Spring Semester 2001

1
Spring Semester 2001
Economic Thought and Methodology
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Lecture One Introduction

• Seminar Arrangements
• Economics before Adam Smith
• Aristotle to Aquinas

3
Why study Economic Thought Methodology?

• You already have
• but until now, textbooks have done it for
  youbadly!
• Lost insights and preserved mistakes
• The bad that men do lives on after them the
  good is oft interred with their bones. So let it
  be with ...
• Best of the past often forgotten by majority of
  profession
• Errors often preserved (many examples given in
  this course)
• Path dependent development
• current state of theory reflects past history
• learning history makes present theories easier to
  understand

4
Why study Economic Thought Methodology?

• Read the originals! Textbooks often very poor
  rendition of original works 5 star restaurants
  vs Big Macs
• I accuse the classical economic theory of being
  itself one of these pretty, polite techniques
  which tries to deal with the present by
  abstracting from the fact that we know very
  little about the future. Keynes, OREF II
• But beware and be patient Early writings will
  look really strange at first
• Archaic language
• Foreign concepts nothing like economics you have
  learnt to date
• but in many ways superior to modern economics

5
Why study Economic Thought Methodology?

• Economists from different schools behave like a
  comedy sketch
• Disagree over fundamentals
• Argue past each other
• Dispute the facts
• Fail to communicate because of different
  assumptions
• Impossible to decide best theory by appeal to
  facts

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Why study Economic Thought Methodology?

• Exposure to non-mainstream thought
• Macro/Micro/Finance cores reflect Majority
  opinion of profession
• Significant minorities reject mainstream
  approach
• Post Keynesians, Austrians, Marxists, External
  critics of economic rationalism
• Youll get a taste of each of these in this
  course
• covered in more detail in Political Economy (next
  year)
• Problems with theories discussed
• Theories of economics finance not as cut and
  dried as textbooks make them appear
• Weaknesses on all sides of economic debate

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Lectures

• Illustrate unifying themes in history of thought
• Introduce you to each school and major proponents
• Set each school in historical context
• Explain areas of controversy
• Some controversial interpretations of literature
• Available in print at bookshop, on line at
  bus.uws.edu.au/Steve-Keen
• Can get by without attending, but
• notes skeletal, lots of detail added in
  lectures
• easy to ask questions during lectures
• I hope, fun!
• Special arrangements 2 lectures in week of
  September 03

8
Textbooks

• Lecture Notes available from Bookshop
• All slides from last years lectures
• Handcount
• How many have 2nd hand copies of last years?
• How many need a copy?
• Original Readings in Economics Finance
• Extracts from original writings from Aristotle
  (350BC) till now in 3 volumes
• Available from Bookshop
• Handcount
• How many have 2nd hand copies of last years?
• How many need a copy?

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Seminars

• Not your usual tutorial
• Reading
• 30-60 minutes reading of Original Readings volume
  during each seminar
• Guarantees you know something about the seminar
  topic
• Gives you an extra chance to take part in
  discussion
• Can ask questions/discuss papers during reading
  time
• 2 Presentations
• Discussant for each presentation
• Comments from tutor and class

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Seminar presentations

• Modelled on best academic work practices
• 12 minute presentation to the class, covering
• Arguments in original references
• Arguments in papers commenting on originals
• Your own opinions
• Comments by discussant who has
• Read the original references
• Read the papers commenting on originals
• Written a paper to same standard as presenter
• Read presenters paper (received in this weeks
  lecture)
• Comments by others in class and tutor

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Essay

• Seminar presentation becomes basis of essay
• Essay should reflect benefit of comments from
• Discussants
• Class
• Tutor
• Chance to improve your essay before its marked
• One topic worth 40 of total assessment
• 10 for presentation
• 20 for essay
• equips you to answer one 10 question in exam
• assists with doing 20 overview question
• Worth doing it well

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Assessment

• 10 for seminar presentation
• For content
• Primary sources read and understood
• Secondary sources consulted, views incorporated
• Your own considered evaluation
• Answer is pertinent to the question
• Replies to comments sensible accept constructive
  criticism, rebut ill-informed comments.
• For presentation
• Overheads, handouts, etc.
• Low mark for just reading a paper

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Assessment

• Presentation paper should be rough draft of your
  eventual essay
• Not finished to essay standard, but
• Arguments obvious to discussants
• References shown
• 2 copies needed one for me, one for discussant
• Due in the lecture the week before
• 1/2 mark deducted per day (and given to
  discussant) if not delivered on time
• Maximum deduction/transfer 2 marks for delivery
  in seminar
• Can revise further (after submitting before
  seminar)

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Assessment

• 20 for discussant
• 10 for paper
• 10 for critique of presenters paper
• Good marks for critique if
• Read primary and major secondary sources
• Read the seminar paper
• Make critical comments (both favourable and
  unfavourable)
• Devise questions which contribute to the class
  and the presenters understanding of the topic
• Who plays role of discussant decided by coin toss
  when papers submitted

