ADDIS ABABAUNIVERSITY

COLLEGE OF BUSINESS AND ECONOMICS

DEPARTMENT OF ECONOMICS

History of Economic Thought I

(Econ 4141)
A/Y 2024/2025
1st Semester
Instructor: Atlaw Alemu

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HET 1

• What is your opinion about this course ?

• What do you expect from this course ?

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The content of the course
1. Introduction

2. Methodology in economics

3. Pre-classical schools

4. Classical school

5. Socialist school

6. Marginalist school

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1. Introduction
1.1 The structure of knowledge on economic science and the place history of
Economic thought in economic science

1.2 The subject matter of Economics and its evolution

1.3 Objectives, Scope and Significance of History of economic thought

1.4 The interaction between Economic history and History of economic thought

1.5 The approach in studying the history of economic thought.

Learning outcome: Clear understanding of the subject matter of the History of economic
thought in relation to other fields within economics

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 1.1 A General structure of knowledge
on economic science

• We resort to Schumpeter’s view. A “two-structure

approach to the mind and society” of Schumpeter has
two systems each consisting of three layers (Shionoya
1997).
• system of substantive theory
• system of meta-theory

The system of substantive theory, is a set of theories about

the economy that consists of:
• economic statics (economic theories)
• economic dynamics ( economic history)
• economic sociology ( institutional economics) .(

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The system of meta-theory is a theory about economics itself
that includes :

 The philosophy of science (Methodology of Economics)

 The history of science (History of economic thought)
 The sociology of science (Economic science and society).

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 1.2 The subject matter of Economics and its evolution

• Economics, as substantive theory, is a social science that

examines, in various respects,
• the problems of relative scarcity societies face in material
requisites of life;
• It deals with the allocation of scarce resources which
have alternative uses.
• Scarcity arises because of the desire to consume more goods
and services than are available or
• scarcity arises because of unlimited wants and limited
resources.
• Since scarcity always prevails as human wants are unlimited
the option is mitigation rather than avoidance of scarcity 7
• To mitigate the problem of scarcity, three directions
were pursued
• restrict wants
( by inducing moral restraint on demand ! Or by forcibly imposing
austerity!) or
• increasing the supply of resources
( through discovery of new sources or through increasing productivity and
output)
Or
• Installing a social mechanism for allocating limited resources
among unlimited alternative wants.

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• Which ever way scarcity is addressed with the first two
directions, the third (social mechanism) was necessary
as scarcity can not be removed.

• The third mechanism is still necessary to determine

• Who gets and who does not get resources.
• Which want gets satisfied and which does not

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• Historically we identify four social mechanisms :
• Brute force,
• Tradition,
• Authority,
• Market
( you are encouraged to identify others outside these
mechanisms )
• Regardless of which mechanism is used to allocate resources,
the harsh reality of scarcity necessitates that some wants
remain unmet.

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 Modern economic thought and social
mechanisms
• Modern economic theory examines the problems of allocation , distribution,
growth and stability, focusing largely on market processes social mechanisms of
allocating resources
(the various ways with which contemporary societies cope with scarcity)

• Markets have replaced the other social mechanisms as primary resource allocating
mechanism.

• Economic theories are commonly divided into micro and macro economics.
• Micro economics considers questions of allocation and distribution
( ideas about what to produce and how to produce, how real income and goods are divided among
the members of society).

• Macroeconomics considers questions of growth and stability

( issues of business cycles, inflation and unemployment )

• This economics is known as mainstream or orthodox economic thinking.

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 .

• Mainstream modern economics ( orthodox economic thinking),

focuses on the use of markets to cope with the problems associated
with relative scarcity;

• In contrast, some economists are interested in broader issues, other

than focuses on markets.

• In dealing with scarcity these economists resort to analyzing other

forces than the market

• In so doing they straddle disciplines within social sciences such as

between economics and political science, between economics and
sociology etc.

• This economics is sometimes called heterodox economic thinking. 12

• Differences between Orthodox and Heterodox economists
mainly lie in the questions they try to answer.

• Orthodox thinking
• Deals with scarcity by studying economic behavior in the
context of given specific social, political and economic
institutions, such as free and competitive market at its best,
democratic politics , sovereign and rational individual
consumers, prevalence of respect for the rule of law and
private property etc.
• focuses on the problems of market allocation, distribution,
stability and growth in the context of the assumed specific
institutions.
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• Heterodox thinking , in stead of focusing on market allocations
and taking markets as given, it focuses on
• forces leading to the development of the institutions in
society that affect allocation.
( Note that these institutions are assumed as given in the orthodox economics,
meaning that it is not the interest of Orthodox economics to study how they come
and go)

• the forces that produce changes in society and the economy,

given the functioning of markets and other forces.

• The differences are often differences of focus i.e. what one tries
to explain is taken as given by the other.

