Rethinking the History of Economic Thought & Methods

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The following chapter is part of the book 'Economy Studies - A guide to rethinking Economics Education'.  It has been published by the Centre for Economy Studies that works on improving and modernising economics education to ensure that students will be better prepared for their future careers and the societal challenges we face today and in the coming decades. 

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Economy Studies A guide to rethinking Economics Education 

The history of economic thought and methods is a crucial aspect of the education of economists. In building block 4, History of Economic Thought & Methods, we proposed to expose students to the historical diversity of economic ideas and methods both within and outside the discipline. In this chapter, we briefly explore how courses on the history of economic thought and methods could look if they were pluralist and interdisciplinary. 

The core logic here is that ideas should be included if they are relevant for understanding the economy. As such, it should not matter who developed the idea, and whether that person is an academic economist or not. In other words, with the history of economic thought we suggest to focus on the long line of thinking on the economy, rather than the history of economists or the academic discipline of economics. 

Of course, the majority of economic thinking is done by economists. But as we discuss in more detail in Interdisciplinary Economics, many crucial insights into economies have been developed by other social scientists, such as economic sociologists and economic geographers. 

Prevalent narratives

Today, most history of economic thought courses, especially when taught by specialists in the field, are fairly pluralist and critical in their approach, as opposed to taking a narrow and celebratory ‘Whig history’ approach that was discussed in Pluralism. Many history of economics courses do, however, pay less attention to methods and economic insights coming from other disciplines. For textbooks, unfortunately the same often applies as many textbooks cover roughly the same material (Barber, 2010; Biddle, Davis, & Samuels, 2008; Blaug, 1997; Brue & Grant, 2012; Colander & Landreth, 1994; Heilbroner, 1953; Hunt & Lautzenheiser, 2015; Medema & Samuels, 2013; Rima, 2003; Robbins, 2000; Roncaglia, 2017; Sandmo, 2011; Screpanti & Zamagni, 2005). 

There is some difference in how early they start and how extensively they include ancient Greek, scholastic, and Muslim economic thought, but most do include discussions on mercantilism and physiocracy. The publication of the Wealth of Nations by Adam Smith in 1776 is generally described as the beginning of classical political economy and thereby also of the discipline of economics (or political economy as it was called at the time). From here various 19^th century strands of economic thought, such as Malthusian, Ricardian, historical, and socialist (mainly Marxian, but sometimes also utopian and anarchist) economics are often included. Then the narrative shifts to the origins and development of modern mainstream micro- and macroeconomics, most notably focussing on the marginalist and Keynesian revolutions and later developments of this thinking. Most books, although not all, do also include what is generally called heterodox economics, with strands such as institutional, Austrian and post-Keynesian economics.

Not all books on the history of economic thought do, however, confine themselves to the economics discipline and its theories. Perhaps most notably the classic History of Economic Analysis by Schumpeter (1954) does include extensive discussions on economic history, economic sociology, political economy, psychology and philosophy. More recently Fine and Milonakis (2009b) focused explicitly on the social and the historical in the evolution of economic theory and by doing so incorporated the early histories of economic history and economic sociology. Another important contribution is made in The Unsocial Social Science? Economics and Neighboring Disciplines since 1945 by Backhouse and Fontaine (2010), in which they discuss the relationships between economics and psychiatry, anthropology, the behavioural sciences, and sociology. These materials can be used to enrich history of economics courses, along with material dedicated to economic subdisciplines and methods in specific, such as the following:

• Economic Methodology: A Historical Introduction by Harro Maas, from 2014.
• Economic methodology: Understanding economics as a science by Marcel Boumans & John B. Davis, from 2015.
• Where did the new economic sociology come from? by Bernard Convert & Johan Heilbron, from 2007. 
• The handbook of economic sociology by Neil J. Smelser & Richard Swedberg, most recent edition from 2010. 
• The New Oxford Handbook of Economic Geography by Dariusz Wójcik, from 2000. 
• Economic Geography: A Critical Introduction by Brett Christophers & Trevor J. Barnes, from 2017.
• The Routledge Handbook of Modern Economic History by Robert Whaples & Randall Parker, from 2013. 
• Routledge Handbook of Global Economic History by Francesco Boldizzoni & Pat Hudson, from 2016. 
• Economic Anthropology: History, Ethnography, Critique by Chris Hann and Keith Hart, from 2011. 
• A handbook of economic anthropology by James G. Carrier, from 2012.
• Comparative Political Economy: States, Markets and Global Capitalism by Ben Clift, from 2014. 
• Introduction to International Political Economy by David N. Balaam & Bradford Dillman, from 2018. 

