Chapter 1

CHAPTER 1
THE HISTORY
OF
ECONOMIC THOUGHT AND DEVELOPMENT
LESSONS
Lesson 1 The Ancient Economic

Thought
Lesson 2 The Industrial Revolution

and Classical Economics
Lesson 3 The Neo Classical

Economics
OVERVIEW
History of Economic Thought deals with the different

thinkers and theories in the field of political economy and
economics from the ancient world right up to the present.
Adam Smith (British philosopher) is generally

considered the father of economics. His ideas were built
upon a considerable body of work from predecessors (in
the eighteenth century), who in turn were grappling with
wisdom received from centuries before and attempting to
apply it to a modern setting.
Aristotle (ancient Greek philosopher) grappled with

the art of wealth acquisition, and whether property is best
left in private or public.
OVERVIEW
Thomas Aquinas (Medieval times) argued that it was a

moral obligation of businesses to sell goods at a just price.
EVOLUTION
Economic thought evolved through feudalism in the Middle
Ages to mercantilist theory in the renaissance, when people
were concerned to orient trade policy to further the national
interest.
The modern political economy of Adam Smith appeared

during the industrial revolution, when technological
advancement, global exploration, and material opulence
that had previously been unimaginable was becoming a
reality.
OVERVIEW
EVOLUTION
Changes in economic thought have always
accompanied changes in the economy, just as
changes in economic can propel change in
economic policy.
LESSON 1 THE ANCIENT ECONOMIC THOUGHT
SPECIFIC OBJECTIVES
At the end of the lesson, the students will be able to:
Identify the Greek philosophers and their

contributions to economics;
Discuss the rise of mercantilists and physiocrats;

and
Translate their views and opinions into the present.

OVERVIEW
The Greeks are often regarded as the first important

contributors to western culture. While archaeology continually
discovers new information, it is commonly believed that the
early man evolved in Africa and began making primitive tools.
The civilizations that were linked to the west began as early as
8000 B.C.E. in the area between the east end of Mediterranean
Sea and valleys of the Tigris and Euphrates rivers. Between
1200 and 200 B.C.E., the classical Greek civilization developed
and flourished. The Greek lived in city-states and sustained a
level of economic development. There were many factors that
contributed to their success. In addition to resources, weather
and location, the attitudes of the Greeks toward knowledge
and philosophy contributed to their development.
ANCIENT ECONOMIC THOUGHT
Some prominent classical scholars have asserted

that relevant economic thought did not arise in
Europe until the Enlightenment (Miekle).
Early economic thought was based on metaphysical

principles which are incommensurate with
contemporary dominant economic theories such as
neo-classical economics (Lowry, 2003)
HESIOD (8 B.C.E.): farmer

Interested in efficiency an economic concept
measured as a ratio of outputs and inputs (E = O
I)
Maximum efficiency is taken to be achieving the

largest possible output with a given input.
He lived in a place that was not exactly conducive to

agriculture, a sorry placebad in winter, hard in
summer, never good.
HESIOD (8 B.C.E.): farmer

For said reason, he understood and wanted to help
alleviate the problem of scarcity on earth.
Work and Days he noted that because of scarcity, time,

labor and production, goods had to be carefully allocated.
He advocated more freedom in land owning and less

stringent rules on the payment of interest.
He wanted to help alleviate the problems of hunger and

debt.
PLATO (488-399 B.C.E.): Greek philosophers

Republic he made mention of specialization as the
reason for and justification of society.
Through specialization, the individual learns and

perfects his knowledge in skills in an art or practice as
well as increasing the production of material things.
Specialization results in increased production

because the individual becomes more knowledgeable
about their craft.
PLATO (488-399 B.C.E.): Greek philosophers

2 Effects of Specialization:
1. It increases output and improves the welfare of the
individual in society by producing more goods and services.
2. It is a component of justice which is linked with each
person.
He said that individuals are not self-sufficient and that humans
must coordinate their activities to facilitate their works.
Interpersonal relationship is necessary and justice exists when

each group does those things that are in their nature.
XENOPHONE (430-355 B.C.E.): Greek philosopher and a

student of Socrates
He viewed division of labor and the allocation of
resources within the Latifunda (pieces of landed
property covering tremendous areas) as a way to self
sufficiency.
He said that with efficient management of this large

estate, it will eventually lead to self-sufficiency.
He termed this kind of management as Oeconomicus.