15
Assessment

• 20 for essay
• An extension of material in seminar presentation
• Due 3 weeks after seminar presentation
• Good marks for same reasons as for presentation
  content, plus incorporating comments made in
  seminar
• Improve argument where discussants found it
  lacked clarity
• Incorporate references you may have missed
• Rebut criticisms you disagree with
• 50 for final exam
• 3 hour exam, covering whole course
• One compulsory overview question, 3 options out
  of over 12 choices

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Materials

• Web resources
• http//bus.uws.edu.au/Steve-Keen/Courses/ETM
• http//www.debunking-economics.com
• Original Readings
• Closed Reserve Materials under 18 headings
• Pre-Classical Economics, Physiocratic Economics,
  Classical Economics, Marx, The Rise of
  Neoclassicism (Walras to Marshall), Keynesian
  Revolution, The Neoclassical-Keynesian Synthesis,
  Neoclassical Resurgence, General Equilibrium
  Theory, Rational Expectations, Game Theory, The
  Capital Controversies, Finance, Methodology,
  Dynamics, Money, Alternative Schools, External
  critique
• Book Debunking Economics (in bookshop)

Now on to content...
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Why does economics exist?

• Key reason the complexity of capitalism
• pre-capitalist production and distribution
  transparent
• Slave empires
• Conquerors live on work of slaves
• Feudal system
• Feudal king rules lords, lords rule serfs, serfs
  do the work
• Capitalism far less transparent
• Output, distribution determined by market
• But what determines the market?
• Many theories economic theories attempt to
  uncover fundamental determinants of production,
  exchange distribution in capitalist economies
• Some central themes, with different
  interpretations characterising different schools

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Central themes

• (I) Concept of value
• Value in use and value in exchange
• Value reflects objective effort vs
• Value reflects subjective utility
• (II) Role of utility/use-value in determining
  price
• Pre-classicals mixed
• Classicals none
• Neoclassicals, Austrians pivotal
• Marx eclectic misunderstood
• Post Keynesians, Sraffians determines quantity,
  not price

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Central themes

• (III) Role and nature of money
• Quantity Theory
• Money simply a veil over barter
• money supply exogenous (set by government)
• Banking School, Keynes etc.
• Money economy fundamentally different to barter
  economy
• Money supply endogenous (set by market)
• (IV) Uncertainty as unknowable vs risk as proxy
  for uncertainty (Lecture 6)
• (V) Static analysis vs dynamic analysis (Lecture
  10)
• (VI) The concept of surplus (Lecture 3)

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Pre-Classical

• Aristotle Aquinas
• Just Price (with ambiguous meaning)
• Mercantilists
• Nationalism in pricing
• Commerce as the pursuit of war by other means
• Physiocrats
• Dynamic input-output vision of economy
• Land as the ultimate source of value

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Aristotle The Just Price

• Philosopher writing in Greece, 350BC
• Social/economic system of the time
• Freemen owned everything, directly or via State
• Slaves owned nothing, produced vast majority of
  output
• Within Freemen
• Ranked by land ownership, religious function,
  birth (aristocracy vs non-aristocratic), sex
• City-state Democratic system of government
• Every citizen could attend Assembly and vote
• Strong sense of nation-state, the common good (of
  freemen)

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Aristotle The Just Price

• Most transfers of goods not exchange as we know
  it but based upon role/rank in society
• But some exchange between individual producers,
  traders from other societies, etc.
• Aristotle considered philosophical basis for
  value placed on commodities in exchange
• Overall context was maintenance of justice
  between freemen
• Starting from both the unjust man and the unjust
  act are unfair or unequal, Aristotle derives
• Exchange must involve equality

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Aristotle The Just Price

• For exchange to be just, things being exchanged
  must in some sense be equal. Parties must not
  feel they have lost or gained
• These names, both loss and gain, have come from
  voluntary exchange for to have more than one's
  own is called gaining, and to have less than
  one's original share is called losing, e.g. in
  buying and selling and in all other matters in
  which the law has left people free to make their
  own terms but when they get neither more nor
  less but just what belongs to themselves, they
  say that they have their own and that they
  neither lose nor gain. Therefore the just is
  intermediate between a sort of gain and a sort of
  loss, viz. those which are involuntary it
  consists in having an equal amount before and
  after the transaction.

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Aristotle The Just Price

• Must be something comparable in two different
  goods
• Let A be a builder, B a shoemaker, C a house, D
  a shoe. The builder, then, must get from the
  shoemaker the latter's work, and must himself
  give him in return his own. For it is not two
  doctors that associate for exchange, but a doctor
  and a farmer, or in general people who are
  different and unequal but these must be equated.
  This is why all things that are exchanged must be
  somehow comparable. OREF I
• Comparable how? An equal amount of what?