An expanded narrative

To give a bit more idea of how courses on the history of economic thought could be structured in a pluralist and interdisciplinary way, here is a brief description of how a broad narrative could also look. In Economic Approaches, we shortly discuss the history of the various relevant economic approaches, and in Interdisciplinary Economics those of the various economic fields in other disciplines are briefly described.

Early History 

Throughout history and throughout the world, people have striven to understand and to improve the social-material organisation of the societies they lived in. Before Adam Smith curiously wandered into the pin factories of 18th century Scotland, Ibn Khaldun, for example, was known for his fascination with the political and economic cycles empires experienced up to the 14th century. Before him, Chanakya in ancient India, wrote on monetary and fiscal policy, regulation of private enterprises and running state-owned enterprises. And even he was most probably not the first to ponder these questions in a structured fashion.

During the 19th century the discipline of economics, or rather political economy as it was called back then, slowly began to take shape. In 1767 Sir James Steuart published the first full English book on political economy, called An Inquiry into the Principles of Political Economy. During this period, economic thought was for the most part characterized by individual thinkers who were themselves trained in other older existing disciplines. Political economy was generally considered to be a part of moral philosophy, history or law. 

In the UK, what is called classical political economy today became a highly influential strand of economic thinking during the 19th century. Karl Marx later built on these economic ideas and developed an economic tradition of thought that was linked to socialist, rather than classical liberal ideas. Although departing from very similar theoretical ideas about how capitalism works, classical and Marxian political economists arrived at opposing conclusions. Classical political economists argued strongly in favour of capitalism, arguing it brings prosperity as well as freedom. Marxian political economists, on the other hand, opposed capitalism, arguing that while it does bring enormous material wealth, it also creates mass deprivation and alienation as well as it forces everyone in self-destructive competitive cycles. 

In Germany, another approach emerged which is generally known today under the banner of the historical school. These economic thinkers disputed the universalist claims made by classical political economists. Instead, they argued that every country had its own character and history. They suggested each country should pursue its own government policies to develop its industrial development and tackle the social issues that arise out of industrialization. Politically, this put them in them in the centre, between the liberalists who embraced capitalism and the socialists who argued for overthrowing it, as they sought to tame the economic system with the help of the state.

Change to ‘Economics’

Around the turn of the 19th and 20th century, a separate academic discipline revolving around studying the economy began to emerge. Initially these departments and faculties carried the name of “political economy”, but slowly the drive to seem more ‘scientific’ and apolitical caused dropping the term “political” from its name changing it to economics. 

This was not merely a change of name. The institutionalization of the discipline also created clear boundaries with different social sciences that previously were difficult to distinguish from each other. In this way, fields such as economic history and economic sociology emerged, which had previously been an integral part of political economy. The institutional structures and divisions that formed during the turn of the 20th century are still largely in place. To this day, those dividing lines have defined how the landscape of economic thinking looks. 

At the end of the 19th century, a lineage of economic thought began to take more shape through what is nowadays called the marginal revolution. It saw key publications in 1871 from Jevons and Menger, and in 1874 from Walras. The core idea was that people optimize their utility and thus look at the marginal differences amongst trade-offs. As such, there was a strong micro focus on how individuals theoretically behave in markets and how prices are determined.

As these marginal theories were further developed, a number of different stands became identifiable. First, the Austrian school distinguishes itself from the others by emphasizing its belief in deductive reasoning and logic together with its rejection of mathematics and statistics. The other marginal strands are generally collectively referred to as neoclassical economics. It is, however, important to realize that there is not just one single way of approaching markets from a neoclassical perspective. Perhaps most notably, there is the opposition between general and partial equilibrium approaches, associated respectively with Léon Walras and Alfred Marshall. The former aims to model entire economies by assuming simultaneous and interdependent market equilibriums, while the later focuses on the supply and demand of specific markets in isolation.

As Germany was the academic centre of the world during the 19th century, most American scholars went there to study economics. In doing so, they were heavily influenced by the historical school, and in particular by its empirical and inductive approach to studying economies. In the early 20th century, many US economists began to work on what is known as institutional economics. They empirically investigated how habits and social structures shape economic life, rather than working on the assumptions that people are isolated individuals who optimize their utility. 