ARISTOTLE (382-322 B.C.E.): Greek philosopher

2 Divisions of Economics
1. Oiconomics dealt with the production and consumption
of goods. It was an analysis of how decisions were made
regarding the management of resources.
2. Chrematistics encompassed the activities of money-
making as well as some aspects of production. It studied
human activities involved with wealth-getting which
could be natural or unnatural.
. Economic activities involved real things and pecuniary or
monetary.
THE RISE OF MERCANTILISM
Mercantilism holds that the prosperity of the nation

depends upon its supply of capital, and that the global
volume of trade is unchangeable.
Economic assets , or capital, are represented by bullion, that

is, gold, silver, and trade value held by the state which is
best increased through a positive balance of trade with other
nations (exports minus imports).
Mercantilism suggests that the ruling government should

advance these goals by playing a protection role in the
economy, by encouraging exports and discouraging imports,
especially through the use of tariffs. The economic policy
based upon these ideas is often called mercantile system.
Mercantilism was established during the early

modern period (starting in the 16 th to the 18th
century, which was roughly corresponded to the
emergence of the nation-state).
This led to some of the first instances of significant

government intervention and control over market
economies, and it was during this period that much
of the modern capitalist system was established.
With the rise of nation-states and expanded trade,

economic thought was restructured.
Mercantilism for a justification for and an explanation

of the activities of the rising of the merchant class.
Trade was seen as the source of the national wealth.
The accumulation of bullion was the objective of trade

and was to be accomplished by a favorable balance of
trade or the exercise of national power (police and
taxation power).
This leads to a new role for the governments, namely,

the regulation of trade and economic activities.
Weaknesses:
1. Mercantilism was not without problems. Its

success, particularly in Spain, led to the
discovery of the quantity theory of money and
inflation.
2. Excesses in regulation and inflation ultimately

led to a re-evaluation of economic thought.
3. Focuses on the rulers wealth, accumulation of

gold or the balance of trade.
PHYSIOCRACY
It immediately preceded the first modern school, classical

economics which began the publication of Adam Smiths The
Wealth of the Nation.
Originated in France in the second half of the 18 th century.
Dominated by Anne-Robert-Jacques Turgot (1727-1781) and

Francois Quesnay (1694-1774).
The wealth of the nations was derived solely from the value
of land agriculture or land development.
Laissez faire is meant that the only legitimate form of

government revenue is to be derived from the value of land.
PHYSIOCRACY
Turgot
Believed that self-interest was the motivating reason for

each segment of the economy to play its role.
Each individual was best suited to determine what goods

he wanted and what work would provide him with what
he wanted out of life.
While a person might labor for the benefit of others, he

will work harder for the benefit of himself.
However, each persons needs are being supplied by

many other people.
PHYSIOCRACY
Turgot
The system works best when there is a

complimentary relationships between one
persons needs and another persons desires,
and trade restrictions place an unnatural barrier
to achieve ones goals.
Significant Contributions: Emphasized productive

work as the source of national wealth.
PHYSIOCRACY
Weaknesses:
1. It only considered agricultural labor to be

valuable.
2. It viewed the production of goods and services as
consumption of the agricultural surplus.
Modern economists consider these to be productive

activities which add to national income.
THE LAISSEZ FAIRE THEORY
Laissez faire is French phrase meaning let do or leave us

alone.
It was used by the physiocrats as an injunction against

government interference (regulation and taxation) with
trade, it became used as a synonym for strict market
economics during the early and mid-19 th century.
It is generally understood to be a doctrine that maintains

that private initiative and production are best allowed to
roam free, opposing economic interventionism and taxation
by the State beyond that which is perceived to be
necessary to maintain individual liberty, peace, security,
and property rights.
It was originally introduced in the English-language word in

