Introduction to history of economic thought

29th March 2021

Mainstream Econnomics #

Economics is the science of studying human behavior as the relationship between given ends and scarce means. It focuses on the behavior of singular economic agents in their attempt to make the best use of available resources. Choices made by individuals follow the rationality criterion: everybody is able to compare costs and benefit according to a scenario of limited alternatives, with the aim of maximizing benefits and minimizing losses.
Society is defined as the aggregate of individual behavior.


Heterodox Economics #

Economics is the study of social economic activities generating an array of surpluses of goods and services needed to sustain social individuals and the society as a whole. According to this definition, social economic activities are something related to an evolving process: the activities of production in a given period depends on the epoch. Moreover, such activities are all entangled with other social aspects such as culture, norms, beliefs, and religion.


Essentially, ME is considered static, while HE appears to be a more dynamic interpretation of Economics. The ultimate distinction between the two lays in their approach to studying the economy.

Ancient schools #

School When Methodology areas of interest Major thinkers
Scholastic Middle age Hyp-Ded Morality and ethics of human behavior Thomas Aquinas
Mercantilistic Reinassance Hyp-Ded How to increase a nation’s wealth and power Bodin and Petty
Physiocracy Enlightenment Hyp-Ded How to develop the output of the agricultural sector Quesnay


Old (still influential) schools #

School When Methodology areas of interest Major thinkers
Classical late XIX Hist-Ded Economic development, determinants of prices, and distribution of income Smith and Ricardo
Neoclassical early XX Hyp-Ded The effect of individuals’ rational decisions on prices and quantities Walras and Marshall
Historical and Institutional early XX Inductive The evolution of societies and the impact of social aspects on human behavior Weber and Veblen
Keynesian early-mid XX Hist-Ded Uncertainty, business cycle and demand-oriented policies Keynes and Kalecki


Mainstream Economics approach #

School When Methodology areas of interest Major thinkers
Austrian late XIX Hyp-Ded Theories of production, capital and interest, and business cycle Hayek and Mises
Monetarist mid XX Hyp-Ded The effect of money supply and financial factors on economic activity Friedman and Williamson
New Classical (RBC) 1970s Hyp-Ded The effect of rational expectations on business cycle and policy interventions Lucas and Sargent
New-Keynesian        



Methodology #

Terminology #

Before diving into the methodologies of investigating economic events, it is important to define some terminology:

  • a phenomenon is a fact or an event observed in reality
  • a theory is a scientific explanation of one or more phenomena. The explanation power of a theory is the range of phenomena it is able to explain . For instance, a theory capable of explaining a “business cycle” is better than one able to explain recession, for the former has more explanation power than the other (???). The domain of a theory is the position of reality within which it works. This enables to distinguish general and specific theories.
  • a model an instrument to synthesize a theory. Models can be:
    1. humanistic: verbal discussion
    2. visual: graphical presentation
    3. analytical: mathematical and algebrical representation


Deductive method #

The deductive method starts from very general premises or assumptions, which can result from our mental elaboration (abstract statements) or from the observation of historical facts. Subsequently, conclusions are drawn by means of logical reasoning.
The kind of premises distinguishes two genres of deductive methods:

  • the Hypothetical-deductive method
  • the Hystorical-deductive method

Drawbacks #

  • conclusions are valid iff the general premises are true
  • independent from time and space: any change in one of the two cannot be taken into account
  • general assumptions/premises are too abstract: conclusions are unable to explain all of the important parts of reality, therefore they explain a limited portion of it.


Inductive method #

The inductive method starts from particular facts and, by means of empirical experiments, it produces general conclusions.

Drawbacks #

  • induction requires several iterations and tests
    • time consuming
    • expensive, since tests have a cost
  • data collection is not always simple or straightforward
  • results can be misinterpreted

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