An important aspect of the development of economics are the methods that are used to study the economy. During the 19th and early 20th century quantitative research methods were developed, both for data collection with survey research and data analysis with statistics. This early methodological work resulted also in the creation of national account systems, with numerous aggregate measures of which gross domestic product (GDP) is most famous. These methodological inventions became hugely important sources of information for economists and to this day analysing quantitative dataset is one of the core activities of economists. At the same time mathematics, as a language to express economic theory, also became increasingly influential.

Interwar Pluralism

During the first half of the 20th century, the mainstream discipline was characterized by a diversity of approaches, such as neoclassical, Austrian, Marxian, institutional, and Keynesian economics, causing some to refer to the period as interwar pluralism. 

A key aspect of the story was the Keynesian revolution during the Great Depression in the 1930s, which is often said to be the start of (modern) macroeconomics. Keynes claimed that the earlier classical liberal beliefs of laissez faire were no longer up to the task of getting the economy out of the crisis and that instead government intervention in the economy was needed to save capitalism. By stimulating the economy through government spending, economic activities would restart to a large extent thanks to the multiplier. Keynes argued the whole economy was not simply the sum of the parts, but instead was characterized by its own dynamics. The macroeconomy would not always automatically arrive at full employment and bad equilibriums could persist over time, even if there were no price and wage rigidities. Rather than always trusting on the market and its participants’ rationality, Keynes emphasized the herd behavior and fundamental uncertainty in economic life. 

Ever since Keynes wrote the General Theory of Employment, Interest and Money, there have been discussions about how these ideas about macroeconomics relate to those in microeconomics, in particular whether they are consistent with neoclassical microeconomic ideas or not. As a result, there have been multiple branches of Keynesianism. At one end of the spectrum we find post-Keynesianism which rejects neoclassical microeconomics and has built what is sometimes called post-Keynesian or heterodox microeconomics on the basis of assumptions of fundamental uncertainty and market power. Neo-Keynesianism argues that Keynesian macroeconomics and neoclassical microeconomics are two different and (largely) independent realms of economic analysis and tried to put Keynes his arguments in mathematical models, most notably the IS-LM model which to this day is the core of introductory macroeconomics courses. New-Keynesianism is closest to neoclassical economics, building on new classical macroeconomics with its neoclassical micro-foundations and rational expectations to argue for government intervention after adding assumptions about price stickiness and imperfect competition.

Neoclassical Synthesis

The neo-Keynesian idea, also known as the neoclassical synthesis, became largely dominant after the second world war, creating an end to the pluralism that previously characterized the discipline. The stagflation of the 1970s, however, discredited many Keynesian ideas and gave rise to new neoclassical approaches to macroeconomics, such as new classical and new Keynesian macroeconomics. These approaches to macroeconomics, in turn, were discredited by the financial crisis of 2008. Ever since, there has been a search for a new way of doing macroeconomics.

Keynesian thinking also inspired new ideas in the field of international economics and economic development. Most notably various Latin American thinkers, also known as structuralist economists, tried to understand how unequal development could persist without constant widespread use of military force. Their core insight was that economic structures, in terms of technologies, sectors and market institutions, were key in keeping a rich industrial centre and poor agricultural periphery. This line of thinking started roughly during the 1950s, although similar ideas building mainly on Marxian thought emerged also earlier. Since then many development scholars have further developed theoretical ideas, such as those of new developmentalists that argue for combining the use of industrial and exchange rate policy to pursue export-led and profit-led growth strategies.

Formalist Dominance

Over the twentieth century, a formalist approach to economics, in which form is prioritized over content, has become increasingly dominant. This change resulted in a redefinition of what economics is about, moving away from a discipline focused on studying the subject matter of the economy towards a way of thinking and analysing any subject matter (ref Coase economics and contingent disciplines). In this way, economics, or ‘the economic approach’, has become synonymous for many people with a rational choice, or neoclassical, approach. Economists also began to use this ‘economic’ approach to study subject matter traditionally studied by other social scientists, a practice that is often referred to as ‘economic(s) imperialism’ (Fine & Milonakis, 2009a). From economics imperialism to freakonomics: The shifting boundaries between economics and other social sciences: Routledge.). While many have criticized the formalist approach for choosing analytical rigor over relevance, axiomatization and mathematical modelling are among the most defining characteristics of mainstream economics today. Surveys since the 1990s indicate that many economists feel skills at mathematics are more important to be a successful economist than having knowledge of the economy (Colander & Klamer, 1987; Colander, 2008; Van Dalen, Klamer, & Koedijk, 2015). As such, it is perhaps no surprise either that most qualitative studies of economic topics can be found in other social sciences, such as in economic anthropology and economic sociology.