1774, by George Whatley, in the book PRINCIPLES OF
TRADE, which was co-authored with Benjamin Franklin.
Principles:
1. The State has no responsibility to engage in intervention

to maintain a desired wealth distribution or to create a
welfare State to protect people from poverty, instead
relying on charity and the market system.
2. It embodies the notion that a government should not be

in the business of granting privileges.
Principles:
3. The government should not create legal

monopolies or use force to damage de facto
monopolies.
4. Free trade the State should not use

protectionist measures, such as tariffs and
subsidies, in order to curtail trade through
national frontiers.
QUIZ NO. 2
1. WHY SHOULD GOODS BE CAREFULLY ALLOCATED?

2. IN WHAT WAY DOES SPECIALIZATION AFFECT
PRODUCTION?
3. WHY AND HOW SHOULD INDIVIDUALS ACHIEVE
SELF-SUFFICIENCY?
4. HOW DO THE MERCANTILIST AND THE
PHYSIOCRATS DIFFER IN ACQUIRING WEALTH?
LESSON 2 THE INDUSTRIAL REVOLUTION AND
CLASSICAL ECONOMICS
SPECIFIC OBJECTIVES
Identify the different classical economists and their

achievements;
Discuss the essence of the Wealth of Nation and its

implications to the development of economics; and
Discuss the advent of utilitarianism and

marginalism.
CLASSICAL ECONOMICS
OVERVIEW
David Ricardo and John Stuart Mill (classical economists).
Examined the ways the landed, capitalist and laboring
classes produced and distributed national riches.
Karl Marx
He castigated the capitalist system of exploitation
and alienation he saw around him, in the midst of the
London slums and before neo-classical economics in a
new imperial era sought to erect a positive,
mathematical and scientifically grounded field above
normative politics.
CLASSICAL ECONOMICS
OVERVIEW
John Maynard Keynes. After the wars of the early

twentieth century.
Led a reaction against governmental abstention

from economic affairs.
Advocated interventionist fiscal policy to

stimulate economic demand, growth and
prosperity.
CLASSICAL ECONOMICS
OVERVIEW
John Maynard Keynes. After the wars of the early

twentieth century.
However, this post-war consensus broke down

due to the worlds division into:
1. The capitalist first world

2. The communist second world
3. The poor of the third world
CLASSICAL ECONOMICS
OVERVIEW
Milton Friedman and Friedrich von Hayek.
Caught the imagination of western leaders.
Warned the Road to Serfdom and socialism
Focused their theory on what could be achieved

through better monetary policy and deregulation.
CLASSICAL ECONOMICS
ADAM SMITH AND THE CLASSICAL SCHOOL
Adam Smith (1723-1790).
Recognized as the founder of Classical School.
Constructed an explanation of how social behavior is

regulated.
Saw a world where each person sought his own self-

interest but was constrained by morality, markets,
and government.
Developed an analysis of the moral system through

his book entitled, THE THEORY OF THE MORAL
SENTIMENT in 1759, and on economics, the
CLASSICAL ECONOMICS
THE WEALTH OF THE NATIONS
Rejected the Physiocratic schools emphasis on the

importance of land.
Believed instead that labor was paramount, and that

a division of labor would effect a great increase in
production.
***Excessive division of labor would lead man to his

most ignorant state possible.
Was so successful that it led to the abandonment of

the earlier economic schools.
CLASSICAL ECONOMICS
Rejected the Physiocratic schools emphasis on the

importance of land.
Believed instead that labor was paramount, and that

a division of labor would effect a great increase in
production.
***Excessive division of labor would lead man to his

most ignorant state possible.
Was so successful that it led to the abandonment of

the earlier economic schools.
CLASSICAL ECONOMICS
Main points:
1. FREE MARKET. Free market, while chaotic and

unrestrained, is actually guided to produce the
right amount of goods by a so-called INVISIBLE
HAND.
. If a product shortage occurs, its prices rises,

creating a profit margin that creates an
incentive for others to enter production,
eventually curing the shortage.
CLASSICAL ECONOMICS
Main points:

