that theorization then goes exclusively
related to the analysis of that particular period. We have in mind in this
regard some historical elements of the industrial revolution or the theory of
business cycles.

MATHS, STATS AND HISTORY


The role of mathematics and statistics is a little more complex. In
fact, mathematics, especially with the advent of econometrics, has
taken on an all-embracing role in the context of doctrine.
Yet we feel that statistics can be useful. But the quantitative
dimension must not define theory. It should rather be a tool
supporting the analysis of reality that can also be independent of
the weight of numbers.

Today, unfortunately, statistics are used to represent sure-fire


forecasts.

MATHS, STATS AND HISTORY


Hayek: Empirical studies, whether they are undertaken with such practical aims in view, or
whether they are confined merely to the amplification, with the aid of special statistical devices,
of our knowledge of the course of particular phases of trade fluctuations, can, at best, afford
merely a verification of existing theories; they cannot, in themselves, provide new insight into the
causes of the necessity of the Trade Cycle.
The elaboration of theory as such does not need statistics for the vision to arise. Statistics can be
used later on as a verification tool. Yet mathematical data can hardly disprove a theory. Or, rather,
it may neither deny nor confirm anything. The interpretative force of an intuition cannot be
assessed by statistics. Let us suppose, in a given historical moment, that it is statistically possible
to observe that increased demand caused a certain variation in prices. The fact that this occurred
does not prove that a given variation in demand will always correspond to the same variation in
price. And such evidence may not even be enough to show that the variation in price was caused
by the variation in demand. The variation in the price level, for example, may have been caused
by a variation in the amount of money (mention need only be made of the price revolution in the
Sixteenth Century and the relationship with the discovery of new American mines).

MATHS, STATS AND HISTORY


Reality is far too complex for relationships between two phenomena to be isolated from
the context and interpreted merely by means of statistical analysis. The intelligence of
the scientist makes the difference and gives rise to a true theory, even if it is not exact in
terms of mathematical measurability.
Is economic forecasting possible? It depends on what we mean by forecast. If we
purport that our science is able to say when and to what extent a certain economic event
will occur, obviously such forecasts are not possible.
The power of a genuine albeit inexact economic theory lies in saying what may happen
in the wake of other phenomena. For example, as we shall see, we support that the
imbalance between the natural rate and the monetary rate of interest will produce an
alteration of productive structure capable of generating, after an artificial boom, an
economic crisis. But to say when this will occur, to what extent and how long the crisis
may last is pure science fiction.

MATHS, STATS AND HISTORY


A good economist is like a bottle of wine. He
must begin by having the luck to be laid down,
as it were, in a vintage year, when he himself
and his class companions are the high-quality
stuff in which ideas and theories ferment and
discourse sparkles in a glow of golden light. But
this is not enough. He must mature. (Shackle).

WHAT IS HISTORY of ECONOMICS?


-The importance of space and time: do you know what we are talking about?
-Definition (Schumpeter): BY HISTORY of Economic Analysis I mean the history of
the intellectual efforts that men have made in order to understand economic phenomena
or, which comes to the same thing, the history of the analytic or scientific aspects of
economic thought.

-Is History of Economic Thought still relevant?


- Progress in Economics? What does it mean? ECONOMICS IS NOT CUMULATIVE.
-Economics as Social Science - The role of History vs Exact Sciences. Is Economics a
science? (Schumpeter 1.3).
- The wide ignorance of today economists: they are useless.

WHAT IS HISTORY of ECONOMICS?


-History as a mean to open your mind and to make you a better
scientist.
There are more things in heaven and earth, Horatio, than are dreamt of
in our philosophy: the history of economic thought, with its own various
research strategies, is of great help in keeping economists fully aware of
the truth of Hamlets observation. Not least for this reason, it is a field
which every economist should practise.

How and Why to study


HISTORY of ECONOMICS?
Schumpeter (1908): To understand is to forgive.
Robbins: The question may have arisen in your minds, Why do reasonable people
studying economics attach some importance to the history of the subject? Well, the
history of the subject is not necessarily important to you in professional life, unless you
aspire to teach the subject matter later on. Be under no delusion in that respect. But as
regards understanding of what goes on in the contemporary world, of what goes on in
intelligent conversation about our subject, the answer is different. The answer is, I
think, that the subject is of some use. Its a subject which, strange as it may seem, has
the property of being describedto use the fashionable wordas relevant to your
interest in the world around you.

How and Why to study


HISTORY of ECONOMICS?
Advantages (Schumpeter, 1.2).
Why Economics is a science (Schumpeter 1.3).

Supports for Economics (Schumpeter chapter 2): History, Statistics,


Theory, Sociology.

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