While the economics discipline became theoretically more narrow during the latter half of the 20th century, these other social sciences developed new strains of economic thinking. The subdisciplines of economic sociology and economic history existed since the beginning of the 20th century, but have experienced revivals roughly since the 1960s and 70s. The subdisciplines of economic geography and economic anthropology arose after the second world war and political economy arose during the 1970s within political science. 

Each of these five sub-disciplines is to this day the home of many important economic thinkers, who analyse different aspects of economies or study the exact same topics as economists but use other approaches. For a more extensive discussion of these subdisciplines, see Interdisciplinary Economics.

Over the last decades, the great tree of economic ideas has evolved more rapidly than ever, and into various new directions. Multiple new approaches, such as social network analysis, field theory, cultural approach, ecological, behavioral, evolutionary, feminist and complexity economics, have arisen. Most approaches, however, remained at the margins of the discipline, possibly with the exception of (new) behavioral economics which has increasingly been integrated into mainstream economics research and teaching. Many of these approaches draw strong inspiration from other disciplines. Behavioral economics, for example, is strongly connected to psychology; evolutionary as well as ecological economics to biology; feminist economics to other feminist social science research; complexity economics to physics and the interdisciplinary field of complexity science; the cultural approach to other cultural or constructivist social science research; field theory to physics and sociology; and social network analysis to the interdisciplinary field of network science.

Rethinking Economics

The financial crisis of 2008 sent shockwaves and surprise through the economics discipline. Many argued that the narrow approach dominant within economics missed several important elements of the economy and had overstated its usefulness. Since then there have been increasing calls for change in the discipline, both from established economists such as those connected to the Institute for New Economic Thinking and from grassroots student groups such as Rethinking Economics. 

The discipline itself, too, seems to be increasingly open for different and new ideas. But it is not yet clear what will replace the previous orthodoxy in research, policy and education. And real world events keep on influencing how the discipline develops, most recently the corona crisis and the increasing attention for the climate crisis. In a changing world, it only makes sense that economics keeps on changing as well.

References

Backhouse, R., & Fontaine, P. (2010). The unsocial social science?: economics and neighboring disciplines since 1945: Duke University Press.

Barber, W. J. (2010). A history of economic thought: Wesleyan University Press.

Biddle, J., Davis, J., & Samuels, W. (2008). A companion to the history of economic thought: John Wiley & Sons.

Blaug, M. (1997). Economic theory in retrospect (5th ed.): Cambridge University Press.

Brue, S., & Grant, R. (2012). The evolution of economic thought: Cengage Learning.

Colander, D. (2008). The making of an economist, redux. Princeton University Press.

Colander, D., & Klamer, A. (1987). The making of an economist. Journal of Economic Perspectives, 1(2), 95-111. 

Colander, D., & Landreth, H. (1994). History of Economic Thought. Boston, MA, itd: Houghton Mifflin. 

Fine, B., & Milonakis, D. (2009a). From economics imperialism to freakonomics: The shifting boundaries between economics and other social sciences: Routledge.

Fine, B., & Milonakis, D. (2009b). From political economy to economics: Method, the social and the historical in the evolution of economic theory: Routledge.

Heilbroner, R. (1953). The worldly philosophers: The lives, times and ideas of the great economic thinkers: Simon and Schuster.

Hunt, E. K., & Lautzenheiser, M. (2015). History of economic thought: a critical perspective: Routledge.

Medema, S. G., & Samuels, W. J. (2013). The history of economic thought: a reader: Routledge.

Rima, I. (2003). Development of economic analysis. Routledge.

Robbins, L. (2000). A history of economic thought: the LSE lectures: Princeton University Press.

Roncaglia, A. (2017). A Brief History of Economic Thought: Cambridge University Press.

Sandmo, A. (2011). Economics evolving: A history of economic thought: Princeton University Press.

Schumpeter, J. (1954). History of economic analysis: Routledge.

Screpanti, E., & Zamagni, S. (2005). An outline of the history of economic thought: Oxford University Press on Demand.

Van Dalen, H., Klamer, A., & Koedijk, K. (2015). De ideale econoom staat onder druk. Me Judice.