HAND.
. If too many producer enter the market, the

increased competition among the
manufacturers and increased supply would
lower the price of the product to its production
cost, namely, the NATURAL PRICE.
CLASSICAL ECONOMICS
Main points:

HAND.
. Even as profits are zeroed out at the natural

price, there would be incentives to produce
goods and services, as all costs of production,
including compensation for the owners labor,
are also built into the price of the goods.
CLASSICAL ECONOMICS
Main points:

HAND.
. If prices dip below a zero profit, producers

would drop out of the market.
. If they were above a zero profit, producers

would enter the market.
CLASSICAL ECONOMICS
Main points:

HAND.
. While human motives are often selfishness

and greed, the competition in the free market
would tend to benefit society as a whole by
keeping prices low, while still building an
incentive for a wide variety of goods and
CLASSICAL ECONOMICS
Main points:
2. GROWTH THEORY.
CLASSICAL ECONOMICS
WEALTH OF A NATION
(The goods & services available for
consumption)
THE NO. OF WORKERS

SPECIALIZATION / SKILL
EMPLOYED
IMPROVEMENT
IN PRODUCTIVE LABOR Dexterity & Judgment
(Labor used to produce goods &
(Labor dexterity, time saving,
services that are to be sold in the
investments, mutual dependence)
market)
EXTENT OF
POPULATION THE MARKET
WEALTH CAPITAL CAPITAL Communicati
REWARD FOR
LABOR STOCK STOCK on,
POPULATION Transportatio
n
CIRCULATING
FIXED CAPITAL
CAPITAL
Machine, tools,
Things that are
buildings, land
produced or are
improvement,
being produced to
skills
be bought and sold
CLASSICAL ECONOMICS
DAVID RICARDO: THEORY OF COMPARATIVE

ADVANTAGE
PRINCIPLES OF POLITICAL ECONOMY AND TAXATION
Ricardos most famous work.
Labor theory of value by demonstrating that prices

do not correspond to this value. He retained the
theory, however, as an approximation and,
continued to work on his value theory to the end of
his life.
This book introduces the theory of comparative

advantage.
CLASSICAL ECONOMICS

ADVANTAGE
THEORY OF COMPARATIVE ADVANTAGE
1. Even if a country could produce everything more

efficiently than another country, it would reap
gains from specializing in what it was best at
producing and trading with other nations.
2. Wages should be left to free competition, so there

should there be no restrictions on the importation
of agricultural products from abroad.
CLASSICAL ECONOMICS

ADVANTAGE
3. Benefits.
a. Distributional. Foreign trade could not directly
affect profits because profits respond only in
changes to the level of wages.
b. Real Income. The effects on income are

always beneficial because foreign trade does
not affect value.
CLASSICAL ECONOMICS

ADVANTAGE
3. It forms the basis of modern trade theory,

reformulated as the HECKSCHER-OHLIN
THEOREM.
4. HECKSCHER-OHLIN THEOREM a country has a

comparative advantage in the production of a
product if the country is relatively well endowed
with inputs that are used intensively in producing
the product.
CLASSICAL ECONOMICS
THOMAS ROBERT MALTHUS: PRINCIPLE OF

POPULATION
Malthus developed his views in reaction to the

optimistic opinion of his father and his associates,
notably Jean Jacques Rousseau.
ESSAY ON THE PRINCIPLE OF POPULATION
Constituted a response to the views of the Marquis

de Condorcet (1743-1794).
Made the famous prediction that population would

outrun food supply, leading to a decrease in food per
person.
CLASSICAL ECONOMICS

POPULATION
Population, if unchecked, increases at a geometric or

exponential rate (2, 4, 8, 16, etc.-n), whereas the
food supply grows at an arithmetic rate (namely, 1,
2, 3, 4, etc.-n).
Excessive population growth could be check by the

following:
1. Natural causes (accidents & old age);
2. Misery (war, pestilence, plague, famine); and
3. Moral restraint and vice (infanticide, murder,
CLASSICAL ECONOMICS

POPULATION
Moral restraint (late marriage and sexual

abstinence).
For the working/poor classes for they took a great

deal of responsibility for societal ills.
Pro-poor laws must be gradually abolished.
Effects:
1. It degenerated the conditions of the poor in
England.
2. It lowered population.
CLASSICAL ECONOMICS

POPULATION
Many people misrepresented this theory.
He did not just predict future catastrophe.