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Aristotle The Just Price

• Aristotles nomination money
• It is for this end that money has been
  introduced, and it becomes in a sense an
  intermediate... The number of shoes exchanged
  for a house ... must therefore correspond to the
  ratio of builder to shoemaker. For if this be not
  so, there will be no exchange and no intercourse.
  And this proportion will not be effected unless
  the goods are somehow equal. All goods must
  therefore be measured by some one thing... Now
  this unit is in truth demand, which holds all
  things together (for if men did not need one
  another's goods at all, or did not need them
  equally, there would be either no exchange or not
  the same exchange) but money has become by
  convention a sort of representative of demand
  OREF

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Aristotle The Just Price

• Problem what is money equal to?
• A circular argument and
• Conflicting themes equality of effort (The
  builder... must get from the shoemaker the
  latter's work, and must himself give him in
  return his own) and equality of demand (Now
  this unit is in truth demand)
• Never resolved by Aristotle
• Marxs explanation for this failure
• Aristotles theory based on equality, but
• Grecian society based on slavery
• Aristotle couldnt see past contradiction

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Aristotle The Just Price

• Methodological issues
• Rational Deductivism (vs Rational Inductivism)
• Deductive logic derive general principles from
  initial premises
• Inductive logic induce general principles from
  observation
• Aristotle tried to deduce all from initial
  premise
• EVERY art and every inquiry, and similarly every
  action and pursuit, is thought to aim at some
  good and for this reason the good has rightly
  been declared to be that at which all things aim

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Aristotle The Just Price

• Problem what is the good to which slavery aims?
• One-sided only--good of slave owner, not slave
• Tyrannical too is the rule of a master over
  slaves for it is the advantage of the master
  that is brought about in it. Now this seems to be
  a correct form of government says a
  slave-owner!
• Deductivism blinded Aristotle to key aspect of
  society
• Slavery basis of production
• Production basis of exchange
• Inequality and injustice therefore fundamental to
  exchange in Grecian economy
• Could not then deduce what made 2 goods equal
  in exchange in his society

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Aquinas The Just Price

• Theologian, writing in 1250AD
• Feudal society
• King/Lords at peak of society
• Wealth based on land ownership
• Agricultural society, direct manual labour by
  serfs

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Aquinas The Just Price

• Ownership of land included ownership of those
  living on it
• Serfs
• Rural workers
• Unfree, could be sold, but far more rights than
  slaves.
• Some land reserved for own produce (minimum 4
  acres in England), so normally self-sufficient
• Required to work land of lord as well
• Some people unbonded to land guild-owners,
  workers in guilds
• Catholic religion dominated thought good evil,
  worship of god, etc.
• All arguments made with reference to role of god

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Aquinas The Just Price

• Revived Aristotlean focus on rationality in
  context of religious Middle Ages
• As with Aristotle, focus on justice
• More emphasis upon work as basis of equality
• Because a man's work is said to be just when it
  is related to some other by way of some kind of
  equality for instance, the payment of the wage
  due for a service rendered.
• But two bases for justice in exchange
• a thing can be adjusted to a man ... when a man
  gives so much that he may receive equal value in
  return, and this is called natural right. In
  another way a thing is adjusted or commensurated
  to another person by agreement,... when ... a man
  deems himself satisfied if he receive so much.

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Ambivalence towards trade

• A utility or cost basis for Just Price?
• the amount of the recompense for a favor
  received should depend on the utility accruing to
  the receiver, and this utility sometimes is worth
  more than the thing given, for instance, if the
  receiver be in great need of that thing
• exchange of things is twofold one, natural ...
  and necessary whereby money is taken in
  exchange for a commodity in order to satisfy the
  needs of life... The other kind of exchange is
  ... of any commodity for money not on account of
  the necessities of life but for profit, the
  latter is justly deserving of blame...
  Nevertheless, a man may ... seek gain, not as an
  end, but as payment for his labor.

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Finance The Prohibition of Interest

• Usury as any interest on money lent
• To take interest for money lent is unjust in
  itself, because this is to sell what does not
  exist, and this evidently leads to inequality
  which is contrary to justice.
• money was invented chiefly for the purpose of
  exchange, ... Hence, it is by its very nature
  unlawful to take ... interest, and just as a man
  is bound to restore other ill-gotten goods, so is
  he bound to restore the money which he has taken
  in interest.
• He ... may accept repayment..., but he must not
  exact more. ... if he exacts more for the
  usufruct of a thing which has no other use but
  the consumption of its substance, ... his
  exaction is unjust.

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Medieval Ideology

• Anti-capitalist in significant ways
• Against merchant profit
• Now if you sell a thing for a higher price than
  you paid for it, you must either have bought it
  for less than its value or sell it for more than
  its value. Therefore, this cannot be done without
  sin.
• Support tradesmen only w.r.t recompense for
  labour
• if he sells at a higher price some-thing that
  has changed for the better, he would seem to
  receive the reward of his labor.
• Again, a cost-basis for exchange
• Anti-financiers
• it is by its very nature unlawful to take
  interest

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Medieval Reality

• Feudal manse centre of agricultural output but
• trade necessary for delicacies, specialty items,
  manufactures
• merchants needed for trade
• finance needed to fund merchants, wars
• In practice, moneylending made province of
  non-Catholics
• Catholic strictures not strictly applicable to
  non-Catholics
• Old Testament/Jewish Talmud not as prohibitive of
  interest
• Deuteronomy Unto a stranger thou mayest lend
  upon usury
• Ruses used by all religions to circumvent usury
  laws

And now for something completely different...