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 1.3 Objectives, Scope and Significance of History of economic
thought

Course objectives
• Providing students with a general picture of the development
of economics(from ancient thinking until the emergence of MARGINALIST thinking)
• Scope of the course
• demonstrating the contributions of
 mainstream thinkers or the orthodoxy and
 deviants from the orthodoxy
in shaping contemporary economic thought.
 Providing perspective and understanding of our past as contributed by various
schools, as there was no monopoly of the truth by a single source

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• Significance and rationale
• The course encourages students to ask "Why economic
philosophers develop different economic theories and
principles and what the pushing factors behind were” so that
students
• develop balanced views of economic issues
• guard themselves from irresponsible generalizations
• enhance their understanding of contemporary economic thought
• Anticipate changes in the future

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1.4 History of Economic Thought
VS Economic History
• History of economic thought charts the development of economic thinking about
the various economic problems of coping with scarcity through ages.

• It reviews the logical structure of the various theories and their evolution in
historical perspective.

• Economic history tells us about the various economic activities , in contrast to

economic thinking.

• Economic history makes an account not only of economic activities that prevailed
to create wealth in the past, but also about the various social resource allocation
mechanisms employed by society to cope with the problem of scarcity across
ages.

• History of economic thought consults economic history to understand factors

that led to the emergence of the thought and to interpret economic thinking in
the past and present.
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 .

• This means formulation of a theory of economic theory

• Can we formulate a theory to explain the development of economic theory?
• Yes , historically there were theoretical approaches formulated with
different perspectives to explain the development of economic theories
• The relativist approach
• historical, economic, sociological and political forces bring
people to examine certain economic questions and these forces
shape the content of the theory.
• The absolutist approach
• internal forces such as the increasing professionalism in
economics account for the development of economic theory as
intellectual reactions to unsolved problems and paradoxes.
• Which one is right? Both convey part of the truth.

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 1.5 The approach in studying the history of economic thought.

• Questions to be asked in studying HET

• What was the historical background of the school?

• How does it relate to the thoughts in the past?

• What were the basic tenets of the school?

• Whom did the school benefit

• How was the school valid ,useful, or correct in its time?

• Which tenet of the school became long lasting contribution?

• What general conclusion can we make towards the origins and evolutions of economic
theories? 19
What did you learn from the foregoing discussions
about the subject matter of HET?

• Have you gained a clear understanding of the subject matter of the

History of economic thought in relation to other fields within
economics?

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 2 Methodological issues of Economics

• This chapter is about the history of the methodology of economics.

• Methodology or Philosophy of science in general describes: the aim and method

of science.

• The methodology of economics defines

• what economists aim to know, or defines its function and
• extends to defining how they know that they know it!
• It provides institutionalized mechanism for sifting warranted
beliefs or provides epistemological criteria to distinguish
between valid and invalid theories

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• The aim and method of science has been changing historically.
• The three general areas of what economists know were:
• How the economy works
• How the economy should work
• Combining how the economy works with how it should work

• What economists aim to know has remained an important

point of distinction among economists.
• This difference served as a source of methodological differences

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 • How the economy works in addressing scarcity
The aim of economics is to know how the economy works
( Positive economics )
• How the economy should work
The aim of economics is to know how the economy should work
( normative economics )
• How to mix positive and normative economics
Knowing how the economy works and given the normative goals, the aim
of economics is to know how best to achieve these goals
( the art of economics)

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• Positive economics
• is formal and abstract.
• tries to separate economic forces from political and social forces
• poses economics as a science rather than art
• Normative economics
• relies on ethical judgments on what is best for society
• integrates economics with ethics
• The art of economics
• concerns policy, mixing positive and normative economics.
• addresses interrelationships among politics, social and economic forces.

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• To answer the question “ how economists know that they
know” , economics has to answer more fundamental
questions:

• “ whether there is an ultimate truth that scientists are in

the process of revealing?”

• If there is ultimate truth how do we find it?

• With regard to these questions there are two general

positions, among which choice has to be made:
• Subjectivism and Realism

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• Subjectivism
• Reality is not independent of our individual or social thinking( reality is
individually or socially constructed) and it is not possible to assert the
underlying ultimate truth
• Realism
• Objective reality exists and Ultimate truth describes that reality(the
absolutist view )
• Objective reality may exist but truths describing it are relative to
circumstances ( the relativist view)
• In realism believing that truth exists leaves one with the problem of deciding
when and how one has discovered it.

• The recognition of the discovery( the belief that one has discovered the truth)
has been varying in the period of prescience and in the period of science.

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The progress in methodology

• Prescience:
• In prescience deductive method was followed in gaining knowledge.
• ( lets think of knowledge as justified true belief)
• deductive method was limited to :
• general propositions that led to specific logical implications.
• no felt need for empirical verifications of the implications.
• Science
• Science evolved from ancient to modern forms
• Ancient Science
• The ancient model of science was Aristotelian, which uses inductive process to
arrive at
• the definition of the essence of things and
• the use deduction to demonstrate why things must be what they are as
defined.