The constantly subsisting cause of periodical
misery has existed ever since we have had any
histories of mankind.
It does exist at present, and will forever continue
to exist, unless some decided change takes place
in the physical constitution of our nature.
Thus, the principle is an explanation of the past
CLASSICAL ECONOMICS
THE MARGINALIST SCHOOL

Classical economist theorized that prices are
determined by the cost of production.
Marginalist economists emphasized that prices also

depend upon the level of demand, which in turn
depends upon the amount the amount the consumer
satisfaction provided by individual goods and services.
Marginalists provided modern macroeconomics with the

basic analytic tools of demand and supply, consumer
utility, and a mathematical framework for using those
tools.
CLASSICAL ECONOMICS
THE MARGINALIST SCHOOL

Marginalist also showed that in a free market economy,
the factors of production land, labor, and capital
receive returns equal to their contributions to
production.
This would justify the existing distribution of income,

that is, that people earned exactly what they or their
property contributed to production.
CLASSICAL ECONOMICS
THE MARXIST ECONOMICS

It comes from the work of German economist KARL
MARX.
DAS CAPITAL.
Published in Germany in 1867.

It focused on the labor theory of value and what he
considered to be the exploitation of labor by capital.
It proclaimed that capitalism was doomed and would
soon be followed by business depressions,
revolutionary upheavals and socialism.
CLASSICAL ECONOMICS
THE MARXIST ECONOMICS

It comes from the work of German economist KARL
MARX.
DAS CAPITAL.
In the 1830s and 1930s deep economic

depressions:
The 20th century economic intellectuals began to

question the economic viability of private
enterprise capitalism.
Socialists began to apply their model in the

Soviet Union in 1917 and by the 1980s almost
CLASSICAL ECONOMICS
QUIZ NO. 03
IDENTIFY WHAT CONCEPT IS REFERRED TO:
1. It holds that the prosperity of the nation depends

upon its supply of capital, and that the global
volume of trade is unchangeable.
2. He made the famous prediction that population would
outrun food supply, leading to a decrease in food per
person.
3. It focused on the labor theory of value and what he
considered to be the exploitation of labor by capital.
4. They theorized that prices are determined by the cost
of production.
CLASSICAL ECONOMICS
QUIZ NO. 03
5. They provided modern macroeconomics with the

basic analytic tools of demand and supply,
consumer utility, and a mathematical framework
for using those tools.
6. If unchecked, increases at a geometric or
exponential rate (2, 4, 8, 16, etc.-n), whereas the
food supply grows at an arithmetic rate (namely,
1, 2, 3, 4, etc.-n).
7. They are represented by bullion, that is, gold,
silver, and trade value held by the state which is
CLASSICAL ECONOMICS
QUIZ NO. 03
8. Even if a country could produce everything more

efficiently than another country, it would reap
gains from specializing in what it was best at
producing and trading with other nations.
9. It deals with the different thinkers and theories in
the field of political economy and economics from
the ancient world right up to the present.
10.He grappled with the art of wealth acquisition,
and whether property is best left in private or
public.
CLASSICAL ECONOMICS
QUIZ NO. 03
11.He wanted to help alleviate the problems of hunger

and debt.
12.It results in increased production because the
individual becomes more knowledgeable about their
craft.
13.It refers to the pieces of landed property covering
tremendous areas.
14.He said that with efficient management of this large
estate, it will eventually lead to self-sufficiency.
15.It encompassed the activities of money-making as
well as some aspects of production. It studied human
CLASSICAL ECONOMICS
QUIZ NO. 03
16.While chaotic and unrestrained, it is actually guided to

produce the right amount of goods by a so-called
INVISIBLE HAND.
17.He saw a world where each person sought his own
self-interest but was constrained by morality, markets,
and government.
18.He examined the ways the landed, capitalist and
laboring classes produced and distributed national
riches.
19.He castigated the capitalist system of exploitation and
alienation he saw around him
LESSON 3 THE NEO-CLASSICAL ECONOMICS
SPECIFIC OBJECTIVES
Identify the neo-classical economics and their

contributions;
Understand the philosophy of the neo-classical

economists; and
Discuss the neo-classical model of economic

growth.
OVERVIEW
NEO-CLASSICAL ECONOMICS
Systematized supply and demand as joint determinants

of price and quantity in market equilibrium, affecting
both the allocation of output and the distribution of
income.
Labor Theory of Value was replace by:
1. Marginal Utility Theory of Value on the demand side

2. Theory of Costs on the supply side.
. Orthodox economics for critics.

OVERVIEW
ALFRED MARSHALL (1842-1924)
Systematized supply and demand as joint determinants

of price and quantity in market equilibrium, affecting
both the allocation of output and the distribution of
income.
Labor Theory of Value was replace by:
1. Marginal Utility Theory of Value on the demand side

2. Theory of Costs on the supply side.
. Orthodox economics for critics.

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Chapter 1 - The History of Economic Thought and Development

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Lesson 1 The Ancient Economic

Lesson 2 The Industrial Revolution

Lesson 3 The Neo Classical

History of Economic Thought deals with the different

Adam Smith (British philosopher) is generally

Aristotle (ancient Greek philosopher) grappled with

Thomas Aquinas (Medieval times) argued that it was a

The modern political economy of Adam Smith appeared

At the end of the lesson, the students will be able to:

Identify the Greek philosophers and their

Discuss the rise of mercantilists and physiocrats;

Translate their views and opinions into the present.

The Greeks are often regarded as the first important

ANCIENT ECONOMIC THOUGHT

Some prominent classical scholars have asserted

Early economic thought was based on metaphysical

ANCIENT ECONOMIC THOUGHT

HESIOD (8 B.C.E.): farmer

Maximum efficiency is taken to be achieving the

He lived in a place that was not exactly conducive to

ANCIENT ECONOMIC THOUGHT

HESIOD (8 B.C.E.): farmer

Work and Days he noted that because of scarcity, time,

He advocated more freedom in land owning and less

He wanted to help alleviate the problems of hunger and

ANCIENT ECONOMIC THOUGHT

PLATO (488-399 B.C.E.): Greek philosophers

Through specialization, the individual learns and

Specialization results in increased production

ANCIENT ECONOMIC THOUGHT

PLATO (488-399 B.C.E.): Greek philosophers

Interpersonal relationship is necessary and justice exists when

ANCIENT ECONOMIC THOUGHT

XENOPHONE (430-355 B.C.E.): Greek philosopher and a

He said that with efficient management of this large

He termed this kind of management as Oeconomicus.

ANCIENT ECONOMIC THOUGHT

ARISTOTLE (382-322 B.C.E.): Greek philosopher

THE RISE OF MERCANTILISM

Mercantilism holds that the prosperity of the nation

Economic assets , or capital, are represented by bullion, that

Mercantilism suggests that the ruling government should

THE RISE OF MERCANTILISM

Mercantilism was established during the early

This led to some of the first instances of significant

With the rise of nation-states and expanded trade,

THE RISE OF MERCANTILISM

Mercantilism for a justification for and an explanation

Trade was seen as the source of the national wealth.

The accumulation of bullion was the objective of trade

This leads to a new role for the governments, namely,

THE RISE OF MERCANTILISM

1. Mercantilism was not without problems. Its

2. Excesses in regulation and inflation ultimately

3. Focuses on the rulers wealth, accumulation of

It immediately preceded the first modern school, classical

Originated in France in the second half of the 18 th century.

Dominated by Anne-Robert-Jacques Turgot (1727-1781) and

Laissez faire is meant that the only legitimate form of

Believed that self-interest was the motivating reason for

Each individual was best suited to determine what goods

While a person might labor for the benefit of others, he

However, each persons needs are being supplied by