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• Modern science (17 century onwards)

• The philosophical foundation of modern science lies in positivism, which

claims that
• the only authentic knowledge is that based on actual sense experience.
• Science can rise above superstition by specializing in the description and
analysis of observable phenomena leading to the discovery of natural
laws
• Modern science involves
• both the inductive method and deductive reasoning.
• trained empirical observation integrated with reason.
(the importance of empirical verification is acknowledged and reason is integrated with
empirical observation.)
• Modern science has different models
• Inductivism, hypthesisism, logical positivism, falsificationism, hypothetico-deductive model,
Covering law model, etc.

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• Models of modern science
• Inductivism
• Is the earliest modern model of positive science
• aims at attaining definite and certain knowledge that can only be
obtained through specific observations,
• avoids unobservable,
• begins with un prejudiced observation of facts and proceed via
inductive reasoning to the formulation of laws and theories
• the laws and theories, or the obtained generalized knowledge, have
breadth that encompass wider areas and objects
• the laws and theories are ultimately to be checked for their truth
content by comparing their empirical consequences with all the
observed facts

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• Hypothesisism
• Aims at
• obtaining knowledge that is not given in observables
• knowing the reality behind what we observe
• explaining what we observe in terms of un-observables.
• As such it aims at generating hypotheses which are descriptions of
unobservable entities and establish them

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• Logical positivism
• grew in the tradition of inductivists.
• entirely rejects metaphysics
• combines empiricism, the idea that observational evidence is
indispensable for knowledge of the world, with a version of
rationalism incorporating mathematical and logico-linguistic
constructs and deductions.
• Scientists are supposed to develop a deductive structure ( a
logical theory) that leads to empirically testable
propositions.
• A deductive theory is true , however, only after it has been
empirically tested and verified.
• It describes economics as a positive science whose goal is to devise
theories that can be empirically validated.
• It purges normative discussions from economics as unscientific.
• Empirical tests are verifications

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Examples in economics-
• Basic propositions of economics were deductions from a series of postulates,
which are universally accepted facts of experience .
• The fundamental assumptions are combined with subsidiary hypothesis that
enable to apply the theory to actual situations.------- Robbins
• The need for testability - including tests of basic assumptions - Hutchison

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• Hypothetico-deductive model
• It is the further development in the tradition of
hypothesisists.
• The Theories are tested by using them to make predictions
about particular events.
• When the predictions are proven false the theories are not
supported and if the predictions are confirmed the theories
get support.

• Examples in Economics
• Classical Economics– David Ricardo, N.W Senior, [Link]

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• Falsificationism

• Popper's Falsification and science

• A departure from logical positivism
• emerged from a concern about the logical validity of “Verification”
of theories
• Uses the hypothetico-deductive approach with falsification
• The criterion of the scientific status of a theory
is its nature of falsifiability, or refutability
• There can be only a science of falsification not verification.

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• Covering law model
• claims that all truly scientific explanations involve at least
one universal law
plus
• a statement of relevant initial conditions that constitute the
premises
from which
• a statement about some event whose explanation or
prediction we are seeking is deduced with the aid of the
rules of deductive logic

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• Kuhn’s scientific paradigms
• is based on history of science
According to the history of science
• most scientific work is normal science in which researchers try to solve
puzzles posed using the framework of the existing paradigm.
• solving puzzles often leads to the discovery of anomalies the paradigm fails
to account for,
• but the existence of such anomalies is not sufficient to overthrow the
reigning paradigm
• only an alternative paradigm better able to deal with the anomalies can do
so.
• Ones such a superior paradigm develops a scientific revolution becomes
possible.

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• Imre Lakatos’s Scientific Research Programs
• Integrates falsificationism of Popper with scientific paradigms
of Kuhn.
• Scientists are engaged in the development of competing
research programs, each of which involves analyzing and
attempting to falsify a set of data but also involves
unquestionably accepting a set of hard core logical postulates
• Theories have hard core which adherents do not attempt to
falsify .
• Hard core is surrounded by protective belt of hypothesis which
may be adjusted to defend the hard core.
• Only when sufficient peripheral implications are falsified will
the hard core assumptions be considered.

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• OTHERS
• Methodological anarchy
• “Any thing will do” approach, as long as there is internal consistency.
• Sociological Approach to Method :
• Social and institutional constraints influence the acceptability of theories.
• Rhetorical approach to method :
• Emphasis on the persuasiveness of the argument
• Instrumentalism and Economics (Freidman’s Essay)- Milton Freidman
• All theory is abstraction and good theory abstracts from reality in a useful way.
Proper test of a theory is by its predictions.
• For this realism of assumptions is irrelevant.( F- twist)
• Operationalism of Paul Samuelson
• contradicts Freidman by saying that good theories are based on
reasonable assumptions.
• Theories are strategically simplified descriptions of observable and refutable
empirical regularities
• Theories are equivalent restatements of assumptions, theorized
relations and conclusions where the empirical validity of conclusions
presupposes the empirical validity of assumptions and relations.

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.
• Austrian Methodology
• The task of the economist is deriving conclusions deductively from
the logic of human action
• Conclusions and theories thus derived need not be tested because
truth had already been logically established.
• Heterogeneity of substance and methods in economics -
Amartya Sen

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 What did you learn about the
methodology of economics ?
• Have you understood the various approaches on how economists
explain?

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